Ned Williams

Structural Unemployment: The Only Cure

Sorry Jeff:

I like most of your stuff, but this one was awful.

First of all, you confused productivity per hour with total worker productivity. While it might be true that more can be accomplished with a 40 hour week verses an 80 hour workweek, that will not hold when you go from 40 to 20. If it held, employers would voluntarily reduce the workweek. Since it does not, a reduction in workweek would mean a reduction in pay for the individual.

You also assume that workers and jobs are interchangeable. It would not be possible for 40 workers to take the place of one, by working one hour each. This is especially true in the age of the "knowledge worker".

You are also missing the "big picture" on productivity. When you introduce a machine that reduces number of laborers from 2 to 1, the retained laborer may or may not increase his pay based on the level of specialized training required to operate the machine. In addition, manufacture of the new machines creates new jobs. Also, increased corporate profits must go either into consumption or investment, both of which ultimately create jobs. Finally, if the new machine allows cost reduction of the product or service, the consumer will have more money to spend elsewhere, which also creates jobs.

Unemployment is caused by a poor investment environment and artificial supports like unemployment benefits that do not allow the supply of labor to drop to the demand level.

Regulatory Reform: The New Geithner Plan

While some leverage restraints are definitely called for, there is an inherent "Catch-22" when you limit leverage. If more liquidity (equity) is required, return on equity is reduced. If ROI is reduced, who will supply the equity?

How PHEVs and EVs Will Sabotage America's Drive for Energy Independence

All these decisions!!

How will the central planner decide for us???

Cash for Clunkers: An Analysis

Bastait described the fallacy of destroying property in his broken windows parable. In it he described the unrecognized economic loss of economic activity caused when an object that has been destroyed must be replaced. Money spent could have gone to a more worthy endeavor which would add to well being rather than just maintaining status quo.

Regarding the green aspect of the clunkers, no consideration has been given to the additional carbon released in the manufacture of new cars and in the transportation and destruction old cars, before their time.

While it is true that new cars get better mileage, is not also true that owners will show off their new cars by driving them more, especially since better mileage lightens the apparent cost of driving.

Finally, we have gotten into this financial crisis because of the debt piled up by consumers. The purchase of a new car will add significantly to outstanding credit balances. Since few wealthy people have clunkers, those at lower income levels will be the ones buried in debt.

Why Economic Dogma Threatens Our Future Prosperity

Lost in this discussion is the fact that revenues are relatively fixed as a percentage of GDP [Hauser's Law]. The Laffer curve shows us that at the point of maximum revenue collection, increasing tax rates are balanced by an equal destruction of the tax base. Therefore the optimum long term strategy is to have a tax rate below the optimum rate, in order for the tax base/economy to grow at a reasonable rate.

Under both Reagan and W, tax revenues increased with lowered rates, yet under Clinton an increase in the tax rate also raised revenues, indicating that we're probably close to the Laffer maximum at current rates. [Note that several high tax states have pushed the combined tax rate above the Laffer maximum and are suffering revenue declines.]

While revenues are relatively fixed, spending has no limit [we certainly have seen that recently]. If we're going to target spending relative to expected tax revenues what should be the limit?

Over the long term, increases in National Debt are not a problem, as long as the economy is growing faster than the debt, in nominal terms. For example, a 3% increase is debt over a period when the economy grew at 5% [including the inflation that has the effect of lowering the "real" value of the debt], is a decrease in debt relative to GDP and the ability of the economy to pay the interest on that debt, since revenues are tied to GDP growth.

In order to achieve this target, legislators must not only constrain themselves [fat chance], but spending patterns must reflect the fact that the economy goes through business cycles. If there is any attempt to have counter-cyclical spending at the same time that revenues are falling [now], targets will be blown out of the water.

I am in no way condoning excessive deficit spending. I also believe that spending relative to GDP could be cut way back or made more productive. If that could happen, a slight amount of deficit spending may allow for decreasing tax rates, in order to stimulate current and future GDP growth.

For a complete description of how this could be done, look for my upcoming book, "Fixing Everything".

The Case Against Raising the Capital Gains Tax Rate

Alphameister:

Sorry, I misunderstood.
If you got rid of corporate taxes, I assumed you would have to tax investors and raise tax rates, or owners of small companies would pay themselves and high paid execs in dividends to avoid taxes on salary.
It's an interesting idea and I plan to think about it further.
I would say that the embedded taxes in price are primarily salary and payroll taxes, not profits. If they added a federal sales tax or VAT to make up the difference, the after-tax price of the goods would be the same and there would be no increase in quantity purchased.
Finally, it would be politically impossible to get rid of the income tax on those evil corporations, no matter what the economic justification. (Same problem cap gains currently faces.)

Thanks for keeping my brain stimulated.

Ned


On May 27 06:02 PM Alphameister wrote:

> Who said anything about shifting a tax from corporations to investors?
> I'm saying the corporate income tax is a cost of doing business and
> shareholders earn essentially the same return whether or not there
> is a corporate income tax (as a review of business history will confirm).
> So I don't accept the "double taxation" issue.
>
> As for inflation, it is indeed primarily a monetary phenomenon, but
> the relevant equation is MV=PQ. MV remaining the same, eliminating
> the corporate income tax would lower P (as companies competed away
> the tax benefit) and also increase Q (quantity of goods and services
> produced) as better compensated workers could and would increase
> demand for cheaper goods and services.
>
> Would higher income taxes on increased numbers of better-paid employees
> make up the shortfall in government revenue? Maybe not completely,
> at least without a federal sales tax, but they would tend to produce
> a significant offset.

The Case Against Raising the Capital Gains Tax Rate

Yellowhoard:

Love the Midas look.

Shine on!

Ned


On May 27 10:10 AM yellowhoard wrote:

> The government obviously wants less investment.
>
> You tax behavior that you want less of.

The Case Against Raising the Capital Gains Tax Rate

Alphameister:
I agree with your thinking process, but disagree on specifics.
Complete answer is too long for this venue, but I agree that we must eliminate double taxation. That leaves the problem of taxing either corporations or stockholders. Efficiency leans toward the corporation as the easiest collection point, especially when you consider that withheld taxes on salaries will necessarily be collected by corporations.
Embedded taxes are a big issue for FairTax proponents, so the issue is well covered in the Boortz, Linder book, which agrees with you. However, being a totally disagreeable character, I must disagree with you both. If you remove taxes from corporations and place it on investors, the yield on investments must go up to reflect the additional cost, so it will have no impact on how much the corporation must charge for products.
Re inflation, that is a monetary issue. Increased costs do put upward pressure on prices, but the market must decide what it will pay based on its allocation of available capital. Increased prices across the board reflect increased cash available. With fixed available capital [not today's standard], increased prices in one area indicate decreased supply or reduced consumption of something else.

Ned

The Case Against Raising the Capital Gains Tax Rate

Trane:
Stocks are valued based on known factors, estimations, and emotion. Tax considerations are one of the known factors, which can be forecast with declining certainty into the future. If the tax rate changes, it changes the after-tax yield now and into the future. It is highly unlikely that a change in the known factors will not be reflected in the price of stock.

If the capital gains rate is increased, I will be happy to sell any stock I own to you at pre-announcement prices.

Ned


On May 27 11:06 AM Trane250 wrote:

> Stocks are usually valued on such things as growth potential, dividend
> yield, proprietary models of investment houses, personal predilection
> of the investor, etc., not on after tax capital gains. It's no surprise
> that you are an adherent of voodoo (sorry, "supply side") economics.

The Case Against Raising the Capital Gains Tax Rate

Alphameister:

Thanks for your kind words. While I did assume away the 50% of stock ownership that is tax sheltered, most of those accounts are not actively traded. Day traders, on the other hand, pay a significantly higher rate that will not be affected by a increase in the capital gains rate. The important take-away is that the capital gains rate has some impact on the price of stock, but an even larger impact on the accumulated-gain tax base.

I am struggling with whether to publish something now on my politically viable solution on how to get the capital gains tax abolished, because it's an integral part of the total solution for taxes and entitlements described in my book. The impact on stock prices will be magnified by a concurrent lowering of the corporate tax rate. The solution can stand alone, but it involves a "painless" tax, that is even less painless, when it's part of the integrated solution, since there will be no out-of-pocket expense.

Ned


On May 27 10:01 AM Alphameister wrote:

> Excellent article, though I'd imagine the existence of tax-sheltered
> investment accounts would alter your numbers somewhat. Unfortunately,
> nobody in Washington (at least no Democrat) is able to see beyond
> intended consequences.

Putting Deficits into Perspective

edgebander

Current government spending is outrageous and the inflation risk is incredibly high. This article is not intended to justify any spending commitments under the last two administrations.
The book supports a citizen revolt, by presenting a rational plan to get government spending under control. It's no good to throw the bums out, if you don't have specific instructions for the new bums.
Spending will be limited to 20-22% of GDP. It is only that high, because the plan is intended to be revenue and expense neutral (pre-bailout), and because it will take approximately 30 years of increased interest expense to work off legacy costs from excess entitlements and the portion of the bailout spent before we retake control or before credit markets slam on the brakes.
Once you've gotten spending under control, limited debt financing is a reasonable way to finance it, but before you can discuss such a plan, you must put deficits in perspective.

Ned

Putting Deficits into Perspective

Farmer:

I totally agree that we need to reboot, with a whole new attitude from our legislators. That's the point of my upcoming book, Fixing Everything. We need a new framework for spending.
On the subject of TIPS and "cost of living" escalators, as the ratio of workers to non-productive decreases, demand for their services will go up. Competition for their services will drive up real take-home demands at an accelerating rate that will stay ahead of such adjustments, creating a hyper-inflationary spiral. The only way to stop it will be to cut benefits.

Ned


On May 25 10:06 AM farmer448 wrote:

> The only problem with the analysis is we have things like TIPS and
> cost of living adjustments. People forget that in the inflation
> of 1973 through 1980 the middle class was again hosed. Thus the
> use of inflation as a hidden tax was greatly reduced.
>
>
> Congress has a lot of tough issues on its plate. It is time for
> the electorate to force congress to act or do not re-elect them.

Solve a Stimulus Package Problem with the Orange Money Plan

Really dumb idea.

Money works as a medium of exchange, because it is a store of value. You have artificially created an expectation of 100% inflation on a specific date.

The day those bills are issued, stores will be happy to redeem them for the $10 they will drop down to, not the $20 listed.

How about cutting their value in half every week and calling them Weimars? Bring your wheelbarrow.

The 'Right' Way To Value the Stock Market

Interesting article, however, the model does not include taxes on capital gains or dividends. Without that adjustment, it is inappropriate to compare historic P/E ratios, since the after-tax returns differ. Hypothetically, would there be no change in P/E if the capital gains rate were 100% or 0%?