Pedestrian Friendly Cities

One of my pet peeves is the total non-pedestrian unfriendliness of our cities here is the U.S. And I include Juneau in that.

Our cities our totally screwed up! 100% screwed up! In the first place, things are almost always too far apart. The distances between home, work, school and commerce are such that you have to have a car. And public transportation is usually very costly, ineffective and inefficient as a result. And then people wonder why we are 'addicted to oil.'

Now I am not a Europe is always better type person. There are a lot of things Europe does that we should run, walk away from in terms emulating. But on the other hand, I like to take an interest in how other people do things.

During our brief visit to Holland, I found the Dutch to be a clever and industrious people. I was fascinated with how the Dutch deal with the fact that their country is flat and sometimes below sea-level. It's more than just the dike thing.

But that's a subject for another day. Look at the above picture. It was taken in Middleberg in southern part of the Netherlands. That is a residential street in a rather small town. How likely do you think that a child would get run over playing that street? And the markets were very close by with rural spaces beyond. From here you could walk to a train station and be in Rotterdam in about an hour, Amsterdam in two.

A Few Thoughts about Herman Cain's 9-9-9 Plan

I have become a great fan of Herman Cain. I think it was sometime in May when a fellow political traveller recommended Herman Cain to my attention. I was skeptical at first. I heard a rather weak answer from him on the war in Afganistan which set him back in my mind. But he has since grown in my estimation.

It is amazing how far Mister Cain has come from just a few short months ago when I, a political junkie, hadn't heard of him till now when all one hears about is his 9-9-9 plan. In that time, he has gone from third tier to leading in certain polls. Before, he did not draw much in the way of attacks. Now, a sure sign of front-runner status, he is drawing all sorts of (mostly half baked or ill-informed) attacks.

One attack that I think is off base is the charge that the 9-9-9 plan is regressive. Low income people go from paying zero income to 9% income tax, they say, plus they have to pay a 9% sales tax. It's regressive, they say.

But they forget the payroll tax which is about 7.5% (unsure of the exact percentage). And when they do remember the payroll tax, they forget that the employer has to match that which brings the total tax that the poor have to pay on their earned income to about 15%. That 15% combined payroll tax drops to 9% under Mista Cain's 9-9-9 plan.

But wait, there's more! Now, as your income increases, your tax burden will increase to 25% and 30% and beyond as you get into the 10% and 15% (and higher) tax brackets. In other words, you are penalized for being successful!

And it gets worse as Obamacare kicks in. I can't remember the figure but when Obamacare was passed last year, I calculated how much a person's marginal income in the $30,000 to $40,000 income range would be reduced for additional taking into account the reduction in the healthcare subsidy that person would be getting unde Obamacare. Let's explain that. Let's say you are earning about $35,000 a year. You are doing yard work or snow clearing and you get $100 in payment. How much of that goes into your pocket. Well, take 30% off right off the bat between both halves of FICA (the payroll tax) and the 15% income tax. Then you have to take into account that your subsidy under Obamacare to buy insurance will be reduced. I don't have the precise figures at my fingere-tips anymore, but when I did the calculation last year, I found that the net amount of money into your pocket would be less than $50 on that $100 when Obamacare fully kicks in.

Well, that's horrible! Talk about moral hazard! Talk about discouraging people from getting ahead!

But under Mr. Cain's 9-9-9 plan, that drops to 9%! You earn an addional $100, you keep $91! That will encourage people to worker harder, to get ahead!

But what about the 9% sales tax? That takes you to 18%! It's regressive I tell you, it's regressive!

Well, I am not so sure. Herman Cain doesn't say what if anything would be exempt from the 9% sales tax, but let's assume food, rent and college tuition would be exempt. Well, when I was going to college, most of what I earned went to food, rent and tuition. I would have been better off under the 9-9-9 plan.

But let's suppose that nothing is exempt for the sake of argument. Let's say that every dime that the poor earn after the 9% income plan will then inevitably get hammered by the 9% sales tax. That's a combined 18%, 3% more than the baseline 15% payroll tax. If that were the price of having a job, would it be worth it?

What if you had to choose between getting taxed at the rate of15% on no income because you have no job and being taxed at 18% on income that not only exists but is growing. Which would you choose?

What's my basis for thinking that the 9-9-9 plan would actually increase jobs? The second 9. The second 9 is a 9% corporate income tax. Right now, corporations pay 35% but there's a huge and complicated asterix next to that figure. GE, for example, famously paid no income tax this past year even though they made a lot of money. They have an army of lobbyists, lawyers and accountants who apparently earn their keep with that company. Companies should not be getting special favors. Under Herman Cain's 9-9-9 plan, all corporations pay the same, no special favor's. That means that the next inovation will start on a level playing field.

But there's another reason. Corporations pay 35% tax on foreign earnings only when they are repatriated to the United States. This encourages corporations to keep their money overseas to avoid confiscatory levels of taxation. But under the 9-9-9 plan, corporation would not be penalized for bringing their capital back to this country. It is capital invested that creates jobs.

I think Herman Cain's plan is bold, no doubt about it. It should be evaluated. Maybe it should be tweeked herre and there. But is should be evaluated fairly and on the facts.

Free Banking - Promises to Pay What?

It's quite forgotten in our day that paper money was originally promises to pay.

Originally, a dollar was defined as 371 1/4 grains of silver under the Coinage Act of 1792. It was also defined as 27 grains of gold. But people didn’t really like carrying around silver or gold coins so it became common practice to deposit them in a bank.

Today, depositing say $20 in a bank means you have an account with the bank and the balance of that account, how much the bank owes you, goes up by $20. But back a couple hundred years ago there was a second option. The bank could hand you a note that promised to pay you $20 on demand. And if you wanted to buy something for $20, rather than returning to get your $20 in gold or silver coin, most likely you’d just hand over the $20 note. The new holder of that note has the right to to get $20 in gold or silver coin from that bank on demand but most likely he will just pass it on to the next person.

Think of it as a kind of check made out to cash not on any specific account at the bank but on the bank itself. Imagine a check from Warren Buffet say, written out to bearer, for say $100. That check could actually circulate for a while until someone decides to cash it. You would only except such a check as payment if you knew the owner of that bank account had money. A bank note is different in that it is not drawn on a specific account in that bank, but on the bank itself.

Thus was born paper money.

It is interesting to consider what a balance sheet for a bank like this would look like:

Assets
Gold $100

Liabilities
Bank Notes $100

I am leaving out net equity for the moment. There is $100 dollars in banknotes circulating and there are $100 of gold in the bank. If all the banknotes came in for redemption, the bank would pay them off with the gold he has on hand.

Next post on the subject, I'll look at how this picture changes when this hypothetical bank starts lending out money.

This Country's Economic Ails - Lack of Respect for People's Self Interest

I am taking a break from my series on Free Banking to write a word or two for the benefit of a friend who is, in his own words, "liberal and proud of it." We are hoping to get together here soon and have a friendly discussion of politics and this up coming discussion has caused me to think about what some of my basic premises are with respect to our current ongoing economic funk. I think I can boil it down to one or two premises.

One I think is real fundemental. The government, the left, should accept and not begrudge the fact that people generally act in their own economic self interest. Now this is not to disparage altruism. That is a separate issue. What I am talking about is that economically speaking, people generally act in their own self interest. If the government is ever to be a positive force in our economy, it must accept and embrace that basic fact and learn to work with it for the best interests of this country.

That's why I get real nervous when I see large crowds of people with signs saying "Stop the Greed!" I am like: "Really? That's like telling people to not have a sex drive."

It is a fact that if a corporation finds it more to its advantage to have products manufactured overseas rather than in this country, it will do so. What we should be doing is asking ourselves what we can do to make it more to a company's interest to make things here. We should also accept the fact that there will always be somethings that are made overseas.

There was a time in this country when we made, or were capable of making, just about everything. The Japanese attacked Pearl Harbor because we stopped selling them oil. Think about that. From a dead stop, we produced a functioning deployable atomic bomb in about three or four years (depending on where you figure we really got serioous with that project.) Moral considerations aside, that was a huge technicalogical achievement.

My personal history is testament to the vitality that was once was ours. I wound up in Quebec in my late childhood and early adulthood as a result of the fact that the U.S. had exportable talents. And, at least in those times, the Federal Government knew how to encourage that sort of thing. I don't know what the tax law is now, but then you could earn up to $125,000, I think it was, tax free. Government apparently figured that it benefited the United States to have its citizens working in other countries earning money that would wind up back in the United States.

Instead today with corporations, we tax their profits at something like 35% and then we castigate them for trying to avoid those taxes by moving their operations overseas. They are just acting in their own self interest. What would you do in their place?

The other thing, and this is almost the subject of a separate blog post, is the whole issue of moral hazards. Every moral hazards has a cost and right now our economy is strained to the breaking point of a whole slew of moral hazards.

The Wall Street protests are in fact protesting some of these morals hazards, though they probably have no idea that most of them are the result of one government action or another.

Take the example of executive pay, specifically the issue of bonuses for bank executives. How is it that the executives of banks that required a baili out are still receiving large bonuses? The problem is that the banks were bailed out in the first place. If the banks has gone out of business and if the exectives of those failed banks were say selling apples on a street cornere, we wouldn't be complaining about executive bonuses. Why did we bail out the banks anyway? Ultimately, that relates back to Federal Deposit Insurance as I outlined in my previous post.

Bottom line is we should not be bailing out buisnesses.

Wall Street Protests

Well, it appears protesters have taken over Wall Street though they seem somewhat incoherent on what they want. There is a hilarious list of demands here:

http://occupywallst.org/forum/proposed-list-of-demands-for-occupy-wall-st-moveme/

I will take this opportunity to give my list of demands with respect to banking.

1) End Federal Deposit Insurance. I was going to have more demands but I decided it was no trying to compete in the number of demands with those protesters. This will do for a start.

This might seen like an antidiluvian view, but FDIC really is a moral hazard that has far reaching consequences. It says to depositors that they can put their money in any bank no matter how careless or careful it is with the depositor's money, it doesn' t matter because the government guarantees they will get their money back. It gives the goverment a pretext to tightly regulate banks because it is the government after all that is on the hook should the bank go under.

It makes banks ironically more careless in their lending practices. As long as they follow the letter of the law or if they can get the laws tweeked or enforced in their favor, they can do what they want. With any luck, if the bank is "too big to fail," maybe it can be bailed out and life can go on as before.

This has become wide spread practice in the industrialized world and it is now one of the root causes of the on-going, scratch that, never ending financial crisis, here and in Europe.

When a large bank threatens to go under or a small country threatens to not repay, governments immediately step forward with offers to bail-out the situation. We had TARP in 2008. We have Germany ponying up more money in Greece in Europe. In both cases, the calculation is it is cheaper to do that than to let the banks fail and then have to reimburse depositors.

The economy goes down and people complain about how much bank executives get paid. More regulations get laid on banks and the economy goes down a little more. We are in a downward spiral and with each step down we hear more calls for more regulations which only make things worse.

Imagine instead the following world:

No deposit insurance. If a bank goes belly up, it gets liquidated and the creditors, including the depositors, get paid off out of the proceeds, the depositors first presumably, then the bond holders and so on. The shareholders likely get nothing. If there is not enough money to make the depositors whole, go after the bank officers, make them liable for the previoous five years compensatioin.

Who cares then what the bank executive makes? If the shareholders want to pay them an outrageous sum why should we stop them? But make the executives liable for loses to the depositors for say up to five years of their compensation.

What it boils down to is personal responsibility. People, be they shareholdeers, bank executives, depositors, should be free to be stupid with their own money and they should not be bailed out.

German and French tax payors should not be bailing out German and French banks that lent to Greece who is not repaying. In the world I just outlined, banks in trouble for making bad loans would simply be allowed to go under and the tax payof would be none the worse for wear.