Why I Started Admitting I Was Wrong

Dale Carnegie said in How to Win Friends and Influence People, that if any of us were right more than half the time, we’d be making a killing on Wall Street.

It feels like others would lose respect for someone who admits they have been wrong, but the opposite is true. Continue reading

Workers Moving Into Low Tax States, Out of High Tax States

A new book suggests that competition between states for residents is alive and well. It seems over the past 15 years people have overwhelming moved out of states with higher income taxes, and into states with lower tax burdens. The author says that between “1995 and 2010 over $2 trillion in adjusted gross income moved between the states.”

Obviously wealth is going to move between states as people change jobs and scenery. What makes this move of wealth suggestive of state competition on tax burdens is the net loss/ gain of residents in states with high/ low taxes respectively. “[T]he nine states without a personal income tax gained $146 billion in new wealth while the nine states with the highest income tax rates lost $107 billion.”

It should not be surprising, but states that continue to raise the tax burden on their citizens lose more residents, and have economies that are stagnating. Blue states can whine that the competition between states isn’t fair because of “aging infrastructures, large pensions to pay, and entrenched trade unions” in the more liberal states, but that is the point; these big government tax and spend policies are not sustainable or good for the economy.

Wisconsin however, proves it is never too late to reform. Governor Scott Walker cut taxes and reined in the unions, and since then Wisconsin has been on the rise. An attempted recall of Governor Walker failed to oust him, and he claims that since Wisconsin Democrats “refuse to pledge to roll [reforms] back”, this shows that the electorate sees the success and is unwilling to risk the economy to go back to failing liberal governing policies.

And this is precisely why states need to have more control over their affairs than the federal government. State competition means better policies in states, because people can easily move within the US. Blanket policies that affect all of the US can do more damage when there is nowhere to escape to. Being from Massachusetts, I am from one of the high tax states slowly killing their economy. Massachusetts lost a congressional seat after the 2010 census (as it did after the 2000 and 1990 censuses) because our population didn’t grow as quickly as the rest of the country.

I’ve known multiple young people with engineering degrees who have left the state for economic opportunity elsewhere, at least one nurse, and other skilled workers who have moved to New Hampshire, the Carolinas, and Florida. Family members who want to start a business plan to move to a more business friendly climate down south within a year and a half. As the economy is still the number one issue for voters, the lesson should be clear. Freer states with less restriction and lower taxes are more attractive to workers and business owners, and will therefore be the homes of more economic opportunity.

The Truth About Minimum Wage

vJust after President Obama delivered the State of the Union address, we can see that consumer spending in January barely grew, just ticking up .1% compared to .5% in December, and 2.2% in the fourth quarter of 2012. The slow growth in consumer spending can easily be attributed to the rise in payroll taxes, and other tax increases on wealthy Americans–people now have less money to spend because more of it goes to the government in taxes. Obviously, this does not help our economic situation, because a slowdown in consumer spending, also means a slowdown in business for retailers. Tax cuts would have had the opposite effect, spurring growth in consumer spending, meaning businesses also grow. Instead the U.S. treasury has grown and your money may be spent on interest for our enormous debt, or maybe a green energy project that goes bankrupt, or maybe more IRS agents to handle Obamacare.

But it is not just taxes which hurt the economy. In the State of the Union speech, Obama talked about raising the minimum wage to $9/hour as a step to take more people out of poverty. This is a classic example of giving a solution that sounds good, but actually hurts people in poverty. When minimum wages are set, that ensures that no one whose skills are worth less than minimum wage can get a job. So if someone has a $6/hour skill set which they use to flip burgers, and the minimum wage is raised to $9/hour, someone with a $9/hour skill set will now be employed flipping burgers. Instead of the business hiring people with burger flipping skills for $6/hour, they will hire someone with cashier skills for $9/hour, even though that person will still be flipping burgers. The rationale from a business perspective is, you might as well get what you pay for. If a business is forced to pay more money than a skill is worth, it is the workers with low skill that will suffer.

And more, most people making minimum wage are not in poverty! According to the Daily Caller:

“The reality is that fewer than 20 percent of people who earn the minimum wage are poor, and most poor people already earn more than the minimum wage,” Jason Riley notes in the Wall Street Journal.

A lot of people earning minimum wage are teenagers and young adults who do not yet have the skills for a job which pays a higher hourly rate. Working a minimum wage jobs allows them to move up the ranks, learn, and acquire skills that pay more than minimum wage. When minimum wage is raised, it eliminates starting positions for people with low skill sets, and erases any opportunity to move up by training for a job that is worth more to employers. In the previous example, someone who only knows how to flip burgers will never be hired, because the employer has to pay cashier level wages. Without a minimum wage the burger flipper would have been hired, and had the opportunity to train on the cash register, then moving up in skills and pay. Higher minimum wages robs the opportunities of low skill labor to move beyond that skill set. And this phenomenon actually hurts minorities worse than white people, according to a study by the Employment Policies Institute.

“Among white males in this group [age 16-24], the authors find that each 10 percent increase in a federal or state minimum wage decreased employment by 2.5 percent. … But among black males in this group, each 10 percent increase in the minimum wage decreased employment by 6.5 percent,” a separate study by EPI found.

Obama would rather pay lip service to low skill laborers and poor people without jobs, than actually help them improve their situations. But the fact is that between 2009-2011, 3 million more Americans slipped below the poverty line. As for the middle 20% of earners, “the Census Bureau found the inflation-adjusted household income was the lowest it had been since 1995”. Obama can talk all he wants, but it is just talk. Americans are doing worse under Obama policy.

Economy Shrank Fourth Quarter as New Taxes Loomed

0penniesAccording to a CNBC article the economy has posted a “stunning drop” in GDP, which the article describes as a “surprise” for the fourth quarter. Are you surprised? I’m not surprised. The “expected” Gross Domestic Product growth during the fourth quarter of 2012 was about 1%, however the GDP actually contracted by .1%. Although it is a small contraction, it is the first time the economy has shrank since the recession ended.

The article says that it could be some one time factors which are effecting the economy, such as the “biggest cut in defense spending in 40 years, fewer exports and sluggish growth in company stockpiles”.

And those volatile categories [government spending cuts and slow inventory growth] offset faster growth in consumer spending, business investment and housing — the economy’s core drivers of growth.

While these factors almost certainly contributed to the economic slowdown during the fourth quarter, they cannot completely explain away the GDP’s shrinking. We may be seeing the beginning of another recession.

This is because tax increases took effect at the beginning of January. Since the payroll tax has increased, families are taking home an average of 2% less income each year. And growth in consumer spending for the fourth quarter might not be as good as it sounds… the fourth quarter includes Christmas. Consumer spending will be a tough category to grow, based on the fact that consumers have 2% less money to spend due to the payroll tax hikes. The article claims that the growth rate could stay weak as people “come to grips” with the payroll tax increase, however even if the public comes to grips with the tax increase, there will still be less money for consumers to spend. And any money that may have been saved is almost sure to remain tucked away, as the tax increase has also led to a sharp decline in consumer confidence.

In regards to another one of “the economy’s core drivers of growth”, business investment may have little reason to grow in the months moving forward. Many businesses have reduced their inventories, such as Caterpillar, Inc. which “said this week that it reduced its inventories by $2 billion in the fourth quarter as global sales declined from a year earlier”. Inventory reduction is also seen as a sign of weak sales to come, and suggests a slowdown in factory production.

Adding fuel to the fire is the fact that capital gains and dividend taxes increased on January 1 for high income earners, from 15% to 23.8%. I would love to hear an explanation for how increasing the taxes paid on investment will spur business investment. In reality, it will harm business investment, because there is less to be gained from investing. This means less economic expansion, fewer new companies, and fewer new jobs.

The contraction in fourth quarter GDP growth for 2012 is more likely an omen of what is to come, rather than being caused by “one time factors”. As businesses and individuals accepted the fact that Obama’s reelection would mean tax increases, their behavior reflected the realization. Companies can’t hire because the costs associated with new employees are high, and growth in company sales are uncertain. It will be harder to find investors for innovation or expansion because of the increased taxation on investment income. Consumers will spend less as they take home less money, and become increasingly skeptical that the economy will bounce back. I believe these factors are what contributed to a fourth quarter economic slump. It is simply impossible to tax an economy out of a recession.

New Deal: $600 Billion Tax Increase

Alright, now that we’ve added $600 billion in tax revenues to the treasury over the next ten years, we can expect our economy to bounce back, right? Maybe in the make believe land of Washington D.C., but out here in the real world, we will see fewer jobs, a continually or increasingly stagnant economy, and less income to spend on things which matter to us and our families. The government cannot create jobs, they can only move them from the private sector to the public sector. When the government does this, jobs are lost in the process because of the inefficiencies of government.

Furthermore the jobs created are not necessarily as productive as the private sector jobs, because private sector jobs are built on demand for a particular product or service, while government jobs are built on the demand for more jobs. Therefore we can confiscate money from the private sector and invent jobs, but the net jobs available will be fewer, and the jobs that are created will produce less, and contribute less to our economy. This year we will see more IRS agents employed, and fewer small business owners, doctors, factory workers, and businessmen employed.

Also, taxes did go up for people in the middle class, which unequivocally means Obama is a liar. Of course most of us already knew this, but some who cast their vote for him certainly seemed surprised. The Social Security payroll tax will increase from the 4.2% rate in 2011 and 2012, to 6.2% from now on. This means smaller paychecks for everyone. Obama will continue to lie however, and tell us all that he cut our taxes.

But we can expect a steep rise in middle class morale, the next time those statistics come out. According to Warren Buffett and his buds, raising taxes on the rich was important to show the middle class that everyone is paying their fair share. Never-mind that this will hurt the economy, and kill jobs; as us peons become dependent on the government, we can relax in the comforting thought that the rich are paying their fair share. Too bad those extra IRS agents I mentioned before won’t be growing food to replace all the farms that shut down because of the Estate Tax. Maybe that is what it will take to make people realize that the government cannot magically create jobs, nor magically create food and other necessities which are produced through the free(ish) market. As the character Hayek says in this video, “if every worker were staffed in the army and fleet, we’d have full employment, and nothing to eat!”

The only good news here is that the “Death Tax”–Estate Tax–will only go up to 40% this year from 35%, and the exemption will remain at $5 million. This will save some family owned farms and small businesses from shutting down and being broken up and sold upon the death of the owner–it will not save all of them. But the Estate tax will likely remain a wash, as it has historically cost as much to collect, as the amount it collects. More IRS agents, bureaucrats, and TSA–more destroyed businesses, unemployed farmers, and more families left without the ability to produce.

But the point that sold the jealous American public was that taxes would go up on people making $400,000 individually, or $450,000 as a couple.

The deal raises the top tax rate, the rate paid by small businesses and investors (America’s job creators), from 37.9 percent (including the 2.9 percent Medicare payroll tax) to 43.4 percent this year (including the higher 3.8 percent Medicare payroll tax from Obamacare)…

The Daily Caller article continued that the accounting firm Ernst and Young estimated that 700,000 would be lost if the rates were raised on people making over $250,000. We can now expect this number to be slightly smaller because of the $450,000 threshold, but doubtlessly more jobs will be lost. You see, when people have extra income, they tend to invest it in things which create jobs–or at least spend it in a way that supports the parts of the economy the producer feels deserve that business. When the government confiscates that extra income, and invests it on behalf of the American people, we get investments like Solyndra, and the countless other government failures. People are more careful in what they invest in with their own money, and will weigh the risks in a vastly different way than government bureaucrats weigh the risk of investing money that is not theirs.

This leads me to the next point, that taxes will shoot up on investment income. This is where I get the urge to start banging my head against the wall. Do people honestly believe investment and job growth will be spurred by taxing investment at a higher rate? Do people honestly believe the rich will continue to make risky investments, when the reward is decreased by 23.8%? Do people seriously think that the rich will risk losing 100% of the money they invest, while the possible gain is only 76.2% of the earnings? Some will still invest, but fewer will invest with less money.

If you’ve got $20 million in the bank, are you going to risk losing all of that by investing it, when even if you have an extremely successful gain of 20%, you collect $3 million and give the government $1 million? I think many of these people would choose to sit on the $20 million, because the possible gain is $3 million, and the possible loss is $20 million. What the government can do is make this sort of risky investment as profitable as possible, in order to grow the economy–the capital gains tax would serve us all better if it did not exist. Instead we see our government trying to squeeze even more money from the people who create jobs, thus creating fewer jobs. The rise in capital gains tax to 23.8% from 15% will mean fewer people invest, because the reward is less. More people will put that money in a high interest savings account where they will have less opportunity to earn “obscene profits”, but can be certain that their money won’t disappear all together.

The point is that even the people who supposedly benefit from this fiscal deal, will hurt in the long run. This is why we saw the stock market plunge upon Obama’s reelection, because people were dumping stock which would be taxed at a higher rate in 2013. Investments in stock are what fuel expansion, innovation, and new technology. All of these new taxes will harm the economy, and allow the government to waste more money on unproductive jobs, unsuccessful investments, and foreign aide to countries that hate us.

Hands Off!

We have all heard talk about jobs during this Presidential campaign, yet we often have a hard time time moving beyond the rhetoric. Obama talks about how many jobs he has added to the economy, but what does it matter if a million jobs are added and 2 million lost? This is why voters need to think beyond the rhetoric, and ask the right questions. How many net jobs were created under President Obama? If more jobs were lost than were gained, there is nothing to be bragging about.

And it should be no surprise that Obama’s economic policies did not create jobs. Hiring government employees can create jobs in the public sector, but it costs jobs in the private sector, because that is where the tax money came from to pay for federal employees. Instead government needs to take a step back and allow companies to do what they do best: create jobs.

Thomas Sowell often challenges the rhetoric of politicians, encouraging readers to think beyond stage one, beyond the handouts and the bailouts to the long term consequences of government action. When considered objectively, you will find that government intervention in the economy has never solved economic issues. Rather, leaving the private sector to its own devices sparks quicker recovery.

[T]he American economy recovered from downturns on its own for more than a century and a half, until President Herbert Hoover intervened after the stock market crash of 1929. Indeed, this was one of those bipartisan interventions so much hoped for by the media — and the results were catastrophic.

The media misconception today is that what we need to speed up economic recovery is to end gridlock in Washington and have bipartisan intervention in the economy. However plausible that may sound, it is contradicted repeatedly by history.

Unemployment was never in double digits in any of the 12 months following the stock market crash of 1929. Only after politicians started intervening did unemployment reach double digits — and stay in double digits throughout the 1930s.

There is nothing mysterious about an economy recovering on its own. Employers usually have incentives to employ and workers have incentives to look for jobs. Lenders have incentives to lend and borrowers have incentives to borrow — if politicians do not create needless complications and uncertainties.

The Obama administration is in its glory creating complications and uncertainties for business, ranging from runaway regulations to the unknowable future costs of ObamaCare and taxes. Record amounts of idle cash held by businesses and financial institutions are a monument to the counterproductive effects of Barack Obama’s anti-business policies and rhetoric. That idle money could create lots of jobs — net jobs — if politics did not make it risky to invest. (Full Article).

To turn our economy around and bring America back from the brink of disaster, Americans’ attitudes needs to move away from the idea that the government can solve problems. The government’s role is to create an environment where people can solve their own problems, or work together through mutually beneficial economic transactions to improve the lives of everyone. Equality under the law, and objectively defined, easily understood laws are what the government should be focusing on, instead of sticking its hands in every situation, and making it worse. Maybe American voters need to find themselves over the next four years, and get back in touch with the founding principals of this great nation.