Real issue vs Fake Issue
There's a lot of political debate going on about the second wave of Depression Era style big government stimulus and health care reform, and soforth that has been happening in the last few months. The popular debate misses the real issues by about 90 degrees, and i'd like to comment on it all:
1) What is the economy? The media doesn't have a clue. They think "the economy" is something like "the amount of money that big businesses like GM, Time Warner, Google, and AIG are making". It isn't. Not even close. The economy is the amount of goods and services being produced and consumed. Measuring it in dollars works so long as the supply of dollars is relatively smooth, constant, or very slowly increasing. The truth is that the supply of dollars dwindled rapidly about a year ago, and so any comparisons of the type (GM earnings this year vs GM earnings last year) is completely misleading. When the dollars aren't a good benchmark, we need to use some other information to gauge the economy. For example production/consumption rate of some basket of goods. It might be interesting to compare changes in several baskets, for example
food + utilities + childcare + rent + automotive_maintenance + home maintenance
vs
restaurant + vacation + CDs + DVDs + online music + Netflix + cable/satellite TV
vs
appliances + automobiles + new houses + electronics
In other words, there are a variety of categories into which you could classify the goods and services we commonly buy. The economy is contracting if the quantity (measured in output units, not dollars) is decreasing. Now "adding" say hours of childcare to square feet of rented housing to pounds of food to hours of mechanics time is impossible... they aren't in the same units.
However if we look at growth rates we can do it. for example the ratio of lbs of food consumed per week to pounds of food consumed per week at this time last year is a dimensionless number. By doing some modeling magic we can construct a reasonable measurement of how much stuff we're consuming now vs how much last year that doesn't rely on assumptions about dollars. Basically we look at weighted averages of the ratios of consumptions. On these scales, we'd have a much better sense of what is going on in the economy. Currently, no-one has the slightest idea really.
2) Industry death: The "death" of certain industries is greatly exaggerated. For example, we are consuming more music than ever, (in terms of variety, and number of different tracks listened to) and yet, the music industry is making much much less money than it used to. Is this a problem? Not for the economy as a whole, only for those people who have been used to sitting back and raking in our dollars thanks to government enforced monopolies called "Copyright". Competition together with new technology for distribution is driving the price of music down quickly. There are many legal ways to listen to music online, this makes buying CDs much less important for people, so they buy many fewer of them... Rejoice!
Similarly for Chrysler and GM. They've both been producing bad cars for a long time. They've been dying due to a combination of overseas competition, unions strangling them, and bad management. If they go away entirely, great, Toyota, Honda, Kia, Hyundai, BMW, Mercedes and others will buy up their manufacturing facilities, and make better cars that we actually want. Problem solved.
3) Labor flexibility. This is a big BIG problem in the US. There are a variety of things that keep people from moving from job to job to maximize their productivity. One of the major things is a kind of anti-competitive regulation that big businesses have purchased known as "health care and retirement benefits". The big problem isn't that businesses aren't providing health care to their workers, or that people aren't taking advantage of their 401k plans. The big problem is that TOO MANY businesses are tying their workers down with specialized plans that require a lot of administration, and therefore are only affordable to largish businesses.
If we give individuals the same ability to buy health insurance and create large retirement savings accounts at low administrative costs, then people will do that for themselves, and no longer be tied to their employers via the threat of serious hassle and risk to their finances and health when they move from job to job. This frees people up to find jobs that pay them good wages, and therefore are providing the most valuable services to the economy.
END EMPLOYER PROVIDED HEALTHCARE and RETIREMENT SAVINGS, and create SIMPLE methods for people to do these things for themselves. Voila, the productivity of America will jump dramatically as people are able to move around to fill the most valuable jobs without significant barriers to change.
4) Income tax significantly penalizes the most productive groups. As arguments abound about taxation and spending levels, no one has been talking about the real problems with the income tax.
Change the income tax rate so that it depends on your total wealth not on your annual income! An extra dollar has very little value to someone with $30 M dollars compared to the value it has to someone whos total net work is $5000. But if both people have $100k per year incomes, they are taxed at the same rate.
Don't think that someone with a $100k income could be poor? Don't think that someone rich could have $10k in income? Believe it, some examples: Doctors, Lawyers, Engineers, Computer Programmers, Business Majors, and others for the first say 10 years out of school can be in so much debt from their educations that they don't even have a positive net worth even though they are "making" $100k in salary, especially since after Social Security, Medicare, Federal income, and State Income taxes a single person with a $100k salary is taking home perhaps $50k
Taking 30% of the marginal dollar from the millionaire hurts that person much less than taking 30% of the marginal dollar of the young surgeon. "The Rich" are not the same people as "those who had a big income this year", not even close. In fact the very rich often have very small incomes, since they don't work a W2 type job!
In addition to an income tax rate related to your net worth, a property tax on stocks, bonds, real estate, and other investment type assets would go a long way toward making those whose marginal utility of money is small pay the most money for government services.
This is just stupidity, and easy to solve. Yet all the tax arguments in modern politics are nowhere NEAR this issue, they're all about what kind of special tax breaks can we put in place to buy votes for politicians.
5) Stifling small businesses and incarcerating everyday normal people:
You want to start a Taco truck, a Plumbing repair business, an auto mechanic, a two person law firm, an architecture office, do a little garage inventing, breed pygmy goats, sell your photographs online... TOUGH. It's almost certain that some aspect of what you want to do is a felony or serious misdemeanor. Good luck figuring out how to avoid that, and paying for the lawyers and accountants that will keep you out of jail. It's just a lottery out there as to whether you're going to go to jail for the crimes you are already almost certainly committing...
Not only is this stifling creative and beneficial business opportunities, but it's incredibly unjust!
Good luck hearing anyone at all on the radio or TV even getting close to talking in the same region as these serious problems...
1) What is the economy? The media doesn't have a clue. They think "the economy" is something like "the amount of money that big businesses like GM, Time Warner, Google, and AIG are making". It isn't. Not even close. The economy is the amount of goods and services being produced and consumed. Measuring it in dollars works so long as the supply of dollars is relatively smooth, constant, or very slowly increasing. The truth is that the supply of dollars dwindled rapidly about a year ago, and so any comparisons of the type (GM earnings this year vs GM earnings last year) is completely misleading. When the dollars aren't a good benchmark, we need to use some other information to gauge the economy. For example production/consumption rate of some basket of goods. It might be interesting to compare changes in several baskets, for example
food + utilities + childcare + rent + automotive_maintenance + home maintenance
vs
restaurant + vacation + CDs + DVDs + online music + Netflix + cable/satellite TV
vs
appliances + automobiles + new houses + electronics
In other words, there are a variety of categories into which you could classify the goods and services we commonly buy. The economy is contracting if the quantity (measured in output units, not dollars) is decreasing. Now "adding" say hours of childcare to square feet of rented housing to pounds of food to hours of mechanics time is impossible... they aren't in the same units.
However if we look at growth rates we can do it. for example the ratio of lbs of food consumed per week to pounds of food consumed per week at this time last year is a dimensionless number. By doing some modeling magic we can construct a reasonable measurement of how much stuff we're consuming now vs how much last year that doesn't rely on assumptions about dollars. Basically we look at weighted averages of the ratios of consumptions. On these scales, we'd have a much better sense of what is going on in the economy. Currently, no-one has the slightest idea really.
2) Industry death: The "death" of certain industries is greatly exaggerated. For example, we are consuming more music than ever, (in terms of variety, and number of different tracks listened to) and yet, the music industry is making much much less money than it used to. Is this a problem? Not for the economy as a whole, only for those people who have been used to sitting back and raking in our dollars thanks to government enforced monopolies called "Copyright". Competition together with new technology for distribution is driving the price of music down quickly. There are many legal ways to listen to music online, this makes buying CDs much less important for people, so they buy many fewer of them... Rejoice!
Similarly for Chrysler and GM. They've both been producing bad cars for a long time. They've been dying due to a combination of overseas competition, unions strangling them, and bad management. If they go away entirely, great, Toyota, Honda, Kia, Hyundai, BMW, Mercedes and others will buy up their manufacturing facilities, and make better cars that we actually want. Problem solved.
3) Labor flexibility. This is a big BIG problem in the US. There are a variety of things that keep people from moving from job to job to maximize their productivity. One of the major things is a kind of anti-competitive regulation that big businesses have purchased known as "health care and retirement benefits". The big problem isn't that businesses aren't providing health care to their workers, or that people aren't taking advantage of their 401k plans. The big problem is that TOO MANY businesses are tying their workers down with specialized plans that require a lot of administration, and therefore are only affordable to largish businesses.
If we give individuals the same ability to buy health insurance and create large retirement savings accounts at low administrative costs, then people will do that for themselves, and no longer be tied to their employers via the threat of serious hassle and risk to their finances and health when they move from job to job. This frees people up to find jobs that pay them good wages, and therefore are providing the most valuable services to the economy.
END EMPLOYER PROVIDED HEALTHCARE and RETIREMENT SAVINGS, and create SIMPLE methods for people to do these things for themselves. Voila, the productivity of America will jump dramatically as people are able to move around to fill the most valuable jobs without significant barriers to change.
4) Income tax significantly penalizes the most productive groups. As arguments abound about taxation and spending levels, no one has been talking about the real problems with the income tax.
Change the income tax rate so that it depends on your total wealth not on your annual income! An extra dollar has very little value to someone with $30 M dollars compared to the value it has to someone whos total net work is $5000. But if both people have $100k per year incomes, they are taxed at the same rate.
Don't think that someone with a $100k income could be poor? Don't think that someone rich could have $10k in income? Believe it, some examples: Doctors, Lawyers, Engineers, Computer Programmers, Business Majors, and others for the first say 10 years out of school can be in so much debt from their educations that they don't even have a positive net worth even though they are "making" $100k in salary, especially since after Social Security, Medicare, Federal income, and State Income taxes a single person with a $100k salary is taking home perhaps $50k
Taking 30% of the marginal dollar from the millionaire hurts that person much less than taking 30% of the marginal dollar of the young surgeon. "The Rich" are not the same people as "those who had a big income this year", not even close. In fact the very rich often have very small incomes, since they don't work a W2 type job!
In addition to an income tax rate related to your net worth, a property tax on stocks, bonds, real estate, and other investment type assets would go a long way toward making those whose marginal utility of money is small pay the most money for government services.
This is just stupidity, and easy to solve. Yet all the tax arguments in modern politics are nowhere NEAR this issue, they're all about what kind of special tax breaks can we put in place to buy votes for politicians.
5) Stifling small businesses and incarcerating everyday normal people:
You want to start a Taco truck, a Plumbing repair business, an auto mechanic, a two person law firm, an architecture office, do a little garage inventing, breed pygmy goats, sell your photographs online... TOUGH. It's almost certain that some aspect of what you want to do is a felony or serious misdemeanor. Good luck figuring out how to avoid that, and paying for the lawyers and accountants that will keep you out of jail. It's just a lottery out there as to whether you're going to go to jail for the crimes you are already almost certainly committing...
Not only is this stifling creative and beneficial business opportunities, but it's incredibly unjust!
Good luck hearing anyone at all on the radio or TV even getting close to talking in the same region as these serious problems...