Obama Taxes

I don't get this argument I keep hearing. Repeating something over and over doesn't make it more true.

I hear things like this over and over:

"I'm not sure that those that voted for Obama would agree with a dictatorship. How can a President "ask" that a CEO of a major company step down? And If that CEO did not step down, then what? Would he tighten the screws on GM and the CEO? 

What about all the spending? And for what? What are we getting for this? Just more debt for our kids."

Which I think sums up the opposition argument.

A) Obama is not a dictatorship - he's at the mercy of congress and the judiciary. He can not make international treaties w/o congress. He can't spend money w/o congress. He can't go to war, enact/ignore a law.. And, if you haven't noticed controlling the Democratic congress is like hurding cats.. Only the repulblicans have mastered the 'block vote' concept.

B) There is no legal enforcement that Obama has over non-banks (yet). We do have SOME regulatory power over banks - but certainly not willy-nilly. However, when one potential investor says to a prospective investee, I'll not grant you money unless I think it's a prudent investment - then certainly he can have an effect on the operatoins of the business. This happens every day around the world. It's what controls what you see on TV, what you eat, etc. 

C) The corporate/bank "spending" is mostly lending/investing - and depending on how the companies survive the melt-down, we'll get most of the money back. Yes, most of the stock is non-voting, and has dropped precipitously, but stocks do that, it's only a paper loss until sold.

D) The 'stimulus' package is the closest detractors have to a real argument. However, their argument is usually poorly crafted. If a state doesn't repair a bridge and it kills 500 people - how cheap do you think that's going to be? It's the state's responsibility to pay for these types of repairs (including schools doing as well as Waltereed), but few states can afford any additional capital expenditures. Thus there is a humanitarian element to this portion of the spending. Unfortunately repairing a road doesn't have as good a return on investment as building a new one (you're not increasing the efficiency of local businesses). The 'stimulus' employs a single set of people, and doesn't amplify sufficiently to recoup the money. Renueable Energy R&D also likely isn't going to be a cash cow.. In fact, it's likely to drain resources - throwing good money after bad. Consider cold fusion, or pretty much anything to do with space exploration. Yes, there are residual advances - but paleing in comparison to the costs. The point is that you're not making financially sound investments.

However, there is another, more important, dimension to the stimulous package. It is effectively printing money. The federal reserve, by maintaining a near-zero interest rate does so by writing checks to bankers for US treatures (now also mortgage backed securities). These checks create money out of thin-air. Banks keep an account with the federal reserve, and thus they never cash the checks - they merely have their accounts credited. Thus there is no actual physical printing of money going on - though banks have the right and do request physical cash transfers as needed - these do result in printing. But a substantial fraction of this has to do with retiring old/damaged bills.

The treasury issues bonds on the open market. The Fed purchases on the same market (though not necessarily directly from the Treasury). When inflation is in check (as happens in an inflation - though not in 'stagflation' - poor Bush I), the fed can freely purchase billions of dollars worth of bonds (offsetting the treasuries expenses). Thus the Fed effectively 'transfers' not-yet-printed money to the treasury.

So long as the resession endures (e.g. no inflation), the fed can fully fund the treasury and NO taxes will increase.. PERIOD.

Now, when inflation does eventually kick in, then the fed is required to stop buying US treasuries, and in fact, start selling them back (taking money out of the economy) This happened just before the y2k bubble. Unfortunately it's difficult to guage the right time to change directions, and many say Greenspan took way too long. BUT, if done correctly, the inflation should happen alongside the economic recovery - which means larger tax collection revenues and thus a lesser need to issue new US treasures (aside from the usual reissuing recently expired treasuries).

So IF the excess spending is truely temporary, and IF the loans are repaid in short order, and IF the Fed correctly manages the money floating in the system to prevent over inflation, or inflation in key sectors attached to their market (like the housing market - tied to those same banks getting all this money during the Bush Era), then we can 'level off' gracefully.. The fed raises rates back to a sustainable level - starts pulling that extra cash back out of the economy, and tax revenues catchup to the [now reduced] spending levels.

There are certainly a lot of things that can go wrong.. But it is ignorant at best and immoral at worst to claim that 'Obama is sacrificing our kids futures' - phrased as if he was knowingly doing this - or worse, that it's not neglegance on Obama's part, but maliciousness- that he's somehow against your children.

Even though several things can go wrong, here is what I consider the worst case to be. Inflation. NOT higher taxes.. The laffer curve says that there is some maximally efficient tax-rate whereby the government would lose money if they lowered OR raised taxes. Namely if you raised taxes, you hurt the economy and thus can't collect as much from the reduced corporate profits. If you charged less, then you're at such a low level that corporations can't further profit from the reduction. Consider that we charge different industries and demographics at different rates - thus there is a maximally efficient point for every section of the economy - and the government obviously is trying to hit that sweet spot in each region (though nobody can know for certain what it is, since it's a moving target). Thus, even if we were overly indebted, it would be STUPID to raise taxes beyond this maximal point. You only collect LESS money in taxes by raising the taxes too hight.... So how do you know it's too high? Ask the oil company. Namely you experiment, from year to year, tweaking the value, and trying to rule out as many variables as possible.

The point is you will NEVER see 90% tax rates again (check your history to understand just how good Americans have it these days).

Finally, on inflation. We have had 2.5% 'core inflation' for ages. But we've had 102% spending for that same time. low-inflation values lenders and cash-holders, but suffers debtors. Property owners are indifferent. As most Americans have $10k of credit card debt, and are now $25k to $500k underwater on their home mortgage, inflation benifits the average american. Why? The min-wage has not moved very quickly over the past 15 years (this has been a huge reason for the lack of inflation - in my lay opinion). Once this rate goes up, we're going to see inflation (regardless of the Fed's monetary policy). Min-wage is considered poverty-line in most of the country. Raising it is not exactly immoral (for the mores of capitalism). Growing it by 25% means that basic household goods can grow in price by 19 to 26% (video games, movie tickets, fashionable clothing would certainly grow faster than milk for example). The growth in price is natural because more people can afford them. This increases base good profitability (though their constituent costs are also rising). Some industries are hurt by the inflation (government wages and procurement certainly is hurt). Basically things average out for most people...

EXCEPT debt. While the operating costs of the government might grow 10%, the tax revenues increase by at least 10% and thus the ability to pay down national debt (along with personal mortgage debt and credit card debt) is stronger (not 10% stronger because costs went up by 10%). But consider having $1 million in debt when you earn $100K / year. That's a lot.. Consider that $1M when you make $1 billion / year. It's almost a rounding error. The point being, as inflation slowly creaps over time, the existing debt becomes less and less of a burdon. Now, what's important is that this does not include NEW debt. Obviously your newly issued bonds need to be 11% or higher with 10% inflation. So you're worse off borrowing in this period. So if you are not careful, you can certainly be in a much worse situation..

But my point is that inflation CAN be a net positive for the country, if managed correctly.