Sunday, May 2, 2010

Eight Economic Problems and Eight Solutions

This was previously posted on on or before 2008-04-05:

In recent months, numerous people have asked me: What's wrong with the economy, and how can we turn it around? This essay I educate you, once and for all, about the eight main economic problems of today, and their eight solutions, so save this piece and forward to your friends - especially those who are running for office.

There are several problems with the economy. Some are short-term, others are long-term. Some have painful fixes, and some fixes are painless:

1. The falling value of the dollar. Long-term, the value of anything is a function of only three factors: supply, absolute demand, and relative demand to hold. In today's case, the two problems are with supply and relative demand to hold. The supply side is straightforward, with the US central bank simply creating too many dollars. It does so to finance the US Federal budget deficit as well as lending the money to banks and other credit institutions. Relative demand to hold (dollars) is a function of expectations of future economic and political developments. In brief, the market is believing that the US will suffer from higher taxes and more regulations, leading to less goods and services produces, and thus lower demand for dollars.

2. Higher prices on energy and other commodities. This is a similar case to the dollar, but in reverse: Supply is not growing much, but both real demand and relative demand to hold, are both going up. Supply is constrained because it's almost impossible to profitably increase the quantity of things such as energy. Regulations and litigation have caused the US to build not a single on-shore oil refinery or nuclear plant in about 30 years. Demand is growing because countries such as India, China and Russia are growing rich following low taxes, relatively low regulation in many areas, and privatization. Besides, didn't many Americans - including many environmentalists - argue for sharp increases in energy prices so that people would use less energy? At least according to them, $4/gallon gasoline must be a big improvement over 10 or 20 years ago, when the price was close to $1. You can't have it both ways...

3. Too high taxes. All sorts of businesses are leaving the US, incorporating anywhere from Macao to Ireland and Latvia because US taxes have become some of the highest in the world. US corporate income taxes are the second-highest in the world, after Japan. Many countries have zero capital gains taxes, whereas the US is at 15% and Hillbama proposing increases to 28% or 39.6%. The top income rax rates in Albania, Estonia, Hong-Kong and Russia are 10%, 13%, 15% and 17%. If you live in Manhattan, federal+state+local income tax is 49%. Small wonder the US economy is depressed with people fleeing abroad. Tax revenue has gone up for almost all of the last 67 years, with the biggest increases in the last 5 years. 70% of income taxes are paid by the top 5% of income earners. 50% of all taxes are paid by the richest 1% of taxpayers. In other words, the vast majority of taxes are paid by a few people at the top, who in some cases are in the process of moving their money abroad following the (recent and expected future) tax increases here at home, in combination with tax cuts abroad.

4. Too much government spending. As high as taxes have gone through the roof, they have not kept pace with spending. This year, the Federal budget is $3.1 trillion, or over over $10,000 per American. Of this amount, approx 20% goes to the department of defense. Most of the other 80% goes go social security, medicare and medicaid, plus gigantic government bureaucracies that make up new rules and new forms to fill out. The government employs literally millions of bureaucrats, whose jobs are to make it as difficult as possible to start and operate a business.

5. Too many regulations. Many US industries are very heavily regulated. It is illegal for FedEx and UPS to deliver first-class (i.e., regular) mail. Affirmative action laws add bureaucratic cost. Sarbanes-Oxley adds billions in cost and forcing companies to list their shares in London and Hong-Kong instead of NYSE and NASDAQ.

6. Too many lawsuits. US corporations spend more money on legal fees than on research and development. Do you think this is the case in India, China, Ireland and Lithuania? Of course not. A doctor's insurance is now over $300,000 per year. And you wonder why health care - and many other things - are expensive?

7. Too little savings. Americans save a very small portion of their income. Investment can only come from postponed consumption, so to make up for the difference we must borrow or receive direct investment from abroad. Americans don't save enough money because they believe that the big government welfare state will bail them out when they have a problem (social security, medicaid, medicare, disaster relief after a hurricane). In addition, we tax savings more than in other countries with higher rates on capital gains, interest and dividends. This party is all coming to an end as foreigners may become unwilling to lend to Americans or fail to invest here. Hence a key reason for the fall in the dollar's value.

8. Too much property owned by the government. Why is 92% of the land in America owned by various levels of government? Who owns most forests? Who owns 40 miles of beachfront between Orange County and San Diego? Who owns the three airports in New York? The US Post Office? The US is normally considered a capitalist country, and the US President is the leader of the free world, but fundamentally the US economy has more in common with the old Soviet Union and Red China under Chairman Mao, than most people realize. High taxes, high spending and high regulations are measurements of the degree to which a country is a socialist country, but so is the degree of government ownership of the most basic means of production: land.

The solutions to these eight problems are as follows:

1. How to stop the value of the dollar from falling? Print less dollars.

2. How to stop energy and other commodity prices from increasing? See (1) plus allow for new/more supply of energy by allowing people to build nuclear plants, oil refineries and drill for oil. But then again, some have been arguing for higher energy prices for decades, so...

3. How to deal with people and companies fleeing the country to lower-tax places? Cut taxes here at home. We should not have higher taxes than Albania, Estonia, Hong-Kong, Russia and Ireland. In addition to cutting taxes, make them simple by abolishing deductions and not more difficult to figure out than the tip on your restaurant bill.

4. How to deal with runaway government spending? Combine medicare, medicare and social security into one simplified - and much smaller - program called "welfare" which will be there to keep people from starving and perhaps freezing to death (simple solution: put people on buses to Florida, where it's warm and there are plenty of oranges growing on the trees). This would cut government spending by more than half, from $3.1 trillion to just under $1 trillion, cutting the tax burden on a family of four from $40,000 per year to approximately $12,000.

5. How to deregulate? Abolish all laws that don't interpret and enforce private property rights.

6. How to get rid of costly lawsuits? This one isn't lacking in complexity, but basically one key part of the solution is to have the losing party in a lawsuit pay for the other party's legal fees. That alone would probably cut over 90% of lawsuits.

7. How to get people to save and invest more? Cut taxes on saving and investments to zero. Also, by abolishing most forms of welfare programs, people would have a greater incentive to save. This would also attract foreign capital.

8. How to get rid of too much governmnent property? In the finest tradition of Margaret Thatcher and Boris Yeltsin, privatize! They turned two extremely poor economies into economic powerhouses not only by cutting taxes (which was extremely important) but also by selling/giving government property to the public. The US just privatized $20 billion worth of radio spectrum for wireless Internet in March 2008. Bravo! Now go sell most of the 92% of land it owns in this country, the US Post Office, airports, etc.

In summary, all of these cures to our eight economic ills are mainstream Economics 101. Generally, no serious economist disagrees with any of this. It's just that politics itself has its warped biases to do all the bad things. That's why so many economies around the world are operating at dramatically sub-par levels of performance. We may never get the optimal economic system installed - unless I am given dictatorial powers - but I still hope that someone will listen and do at least something in the right direction. The eight points above would do most of the trick.