What do Henry Ford & Joseph Stiglitz have in common?

Henry Ford was a leading industrialist, perhaps THE leading industrialist, of the early 20th century.

Joseph Stiglitz is a current leading economist, and a winner of the Nobel Prize in economics.

Here's what they have in common:  They both recognized that, in order for the society as a whole to be a prosperous one, the common person needs to have much more than a subsistence income.  It's pretty simple, really.  If most people are broke, who's gonna buy the products of industry?  In order to sell lots of cars & washing machines & insurance policies, lots of people need to have money to spend.  If only the rich have extra money, well, there are not very many of them, so you can sell only a much smaller number of these items.

Ford came upon this principle early in the rise of the Ford Motor Company.  Through innovations in assembly line production of automobiles, the company rapidly increased the number of cars they were able to produce each week.  When this number was small, Ford had no trouble selling all of them, because his car was very practical, and his prices were lower than his competitors.  But as his output rose, eventually there came a time when there just weren't enough buyers that could afford a car.  This was at a time when most people earned just enough money for the basic necessities, which did not include a car.  Ford then began to pay his employees a lot more than the prevailing wage at the time.  This had multiple effects.  It got him the most qualified employees available, and an endless supply of them, so that he was able to continue to expand his factories and his production.  It also caused an economic boom in the Detroit area because of all of the money that Ford's employees were spending in all of the common types of businesses.  The well-know multiplier effect was in operation here; most of the businesses in the Detroit area prospered, and this caused even more spending.  Furthermore, other employers were forced to raise wages in order to prevent losing their employees to Ford.  Detroit became a boom town, with new residents flocking there, lots of cash being spent, and plenty of that going to buy new Ford cars.

This principle, of prosperity resulting from good wages for the common worker, has been known to economists ever since that time. The reason that Joseph Stiglitz is invoked here is because he recently wrote a book about it.  His book is entitled: "The Price of Inequality: How Today's Divided Society Endangers Our Future."  It seems that in recent decades America has drifted away from this prosperity principle, as the common worker has been losing spending power, while the rich are getting richer.

Should the government get out of the marriage business?

In our country it's mostly the state governments.  They issue marriage licenses and give certain privileges to married couples.  The federal government treats married couples differently for income tax purposes.  The following quotation is from Wikipedia:

"According to the United States Government Accountability Office (GAO), there are 1,138[1] statutory provisions in which marital status is a factor in determining benefits, rights, and privileges. These rights and responsibilities apply to only male-female couples, from the 1996 Defense of Marriage Act (DOMA), defining marriage as between a man and a woman."

I'm nowhere near the first to propose this, but I think marriage is basically a religious rite, and should be left entirely to the churches.  (and of course synagogues, temples, etc.)  The governments of the fifty states should deal with civil unions, AKA domestic partnerships.


This approach would end the current controversy over whether same sex marriages should be allowed.  Some churches would perform same sex marriage and some would not.  There would be controversies within many churches, but that's just a matter for those believers.   Most states would recognize civil unions between two people; I think eventually all states would.

A few, very few, public figures have suggested that marriage, being traditionally a sacrament, should be something for religious organizations to deal with.  Governments, on the other hand, should be responsible for defining and regulating civil unions, or domestic partnerships, however they might be named.

This makes a lot of sense to me.  It would end all of the quarrelsome controversy over same sex marriage, except within individual churches.  Each religion could make its own rules about marriage.  Same sex couples presumably would qualify for civil unions.  Those who also want to marry would have to find a church that accepts that.  Disputes on that issue would take place within individual churches.

Each state government would have the responsibility of defining civil union and deciding how it works. Presumably, the vast majority would not specify that the partners need to be of opposite sexes.  I think that eventually, all states would permit same sex domestic partnerships.

This also make it possible for the civil union concept to be extended toward non-sexual partnerships.  There are many cases of long time friends, who are not lovers, and who have no other highly important relationships in their lives, who might benefit from a civil union, if it was divorced from sexuality. Civil unions might not even be restricted to pairs; small groups of single people who are very close friends might benefit from such an arrangement, and I see no downside for society.

So, in conclusion, I advocate that marriage be exclusively the domain of religion, and that government promote only domestic partnerships.  Many couples, especially those with religion, would choose to have both.  Although this is primarily an issue for the individual states, the federal government would have to confirm that the benefits, rights, and privileges formerly given to married couples, would now apply to domestic partnerships.

Our Jails are too Full

What I might say has been said many times.  Every month or so I read or watch some reportage about our huge prison population.  How can we feel good about our country when so many humans are locked up?
We lock up a far higher fraction of our population than any other country!  How can this be?  Is the typical American a cruel, sadistic bastard?  I don't think that's the case, but there is something very wrong that needs to be changed.  The latest article that I have read is entitled The Caging of America, by Adam Gropnik.  It's in The New Yorker, and you can read it here:
http://www.newyorker.com/arts/critics/atlarge/2012/01/30/120130crat_atlarge_gopnik#ixzz1n8vbMjpF

That's a better article than anything I can write.  This situation won't change until enough people badger their elected representative to change it.  Of course, those who are cruel sadistic bastards will be content with things as they are.

The Right Way to Tax Capital Gains

If I buy something, and sell it later for more than I paid, I have made a capital gain.  If I waited less than a year before I sold it, my profit is taxed like any other income.  The capital gain is added to my other sources of income.  But if I wait a year or more before I sell, then our current tax code treats it differently.  It's considered a "long term" capital gain, and the tax will be 15%.

So what's wrong with that system?  The most common complaint that one hears is that people who earn their living via long term capital gains are getting a tax break that is unfair to regular people.  Those who think this way say that all capital gains should be taxed the same as ordinary income.  But there is another issue that is talked about much less often, and that is the effect of inflation.  Inflation can produce long term capital gains that are totally illusory.  Suppose, for an example, that I bought a house in 1991 for $100,000.  then in 2011 I sold it for $200,000.  It seems like I earned $100,000, right?  But I didn't really, because the 2011 dollars are each worth less than the 1991 dollars.  According to the Bureau of Labor Statistics the $100,000 that I paid in 1991 has the same purchasing power as $166,100 in 2011.   If I had sold the house for $166,100 I would have broken even, or exactly gotten my money back.  Since I sold it for $200,00, my true profit is $33,900.  But I will have to pay tax as if the profit were $100,000.  My tax will be $15,000, which is almost 50% of my true profit.

So it seems that the current system is capable of taxing both too little and too much depending on the circumstances.  My proposal to remedy this is to take inflation into account when computing capital gains. The government already considers inflation for other purposes.  For example, social security checks are adjusted upward annually to compensate for inflation.  And the government sells a type of bond, Treasury Inflation-Protected Securities, or TIPS, whose value is adjusted for inflation.  Hence there is already a precedent for considering inflation in government financial matters.  So what I suggest is that capital gains be inflation adjusted by the change in the CPI from the time of purchase to the time of sale.  The distinction between long and short term capital gains is no longer necessary; it could be eliminated.  All capital gains could be taxed as ordinary income, but they would be computed differently.  The effect of this difference in computation would be to reduce the tax on long term capital gains, but the amount of reduction would depend on how much inflation occurred during the interval between purchase and sale.

My main point here is that capital gains should be adjusted for inflation.  Whether to tax them at the same rate as ordinary income, or to treat them differently, is another issue.  Since new business formation is aided by readily available capital, there is justification for giving favorable tax treatment to long term capital gains.  If this is done I think the waiting period should be something like 3 to 5 years, not 1 as is currently the case.  The latter encourages "flipping", which is not something to be encouraged.  5 years is a reasonable time to wait when you invest in a new business.

Full Employment: Let Me Count the Ways.

Some people think that the free market economy will create jobs for everyone if it is just left alone.  We will never know if that theory is correct because no government will let the economy alone.   However there are many nations in the world with minimal, ineffective, governments that have very little effect on their own economies.  To my knowledge, all such nations are characterized by having mostly very poor people, and a handful of wealthy families owning almost everything.  So, by inference, that supports another theory that says that a true free market economy leads to stagnation and great inequality of wealth. (But more about that another time.)

So, given the type of government that we have, what policy alternatives could lead to full employment, and maintain full employment?  I think we have to start with the fact of today's very high productivity, which means that it only takes a fraction of the population to produce the goods and services that people need.  That leads us to our first alternative, reducing the work week.  If we could get most people to work no more than about 30 hours per week, that ought to keep almost everyone employed, fulfilling our basic needs.  It would also be a boon to the recreation segment of the economy, because people would have a lot more time for sports, hobbies, and travel.

A second alternative is to put more money into the pockets of the common people.  This will enable them to buy a lot of stuff that they don't really need, but would like to have.  This causes businesses to produce more and hence hire more.  With sufficient monetary stimulus of this type we should be able to keep the economy humming along at full capacity.  With more people working and more income to businesses, tax revenue would increase, and this would, at least partially, pay for the monetary stimulus.  If further revenues are required they can come from increasing taxes on those with very high incomes.  If this approach is taken then America can continue to have lots of giant TV sets, smart phones, luxurious cars, muscular trucks, and full closets.

A third alternative is for the government to be much more aggressive on infrastructure maintenance and construction.   This means letting contracts to build or repair bridges, roads, dams, railways, communication lines, hospitals, clinics, job training centers, and so on. The U.S. Postal Service is part of our present infrastructure, so if this policy were adopted we would certainly maintain Saturday delivery, and not close any existing post offices.  On the contrary, new post offices would be built so that everyone has one close by.

A fourth alternative is to imitate the pharaohs of ancient Egypt, who employed large number of people to build pyramids.  Nowadays, we would build space vehicles instead of pyramids.  In addition to expanding the space program, we would increase support for scientific and industrial research, and for the arts.

The fifth alternative is to expand the military establishment.  Of course we are already spending a large proportion of the government's revenue on defense.  This goes not only to paying the salaries of the million and a half service personnel, but also to funding 100's of corporations, large and small, to develop and produce their equipment. (Think tanks, aircraft, ships, missiles, rifles, uniforms, and 100's of other things.) However, we have had a lot more men under arms in the past, so it would be possible to greatly increase the size of the military.

Those five methods are not mutually exclusive; any of them might be combined with any of the others.  As a matter of fact, the nation is currently doing ALL of them, to some extent.  To achieve full employment it would be necessary to increase one or more of these approaches.

Personally, I would prefer more of the first approach mentioned, reducing the length of the work week.  This would be in line with the historical trend.  Our great-great-grandfathers used to work 70 hours per week; popular demand, along with increasing productivity, gradually reduced the workweek until it reached it's current 40 hours. But since the 1950's the trend to reduce the workweek has not been evident.  Why not resurrect this trend?

Employment, Debt, Deficit & Austerity

Before we get into the details, let me point out that when a government reduces spending, it has to fire people.  If there is already high unemployment, this makes it worse.  Furthermore, these fired people now stop paying taxes, and collect unemployment benefits instead, making the government's financial problems worse. And finally, these newly unemployed people don't have much money for shopping, so the retail industry suffers a hit, and they order less stuff from manufacturers, and so on.  A policy like this, sometimes called austerity, just makes matters worse.

Just to be clear, the debt I'll be talking about is the total amount of money that the U.S. government owes, and that it pays interest on. The deficit is the difference between total government spending and total government income, in one year.  It should be clear that the debt is the result of having a deficit, year after year.  In order to reduce the debt we need to have an annual surplus instead of a deficit.

Deficit and debt are bad over the long haul.  It's quite important to reduce the deficit, and reduce it a lot.  But it does not have to be done immediately.  It's a long term problem.  The main reason to pay off the debt is because of the interest payments that have to be made.  Those are a significant part of the government's total expenses, but in 2011 they are still manageable, still less than what we spend on the military, for example.  But if the deficit remains high, the debt will rise, and the interest payment will eventually become unmanageable.  As we approach that point, interest rates will rise, because lenders will worry about the safety of their investments. Fortunately, that point is still a few years away, but the danger must be taken seriously.

Having 20% of the population under or un-employed is a very serious immediate problem.  That is the principal cause of our large deficit, because unemployed people don't pay taxes!  There is no doubt that stimulus works if it's the right kind.  Giving money to wealthy people doesn't do it.  Same for giving money to large corporations.  What does work is either the government hiring people directly, like Roosevelt did, or letting contracts to private companies for goods or services that require workers immediately.  Since the nation has thousands of roads and bridges that are in serious disrepair, this one is a no-brainer.  Do you remember the bridge that collapsed in the midwest a couple of years ago?  That's pretty serious. That should have been a wake-up call, but it was not heeded by our dysfunctional congress.

But hiring people, or letting contracts, requires money.  If the deficit is already a problem, how can the government spend more money, and where will it come from?  The answer is that you have to go where the idle money is, and that location is well known today.  It is in the financial accounts of large corporations and very wealthy individuals.  If we were to simply return to the taxation policies of 1960's and 70's there would be plenty of money for hiring people and letting contracts.  Our financial problems today are in large part due to a steady reduction of the tax rates on high incomes that began in the 1980's and continue today.

What I'm saying is: Increase taxes on the rich and use the money to fix and build roads, bridges, railways, airports, high speed internet lines and hospitals.  Also use it to train medical workers and technicians in industries with shortages of skilled labor.

When you hire unemployed people you not only remove them from the unemployment lists, but they then have money to spend, which they do. This spending increases demand for goods and services, resulting in more hiring, to produce those goods and services.  It's a positive feedback process.  OTOH, if you give tax breaks to wealthy people, they invest most of that money, and so the economy is not stimulated very much.  (This would be different if the nation had a shortage of capital, but that is not the case.)  The newly employed people also begin paying taxes again.

There are false myths being repeated endlessly by some in public life. One is that if you tax the "job creators" you will hurt the economy.   Well, the evidence is clear: those job creators have been sitting on huge piles of cash for several years now, and they are not creating jobs.  30 years ago, when they WERE creating lots of jobs, they were paying MUCH HIGHER taxes than they are today.

It's when the economy is strong, and growing, that governments can, and should, reduce spending.

I just watched Obama's Speech about restoring a strong economy.

Did you catch it?  I'd be curious to hear your impression.

My impressions of course are those of a progressive, a formerly
enthusiastic supporter of Obama, lately a disappointed, un-enthusiastic supporter.

The speech was GREAT!  Rooseveltian!  He described a serious,
comprehensive plan to rescue the nation from the current economic
crisis, a plan that made very good sense to me.  Furthermore, he threw down the gauntlet to the Republicans, kind of daring them not to pass it. (my words, not his.)  If the Republicans continue with their attitude of the past several months they will not pass his bill.  The only thing that might get them to pass it, IMO, is fear, fear of serious disapproval by the voting public.  This speech, and the public's reaction to it MIGHT have that effect.  Only time will tell.

There is one serious flaw.  Obama said everything would be paid for,
but to do that he is relying on congress to pass serious tax reform.
I don't believe they are capable of that, even if they wanted to.

But I'll bet that this speech increases his approval rating, and I'll
bet that a strong majority of the public would want the plan to be
enacted.

For those who did not see the speech, it was unusual for Obama.  For
example, he said about ten times throughout the speech: "You should
pass this bill, now!"   It was a ballsy and challenging speech.

m

--
Tax the rich - build roads, bridges, railways, solar energy plants,
space vehicles, ...................

Earthchurch Again Looking for a Leader

Many months ago we thought we had found a new leader in Jon McLane, but that has not worked out, so we are again looking for a new leader.

I should have made that announcement several months ago. :(

My earlier post about Earthchurch needing a leader can be found here, dated December 2008.

Fantasy Foreign Policy

Some people think my ideas about foreign policy are too hawkish, so I thought I should explain myself.  This little essay is not about every aspect of foreign policy, it's just about the question of intervention in small dysfunctional nations, or nations with oppressive regimes.  Current examples would be Libya, Somalia, Zimbabwe, Syria, Burma, Uganda and many others around the world.

I would like to see regime change in those countries, but I realize that this is very difficult to accomplish successfully, and at reasonable cost in blood and treasure. What I would like to see is a general policy adopted by the U.N. or NATO or some association of modern and democratic countries.  Following are the general outlines of such a policy, as I envision it:

First, I don't want to see the U.S. attempt to do this on it's own. I want to see a genuine coalition of several nations, with no one of them shouldering more than about 40% of the burden.

Secondly, the choice of the nation targeted for regime change should be considered and debated very carefully, based on various criteria, including:

a) How difficult will it be?  We want to start with the easiest projects.
b) How serious is the situation?  We want to intervene only in the most serious situations, where many people are suffering, or the international community is being harmed.
c) Are we already busy with such a project?  I think these projects should be handled serially rather than two or more at a time. Exceptions could be made for emergency cases.
d) Do we have a feasible plan for nation building after the present regime is overthrown?  As part of this, I would like to see an international team of appropriate experts draft a model constitution which could be used as a starting point.
e) The nations which agree to this intervention must negotiate a treaty among themselves spelling out what each of them will do, and what happens if they don't.
f) The regime to be overthrown must be given a reasonable, but not lengthy, period of time to step down voluntarily.

The policy that I advocate would have a long term goal of reducing the number of despotic regimes, one at a time.  The same policy would apply to countries, such as Somalia, which currently have no effective government.

Some will say “Why should I care what happens over there?”  One thing I can say to them is that it bothers me to hear about people suffering, either suffering from extreme poverty, lack of freedom or cruel treatment.  Human society has improved quite a bit since the time of the Roman empire, although this is not true everywhere.  A typical citizen of Zimbabwe, for example, may have a worse life than a typical citizen of the Roman empire.  Furthermore, they have little hope of improvement as long as their present dictator is in power, and he is determined to hold onto power for the rest of his life.  He is old, but he is likely to be replaced by a person or group that will continue the same totalitarian policies.  The only hope for improvement in the lives of those people is a forcible intervention by an outside power.  There are several dozen nations around the world for which this statement is true.

In addition to oppressing and/or impoverishing their people, these nations often harm the international community.  In the case of Somalia, for example, serious international piracy is able to flourish by having safe bases there.  In other cases, rogue nations sometimes either support or engage in international terrorism.  The Lockerbie airliner bombing is one example of that.

Taxation is not Theft.

I'm writing this in response to those who look upon taxation as theft, or who want their taxes minimized by eliminating most government programs and services.  They want the smallest possible government, usually meaning that they want only police and national defense services. They don't want the government attempting to improve society or make it more fair.  Their attitude is that they have their wealth legitimately, and no one has the right to forcibly take it from them.

The people with wealth have it for a variety of reasons; it was not

given to them by god because they are virtuous.   The most common way is to have the luck of the right parents.  I'm not speaking of genetics here; I'm referring to wealth, knowledge & culture.  Most

wealthy people got a good start by having some inherited wealth, plus the knowledge and attitude to make good use of it.   A child of a blue-collar family typically enters adulthood with no money, and little knowledge about how to get it legally except by getting a job.

Then there are those who get their money illegally or immorally.  This may have happened several generations ago.  Originally, our ancestors came over here and drove the original inhabitants away, by force.  They then had a very productive land to farm, fish, hunt and mine in.  They thereby created a lot of wealth, the original source of which was robbery, extortion and murder.

Throughout the 20th century the Mafia accumulated a great deal of

wealth, using murder and brutality as tools.  A few of them went to

jail, but thousands of their descendants became legitimate business

people, using proceeds from their ancestor's crimes.

Then there are today's CEO's and banksters.  A lot has been written in recent years about today's corporate culture.  How many of those wealthy people deserve their millions?  Many have been stealing from the common people for centuries, using government as one of their tools.

Of course there are also many people, or their ancestors, who earned their wealth through hard work, good ideas and smart planning.  They are not in any way criminals.  But, they did not make their money in a vacuum.  They were within a society, and depended on the infrastructure, and customers, provided by that society.  For example, they needed roads, communication lines, advertising media, workers & customers, to name a few essentials.  Society as a whole is therefore partially responsible for their success, and is entitled to share in the profits.

In the light of the above, how can one take seriously the complaint

that taxation is theft?

Civilization is inherently unfair in the sense that there are always the few ruling the many, and having most of the wealth.   Man is a social being.  It is natural for him to have a government.  Fairness is a desirable goal.  It is fair for the government to reduce the inherent unfairness of civilization by helping the disadvantaged, and that requires taxing the advantaged.