Why Regulation and Regulators?

The Fed, FDIC, and Congress are wrangling ever more fervently about who should regulate what. Here's a question; why should the Fed, the FDIC, or any other alphabet soup agency regulate anything? Regulation is the problem, not the solution.

We all understand that human nature being what it is, we do need laws. We need laws that say simply and plainly, "thou shalt not lie, cheat, steal, kill, defraud (a form of lying), or in any other way compel another human being to do your will." Voluntary exchange must be the order of the day. It's moral; it works. No other form of human interaction is moral, nor does any other system of social interaction work.

Beyond rule of law --- and a system of justice to enforce that law --- why do we need regulators at all? In fact, history shows us over and over and over again that regulators fail and fail miserably. Witness the SEC and Bernie Madoff; witness the Fed and today's banking system with its massive failures.

Now, we are told by Congress and regulators like the Fed and FDIC that it is more regulation and ever more centralized regulation that we need. If that doesn't smell fishy to you, you just don't know a fish when you smell one.

No, we don't need regulators; we just need laws and law enforcement. We especially don't need financial regulators or regulations. We just need people not to lie, cheat, or steal. And when they do lie, cheat or steal, we need to put them so far behind bars that we have to shoot biscuits to them for breakfast in the morning.

We have no fewer than seven major acts of Congress that regulate the financial industry (Securities Act of 1933, Securities Exchange Act of 1934, Investment Company Act of 1940, Investment Advisers Act of 1940, Public Utilities Holding Company Act, Security Investors Protection Act of 1970, National Securities Market Improvement Act of 1996). On top of that, we have state Blue Sky Laws and a whole additional layer of financial regulators.

We have the SEC, FINRA, the Federal Reserve Board and the rest of the Fed, FDIC, the Comptroller of the Currency, 50 state regulatory authorities, and the Office of Thrift Supervision. We have bank examiners, both federal and state. And now, we are to have yet another regulator --- the Office of Financial Regulation proposed by BHO and his czars.

Will we the people never learn? Regulation and regulators fail. Laws and enforcement of laws to keep people from compelling each other works. Regulation and regulators actually make it easier for a small set of people to compel everyone else. I will argue that Bernie Madoff could not have swindled as he did without the SEC. Care to argue?

Who is ready to argue that regulation and regulators have preserved us, saved us, or helped us in any way? The evidence is all to the contrary.

The Next Crisis Is Right Around the Corner

Here, Matthew J. Novak writes about a disturbing future crisis in the commercial real estate market and its financing, which BHO and his henchmen will doubtless use to advance their vision of a socialist society. You know --- as Rahm Emanuel said, never let a good crisis go to waste.

We are beginning to hear main stream media report that the recession is over. I heard another such report just this morning. Evidently, the pundits and wags who think the recession is over have visions of the future that belie the financial condition of the commercial real estate market.

I personally recommend that folks keep whatever they have left of their wealth in the form of real stuff. I have very little confidence that those in power at the Fed and in Washington DC know the way out of these particular woods.

The purchasing power of your dollars will definitely be falling like that crippled satellite a few months back that the US military shot down. That means the value of fixed income streams --- as in bonds --- will also be falling down the road. What about stocks?

The more socialist our political economy becomes, the less valuable will be those certificates of ownership in companies --- that is to say, stocks. Would you like to own some GM or AIG stock? Make no mistake; this country has set its foot on the path of becoming ever more socialist. We the people elected BHO, didn't we?

Folks who are looking to Washington DC to solve problems that Washington DC created in the first place must be hoping for a mystical experience. History shows us amply the experience they will end up getting.

The Helath Care Reform Motherlode

Here it is.

Letter from the Boss

A good friend sent me this; I couldn't resist passing it along.


As the CEO of this organization, I have resigned myself to the fact that Barrack Obama is our President and that our taxes and government fees will increase in a BIG way. To compensate for these increases, our prices would have to increase by about 10%. But since we cannot increase our prices right now due to the dismal state of the economy, we will have to lay off sixty of our employees instead. This has really been bothering me since I believe we are family here and I didn't know how to choose who would have to go.

So, this is what I did. I walked through our parking lots and found sixty 'Obama' bumper stickers on our employees' cars and have decided these folks will be the ones to let go. I can't think of a more fair way to approach this problem. They voted for change...... I gave it to them.

I will see the rest of you at the annual company picnic.

Sincerely,

The Boss

Love That Fed

Here Allan Meltzer provides, clear and incisive analysis of what's wrong with the Fed's current monetary policies. Some parts of Meltzers' article may seem a bit technical, but most readers will understand well enough.

A Lesson Not Yet Learned

Here, from the WSJ is a clear lesson.

The lesson here is that spending on nearly all federal benefit programs grow (sic) relentlessly once they are established. This history won't stop Democrats bent on ramming their entitlement into law. But every Member who votes for it is guaranteeing larger deficits and higher taxes far into the future. Count on it.

But everyone already knows this simple truth, don't they? Of course they do. I guess it just doesn't matter.

Fair Tax, Flat Tax, or Value Added Tax?

Greg Mankiw provides here a nice summary for comparing the Fair Tax, a particular flat tax (Hall-Rabushka), and a value added tax (VAT).

Like professor Mankiw, if I were a benevolent dictator, I would replace the U.S. personal income tax, corporate income tax, payroll tax, and estate tax with a consumption tax --- a simple national retail sales tax (NRST). Mankiw prefers a VAT because he thinks a VAT reduces compliance problems compared to the Fair Tax.

I personally favor the Fair Tax because of its visibility, transparency, and efficiency. A VAT is out of sight, and therefore, out of mind --- pretty much like an income tax that's deducted by your employer before you ever get your paycheck.

Do you know how much federal income tax you paid last year? Most people have no idea. With the Fair Tax, you would see how much you pay in federal tax every time you made a purchase of a final good or service. You would also get your paycheck without a huge deduction for personal income tax and payroll taxes.

I think it's important that people understand how much federal taxes they are paying. The Fair Tax would accomplish that goal and would rid us of the ridiculous, unfair, despicable, abhorrent embarrassment called the United States Tax Code.

A good friend asked me to post in this blog a little bit of analysis about the NRST tax rate that would be necessary with and without the federal government being required to pay the NRST on its own purchases. The Fair Tax calls for the federal government to pay the NRST on its purchases. Some folks think that would be a problem. The analysis below shows it is not.

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Comparing the Required National Retail Sales Tax (NRST) Tax Rate for Budget Neutrality with and without Taxing Federal Government Spending.

Define the following economic variables:

C = Annual dollar value of households’ spending on final goods and services

T = Annual tax collections by the federal government

G = Annual dollar value of federal government spending on final goods and services

a = Percentage of annual household spending on goods and services subject to a national retail sales tax

b = Percentage of federal government spending on goods and services subject to a national retail sales tax (if federal government spending on final goods and services is subject to the NRST at all)

t = National retail sales tax rate

For simplicity, assume there is no federal budget deficit; then G=T, which says total federal government spending is equal to total federal government tax collections. This assumption has no effect on the analysis; it just makes the calculations less cluttered and easier to follow.

Assume also that all federal taxes are collected domestically, so we can ignore duties on imported goods and services. This assumption also has no effect on the analysis.

If federal government purchases are not subject to the NRST, then

T = (t)(a)(C), which implies that

t = T/(a)(C)

For example, using approximate numbers (dollars in trillions) taken from the 2003 National Income and Product Accounts for the United States, and from U.S. Department of Treasury reports, if federal government purchases are NOT subject to the NRST, then

t = T/(a)(C), where C=$9.267, a=90%, and T=G=$1.668 ,

t = 20.2 % tax exclusive =$1.668/(0.90)$9.267 =, which is a 16.67 % tax inclusive rate

Now, if a portion of federal government purchases of final goods and services are subject to the NRST, then tax collections will be

T = (t)(a)(C) + (t)(b)(G),

which says that tax collections come from households and from the federal government itself. But total tax collections can also be written

T = G + (t)(b)(G),

which shows that total tax collections must sum to the part that the federal government will spend on final goods and services (G) plus the part that the federal government will pay itself in taxes (t)(b)(G). Using algebra and the equations above we get

G + (t)(b)(G) = (t)(a)(C) + (t)(b)(G), which simplifies to

G = (t)(a)(C), or rearranging,

t = G/(a)(C).

For our example using 2003 data we get

t = $1.688/(.9)($9.267), or

t = 20.2 % tax exclusive =$1.668/(.9)$9.267 =, which is a 16.67 % tax inclusive rate

Conclusion: If the federal government also pays the NRST on a share of its purchases of final goods and services, the tax rate consumers pay for revenue neutrality stays the same. It does not rise or fall, regardless of whether the federal government pays or does not pay the NRST on its own purchases of final goods and services.

If the government pays itself taxes, this is really just moving dollars from one pocket to another pocket (i.e., robbing Peter to pay Peter) The NRST tax rate that consumers face must stay the same, since government cannot pay itself taxes without first collecting those taxes from households. That really shouldn’t surprise anyone, since households are the ONLY source of tax dollars available, provided we are not collecting taxes from the rest of the world

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Second Conclusion: Focusing attention on what NRST rate will be required for budget neutrality is something of a red herring. The household sector pays all the taxes that ever get paid---period, end of sentence, end of story. This is true whether the tax base is a portion of aggregate consumption or a portion of aggregate income, since households ultimately own all the real assets of businesses, and therefore own all the income generated by those real assets. Moreover, comparing the marginal tax rate paid currently on income to the marginal tax rate that would be paid on consumption under a NRST is also something of a red herring. Since the rates are applied to different tax bases, the rates are not directly comparable in any meaningful way. What does it matter if one or the other rate is higher or lower? What matters is how many dollars flow into the federal coffers.

Third Conclusion: Lower marginal tax rates are always more productive, regardless of whether the tax base is consumption or income. That’s because most dollars of federal taxes that are siphoned away from households in no way increase the nation’s stock of capital (real assets like technology, plant, equipment, and tools), which is the well-spring of growth in real gross domestic product. Growth in the nation’s stock of capital is in turn the well-spring of growth in the productivity of labor. Finally, growth in labor productivity is the source of growth in real wages of labor.

Fourth Conclusion: If we really want the fastest growth possible in real gross domestic product and labor productivity, we must reduce the share of gross domestic product spent annually by the federal government. But that’s another story.

Who Gets the Interest Paid on the National Debt

Lawrence Kadish writes here about the magnitude of the interest paid each year on the $12 trillion national debt. He argues that the burden of interest on the debt of the Treasury is large, burdensome, and ultimately unsustainable.

What Kadish does not talk about is who it is that receives the interest paid each year. Who buys the U.S. Treasuries, and is therefore entitled to the interest payments that Treasuries promise to pay? Every day of every week, interest payments are made as they come due on the national debt. Real checks are mailed to real people who deposit the checks in banks, adding to their annual income and wealth.

Don't you think the US Treasury should have to report to the American people annually who got all that interest paid to them?

Voluntary Exchange: A Love Story

Michael W. Covel writes here a review of Michael Moore's "Captialism: A Love Story." Be sure to view the Donahue interview with Milton Friedman, which is linked in the source file and here. It says more of value in the span of a few minutes than all the ink ever spilled in the New York Times.

Michael Moore rails against capitalism. Yet, has anyone noticed that Michael Moore is himself a capitalist? Methinks he protestith too much.

I personally don't like the term "capitalism" because it has no clear and compelling definition, and because it carries a lot of baggage for lots of people --- baggage based on the kind of ignorance that Michael Moore exhibits in his new master piece.

Instead, I encourage people to focus on the morality and effectiveness of voluntary exchange. Anything but voluntary exchange is simply immoral. History is full of that immorality. But if that were not enough, anything but voluntary exchange simply doesn't work to generate economic prosperity. History is full of that simple truth, too.