Not Seeking a Second Term?

As a somewhat dull observer of our President, I find myself ever more convinced, despite my dullness, that he is not enjoying the job of presidenting. His facial appearance seems to be strained and at times angry. He appears annoyed that there are many people who do not accept his judgments and who persist in opposing his policies. He seems bothered, I know not why.

Perhaps it is because none of his initiatives have shown success, except in the direction of hiring left wingers to government and providing government support of his political supporters.

In the beginning, with Democrat control of both houses of Congress, he was able to obtain passage of several massive bills, that nobody was given a chance to read, that vastly increased bureaucracy and rules on business as well as costing trillions. Having lost control of the House of Representatives this source of pleasure has vanished.

His foreign affairs ventures have all been unusually unsuccessful. His wooing of Russia, Iran and Syria have brought only contempt from them and escalation of their trouble making. His Libyan venture not only annoyed congress by being done without consulting it, but was an instant quagmire, easily predictable because it was aimed at prolonging the insurrection and against ending it with victory for either side. His campaign promises to improve the civil liberties of terrorists, to close Gitmo and to end all wars disappeared (thankfully) upon taking office. Making the Afghanistan war his own hasn’t worked so well. His inaction in the face of unrest in Iran and now in Syria and Iranian meddling in Iraq make him seem like a wuss, perhaps even to himself.

The economy and employment situation have eaten into his support and since despite their names all of his initiatives have been destimulating to the economy and to employment, even his supporters are beginning to wonder whether all troubles can be blamed on his predecessor. Some question how threatening to smite employers with high taxes and worse will get them to hire more people. By the way, the Democrats controlled congress during the second term of his predecessor so they must share blame for what happened then.

Most of his interactions with foreign dignitaries (another of his presidential duties) have been painful at best.

At the beginning he seemed to enjoy addressing the people and he did so incessantly

There have been a number of occasions in which the President has made decisions on his own that have been high handed and poorly thought out. Can he be completely unaware of all of them? Perhaps his anger stems from his awareness that some fools disagree with his belief that he has never made a single mistake as President.

In general, in my mind he is coming to resemble Joe Bftzyk, the Al Capp character who walked around in a cloud that always surrounded him, and always, apparently, kept raining on him.

At the beginning he seemed to enjoy sports, at least hobnobbing with big time sports figures, playing basketball and golf, presiding over gala parties and taking vacations. These are worthwhile sources of pleasure and distraction, but do not require his being president for him to enjoy. He also seems to enjoy fundraising gatherings and making political speeches. The necessity of being nice to fat cats who he randomly turns on later and denounces in his speeches, suggests that he actually hates doing this and hates them.

What I cannot fathom is why he want a second term. Unless the Democrats regain control of the House, which seems quite unlikely, he will get nothing he wants passed in a second term. True nobody is suing him or calling for impeachment, but there are some scandals, particularly in the Justice Department, which may yet lead to that, particularly if the Republicans take control of both houses.

I wonder what would happen if one could assure the President that if he does not run, he can keep all the hard earned campaign funds that he has raised and would not have to spend. If this can be done, his optimal path would be to raise as much money as possible up until the time comes to spend it, and then decide to bow out, on the basis of some hitherto unknown health problem (like that of the perpetrator of the Lockerbie disaster.) He could then spend all his time in playing golf or whatever, and taking vacations, and even pontificating a la James Carter, to an admiring national press.

I first thought that the Republicans would gain from this, being able to have some other Democrat as presidential candidate in 2012. In fact most prominent Democrat politicians are insults to the human race, and would surely lose. But if the Democrats could convince either Chris Christie or the Republican Senator from Massachusetts to run as Democrats, they could win in a walk, so maybe the Dems could turn this into a win.

Some Economic Fallacies

The words that people use to describe things are often highly misleading, and they cause a great deal of mischief. Let’s look at some examples.

In speaking of taxes, there is argument and disagreement about “raising taxes”, but what actually do we mean by that phrase?

There are really two concepts involved here: one is raising tax rates, and the other is raising the amount of money brought in by taxes. It is often assumed that these are synonymous but this is usually wrong.

Generally speaking, when the cost of something goes up, less of that something gets purchased, and the total of all purchases of the thing may go down as the price of it rises. Thus, as every business person knows, the way to stimulate business activity when sales are sluggish is not to raise prices, but rather to reduce them, which is often done by running a sale. The way to get income to exceed expenses for a business is normally by lowering prices rather than by raising them.

Yet in government it is generally assumed that raising tax rates which represent the price of government, will increase tax revenue and not diminish it.

There is an obvious difference between government and business activities. In dealing with government you are forced to pay assessed taxes and will be penalized if you do not. Private activities are voluntary and subject to competition and this means that the lower profit margin available to a business during a sale can be made up for by increased market share, to produce a better net profit when prices are lowered.

There are many kinds of taxes, and there is something similar for each. The various states, for example, compete with one another for new business and for population through their state tax rates. It seems to be the case that low tax states usually do better than high tax states in this regard, and the increase in population and business activity in the low tax states even seems to lead to better public services in them, compared the same in high tax states.

Federal income taxes seem like they can only be avoided by moving abroad, or by taking advantage of quirks in the tax code that insulate taxpayers from rate changes. But that is not actually so. As a general rule, higher taxes affect the costs of doing business for the worse, and they can cause people contemplating starting a business to decide against it on that basis. This has a slowing effect on the overall economy and tends to reduce tax collection.

I recall reading years ago that most of John Kerry’s wealth was invested in federal tax free state bonds, which tend to go up in value if federal taxes rates increase. Raising federal tax rates tends to encourage individuals to purchase such bonds, and in this way can lower federal tax revenues. And of course people can invest abroad to avoid federal taxes here. But a more serious cause of the difference between increases in federal tax rates and federal tax revenues comes from the fact that not all federal taxes are mandatory. Capital gains, which are increases in the value of property are only taxed when the property is sold. A high tax on capital gains discourages people from selling the items whose value has increased. When capital gain taxes have been lowered, the selling of appreciated property has accelerated and that usually increases the capital gain tax collection.

The collections from capital gain taxes are exactly like commercial sales, in that running a sale increases collection.

And there are many other ways that people and corporations can use that employ the myriad of incentives and tax credits imbedded in our tax code to reduce their taxes, when tax rates increase.

So in fact, raising tax rates in most cases does not increase tax collections, except when they are imposed retroactively or the change in tax collection is measured over a time interval too short to register changes in taxpayer behavior.

Of course there are other important side effects of high taxes. Taxes act like a brake on the economy. The higher taxes are, the heavier the government foot is on the brake.

There are two ways to reduce the national debt. One is by promoting expansion of the national economy while keeping government expenditures down. The other is by inflating the currency so that the debt need only be repaid in worthless money. slamming brakes on the economy tends to make the former of these impossible. The latter will ruin us all.

Another example. Many pundits speak as if those with high income are the rich, and the rich have high income (I suppose income is measured by AGI which on your tax form is Adjusted Gross Income). But this is very far from true. Some of the very rich, like Senator Kerry, have most of their money invested in state bonds, and a relatively small AGI, since state bond income does not appear in that figure.

More importantly, many people with high incomes have such for only a few years of their lives, and are by no means very rich and will probably never be very rich. This includes those whose high income comes from sales of some family asset, like a family business, which income appears high for only one year. Others are people like star athletes who make large sums for only a few years of their lives

An important question on this subject is: what does it mean to be very rich? To have an estate over say a hundred million dollars (in current funds) can be said to be very rich today. Suppose we take that round number as a threshold for being very rich. Today, someone with income over $250,000 per year will pay approximately 40% of that in federal and state taxes. (or more with real estate and sales taxes included). Such a person cannot become very rich with an estate of $100 million now unless his total income before taxes over the years exceeds $165 million even if he never spent a penny on living

Raising taxes on people with incomes over $250,000 will have very little effect on the very rich, will increase the value of John Kerry’s portfolio, and will prevent some people probably including your children) from ever becoming very rich. and will hurt many people who are not really rich at all. It’s no wonder to me that people who now are very rich have no quarrel with higher taxes on income. It means little to them. Actually it means that there will be fewer others of them which renders them more special and important. It is those with income in the $300k range who would bear the brunt of the change, and unless they were born to great wealth they will never get there (unless of course they spent nothing and had this income for 500 years).

As a final example, there are some soi-disant economists who believe that government spending is capable of stimulating economic activity. The idea sounds reasonable. If the government spends money, that money will circulate in the economy; those who receive it will spend it and it will slosh around the economy producing economic activity.

This sounds quite reasonable, except when one asks, where does the government get the money that it spends to perform such stimulus?

There are actually three possible sources of money. One is through taxation: But the money spent that is paid for from funds raised by taxation, is money taken out of the hands of taxpayers. As a result they have available to spend or invest that much less money. The question then becomes, does the money spent by government have a greater effect in stimulating the economy than the money taken in taxation unspent would have had it had been spent by the citizenry taxed.

The second source of stimulus money is from borrowing. But again the money borrowed by the government is as a result of that borrowing, not available to be borrowed by businesses in the private economy. Thus it will lead to stimulus only if the government is more efficient than private borrowers would have been in expanding the economy.

There is a third source but that is a very dangerous one. The government can simply print more paper money. This is what our government has been doing lately in its quantitative easing policy. The trouble is, that money is a measure of wealth. If you increase the amount of money in circulation without changing the amount of wealth, you are actually reducing the wealth value of all money in circulation. You are in effect stealing wealth from anyone who is holding your currency. This kind of policy has always led to disaster wherever attempted.

Let us examine the questions raised in these last paragraphs. First, can the government stimulate the economy more efficiently than the citizens taxed would have if they had their tax money to spend or invest?

The answer to this question seems to be no! Government spending is intrinsically a drag on the economy.

Why? How come?

One problem is that the government spends other people’s money while private individuals or corporations spend their own money (or in the latter case money that the spenders will be held accountable for spending.) This means that government expenditures are required to go through extensive formal procedures to protect them from being stolen by corrupt government agents. Without such protection, and even sometimes with it, government spending has a tendency to go to friends of the government agents disbursing it, rather than to forward the public good. These formal procedures tend to slow down the speed with money circulates when it passes through government as opposed to when it remains in the hands of private spenders. In short, you can spend your money as soon as you see an opportunity to do so, while the government has to delay and delay when a similar opportunity arises.

The production of wealth in an economy is proportional to the “action” in it, and that action of an economy is proportional to the amount of money in circulation multiplied by the speed at which this money circulates. Thus, the slowing down that arises from the intrusion of government spending slows down the production of wealth and the GNP. This slowdown is typically by a factor of 1/3 or more.

There is more to economy than this. The actual production of wealth requires sustainable action that actually produces wealth. Much of government spending does nothing to do so rather it impedes it. Much of government operation consists of making ever tighter rules that inhibit wealth creation and certainly don’t help it. There are myriads of examples of this: efforts (that are failing) for the purpose of saving a species of owls has shut down almost all of the once multi-billion logging industry in the Pacific Northwest. The moratorium on drilling in the gulf, and in much of the country has effectively crippled another industry, as have ever more restrictive rules about almost every possible pollutant. These new regulations have almost no positive benefits to society and great costs. All the efforts of writing tax laws and collecting taxes are important to government but produce no wealth. And the time and effort that individuals and corporations must devote to obeying rules and paying taxes are all unproductive of wealth.

All human institutions, if left to themselves, start with promising motivation toward positive goals, but soon end up being run mainly for the people who run them and for their own employees, with their original stated purposes strictly secondary. Inner city school systems are a perfect example of this. The systems fail to meet the needs of a majority of their students, but they do well by their teachers other staff and administrators. It is very rare that one of these is fired for incompetence, though the systems are functionally incompetent. In general government employees get to bargain for improved benefits and conditions with politicians whose campaigns they contribute to, a situation that is the epitome of corruption.

If left unchecked government employees evolve into an aristocracy, with special rules and privileges unavailable to the private citizen. Actually aristocracies of the past consisted of those who had especially served their king or tyrant; just like high level civil servants. And in the Soviet Union, society was highly stratified, with the higher levels of civil servants allowed to shop at separate stores and go to separate hospitals from those available to ordinary citizens. This is still true in North Korea. What is most embarrassing about all this is that the government eventually fails to perform its basic functions effectively as in North Korea, the USSR and many other countries.

There is even another disadvantage to government spending. What is valuable to an economy is wealth producing expenditure and more particularly, sustainable wealth producing expenditure. Mere spending that is neither of these has the effect of crowding out the important sustainable wealth producing expenditure.

For example, I have observed that many people will not seriously look for jobs until their unemployment compensation runs out. Thus extending unemployment compensation periods tends to keep these people out of the job market, even when they could get jobs.

Another example: it is not a coincidence that the areas that have received the most pork government spending (West Virginia and Western Pennsylvania) have remained quite poor. Powerful congressmen put people to work on pointless public works thereby crowding out the natural development of sustainable wealth producing businesses. When these projects ended there was little of the latter left.

And another: Government spending and incentives were the biggest factor in producing the housing boom which produced an unsustainable glut of housing. The ending of this boom produced the recession of 2008 which is still with us.

In all of these ways government expenditure is a drag on the economy. It is no wonder therefore that the massive government expenditures of the “stimulus” actually tended to cripple it.