For those of you who wonder how our country will play out after November 4, look no further than Ayn Rand's 1957 novel Atlas Shrugged. In that book, anti-business policies in the form of higher taxes and more regulation caused the major captains of industry to go on strike, shutting down wealth-creation as we know it. That's the essence of Atlas Shrugged, and that is – at least directionally – what we may face if such policies are enacted in coming months and years.
Actually, "shutting down" isn't the only option for investors and businesspeople anymore. Back in the 1950s, when Ayn Rand authored Atlas Shrugged, the US constituted an extremely large share of the world economy. In 1951, the average American ate 50 percent more than the average European. Americans controlled two-thirds of the world's production, owned 80 percent of the world's electrical goods, and produced more than 40 percent of its electricity, 60 percent of its oil and 66 percent of its steel. America's 5 percent of the world's population had more wealth than the other 95 percent, and Americans made almost all of what they consumed: Over 99.9% of new cars sold in the U.S. in 1954 were U.S. brands. By the end of the 1950s, GM was a bigger economic entity than Belgium, and Los Angeles had more cars than did Asia.
There were very few other advanced, functioning economies. The US captains of industry had no ships to sail, no destinations to go. In this respect, the world has changed radically not only over the last 50 years, but perhaps the most dramatically in the last 15: The rise of the Asian economies from India to China, Eastern Europe and Russia, as well as Dubai as the Hong-Kong of The Middle East. Over 3 billion people now have cell phones – half the world's population. Cell phone penetration is Moscow is 176% -- the average Moscowite has 1.76 cell phones.
For this reason, unlike the industrial shutdown in Atlas Shrugged, we could simply see a giant emigration of capital, businesses and eventually people. This has started already, with individual investors and investment funds winding down US-domiciled investments in preparation for international transfers if the US becomes filled with anti-business, anti-rich and anti-Wall Street policies. Most Silicon Valley companies have already been locating an increasing percentage of their workforces abroad.
16 years later, Ross Perot would have called this "The Giant Sucking Sound." In Western Europe in the 1950s, they called it "The Brain Drain." People from all over the world, looking to get ahead, were moving their money, their businesses, and themselves, to The Shining City On A Hill – the place where the business climate was better. We saw it in our universities, we saw it in Silicon Valley, and we saw it on Wall Street. Well, I hope you captured those memories on your home video camera, because the new anti-business climate in America will make them only a memory.
Some Republicans used to make a big deal as late as 2007 about our immigration problem. Now they will have to focus on describing our emigration problem. In 2008, the emigration of our capital started, and it belonged to John Galt.
Sunday, October 26, 2008
Why is McCain Playing Defense on This Market?
His other forward-leaning arguments aside, McCain has been playing defense on the recent decline in the stock market. His defensive posture, insofar as he doesn't have much of a posture at all on the stock market, can subconsciously be interpreted to mean that he feels a bit guilty about it, and therefore avoids the issue. It's become the millstone around his neck.
This is the wrong tactic for McCain! The argument he should be making is that one contributing reason for the market's decline this year is that the market participants dislike Obama's plans for taxes, spending and regulation. Imagine the political narrative if at least half of Americans had come to believe that this is a reason for the market decline?
The merits of the market causality argument can be debated until the end of time. Obama supporters would disagree that his tax, spending and regulation plans are contributors to the market decline. Free-market people will claim that the argument is basically axiomatic in its logic. The point here, however, is not with the fundamentals of that market causality argument – even though I think it is indeed axiomatic in its logic – but rather one of political tactic. By failing to make the argument, McCain is essentially ceding this election season's most valuable real estate to Obama because of a lack of resistance on this crucial issue. This is probably majority of the reason why McCain fell behind in the polls starting in mid-September.
McCain's failure to blame some part of the stock market decline on the market's fear of an Obama Presidency is an even bigger omission than McCain's failure to rebut Obama's linking him to George Bush: I never once heard McCain rebut Obama on this issue – such as in the TV debates – by reminding people that the only one in this election who has ever run against George Bush is actually John McCain, in the 2000 Republican primary. McCain conspicuously fails to rebut Obama by reminding the American people that he sat across the table from George Bush on live TV and basically called him a scumbag. Nobody else has done this.
At this point, McCain's failure to link Obama as one contributing factor to the market decline, will likely cause McCain to lose this election. That is, unless he starts to make this argument his central one for the last 10 days.
This is the wrong tactic for McCain! The argument he should be making is that one contributing reason for the market's decline this year is that the market participants dislike Obama's plans for taxes, spending and regulation. Imagine the political narrative if at least half of Americans had come to believe that this is a reason for the market decline?
The merits of the market causality argument can be debated until the end of time. Obama supporters would disagree that his tax, spending and regulation plans are contributors to the market decline. Free-market people will claim that the argument is basically axiomatic in its logic. The point here, however, is not with the fundamentals of that market causality argument – even though I think it is indeed axiomatic in its logic – but rather one of political tactic. By failing to make the argument, McCain is essentially ceding this election season's most valuable real estate to Obama because of a lack of resistance on this crucial issue. This is probably majority of the reason why McCain fell behind in the polls starting in mid-September.
McCain's failure to blame some part of the stock market decline on the market's fear of an Obama Presidency is an even bigger omission than McCain's failure to rebut Obama's linking him to George Bush: I never once heard McCain rebut Obama on this issue – such as in the TV debates – by reminding people that the only one in this election who has ever run against George Bush is actually John McCain, in the 2000 Republican primary. McCain conspicuously fails to rebut Obama by reminding the American people that he sat across the table from George Bush on live TV and basically called him a scumbag. Nobody else has done this.
At this point, McCain's failure to link Obama as one contributing factor to the market decline, will likely cause McCain to lose this election. That is, unless he starts to make this argument his central one for the last 10 days.
Sunday, October 12, 2008
The Difference Between 1993 and 2009
At the center of Senator Obama's tax policy argument is that by raising taxes on the top 5% of income earners, we are only returning to President Clinton's 1993 tax increases. Let's for a moment leave aside that Obama really is looking to raise taxes on social security (above incomes of $103,000) and on everyone's capital gains, regardless of income. Rather, the Obama argument goes that because we had a relative economic boom following the 1993 tax increase, it's perfectly safe to raise taxes in 2009 as well.
Wrong. There is a major difference between 1993 and 2009 that Obama and McCain alike are both failing to articulate. In 1993, the U.S. was one of the world's lowest-tax countries, with Europe mostly at much higher rates, and most of the Asian economies too underdeveloped to be alternatives for investments and businesses. Eastern Europe was under a cloud of uncertainty and instability following the rapid demise of The Soviet Union on Christmas Day 1991. The 1993 tax increase left the U.S. as the leading free-market economy, albeit at a smaller margin than before.
As we enter 2009, the U.S. position in the world is extremely different than it was 16 years earlier. We are no longer the low-tax beacon of the major industrialized world. Numerous countries in Western Europe, Eastern Europe, Asia and elsewhere now have lower capital gains taxes than the U.S. The same goes for top marginal income tax rates, where Albania is at 10%, Estonia 13% and Russia 17%, just to mention a few. Here in the U.S., the current top rate is 36% for Federal, and if you live in NYC or California, you probably pay very close to 50% all-in. Our 15% long-term capital gains tax can't compete with the 0% rates in many other countries, but don't forget that many capital gains taxes aren't long-term, at which point you will pay 36% or higher.
The effect of the current high-tax policies is becoming an increasing disaster. There has been no employment growth in places such as Silicon Valley in the last decade, because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. Have you noticed the lack of IPOs in the U.S. this year? For the first time in 30 years, there were no venture-backed IPOs. This has a significant impact to the standard of living here at home.
In this context, it is strange to listen to Senator McCain saying repeatedly that he wants to "Keep taxes low." Well, if taxes aren't low, why does he want to keep them? We have some of the world's highest capital gains and income taxes, so we are hemorrhaging investments and human capital to those places where they are not taxed as much.
So what is the 2009 recipe to strengthen the U.S. economy? Clearly McCain is wrong about "keeping taxes low" because they are already way too high. As for Obama, he proposes an outright train wreck in terms of forcing investors, businesses and high-wage earners abroad. Rather, we should once and for all abolish the capital gains tax – whether for short-term gains, or long-term. We should also become competitive with the fastest-growing economies in the world by cutting the top Federal rate to below Albania's 10% rate. Given that some U.S. states and local governments have combined rates of around 10%, it would be appropriate to abolish our Federal income tax altogether. This would stop the hemorrhaging of investments, businesses and talented individuals leaving our country.
What about the budget deficit, you say? Wouldn't abolishing the income tax and capital gains taxes reduce tax revenue? Of course it would. So the answer is to cut government spending correspondingly. The Federal budget now exceeds $3 trillion, or $10,000 per U.S. citizen, of which the Department of Defense is little over 20%. Big ticket items are Medicare, Medicaid and Social Security, for starters. Medicare and Medicaid in particular, are hugely inefficient and unnecessarily bureaucratic ways to induce people to over-consume health care services, and should be abolished in favor of lower taxes that would lead to a booming economy. The list goes on, but the Federal budget can be cut from over $3 billion to around $2 billion immediately, followed by another cut down to $1 trillion over time as Social Security payments dwindle in favor of a private 401(k)-style private system. The government can also raise funds by selling property, including land. After all, various agencies of the U.S. government is by far the largest property owner in the country, and could fill several years worth of budget gaps by auctioning off vast amounts of lands and buildings no longer necessary when we cut off the bureaucracy and the socialist apparatus currently consuming our tax dollars.
Wrong. There is a major difference between 1993 and 2009 that Obama and McCain alike are both failing to articulate. In 1993, the U.S. was one of the world's lowest-tax countries, with Europe mostly at much higher rates, and most of the Asian economies too underdeveloped to be alternatives for investments and businesses. Eastern Europe was under a cloud of uncertainty and instability following the rapid demise of The Soviet Union on Christmas Day 1991. The 1993 tax increase left the U.S. as the leading free-market economy, albeit at a smaller margin than before.
As we enter 2009, the U.S. position in the world is extremely different than it was 16 years earlier. We are no longer the low-tax beacon of the major industrialized world. Numerous countries in Western Europe, Eastern Europe, Asia and elsewhere now have lower capital gains taxes than the U.S. The same goes for top marginal income tax rates, where Albania is at 10%, Estonia 13% and Russia 17%, just to mention a few. Here in the U.S., the current top rate is 36% for Federal, and if you live in NYC or California, you probably pay very close to 50% all-in. Our 15% long-term capital gains tax can't compete with the 0% rates in many other countries, but don't forget that many capital gains taxes aren't long-term, at which point you will pay 36% or higher.
The effect of the current high-tax policies is becoming an increasing disaster. There has been no employment growth in places such as Silicon Valley in the last decade, because U.S. companies are choosing to locate more employees in lower-tax areas such as China, India and Eastern Europe. Have you noticed the lack of IPOs in the U.S. this year? For the first time in 30 years, there were no venture-backed IPOs. This has a significant impact to the standard of living here at home.
In this context, it is strange to listen to Senator McCain saying repeatedly that he wants to "Keep taxes low." Well, if taxes aren't low, why does he want to keep them? We have some of the world's highest capital gains and income taxes, so we are hemorrhaging investments and human capital to those places where they are not taxed as much.
So what is the 2009 recipe to strengthen the U.S. economy? Clearly McCain is wrong about "keeping taxes low" because they are already way too high. As for Obama, he proposes an outright train wreck in terms of forcing investors, businesses and high-wage earners abroad. Rather, we should once and for all abolish the capital gains tax – whether for short-term gains, or long-term. We should also become competitive with the fastest-growing economies in the world by cutting the top Federal rate to below Albania's 10% rate. Given that some U.S. states and local governments have combined rates of around 10%, it would be appropriate to abolish our Federal income tax altogether. This would stop the hemorrhaging of investments, businesses and talented individuals leaving our country.
What about the budget deficit, you say? Wouldn't abolishing the income tax and capital gains taxes reduce tax revenue? Of course it would. So the answer is to cut government spending correspondingly. The Federal budget now exceeds $3 trillion, or $10,000 per U.S. citizen, of which the Department of Defense is little over 20%. Big ticket items are Medicare, Medicaid and Social Security, for starters. Medicare and Medicaid in particular, are hugely inefficient and unnecessarily bureaucratic ways to induce people to over-consume health care services, and should be abolished in favor of lower taxes that would lead to a booming economy. The list goes on, but the Federal budget can be cut from over $3 billion to around $2 billion immediately, followed by another cut down to $1 trillion over time as Social Security payments dwindle in favor of a private 401(k)-style private system. The government can also raise funds by selling property, including land. After all, various agencies of the U.S. government is by far the largest property owner in the country, and could fill several years worth of budget gaps by auctioning off vast amounts of lands and buildings no longer necessary when we cut off the bureaucracy and the socialist apparatus currently consuming our tax dollars.
Subscribe to:
Posts (Atom)