Saturday, October 29, 2011

Solutions for America

America faces an uncertain future due to decades of misguided policies which have bankrupted most of the population and the economy.  Fortunately, solutions to these problems are available and can be readily implemented if the political will can be found to do so.  America is not just another country that has operated by the policies which have generally guided other countries.  If it did, America would never have become the enormously successful nation it is today.  Returning to the policies which made this country great is the only way to ensure the survival of the American way of life and liberty for future generations.
The actions needed are manifold but interrelated.  These are mainly the reimplementation of former policies which have been recklessly discarded over the last few decades in the name of ‘de-regulation’ and ‘globalization’.  Unless we reverse these changes few people will recognize the country that America will inevitably become.
These solutions fall into four broad, but related, categories: The money supply, finance, national investment, and national sovereignty.
These changes include:
Reinstate the Bretton Woods international settlement system.  This system was used to settle trade imbalances on a periodic basis, using gold reserves as the commodity for settlement.  Since this was abandoned in 1971 the US has accrued a trade debt of ~$7Trillion.  This means a trade balance must be ensured.  A trade imbalance is, by definition, a transient condition, as trade ultimately is an exchange of a domestic group of goods and services for a group of foreign goods and services.  What is done today isn’t trade per se, but multi-currency purchase and sale agreements.  These purchases and sales can lead to a situation where trade is out of balance and one side ends up with more goods and services and the other with more foreign currency.  This imbalance used to be settled using the Bretton Woods agreement by shifting gold to the foreign cash holding nation from the good and services purchasing nation.  The deficit is eliminated by selling the gold to the holder of the excess cash which returns the cash to the issuing nation.  In essence the gold is traded for the goods and services as if the currency was never part of the transaction.  This works fine for small, random deficits that go in both directions.  Over the longer term, one-sided trade deficits lead to one nation perpetually having excess foreign currency and the other nation perpetually transferring gold to the first to settle.  This situation is untenable as the first nation will eventually run out of gold.  This is exactly the situation in which the US found itself in 1971 when the US withdrew from the gold standard and Bretton Woods.  Withdrawing from the system didn’t solve the problem, rather it merely deferred the day of reckoning to the future, which is rapidly approaching.  The problem wasn’t the gold standard or Bretton Woods.  The problem was perpetual trade imbalances.  Therefore, a mechanism to ensure balanced average trade over extended time is needed.  This mechanism is the tariff, whereby the deficit nation that is spending more currency than is covered by sales to foreign nations imposes a tax on imports to reduce the size of the imbalance by curbing demand through effectively higher prices for imports.  Reinstating tariffs as a trade balance mechanism is a necessary step for the US to undertake.  Tariffs also protect domestic industries to maintain a diverse economic base that assures the economic self-sufficiency of the country.
Reinstate the Glass-Steagall regulations which partition the financial, insurance, and real estate industries into distinct businesses.  This formed a kind of integrity infrastructure for the entire system.  A business had to choose to be one and only one of a: commercial bank, a broker, an investment bank, an insurance company, a real estate company, etc.  The goal was to insulate the various segments from problems in other segments.  However, the one most important goal of this law is the separation of commercial banking, which creates the US money supply, from brokers and investment banks which often engage in speculation.  This separation ensured that the public money supply was not leveraged to purely speculative, financial instruments.  Instead, these brokers or investment banks would need to raise funds from private investors rather than use leverage from the US money supply.  Any loss incurred by the speculative activity would be borne by the investors and not the US treasury, or taxpayer, nor impact the money supply.  Today, these rules would apply to hedge funds and other investment organizations as well. This and the trade tax (see below) would serve to greatly limit the creation of derivative securities which are purely speculative in nature and threaten our financial system.
Institute a ½% trade tax on all trades of financial instruments and make this iterative such that financial instruments that in turn trade underlying instruments must pay the tax on those trades as well.  This would discourage financial speculation that contributes little if any value to the economy.  The financial system is currently too liquid.  Like a car that bounces down the road because its shock absorbers have failed, financial flows today gyrate wildly with ‘flash crashes’ and massive inflows and outflows of money to regions.  This tax would act to damp out these fluxuations and smooth the operation of the financial system as well as raise badly needed revenue from a sector that largely has avoided taxes in the past.  Impose this tax on the trade of US securities anywhere in the world so that these activities will not be merely moved offshore.
Stop bailing out banks.  As part of the return to Glass-Steagall, commercial banks will once again be regulated in their entirety by the FDIC, which will again be able to set lending standards for these banks.  Any bank that is in terminal trouble can be seized by the FDIC and cycled through bankruptcy so a healthy, functioning bank will emerge ready to make loans to credit worthy borrowers.  Brokerages and investment banks will merely fail as private enterprises often do.
End ‘naked’ shorting of securities.  Traditional shorting of securities involves borrowing securities from an owner, typically a client of a broker, then selling those securities with the promise of returning them in the future.  Naked shorting simply sells the securities without actually borrowing them!  This is nothing but market manipulation.  And there is no limit on the pressure a trader can put on a security through this method.  
Return to the uptick rule where a security can only be shorted after the price has risen from the previously posted trade price.  This prevents the kind of short manipulation of prices that occurs by short position traders making one short sale after another thus artificially driving down the price of a security, so they can then buy back, or cover, at the bottom.
Reassert US sovereignty, which includes regulation of all border crossing activities.  These include: people, goods, services, money, securities, etc.  The flow of illegal aliens across the border must be stopped.  The transit of over 12 million illegal aliens over the last decade could not have occurred without the tacit consent of the Federal government.  Legal methods of immigration exist and should be used.  
Reinstate the draft.  A democratic republic is based on government of the people, for the people, and by the people.  Thus it is a responsibility of all able citizens to participate in defending the nation.   Medical and conscientious objector exceptions only can be allowed, and these folks can perform some form of public service instead.  This would have the side benefit of reducing the endless wars of empire that the US currently conducts as people of influence would have little stomach for such wars when they realize that they or their children would have to go fight and die in them.
End the wars of empire.  The US does not need to be an empire in order to be great.  America does have interests around the world, but these interests are largely not protected by military intervention or all out wars.  These interests, such as access to commodities such as oil and minerals, navigation of the seas, flows of ideas, and equal access to markets can be achieved through diplomatic means.  Returning to the principle of self sufficiency will allow the US to lessen its dependency on foreign resources.  The US interests should include spreading the message of the American system, as expressed e.g. in the Declaration of Independence and the Constitution, around the world.
Return the age of majority from 18 to 21.  This experiment in granting adult status to minors has been an abject failure.  Today conditions for young people are less certain and more confusing than ever.  Scientists now know that the maturation process does not complete until age 25, which is something that apparently auto rental companies already know as one can’t rent a car until that age.
Reinstate the Estate Tax.  A fundamental principle on which this nation was founded is that we should have no aristocracy.  An aristocracy is primarily vast inherited wealth passed from generation to generation and the interrelationships of these wealth passing families.  After some time these families also create titles for themselves which give them rights beyond that of the general population.  A confiscatory estate tax would prevent the creation of these aristocratic families.  Note that estate taxes are not levied on the deceased.  There is no ‘death tax’ and never has been.  Rather estate taxes are levied on the recipient of the estate.  If the entire estate is left, for example, to charity, then currently no estate tax would be imposed.
Return Social Security to the pay-as-you-go system that it was at inception and as it had operated for many decades.  The currently “finacialized” system put in place by Alan Greenspan in 1987 likely only had the intent of creating a large trust fund that could be privatized in the future.  Social Security is an economically sound system that provides the economic security for retires that only the Federal government can ensure.  The trust fund should be drawn down through reduced employee payroll tax.  This will have the highly beneficial side effect of stimulating the economy by putting money in the hands of those who need it most and are most likely to spend it.
Reduce tax breaks for corporations and the wealthy by closing the myriad of loopholes.  Greater tax rates are not needed as significant additional income for the government can be gained merely by closing these loopholes which allow vastly profitable companies and individuals to pay little or no taxes.
Expand spending on infrastructure and public works.  From the 1930s to the 1960s the government at all levels spent lavishly on these areas in the form of highways, bridges, waterways, water and sewage, schools, hospitals, libraries, parks, public spaces and buildings, etc.  Thus was created a more livable, attractive, and friendly environment for citizens and companies to flourish.  This spending is also a chief stimulant for the economy as many citizens are employed in these enterprises and they in turn spend their incomes in the private sector thus stimulating a wide variety of industries.
Expand public spending for liberal education, the arts, and cultural institutions and activities.  The creation and sustainment of proper citizens of a republic requires a liberally and culturally educated person.  A proper citizen is one who is conversant in history, literature, art, philosophy, religion, music, etc. so that he can comprehend the myriad of issues facing our nation and society at a level that allows him to detect when specious arguments are being used to manipulate our nation to nefarious ends.  The acceptance of such sophistry is the means to the end of a republic.
There are many more efforts that the Federal government and local governments can undertake to bring opportunity and stability back to our nation.  But, the ones listed above can form a basis for that activity and start getting this country back on track to being the exemplar nation of what a modern, successful, and free republic is, and what they should seek emulate.

Friday, February 4, 2011

Aiding the Economy and Social Security through a Payroll Tax Modification Program

The economy is suffering the severest slowdown since the Great Depression, and the efforts to date of the government and the commercial sector have done little to ameliorate the economy’s problems.  Unemployment is at a near-record high and is showing no sign of improving.  The essential problem is that current financial flows of money and credit through the economy do not match the expectations of people for activity of the economy.  In other words, people have no money, so they can’ t spend it on the homes, cars, travel, etc., that are needed to boost the economy.  In the previous decade this problem was masked by the willingness of consumers to borrow in order to finance their purchases.  Since the recession this borrowing has slowed dramatically, leading to a downward spiral of reduced consumption and falling employment.  The solution, therefore, is to get money to the people who will spend it--those in the so called working and middle classes.
The plan outlined below intends to simultaneously: boost the economy by giving money to workers who are likely to spend it, 'fix' SS by returning it to the pay-as-you-go structure it had for its first 50yrs, give workers back their money so they can use some of it to pay down some of the onerous debt load they are now under, ensure that SS is not raided to pay for other expenditures, while not increasing the national debt, but requiring debt ownership to shift from the Social Security Trust Fund to other holders.

One of the largest expenditures affecting the middle class is the Payroll Tax (FICA), which funds Social Security.  For 2009 and 2010 the Social Security portion of FICA was 6.2% each from the employee and the employer, for a total of 12.4%, to a maximum income of $106,800/yr.  Until recently the total collected from the Social Security tax exceeded the amount paid out each year, with the excess being placed into the Social Security Trust Fund.  This fund was created in 1983 at the encouragement of Federal Reserve Chairman Alan Greenspan as a mechanism to address expected future shortfalls in the system.  Since that time the Trust Fund has amassed a significant total of $2,540B at the end of 2009.

A reduction of the Payroll Tax has the potential to boost the economy, as people in the income brackets for which Social Security makes up a significant portion of total taxes paid, i.e., those making under $100,000/yr, will likely spend much of this extra income available to them.  Such a reduction in the Payroll Tax will create numerous economic benefits by helping to realign the financial flows with expected economic activity.  This will boost consumer spending, leading to increased employment and increased business investment to meet rising demand.  The lower Payroll Tax will also allow those who are struggling under mortgage debt to be better able to meet mortgage payments and avoid default by using some of the retained income for debt reduction.  Similarly, it will increase the ability of potential home buyers to purchase a home, and support home prices as the extra retained income that can be counted on for many years will allow home buyers to qualify for larger mortgages, although willingness to take on more debt may be lower now than before the financial crisis began.

A fixed, short-term reduction in the Payroll Tax will not likely have many of the aforementioned benefits if consumers do not anticipate that it will last for many years.  Rather, a modification of the Payroll Tax schedule for the coming decades will lead to predictable future tax expectations, a reliable expectation of extra retained income, and more predictable financial behavior as a result. 

The modification of the tax schedule will also provide a mechanism for drawing down the Social Security Trust Fund in a defensible and predictable manner.   The drawdown will not add to the National Debt, because the funds in the Trust Fund are already held as Treasury securities.  That is, these funds are already part of the National Debt.  Drawing down the Trust Fund would entail swapping one set of securities, held by the Trust Fund, for another set held by some other lender.  Such a transfer would require finding new buyers for government debt, but this is already an existing issue with the current, large budget deficits.  An additional benefit, as shown below, is that securities currently held in the Trust Fund are yielding 4.9%, while the new securities would likely yield far less, thus resulting in a savings to the government on interest payments on the debt.  In this way the Trust Fund is actually serving as a “rainy day fund” for the economy, by providing the stimulus funds to those who are most likely to stimulate the real economy.  

During 2009, Social Security took in $807B in receipts and paid out $686B in expenditures, resulting in an increase in the Trust Fund’s holdings of $121B.  Of the receipts, $667B were contributions from the Payroll Tax, $22B were from taxing benefits, and $118B were from interest on government securities held by the fund, yielding an average annual return of 4.9%.  Using 2009 as an example, if the Social Security tax rate were reduced from 12.4% to 8%, with the cut coming out of the employee, rather than the employer, contribution, contributions would have been $430B, resulting in an extra $237B of funds in the hands of likely consumers.  This change would have drawn down the Trust Fund by $116B to $2,424B at the end of 2009.  The median family income in 2009 was $50,000.  Applying the rate cut of 4.4% would mean $2200 extra in the budget of those families, which is a significant amount for such families.  If even half is spent rather than saved, this would produce an additional $1100 of consumer spending for such a family.

A schedule for Social Security contributions over the next 10-20 years can be devised to allow a gradual, monotonic increase in the contribution rate and an asymptotic transition to the break-even level for the year for which the Trust Fund is exhausted.  Thus, the system will once again become self supporting with a yearly balanced budget as was the case before the 1983 financialization.  Creating such a schedule would take some analysis by the Social Security actuarial office using their projections of expenditures, payrolls, economic growth, etc.  

For the purposes of this paper an example of an extreme limiting case of maintaining the 8% contribution level from 2010 until the Trust Fund is exhausted. This example was derived using the SS Trustees’ predictions for the next 10 years.  In this example the Trust Fund is exhausted at the end of 10 years, and the contribution rate is raised to 11.2% to provide the needed receipts to match expected expenditures.  N.B. that this contribution level is still lower than the current 12.4% level.  The contribution level for Social Security will need to be adjusted either annually, or as needed, to match the expected expenditures for each year.

This plan would allow the transition of Social Security back to the original ‘pay-as-you-go’, balanced budget model that was implemented in 1935, and worked well for almost 50 years.  The advantage of the original plan was that it was an economic plan, not a financial plan.  That is, the framers recognized that beneficiaries do not produce, and that a fraction of production needs to be transferred from producers to beneficiaries each year.  That regardless of how a plan is financed, the underlying transfer of good and services occurs each year from producer to beneficiary.  Thus the simplest mechanism is to simply tax the value of the transfer on the producers and provide those funds to the beneficiaries each year.

The result of such a Social Security tax schedule modification will be an immediate stimulus to the economy that will not add to the National debt, a drawdown of the Trust Fund over an extended period of time provides certainty for future contributions and expenditures, a smooth transition to a balanced budget for Social Security in the future, and the establishment of a mechanism and expectation of regular changes in the contribution rate.

Purpose of Wall St

The fundamental purpose of Wall to provide credit to the manufacturers of goods and providers of services of the real economy.  This is actually pretty mundane business.  Mainly underwriting stock sales, and bond issuance for real companies.  Oh, and creating the money supply, by fractional reserve lending, we can't forget that ;-)

But Wall St isn't satisfied with providing a service that is needed by our economy.  No they have to create other gimmicks to fatten their wallets.  First they take the occasional merger or acquisition and change that into 'me too' waves of one or the other.  Then, they create venues for speculation.  Then they create new kinds of securities called derivatives, and they get into businesses where they have no business being like mortgages and insurance.  Finally, they leverage all of this with their ability to create money out of nothing enabled by their friends at the Fed and Treasury.  Of course, all of this slight-of-hand has to come to an end.  

So, when it does, Wall St. makes sure that they are protected.  They threaten to hold the economy hostage unless the government hands over what they want.  ie. these are the Financial Terrorists.  The government readily complies as not wanting to upset their friends and future employers.  Besides, the US has lots of hard working people who the government can tap for decades to pay of this bill.

And so it goes.  The Biggest Shakedown in World History!

Right to Bear Arms

The motivation of the framers for the constitutional guarantee to arms was about the citizenry having the power of force in their hands should the need arrise to overthrough a tyranical government.
The Bill of Rights was written over two hundred years ago and much has changed since then.  I've been thinking about the efforts over the last century that have been successful in changing governments and changing the policies of governments.  I can't think of any that were achieved by the people using force. 
The overwhelming evidence is that the best policy for the citizenry to achive it goals of governmental change is: non-violence.  This is the policy that was so well defined and implemented by Ghandi in India, which led to the overthrow of the British governmnet there and rights for the native people of India.  Ghandi's non-violence was the model that ML King cited in pushing the civil rights movement.  This is the movement that had success, while the violent movements such as Malcome X and the Black Panthersfailed.  Non-violence, well mostly, is what brought down the Iron Curtain, and crushed Communism in Poland and the rest of Eastern Europe.  This is the method that Pope John Paul II pushed. 
In the end, it seems that the possesion of force is a short term inpediment to the people when they are united in non-violent struggle over oppresion.  Non-violence has the moral high ground.  As tyranical governments inevitabley respond with violence against protestors and instigators, thus exposing themselves as the tyrants they are.  Violent popular movements simply justify the governments use of force in putting down violence and restoring order. 
The diffence of the American Revolution is that the entire people seperated from a nation and formed a new state, and that newly formed state had to defend itself against the former state.  To do this, the new state formed a citizen army, where the citizen provided much of the arms.  Hence the need for an armed citizenry.  The closest thing to this today that I know of is the Swiss citizen army where every male between 18 and 54 is in the army reserve.  Each is issued a weapon and a box of bullets, and must qualify every year by shooting those bullets and getting a new box.  ( fresh bullets for everyone ;-) 
The idea of guns for personal protection appears to assume that a state of lawlessness exists, and that people must act as vigilanties to defend themselves.  This usually only occurse during cisis such as war or natural disasters (Katrina) and is a highly unusual state of affairs.  If this is the normal state then a failed or ineffective government is in place and needs replacing.  Unfortunately, most of the latter type of governments are in smaller, third world countries which are propped up by larger western governments against the interests of the local people.