Miscellany: 5/28/13

Quote of the Day
People love chopping wood. 
In this activity one immediately sees results.
Albert Einstein

Guest Quote of the Day

On Income Taxes:  "When men once get the habit of helping themselves to the property of others, they are not easily cured of it." - The Gray Lady, 1909 BK (Before Krugman)

Courtesy of Joseph Thorndike, WSJ

Some Random Reflections

• The Stock Market. The market is up today based on home prices up, year over year nearly 11%, especially in the more price-volatile areas like California, Las Vegas, Phoenix and Florida, and the highest consumer confidence since early 2008. What bothers me is the frothiness in some areas, e.g., price gains of 20-odd percent in the Bay Area, CA; whereas some regression to the mean is to be expected after a market correction and no doubt there's some backlogged demand waiting for the market to bottom out, speculators may think that locking in a less than 4% rate on a mortgage where price appreciation makes owning a house a no-brainer, this pace is not sustainable, especially in a high-tax, low-growth state like California. The Fed is caught between the devil and the deep blue sea--if it increases rates too quickly, it could kill the housing recovery, one of the brighter spots in the economy; but the last thing it needs to do is feed another housing bubble. It's hard to argue, at least in some areas, Fed needs to stimulate housing purchases; they need to revert to more of a historic norm; note that the federal government still hasn't taken the opportunity to strip the mortgage interest deduction--which favors higher earners whom itemize their taxes. If you're going to do it on new mortgages it makes sense to do it when rates are lower.

The other troubling sign is the escalating use of margin debt during the stock market surge--to near the peak before the recession. Now whereas I would expect margin debt to track the major stock indexes and one can argue in terms of adjusted prices and PE levels, we are  not frothy yet from a historical perspective, it doesn't make a lot of sense for the Fed to subsidize speculative behavior. The theory that stock speculators are going to cash in and spend money in the economy is a pleasant pipe dream; more likely--they are going to try to leverage their gains. Once again, the Fed is caught in a dilemma. To some extent they've deferred the inevitable because the dollar has accidentally strengthened despite their best efforts, based on the woes of the yen and the euro and the dollar being the world's reserve currency--but it looks like China is cutting yet another direct exchange deal with New Zealand.

• Follow-Up on Nixon Discussion. In yesterday's post, I was scornful of a conservative columnist's article of those of us suggesting a Nixonian side to Obama. In fact, it's not just a conservative observation and goes beyond Chapman's narrow, simplistic distinction on misbehavior by the IRS; Will Bunch is critical particularly on the Nixonian paranoia over leaks (remember the infamous Pentagon Papers?) and the Obama war on whistle-blowers, gathering intelligence on AP personnel. Ir is part and parcel of the Administration's attempt to manipulate public opinion, disclose only what they choose, and to intimidate the press from publishing politically inconvenient stories.

In my rant on the Chapman piece, whereas Nixon did push the envelope in abusing the Presidency for his own agenda, I suggested more troublesome for me was his domestic policies and specifically his breaking the Bretton Woods arrangement (where trading partners could insist on gold for payment if they didn't trust our (debased?) fiat currency). The correct strategy would have been a sound money policy, especially a balanced budget versus putting the cost of the Vietnam War on future generations. Ben Traynor of  LFB published a broader essay on Nixonomics.

Let's start with this excerpt from his address on the decision: "Let me lay to rest the bugaboo of what is called devaluation... If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the dollar." If Barack Obama ever said this nonsense, I would be screaming. It's ludicrous; it goes beyond nationalistic demagoguery--and the Dems do enough of that--remember 'buy American' with the stimulus? A devaluation decreases an American's purchasing power. Many goods, parts or resources (like oil) are imported--and those prices are passed along to customers. American goods or companies are more affordable for foreigners; for example, a Brazilian yuppie might outbid me for that south Florida condo. What will stabilize the dollar is sound money policy--no trying to print ourselves out of unsustainable deficits--, fiscal conservatism, and pro-growth policies. Nixon succeeded at none of that. The consequence? "Between August 1931 and August 1971, the consumer price index — as measured by the Bureau of Labor Statistics — went up by 170%. Since 1971, the CPI has risen 453%."

 What were Nixon's economic "reforms"? Wage and price controls and a tariff. These are anathema to bloggers like me committed to free markets and free trade. Traynor goes on to explain that the real problem was the dollar serving as the world's reserve currency; this basically means the US maintaining a trade deficit to facilitate growing global trade (we have not run a trade surplus since the mid-70's)--which it could finance (unlike other countries) by simply printing more money. Why did Nixon really close the gold window? More dollars for a given quantity of gold made it impossible to maintain a fixed exchange rate for dollars; central banks were having to sell gold to keep the price of gold low; France decided that it preferred cheap gold to dollars, with profitable arbitrage opportunities,  and Nixon was facing depletion of US gold reserves. Clearly Bretton Woods needed to be reformed, but unleashing an unfettered fiat currency can only make anyone uneasy whom remembers the early American experiment with Continentals: "During the American Revolution, the colonies became independent states; freed from British monetary regulations, they issued paper money to pay for military expenses. The Continental Congress also issued paper money during the Revolution, known as Continental currency, to fund the war effort. Both state and Continental currency depreciated rapidly, becoming practically worthless by the end of the war."

• An American History of Taxes. There's a reason I've often tried to advocate reform as a composite of consumption taxes and income taxes (flattened). The Thorndike column above does a good description of the tensions between imposing regressive and progressive taxes. The rich could avoid taxes by minimizing taxable transactions while, among other things, profiting from selling goods and services to the government, otherwise paid mostly by less wealthy individual taxpayers--not to mention special favors like deferments or noncombat roles for their sons, unavailable to the average joe. (To be honest, as I read the account of how the first income tax law came about to finance the Civil War, I felt like saying, you wouldn't have a massive funding problem if you didn't pursue an unnecessary war....)  Hearing Thorndike talk about the use of a progressive income tax basically as a concession to regressive tax policies like FICA makes me roll my eyes: a low flat/proportional income tax would still collect much more revenue from richer individuals. Raising the top bracket to, say, 94% didn't achieve its intended result because rich people could simply defer taxable events: they could wait out the government. The problem is that the government has radically expanded its costs through entitlements and social programs and imposed these costs on a minority whom get little or no benefit from these programs; it's a form of theft.
• A Financial Newsletter Commenter. I normally don't comment on every stupid thing someone says or does, but let me paraphrase here: "It only makes sense to audit rich Republicans/Tea Party members. Let's face it: they're not going to recover income from lower-earning Americans; besides, wealthy progressives are decent, honest folks willing to pay their fair share; it's obviously those rich conservatives whom obviously have something to hide. So, of course, they should be getting strict scrutiny." 

First, let me disabuse you of the notion that wealthy progressives are decent, honorable folks; many conservatives, rich or poor, tithe their income, giving to churches and/or charities. VP Biden has increased his giving in his current role, but for much of his career has given a very low percentage. Buffett makes a big deal of the fact he pays a low income tax rate--because much of his compensation is not wages, subject to high tax rates. He could easily take a higher salary instead of stock--he could also optionally pay the Treasury more than he owes--plus he could also leave the bulk of his estate to the US Treasury. The real story is these hypocrites want to impose a tax rate they're comfortable with on other people--including high earners with most compensation in the form of higher-taxed wages. Don't forget: those evil Wall Street bankers heavily supported Obama in 2008.

 Second, a lot of, probably the vast majority of Tea Party people, including myself, are not wealthy and virtually all of us are civil and scrupulously honest (I even reported pocket change in interest income over last year when I didn't have to)--we wouldn't take a government handout, even if we were eligible for one. We oppose spendthrift government on principle; we believe that this government is plundering future generations of Americans. The government should not be singling out critics of government, a violation of constitutional principles.

Audits can and should be based on things like the nature and extent of documented transactions  and objective criteria, such as unusual patterns of data, not arbitrary grounds. The fact that progressive groups largely got a pass while Tea Party groups didn't is unconstitutional at its core. The fact that they were asked for identification of donors exercising their constitutional rights to anonymous speech is also illegal. The audit process must be objective and nonpartisan; anything less undermines the principles of this republic.

Entertainment Potpourri

• American Idol Has Lost My Niece. One of my nieces, an elementary school teacher and herself an able musician (euphonium) and talented church vocalist (I have another niece whom once studied opera in Oklahoma) and I have compared notes probably for a half dozen years. She finally got time after school was out to catch up on some emails. We tend to have similar opinions on contestants, but I liked Fantasia more than she did. She basically said she blew off this season, preferring The Voice.  She didn't go into specifics but seemed to share my dislike of Nicki Minaj as a judge. She seems to prefer the differences in format. (For me, The Voice is more of an acquired taste, and I could do without the inane chatter between the mentor/judges, but I do like, for instance, a country duo is able to compete.) I don't know what AI can do to get her back, I did briefly venture on AI's Facebook account; they wanted to do a brief survey of AI fans; I didn't post an entry but reviewed some of the comments, like "bring back Simon Cowell", with which I agree. Another fan wrote that AI lost her permanently. I've asked my niece (no response yet), whether the AI alumni judges might make a difference--I suspect not. I saw a Google news link that implied Jennifer Hudson was negotiating but had not yet signed on for next season. The next season's auditions start in a few weeks, so I expect some signings to be announced soon,  but I'm very negative on the idea of alumnus judges

Speaking of AI alumni, who wouldn't want to duet with Jagger? Carrie now dominates the country genre, but in the video below, she takes on a role as rock chick; I wonder if Linda Ronstadt ever joined Jagger on "Tumbling Dice"?

Musical Interlude: My Favorite Groups

Bruce Springsteen and the E-Street Band, "Tunnel of Love"



Fellow Americans Helping the Moore, OK Tornado Victims