Saturday, December 4, 2010

Quick Hits

  1. A recent realization is that speculative bubbles are necessarily predatory.  There's nothing else to conclude from what Henry George observed in the 1880s, or what we've observed over the last decade.  Anybody who believes that a government owned and controlled by the banks forced the banks to loan money against the banks' wills is a complete and utter fool.
  2. I've long been of the view that placing blame for what went wrong is completely useless.  What matters is understanding WHY things went wrong so you can avoid the same thing happening again.  To that end, as much as I have observed centuries of lies in the economic profession, who is to blame is of little interest or consequence to me.  The point is to identify the problem (false messaging) and deal with it.
  3. For a much longer time, I have been of the view that the First Amendment was designed by the founders to help troublemakers self-identify.  I've clearly taken on the role of a troublemaker, but the good news is that so few people read my scribblings that the scale of the trouble I potentially threaten is so miniscule that it is not worthy of notice.  Right?  Hellooooo!?  Right?
  4. I was asked today whether I was aware of the New World Order threat.  I had to admit that I was not well-versed, but that I generally understand the mythology behind it (at least in some of its instantiations), and that I am open to being convinced about it.  That being said, focusing on 2 above, I have no control over what other people do.  The only thing I can control is my own actions.
  5. Hubris = opportunity (thank you, by the way)
  6. If we were to create a bell curve to represent evil v. good, where "good" equals the people within a standard deviation of a mean, and "evil" equals everybody more than a standard deviation less or more than the median, we'd roughly identify the number of evil and good people in the world.  The problem is that the size of the standard deviation depends entirely upon the values of the society in which the individual operates.That is, the more depraved the society, the narrower the "bell" of the bell curve.  Hint: we have a VERY narrow bell these days.
  7. A big thank you to the people who think beyond themselves and try to make things better for the world at large.  You're awake and human.  Forgive the rest of us who aren't.

Friday, December 3, 2010

Henry George Was Very Insightful

I started flipping through George's Progress and Poverty last night, and I was extremely impressed by his thinking in terms of scoping the problem. 

There were a couple of things that caught my eye, and here they are.  First, George seemed to consider speculative land bubbles as a means to increasing rents, not necessarily as an end in and of itself.  Second, George did, in fact, lump speculative gains from the sale of inflated assets as part of rents.  I realize this at least partly undercuts my first observation, but it does not do so where it counts.  His focus was where the classical economists put it, which was on the marginal value of production (i.e., whatever is left after labor works capital to produce something, and capital pays the rent).  When you frame the inquiry that way, of course speculative gains are completely overlooked. 

Remember, though, I gleaned this from a very quick scan of certain sections of the book.

Still, my intiution is that George would have been better served to expand classical economics' labor-capital-rents paradigm to include a separate category for winnings instead of trying to redefine the term "rents," which neoclassical economics ultimately disappeared, thus extinguishing his argument.  This explains the deep problems I have with starting a debate within somebody else's framework, particularly when that framework appears to be built upon layer after layer of lies and obsfucation.  The person who chooses the battlefield most often wins the battle.  Framing matters.

Thursday, December 2, 2010

(Minor) Changes to the Blog's Design

The biggest change is that I've added a recommended reading list with links to full view books at Google Books, all of which can be downloaded as .pdfs and some of which can be downloaded as .epubs for reading on smaller format ereaders (other than Kindle).  The first addition to the list is Henry George's Progress and Poverty, which I have skimmed through enough to realize it is worth a careful reading.

I'll be adding other historical texts as time goes by.

The other changes are quite minor: I've removed two blogs from my blog roll.  The removal of Barry Ritholtz's Pig Picture is a permanent change.  I stopped reading his blog awhile ago, mostly because it has started to feel less like an econ blog and more like a trader blog.  The removal of Max Keiser's blog is temporary, and it is also because it has taken on a "trader" vibe.  His attempt to manufacture a "kill JPM with silver" seems more like the pumping that will lead to his dumping silver than it does a genuine effort to create meaningful change.  I still enjoy everything else about his site.

Rethinking the Function of Taxation

I've come to the realization that taxation determines whether an economy is capitalist or financialist.  Let me explain what I mean and the implications of viewing the world this way.

In a prior post, I stated:

The focus of this "checkpoint" post is tax policy, which many claim redistributes wealth. This is incorrect. Tax policy, against the broader background established by monetary, fiscal and industrial policies, does not so much affect one's wealth as how one's wealth is distributed among wages, entrepeneurship and rent-seeking.
I've emphasized "wages, enterpeneurship and rent-seeking" because implicit in this statement is the classical economic triumverate of labor, capital and rents, which I think (mostly) accurately describe what one would find in a capitalist economy.  There is a trick here, however, and that is the composition of "rents." 

Classical economics was developed at a time when both land rents and pure financial speculation existed.  Since both rents and the gains from speculation are "money from nothing," I have to believe that speculative gains (which I will call "winnings" from here on at)  were folded into the conception of rents as used by classical economists.  I'm sure that I could quickly confirm my intuition, but it is a secondary issue.  I understand from, oddly enough, an reviewer, that Adam Smith viewed speculators as a particular problem and even made recommendations similar to mine that money should not be lent to them for the purposes of speculation (I'll have to read the pages the reviewer identifies from Wealth of Nations). 

It may well be that classical economics was developed to paper over the dangers of speculative bubbles due to debt-financed asset speculation, which Smith (apparently) clearly identified and discussed in 1776.  Perhaps one way to think about things is that Smith viewed the economy was in terms of labor, capital, rents and winnings, and the classical economists came along and "disappeared" winnings into rents, just as neoclassical economists came along and disappeared rents (including winnings) into capital, just as neoliberal economists through direct financialization of the real economy have disappeared labor into capital, thus abstracting the real economy away entirely.

Regardless whether this theory actually pans out, I feel compelled to consider the real economy in terms of four factors, not three: labor, capital, rents and winnings.

Our current tax system is heavily skewed in favor of rents and winnings and against labor and capital.  Although speculation in the secondary markets is not considered an investment in productive capital for GDP purposes, the tax code treats winnings from longer-term speculative trades as "capital gains."  Similarly, our tax code encourages the destruction of domestic capital and investing in foreign capital by allowing domestic corporations to shield profits made and sold entirely offshore from taxation.  The destruction of domestic capital is commonly known as offshoring jobs because that is the immediate effect on workers (and it plays well in the news), but I think the destruction of capital is the real harm because productive capacity that potentially spans decades is lost.

The current tax system was put in place piece by piece since the days of Ronald Reagan (with some foundational acts by Nixon and Carter).  Another important change was the shift in 1975 to targeting monetary aggregates, which is best viewed as form of inflation targeting.  At the time, stagflation had set in, and monetarists like Milton Friedmand and Paul Volker were complaining that the Fed only focused on managing interest rates and not on the true cause of inflation, i.e., an increasing money supply (specifically, I believe, M0 and M1).  If we apply the key insight of Prospect Theory, which is that loss aversion dominates economic decision-making, and it is easy to see how inflation-targeting results in a strong (if not manic) desire by those who have accumulated wealth to put there money into something that GUARANTEES a return greater than that of constantly compounding rates of inflation. 

Did you catch that?  Inflation-targeting creates a strong demand for "investments" that perpetually and exponetially grow faster than inflation.  (FYI - to make my life easier, I'm going to assign the acronym "PEG" concept of perpetual exponetial growth.)  The result has been a categorical shift away from capitalism and towards financialism as the tax system was skewed to clear the way to meet the demand for PEG investments. 

This suggests that to shift back to capitalism from financialism requires (1) removing the artificial demand for PEG returns on existing wealth caused by inflation targeting  and (2) adjusting tax policy to encourage investment in capital and discouraging speculation.

The first point deals more with monetary policy, which I have not thought through yet within the context of financialism and will save for another time.

Regarding the second point, it makes some sense to start with Henry George.  Henry George proposed his Single Tax as a way of preventing land speculation and doing away with land rents in one fell swoop.  The problem with attempting to apply George's solution today is that, with financialization, pretty much all asset classes have become prone to speculation, relegating land speculation to a bit player.  Indeed, when you consider that the housing bubble was driven by speculation in the derivatives market, we've reached a point where the real economy dog is being wagged by the financialist tail.

Given the ability of financial speculators to innovate around laws and regulations (i.e., cheat), I think it makes sense to apply different tax rates based on the type of income (returns on capital, wages from labor, rents and winnings), with capital income (including dividends) being taxed the least (perhaps even not at all), wage income being taxed modestly more (and most likely less than they are today), rents being taxed moderately more, and winnings being taxed out the wazoo.   

Goodbye debt-financed asset speculation.  Goodbye destruction of domestic capital and job offshoring.  Goodbye average people complaining about income taxes (and thus being coopted to vote against their own best interests).  Goodbye banksters. 

Hello domestic capital investment.  Hello full employment.  Hello American capitalism.

I definintely need to put more thought into this, but I wanted to put a stake in the ground.  I suspect that CAPM itself provides the basis for constructing tax and monetary policy so as to render CAPM inoperative and unattractive.  One key thing to do is use tax and monetary policy to twist the dials of the Miller and Modigliani equations to make it clear that actual investment provides a far better return than speculation.

Wednesday, December 1, 2010

The Third Way: Cutting Through the False Left-Right Frame

Can we throw away the false "two sides" frame of politics yet? 

What I’m seeing right now is at least three sides.

First, we have the “right,” which believes that government never works and unwittingly fetishizes corporate tyranny as a public benefit.

Second, we have the “left,” which believes that government always works and unwittingly fetishizes government tyranny as a public benefit.

Finally, we have a growing group of people who understand that big business and big government are actually one and the same, and who know that the system must be changed fundamentally if we are to avoid a return to a new form of pre-Enlightenment feudalism.

The fact is, the biggest service we can do for our growing movement is to open the eyes of the so-called “left” and the so-called “right” to the fact that big government and big business are the same thing, that both “sides” are supporting policies that tighten the noose around their freedom. What they’re doing right now is the political equivalent of auto-erotic asphyxiation that is sure to go wrong, leaving the body politic swinging pathetically from the closet door, the belt of liberty cinched tightly around its neck.

To have any hope of turning back the tide of the neoliberal Counter-Enlightenment, all of us need to get past the polarization and bunker mentality that has been forced on us by the dominant, normative narrative.

**Note: this post is adapted from a comment I made over at Russ's place.  Visit it.  He makes you think.