Issues of 2020: Universal Basic Income

Even communists demand that each person give according to his abilities.

Issues of 2020: Universal Basic Income

By: George Noga – March 8, 2020

 

        This is the next in MLLG’s intermittent series covering 2020 election issues. Previously, we wrote about Medicare for all (12/8/19), the Electoral College (2/2/20) and the wealth tax (2/16/20); all these are available on our website: www.mllg.us.

      The idea for a universal basic income (“UBI”) originated with American revolutionary Thomas Paine in the 18th century. The modern genesis belongs to British politician Rhys-Williams in the 1940s. Milton Friedman advocated it in a 1962 book in the form of a negative income tax, although he later came to oppose the idea. Today, Yang, Castro, Williamson and Gabbard favor UBI of $1,000 per month – no strings attached. Warren, Sanders and Buttigeig all are sympathetic to the concept.

          UBI makes for strange bedfellows. Liberals favor it for social justice reasons, while conservatives view it as the least destructive way for government to transfer wealth between citizens. UBI (or a variant) has been implemented in other countries but failed to take root anywhere it was tried. Finland ended its UBI program in 2019. Currently, about half of all Americans (72% of those ages 18-34) support UBI.

The Case for Universal Basic Income

        There is a crescendo of voices in academia, media and politics asserting that automation, driven by advances in artificial intelligence, robotics, computers, 3-D printing, driverless vehicles and other technology will displace millions upon millions of jobs in the coming decade causing entire trades and professions to disappear. They argue UBI is necessary to provide for all these millions of jobless people.

         Advocates claim it can pay for itself by displacing all transfer payments and welfare including Social Security, Medicare, Medicaid, food stamps, SSI, and housing subsidies plus all the bureaucracy that supports these programs. Some conservatives and libertarians sign on to UBI in the wane hope it will reduce the role of government in people’s lives and will be a more efficient way to effect transfer payments.

     Progressives cite social justice as their rationale, including providing greater security, choice and freedom to recipients. They allege it empowers individuals because there are absolutely no strings attached. Supporters cite Alaska which since 1982, despite its rugged individualistic culture, pays every citizen a royalty share of its energy fund – last year the amount was $1,600 or $6,400 for a family of four.

The Case Against Universal Basic Income 

       For centuries, going back to the industrial revolution, doomsdayers have argued advances in technology would result in massive unemployment. Each and every time for 300 years, the opposite has happened as new advances created as many or more new jobs than those displaced. Despite recent tech advances, the unemployment rate is at an all-time low even though more workers are entering the workforce. Advocates of UBI say it is different this time, but so did worrywarts for the past three centuries.

      The political apparat would not eliminate any bureaucracy; they would incessantly tweak UBI to attach conditions and mandates. UBI soon would metastasize into a monster. Politicians would favor some groups at the expense of others based on the politics du jour and engage in class warfare. A Chinese system could evolve in which each person’s UBI depends on his/her social credits. UBI would require everyone to have a universal ID and a bank account, leading to an Orwellian twilight zone of government control. If history teaches anything, it is distrust of government; however, you can’t take the politics out of politics and UBI would be a political Godzilla.

         As with many other pie-in-the-sky schemes, the strongest argument against UBI is a moral one. It would entitle people to the work of others, untethered from need and with absolutely nothing required in return. Even communism demands that each person give according to his abilities. UBI would sever the link between income and work, create a cycle of dependency and would serve as a gateway drug to collectivism.

       Universal Basic Income would result in less liberty and more government, directly opposite MLLG’s raison d’etre. UBI should stand for Universally Bad Idea!


Next on March 15th, we address the tyranny of democracy.
More Liberty Less Government  –  mllg@mllg.us  –  www.mllg.us

Greatest Social Thinker of the 20th Century

“There is no such thing as a mixed economy midway between capitalism and socialism.” 
Greatest Social Thinker of the 20th Century
By: George Noga – September 29, 2019

           Today marks the 138th birthday of Austrian economist Ludwig von Mises, who died in 1973 at age 92. I have read economics for over a half century and von Mises has influenced me more than anyone.  I consider him not only the best economist, but also the greatest social thinker of the last century. I honor his birthday by presenting a small sample of his writings, very lightly edited for modernity and length.

        Sovereign consumer:The common man is the sovereign consumer whose buying, or abstention from buying, determines the quality and quantity of what is produced, and who in preceding ages were serfs, slaves and paupers. They are the customers for whose favor businesses compete and who always are right. Wealth is only acquired by serving customers in a daily plebiscite in which every penny gives the right to vote.

       Anti-capitalist mentality:Laissez-faire capitalism has raised living standards to unprecedented levels. A nation is more prosperous the less it puts obstacles in the way of free enterprise. The US is more prosperous than all other countries because its government embarked later than others on policies that obstruct business. The bias and bigotry of public opinion manifests itself by attaching the epithet ‘capitalistic’ exclusively to things abominable but never to those of which all approve.

      Socialism: “The champions of socialism call themselves progressives, but they recommend a system which is characterized by rigid observance of routine and by a resistance to every kind of improvement. They call themselves liberals, but they are intent on abolishing liberty. They call themselves democrats, but they yearn for dictatorship. They call themselves revolutionaries, but they want to make government omnipotent. They promise the blessings of the Garden of Eden but they plan to transform the world into a gigantic post office – every man a clerk in a bureau.”

       Foreign aid:Making underdeveloped nations more prosperous cannot be solved by material aid. It is a spiritual and intellectual problem. Prosperity is not simply a matter of capital investment. It is an ideological issue.”

     Von Mises Sampler:If history teaches anything, it is that private property is inextricably linked with civilization. . . . All rational action is in the first place individual action. . . . Every government intervention creates unintended consequences which lead to further interventions. . . . Every socialist is a disguised dictator. . . . Tyranny is the political corollary of socialism as representative government is the political corollary of a market economy. . . . . Worship of state is the worship of force. . . . . . Socialism is not what it pretends to be. It is not the pioneer of a better world, but the spoiler of thousands of years of civilization; it does not build, it destroys.

Following is the conclusion of von Mises’ magnum opus, Human Action

     “Economic knowledge is an essential element to human civilization; it is the foundation on which all moral, intellectual and technological achievements of the last centuries have been built. It rests with men whether they will use this rich treasure, or leave it unused. But if they disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.”

Note: The Ludwig von Mises Institute is an outstanding source of information; it has a free daily email newsletter (available at articles@mises.org) to which you may subscribe. It is one of only a very few publications I read every day. Try it; you will be glad you did.


Next on October 6th is “Condor Cuisinart” or, liberalism is for the birds.
More Liberty Less Government  –  mllg@mllg.us  –  www.mllg.us

Spending Crisis – Part IV

We chose to steal from our children and grandchildren rather than control our spending.
Spending Crisis – Part IV
Can Catastrophe Be Averted?
By: George Noga – May 19, 2019

        This is the fourth and final post in our Spending Crisis series, available in its entirety at www.mllg.us. Our headline asks, “Can Catastrophe Be Averted?” The answer (spoiler alert) in one word is: no! If something cannot go on forever, it won’t; the spending cannot go on forever, so it won’t. America today is only 2-3 years from the point-of-no-return, from which no nation ever has escaped without grave harm.

          The USA will blow past the point-of-no-return because there is no constituency for action and there won’t be until the crisis affects people’s daily lives. Politically, there is no incentive, and in fact there is a strong disincentive, to act absent a manifest crisis. When the crisis arrives, government initially will take only quarter-measures and it will be far too little, far too late. We simply have dug the spending, debt and deficit hole too deep; but instead of beginning to fill in the hole or even to stop digging, we blithely continue to dig the hole ever deeper, oblivious to the consequences.

         The most likely initial government response to the crisis will be to hold short-term interest rates at or near zero – and perhaps even negative. If the interest rate is ultra low, the amount of debt theoretically is unlimited. However, although the Fed exerts strong control over short-term rates, they don’t have similar control over long-term rates. Alternatively, the Fed can simply buy an unlimited amount of debt in a massive quantitative easing process. Neither of these actions is without consequence and at some point everyone will know that the emperor has no clothes.

Comments from Reviewers

        Three highly knowledgeable people, to whom I am grateful, reviewed this series. No one disputed the data or the analysis. Most were less pessimistic about the final outcome, although they didn’t present solutions; one wrote, “Things are never as good or as bad as they at first seem; the sky is not falling – it never does.” Another wrote, “As long as (people) continue to invest in our Treasury debt, the crisis will not happen. The point-of-no-return comes when no one will invest.” All the reviewers noted that, despite everything, we are better off than in the past and than most other countries.

         One reviewer suggested we might be able to reduce the debt to acceptable levels, over many years, by a combination of inflation and weakening the dollar such that foreign holders of our debt absorb most of the pain. Officially, foreigners hold only 39% of the debt, but this reviewer believes the real number is higher as some foreigners mask their ownership. However, this reviewer acknowledges this tactic can only succeed if the US gets its budget into balance; otherwise, it doesn’t matter.

Two Dimensions to Crisis: Excess Debt and Balancing the Budget

        There are two distinct dimensions to the spending crisis. First, we must purge the system of all excess debt to return the debt/GDP ratio to an acceptable level. Second, we must get our spending under control and balance our budget. Even if aliens from another galaxy showed up and miraculously repaid our national debt, we would be right back in the same position unless we got our budget into reasonable balance.

        Timing: When Will the Crisis Begin?

         The most frequent questions I get are about timing. The short answer is that there is no way to know. No bell goes off when the crisis begins; no bell went off in Japan or Greece; at first, the crisis may seem transitory. I can make a credible argument that the crisis already may have begun given the ultra low interest rates. In all of recorded history (since 3000 BCE) there never before have been zero or negative interest rates.

        The best answer I can muster is the crisis will be in full bloom when the ratio is 125% to 150%. But it could happen much sooner; once markets see where things are headed, it isn’t necessary to wait until they get there. It also could happen much later. I recall Adam Smith’s admonition, “Be assured, that there is a great deal of ruin in a nation“. By that, Smith meant it requires much to completely ruin a nation, which can survive mistakes, stupidity and disastrous policies far longer than is assumed.

 

Concluding Thoughts

            The spending crisis has many moving parts and it is easy to get overwhelmed by the data. Fundamentally however, it is simple. The US has spent and borrowed too much in relation to the size of its economy. It is rapidly approaching a hard and fast tipping point (90%) determined by the inexorable laws of mathematical compounding and from which no nation ever has escaped without great pain and a lost generation.

           By the time the crisis is manifest, the budget gap will be over $1.5 trillion per year, or 30%, amidst punishing demographic forces. There is no realistic way to bridge that gap. Perhaps, catastrophe can be postponed or ameliorated with extreme financial repression – which in itself will put America in crisis; moreover, it won’t permanently solve the fundamental problem. Ultimately, all excess debt must be purged and the budget brought into some semblance of balance. There is no other way out!

       Charles Murray, one of the titans of our time, recently said, “The American experiment in self-government is essentially over“. I fear he is correct, as America in 2019 panders to people’s fears and prejudices, while it ignores existential threats. The spending crisis, which will cost America a lost generation, was eminently foreseeable and preventable. It is at root a moral crisis because we lacked the will to act.

          We chose to take from our children and grandchildren rather than to control our own spending. To make matters even worse, the money we stole was not put to good use. Instead of borrowing to save our nation from calamity (as in World War II), we stole the money from future generations to finance a perpetual New Year’s Eve party.

Note: Email us with questions or comments. We may publish a follow up post in a few weeks with reader questions. We also are open to publishing other viewpoints; if you are interested, email us for guidelines. We will continue to publish regular updates about the spending crisis.


Next up: MLLG’s Complete Principles of American Politics

Spending Crisis – Part III

Possible solutions: grow, cut, tax, inflate, repress, restructure, repudiate, seize, MMT
Spending Crisis – Part III
Possible Solutions to Spending Crisis
By: George Noga – May 12, 2019

           This is the third of four posts in our Spending Crisis series, which is available in its entirety at www.mllg.us. There are many theoretical ways a spending crisis could be averted; we could grow, cut, tax, inflate, repress, restructure, repudiate, seize, or MMT our way out. More likely, we will employ a combination of these measures.

          Grow: There once was a time, as recently as 5-10 years ago, where growth was a possibility: no longer. There is no way the economy can grow at a faster rate than the debt, which currently is growing by 5.25% and increasing to 8.00% by 2025.

         Cut (Spending): FY 2019-2020 spending will be about $4.7 trillion with a deficit of $1.1 trillion. To balance the budget requires spending cuts of 23.4% but, by the time an impending crisis gets Congress’s attention, cuts of 30% will be necessary. Social Security, Medicare, Medicaid, pensions and defense would have to be savaged to such an extent as to sow the seeds of civil unrest. Moreover, the cuts would have to remain in effect for 15 straight years just to get back to today’s 78% debt ratio.

       Tax: Balancing the budget will require a 36% tax increase. Even if possible, it would be self defeating, as sky-high taxes would lead to economic stagnation. Note: tax hikes are a higher percentage than spending cuts due to starting from a lower base.

        Inflate: Inflation is the cruelest tax of all and devastates everyone’s plans, hopes and dreams. Just to cut the debt in half requires 10 years of 7.5% inflation provided the deficit is not increasing during that same time. Realistically, it would require 20%  inflation for ten or more consecutive years just to maintain the status quo.

       Repress: Repression is government action that insidiously transfers wealth from the private to the public sector to facilitate financing massive public debt. It includes: (1) low or negative interest rates; (2) war on cash; (3) currency/capital controls; and (4) bail-ins. We already have repression; it will get much worse as the crisis approaches.   See our post of November 11, 2018, devoted entirely to financial repression.

       Restructure: Debt restructure likely will be part of the government crisis response. It takes many forms including: (1) lengthening maturities; (2) requiring roll-over; (3) imposing haircuts; (4) lowering interest rates; and (5) conversion to other securities.

       Repudiate: Nations that have repudiated are unable to borrow again for decades. Any repudiation would be perpetually tied up in courts and would decimate the savings of ordinary Americans who own government debt, directly or indirectly, in money market accounts, pensions and annuities. A direct repudiation is unlikely.

       Seize: When crisis hits, there will be $25 trillion of IRA, 401(k) and pension assets; government could seize some or all such assets in exchange for government pensions. In recent years, Poland, Hungary, Bulgaria, Ireland and France have, through one artifice or another, seized money from pension assets. Government, like Willie Sutton, will go where the money is and that place is pensions.

         Modern Monetary Theory: MMT has been around for a while but recently has been embraced by the democratic socialist crowd as a justification for unlimited spending. MMT asserts that a sovereign government that issues debt in its own currency, has flexible exchange rates and controls its central bank can spend without limit or constraint. With MMT, the state simply creates unlimited amounts of money.

Combination of Most of the Above

          Just to stabilize (not to fix) the ratio requires $1.25 to $1.50 trillion per year from the above sources for up to 15 years. In the early stages of the crisis, a panicky government will: (1) enact VAT and/or carbon taxes; (2) make modest spending cuts; (3) increase repression; and (4) tweak Social Security and entitlements. It will be too little, too late; at most, it could slow the progression of the crisis for a few years.

          In the advanced stages of the crisis anything is possible including: (1) massive tax increases; (2) hyperinflation; (3) severe financial repression including negative interest and currency/capital controls; (4) debt restructure; and (5) reliance on MMT to create unlimited amounts of money. When the crisis reaches the desperation stage, I would not rule out government seizure of most or all IRA, 401(k) and pension assets.


        Our final post in this series (next week) addresses the ultimate question of whether or not a spending crisis catastrophe can be averted. Don’t miss it.

Spending Crisis – Part II

Official government data are frightening – despite being wildly optimistic.
Spending Crisis – Part II
Analyzing the Data
By: George Noga – May 5, 2019

       This is the second of four posts on the spending crisis. The entire series is available on our website: www.mllg.us. Parts III and IV will be distributed on May 12 and 19 respectively. We begin with some data. The current public debt to GDP ratio is 78% and is increasing rapidly. GDP has been growing at 2.5% (with no recessions); we assume it continues to grow at 2.5% in the future, but at a net rate of 2.0% after taking into account the inevitable periodic recessions. The debt is now growing at 5.25%; we assume it grows at 6% until 2025, 8% to 2028 and 10% thereafter – again net of recessions. This assumption is consistent with projected deficits and demographics. These are conservative assumptions and actual results are likely to be worse.

          Based on the assumptions supra, the US will exceed a 90% ratio in 2022 and a 100% ratio in 2025. After 2025 it gets really ugly, with the ratio approaching 150% by 2030. Social Security is now devouring its reserves, Medicare exceeds its funding in a few years and interest on the debt skyrockets. Deficits will average $1.5 trillion over the coming decade. The deficit easily will exceed $2 trillion during the next recession and it would not be shocking for it to be as high as $2.5 trillion, or even $3.0 trillion.

          The really bad news is that the above data (mostly from government sources) are wildly optimistic. For example, CBO projected in 2018 that the deficit would not go above $1 trillion until 2022, but now is expected to exceed that in FY 2019-2020. CBO is touted as being non-political, but it really isn’t; it is required to follow the rules established by Congress. Hence, CBO is severely constrained and its data are neither objective nor accurate. MLLG’s data have proven to be far more accurate.

Caution: Don’t get hung up on the source of the numbers or the specific timing. There is no significant difference whether you use CBO, MLLG or other data; they all lead to the same ultimate outcome, only the timing differs slightly

Significance of a 90% Public Debt to GDP Ratio

          The 90% ratio is not arbitrarily plucked from the ether. Governments have been borrowing money for 600 years and there is no example of recovery from a 90% ratio without social and economic upheaval, usually accompanied by a lost generation until excess debt is purged. The 90% ratio is valid because beyond 90% the mathematics of interest and compounding results in an economic death spiral. Note: The World Bank asserts the tipping point is reached at 77%, which the US already has exceeded.

          The crisis doesn’t begin on cue when the debt ratio hits 90%; that just represents the point-of-no-return. The crisis may not begin until years later when the ratio reaches 125%, or even higher. The 90% ratio is analogous to Titanic hitting the iceberg. The ship remained afloat for quite some time after the iceberg encounter and no crisis was immediately evident to passengers. Nonetheless, the moment Titanic hit the iceberg its fate was irreversible as is a nation’s fate once its debt exceeds 90% of its GDP.

The Mathematics of a 100% Public Debt to GDP Ratio

          When GDP and the debt are equal, i.e. the ratio is 100%, it is much easier to grasp the mathematics of the death spiral. At a 100% ratio, the economy (GDP) must grow as fast as the debt to prevent a meltdown. Herein we assume that GDP grows at a sustained 2% rate net of recessions and in 2025 debt grows at 8%. The differential between the growth of the economy and the debt is then 6% per year; debt grows $2.0 trillion while GDP grows $400 billion. The annual addition to the debt now is up to $2.0 trillion and increasing; soon thereafter, the debt reaches critical mass.

           Clearly, our debt is growing at a much faster rate than our means to discharge it. This is readily apparent to creditors who are likely to demand much higher interest rates. If interest on the debt simply reverted to its historic level of a composite 6%, it would amount to $1.5 trillion a year in 2025, equal to about 25% of the budget. Long before America reaches that point, the spending crisis will be in full bloom.

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Next on May 12th – Part III: Possible solutions to the spending crisis.

Spending Crisis – Part I

At root, the spending crisis is moral rather than economic.
Spending Crisis – Part I
Introduction and Background

By: George Noga – April 28, 2019

           This is the first post in our series about the spending crisis. It is a spending crisis and not a debt or deficit crisis because it is the spending that drives both the debt and deficits. It is a moral rather than an economic crisis because preventing the crisis requires only summoning the national will to control spending. It is about who we are as a people, what kind of country we bequeath to our children and our national security and survival. I have marshalled all the facts, logic and wordsmithery I possess to explain this crisis in an objective and non-political manner.

Our series is in four parts. Part II, Analyzing the Data, will be distributed May 5, Part III, Possible Solutions, on May 12, and Part IV, Can Catastrophe Be Averted?, on May 19. The full series is now on our website www.mllg.us. The series was reviewed in advance by three experts with diverse viewpoints. I carefully considered all their feedback, incorporated much of it and offered to publish any dissenting opinions.

         In addition to my MBA, CPA background, I have studied economics for 50 years. I devoted much of one summer in Montana to constructing a quantitative model of the US economy, including the deficit, which has proven to be highly accurate. I have been writing about the crisis of spending, debt and deficits for over a decade.

Background Information

         US GDP now is $21.0 trillion; the public debt is $16.3 trillion, while the total debt is $22.2 trillion. This results in a public debt to GDP ratio of 77.6% and a total debt to GDP ratio of 105.7%. The $5.9 trillion difference between the total debt and the public debt consists of intragovernmental debt, which mostly is money owed to Social Security and, to a lesser extent, to FHA and other agencies. For example, when Treasury spent the Social Security surplus, it issued special non-negotiable bonds.

        Throughout this series we use the public debt ratio and not the total debt ratio because intragovernmental debt is notional, with interest accrued and not paid in cash. It is analogous to writing yourself an IOU. Most who cite the higher total debt ratio do so out of ignorance or as a scare tactic. However, there are some credible sources who believe total debt is more relevant than public debt. If they are right, our debt ratio is 105.7% and not 77.6% and America is much worse off than described in this series.

           There are some who minimize the seriousness of the current ratio because it was higher (115%) in the aftermath of WWII (the only time prior to 2009 it was above 50%) and America easily recovered. However, the WWII deficit saved America from totalitarianism and was transitory. Afterward, war expenses ceased, Social Security ran surpluses, Medicare didn’t exist and demographics were favorable. Now, the deficit is structural; Social Security, Medicare and pensions run huge deficits and demographics are bleak. We are in the tenth year of an economic expansion and growth is 3%; yet, the FY 2019-2020 deficit will be $1.1 trillion and increasing each year thereafter.

       It must be noted that many states, counties and cities also are in serious debt trouble and will, at some point, require federal government bailouts. Private debt is hovering at an all-time high. The world debt to GWP (Gross World Product) ratio currently is 84% and spiraling upward. Global debt (public and private) is $230 trillion and is over 300% of GWP. Although these issues are beyond the scope of this spending crisis series, they deserve at least some recognition.

          We close with some examples that seem to defy expectations. Japan’s debt ratio is 250%, but dedicated pension assets lower the effective ratio to 110%. The NIKKEI index is down 46% from 1989 and economic growth is 1% amidst chronic deflation. Greece’s ratio hit 180%; it avoided default due to its small size and bailout by the EU. It’s economy contracted, pensions were halved and there was social and political upheaval. Italy, with a 130% ratio, is following in Greece’s tracks. Even though they avoided default, Japan, Greece and Italy did not escape the consequences of massive debt; they all have suffered lost generations and their crises are far from resolved.


Next on May 5th is Part II of our series about the spending crisis.

Wanted: More Millionaires and Billionaires

Newly minted millionaires and billionaires are essential for a thriving society.
Wanted: More Millionaires and Billionaires
By: George Noga – April 7, 2019

         Alexandria Ocasio-Cortez condemned “a system that allows billionaires to exist“. Her chief of staff tweeted “Every billionaire is a policy mistake.” Pocahontas called billionaires “freeloaders“. Bernie Sanders said “Billionaires’ insatiable greed is having an unbelievably negative impact on the fabric of our country“. The economic illiteracy of such people is staggering. Even the laughable commie economists (oxymoron) of the old USSR understood that new millionaires were vital to economic success.

      In a market economy, one becomes rich only by creating a product or service voluntarily purchased by sovereign consumers. The more people helped, the greater the wealth. Sam Walton, Bill Gates, Steve Jobs and Jeff Bezos became billionaires by improving the lives of hundreds of millions, or even billions, of people. Newly created wealth is the best metric for gauging how well a society is innovating and serving the needs of its people. A society with no new wealth creation is stagnating.

        Many who well understand that wealth creators are vital to America’s prosperity, nonetheless believe inherited wealth is evil. They are wrong; however, we leave that issue for another day. We do note however that almost all great wealth is dissipated within three generations due to the ever-increasing number of heirs, estate taxes, charitable bequests and poor decision making. Also, much of the motivation of the original wealth creators was to provide financial security for future generations.

        Not only is the latte left dead wrong about wealth creation, its positions on many other economic issues – tax rates, minimum wage, free college, Medicare for all and rent control – are voodoo economics and nothing short of modern day witchcraft.

Income tax rates/minimum wage: These were subjects of full postings on March 3 and 10 respectively and are available on our website: www.mllg.us. In those posts, we showed that higher tax rates do not result in more tax revenue and that minimum wages are insidious and harmful, especially to the people they purport to help.

Free college: Social science degrees from overcrowded schools, with courses taught by graduate assistants, are cruel hoaxes. The inevitable result is a surfeit of psychology, sociology and hyphenated-studies majors driving for Uber. Free college devalues all college degrees and the added competition from more degrees suppresses wages. There will be more degreed people seeking the same number of jobs requiring degrees.

Rent Control: Government creates housing shortages by restricting development and then compounds it by enacting rent control. They blame landlords when the problem is due entirely to government failures. Ultimately, it leads to more homelessness.

Medicare for all: The bill Democrats introduced in Congress provides for rationing and reinstitutes the dreaded Obamacare death panels. Even the Canadian system, which is better than many, is a failure; see our July 22, 2018 post entitled “Canadians Flock to Whitefish“. In Canada, the median wait time between referral and treatment is 21 weeks and years in some provinces. Over one million Canadians (3%) are on wait lists when same day service is inexpensive and readily available in the USA.

        Progressives prefer to attack the wealthy rather than to improve the lot of the poor; they care more about appearances, class warfare and political talking points than about results; it is much easier to demagogue billionaires than it is to reduce poverty. Instead of billionaires being policy mistakes, good economic policy fosters creation of more billionaires. Most Americans don’t resent success, they want to achieve it!


Our next post challenges Hillary Clinton’s claim to winning the 2016 popular vote.

Hauser’s Law: Why You Can’t Soak the Rich

Taxpayers are not sheep docilely waiting to be shorn.
Hauser’s Law: Why You Can’t Soak the Rich
By: George Noga – March 3, 2019

        There are 7 reasons it is impossible to soak the rich by raising income tax rates; there is only one way it can be done – revealed herein. Full disclosure: I have firsthand knowledge of this by virtue of being a CPA tax professional and, during the 1970s and 1980s, the founder and CEO of one of the largest tax shelter firms in America.

Why You Can’t Soak the Rich With Higher Tax Rates 

1.  Hauser’s Law: Tax revenue remains constant at 18% of GDP (20% in good times, 16% in bad times) regardless if the top rate is 28% or 92%. This has been true for the 75 years since WWII. Later in this post we explain why Hauser’s Law works.

2. Elasticity of Taxable Income: ETI is a variant of Hauser’s Law and is measured by comparing tax returns before and after tax increases. For incomes above $500,000 the ETI is -1.2, which means the higher rate collected less money than before. For capital gains and dividends, the ETI shows that virtually no added tax is collected.

3. The rich are not the same people: The highest bracket taxpayers are not the same people each year. Someone who runs a family business with modest income suddenly becomes rich for one year when the business is sold. It is precisely such ordinary people (rich for one year only) who get caught in the crosshairs of high tax rates.

4. There is no way to identify the rich: Government (thankfully) has no data on wealth, only on certain types of income – which is a poor surrogate for wealth. It is impossible to soak the rich if there is no way to know who they are. Also see #3 supra.

5. Corporate taxes are not paid by owners: Businesses and corporations collect taxes but the money they pass along to government is not their money. Nearly all business taxes are passed along to consumers as higher prices – extremely regressive.

6. There aren’t enough rich: Not only are they different people from year to year, there just are too few of them to make soaking them worthwhile. The only way to raise significantly more revenue within the current tax code is to tax the middle class.

7. The income of the truly rich is not taxed as ordinary income; it is capital gains.

Why Hauser’s Law Works and ETI is Negative

        Hauser’s Law appears counterintuitive; why would government collect the same percentage of taxes when the top rate is 92% as it collects when it is 28%? The answer lies in human behavior; people are not sheep docilely waiting to be shorn. Higher rates incentivize people to go to great lengths to reduce taxes. They will work, save and invest less; barter, retire earlier; hide, defer and underreport income, convert ordinary income to capital gains and not realize capital gains without offsetting losses.

        They employ tax shelters; shift income to lower bracket family members; seek out tax-free income; change the amount, location and composition of taxable income; exploit ambiguities and loopholes; shift income to corporations; lobby aggressively for tax breaks, move from one place to another – even outside the US; move into the occult economy; employ top tax lawyers and accountants and much more – mostly legal.

How to  Soak the Rich – Using the Tax Code

       There is only one way to soak the rich and that is with lower tax rates. It works for the same reasons that Hauser’s Law works; the rich become disincentivized to take measures to reduce their tax bill. Whenever rates drop, the rich pay a much higher share of taxes than before. The 2003 Bush tax cuts resulted in the largest tax increase on the rich in American history; they paid over double what they paid when Carter was president. It works every time, but you won’t hear it from AOC and her compadres.


Our next post debunks another liberal shibboleth, the $15 minimum wage.  

Debt Crisis Timetable Accelerating

When Titanic struck the iceberg, it remained afloat and the disaster was not yet apparent. However, its fate was irreversible from that moment; so it is with a 90%  debt/GDP ratio.
Debt Crisis Timetable Accelerating
By: George Noga – August 1, 2018

       I have a recurrent nightmare about an endless train, brimming with passengers and priceless cargo, slowly but inexorably hurtling along its tracks toward a bottomless abyss. The engineers, conductors, passengers and observers all know the train is going over the cliff; however, instead of trying to stop the train they are opening the throttle to speed it up. When I awake, I realize it is no nightmare; it is happening right now to the United States of America. Following are data just released by CBO and SS.

  • Social Security begins devouring reserves this year, 4 years earlier than projected last year. Reserves will be depleted in 15 years and benefits would require a 25% cut.

 

  • Medicare will be unable to pay scheduled benefits in 8 years; just during the past year this shortened by 3 years. What does that say about the integrity of the data?

 

  • Deficits average $1.5 trillion (total $15 trillion) over the next 10 years (based on current policy), raising the public debt/GDP ratio to 105% per the latest CBO estimate.

 

  • Interest on the debt will triple to just under $1 trillion per year within 10 years per the June 2018 CBO report. Debt service will soon overtake defense spending.

 

  • The really bad news is that the projections cited above, by government agencies, are wildly optimistic. None assumes a recession during the coming decade, while it is nearly certain there will be one or possibly even two. Recent projections made by private sector economists (Fortune Magazine, Cato Institute) are much worse.

       No one cares! For most Americans the problem is too abstruse; they are tired of hearing pundits cry wolf; and there is no discernable impact on their daily lives. For politicians, tackling the issue has no upside; it is all downside, including possible electoral loss. No constituency exists for reining in benefits, cutting spending or raising taxes; the political apparat favors the opposite. Each year that we dithered, the problem became more intractable and costly; now, finding a solution is virtually hopeless.

        Economists believe the point-of-no-return is a public debt to GDP ratio >90%; the World Bank says 77%. The US already is at 77% and will reach 90% much earlier than believed only months ago. The crisis doesn’t begin when we exceed 90%; it just means there is no going back. The Titanic remained afloat a long while after it struck the iceberg and the crisis was not immediately evident to those aboard. Nonetheless, the moment Titanic hit the iceberg, its fate became irreversible; so it is with a 90% ratio.

       As my nightmare continues, nothing happens until after the train goes over the cliff and we are subsumed by crisis. Panicked politicians impose a VAT, modest at first, but rapidly ramped up to European levels of 20+%. Income taxes skyrocket. Only token changes are made to entitlements. Economic growth tanks. Defense is compromised. There is a 15-25 year lost generation as we morph into a European-style welfare state. People lead lives of quiet desperation and the USA, as we know it, ceases to exist.

      There are two certainties about the impending debt crisis: (1) if something cannot go on forever, it won’t; and (2) excess debt ultimately must be purged from the system. The debt can be purged only via higher taxes, less spending (especially entitlement spending), hyperinflation or repudiation; there are no other options.

      By the time the crisis hits, a combination of new and higher taxes and spending cuts totalling $1.25 trillion per year in today’s dollars (25% of the budget) for 15 straight years will be needed just to get back to today’s 77% debt/GDP ratio. That should give you some perspective about the devastation that purging the debt will wreak on America – as well as the reason for my recurrent nightmares.


Our next post on August 10th documents great causes turning into rackets.

American Birthright Accounts: Readers Respond

This post compares American Birthright Accounts to Social Security and responds to readers’ questions about seeming too good to be true.
American Birthright Accounts: Readers Respond
By: George Noga – June 17, 2018

       Reaction to our May 20th post about American Birthright Accounts (“ABA”) was extensive and spirited. If you missed the original post or wish to reread it, you easily can access it on our website: www.mllg.us; however, we provide a summary in the next two paragraphs. Reader responses (addressed herein) centered on (1) comparisons with Social Security; and (2) questioning whether ABAs were too good to be true.

       American Birthright Accounts are an original MLLG idea, although the name is borrowed. ABAs are simple and affordable. Every child born in the USA receives a professionally managed, tax-free account funded by government for $5,000 at birth and $500 per year thereafter until age 65. If the account grows at 7% net of inflation, which mirrors the average annual performance of markets since 1930, the account will exceed $1 million at age 65 and generate $6,000 per month of retirement income.

         A retired couple, both with ABAs, receives $12,000 a month tax-free, equivalent to $200,000 per year taxable. They own their own accounts and have $2 million to bequeath to their heirs – all tax-free and in today’s dollars. The cost to the government is equal to one-half of one percent of the federal budget, or 25% of what we will spend this year just on food stamps. ABAs also would vastly reduce inequality in America!

How Do ABAs Compare with Social Security?

       An American working from age 20 to 67 earning the median income ($60,000) pays $430,000 into Social Security (“SS”) and receives a real (net of inflation) rate of return of 1.2% (per Heritage Foundation) resulting in a notional value of $738,000 at retirement. The average SS beneficiary receives $16,000 per year, or a rate of return of 2.2%. Because SS is 85% taxable, the benefit is equivalent to $13,000 after tax – equal to a real return of 1.8%. Finally, SS benefits are unsustainable at their present level and after circa 2030 beneficiaries can expect to receive only 75% of present benefits.

        Let’s put SS side by side with an ABA. The average cost of SS is $430,000, for an ABA it is only $37,500 ($5,000 at birth and $500 a year for 65 years). Average SS benefits are $13,000 per year after tax; for ABAs the comparable number is $72,000. At death, the value of your SS account is zero, zilch, nada; the value of your ABA is over $1 million. Everyone benefits equally from an ABA, whereas the benefits vary wildly for SS. I could go on ad infinitum in this vein, but I believe you get the drift.

Are ABAs Too Good to be True?

      Some readers had trouble with the mathematics of ABAs, wondering how it is possible for everyone to be a millionaire? The math is straightforward; the initial $5,000 increases to $435,000 and the $500 per year grows to $573,000 for a total of $1,008,000, all computed from standard compound interest formulas. ABAs compound from birth for 65 years, whereas SS doesn’t begin until 20 years later. ABAs grow at a market rate, while SS grows at the much lower short-term government bond rate.

* * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *

      There is a much larger lesson here. ABAs succeed due to the power of markets, while SS fails because of the evils of government. Progressives oppose privatizing SS, fearing market success will turn workers into nascent capitalists by giving them a big stake in the free-market economy. Liberal poseurs oppose making everyone rich because it doesn’t fit their nihilist, tribalist, class warfare, identity group narrative.


Next up: The Supreme Court decision to permit sports betting.