As parents, one of our most important tasks is to know when to say “no” to our children.  We all recognize a “brat” when we see one — a child who’s never been told “no”, and whines and complains until he or she gets his or her way.  ”Shame on his parents!”, or perhaps that’s not politically correct to say anymore.  But bratty children grow up to be bratty voters, too.

Unfortunately our political system often rewards the political equivalent of the irresponsible parent.   Using Other People’s Money, irresponsible politicians promise the world, and the bratty voters like it.  Once elected, these politicians do their best to deliver the goods.   It’s alright, they say, because of their interpretation of the General Welfare and Commerce clauses of the Constitution.  Others beg to differ…

Sadly, under such a system, no amount of revenue to the government is ever enough, because human wants are themselves unlimited.  Therefore, those with a lot of assets, with “a lot” being defined by the politics of envy, become natural targets for the boundless benevolence of these irresponsible people – voters and politicians alike.

At least one prominent media figure is finally on to the correct way to put a lid on this ruinous line of “fair share” reasoning.  Most recently, it was Stuart Varney.

On his September 20th show, Mr. Varney put a simple question to a Democratic strategist, Mary Anne Marsh, in the context of discussing Obama’s plan to raise taxes on the wealthy.   To paraphrase:

“What is the maximum percentage of income that someone should pay in taxes?”

It’s an arresting question, for several reasons.

 

 
Continue reading at Forbes Opinions…

 

Continue reading, at Forbes Online…

Let’s examine two of the most influential billionaires of our times, Warren Buffett and George Soros.  One squanders opportunities to promote and enhance the system that made both of them rich, while the other actively seeks to destroy it.

In the case of Warren Buffett, when the infamous “Oracle from Omaha” speaks, people listen (just like E.F. Hutton!).   The only problem is, what they listen to hurts our economy:  some economically illiterate member of Congress hears Buffett (or Soros) talk, feels it makes some amount of superficial sense (or can be construed into supporting some new government program) and says “What works for Buffett (Soros) works for me.  We’re done here!”   Indeed, Barack Obama continues to site Buffett’s easily-mischaracterized anecdote of his secretary paying more in taxes than he does.

Passive-aggressive capitalism non-defender, Warren Buffett

In a recent interview with CNBC’s Becky Quick, Buffett seemed to indicate he was pretty flummoxed by the apparent failure of Keynesianism to right the listing supertanker that is our present-day national economy.   He’s so close,

I think the most important factor in getting out of the recession actually is just the regenerative capacity of– of American capitalism.

and yet so far:

I thought maybe– maybe they [the Fed] ought to charge them [the banks] a quarter of a percent to leave their money on deposit and that would really push it out.  (Laughter.)  But– but I mean, we’ve used up a lot of bullets.  And we talk about stimulus.  But the truth is, we’re running a– federal deficit that’s nine percent of GDP.  That is stimulative as all get out.  I mean, that is more stimulative than any policy we’ve followed since World War II.

And, of course, World War II, we had a huge stimulus and it– it took us out of– a depression. But we are– it doesn’t depend on calling it the ‘Stimulus Bill’ to be stimulating.  I mean, if– if– if the government is spending $3 for every $2 it takes in, that is– that is fiscal stimulus.  And it isn’t kick-starting things as much as the American public would like.  I’m sure as much as the Administration or Congress would like.  It’s probably had some effect, probably less than the economists thought it would have going into this.

That’s probably true, if the “economists” he has in mind are Robert Reich, Paul Krugman, and other modern-day purveyors of that discredited theory from Lord Keynes.   Ironically, these and other comments were made surrounding Goldman’s Sachs’ “10,000 Small Businesses” graduation (a firm from which Mr. Buffett profited handsomely as an appropriately private investor, proving that attractive investment opportunities will find financing).   Where Quick gives The Oracle room to opine on just about anything, nowhere does he launch into the litany of reasons why small (and large) businesses are being stymied by our current government, something this author forewarned of nearly a year ago.

But what truly gets this writer’s blood boiling is Buffett’s yearning for the higher tax rates of a prior generation, and saying that our country’s prosperity was no worse for the wear.  This is a common theme for Buffett, as demonstrated on June 27, 2007, November 15, 2007 and  September 10, 2009, just for starters.   Nevermind how much better things could have been then had taxes been lower.   Nevermind the “malaise” we found ourselves in at the end of the period he reminisces.    Nevermind the explosion of tax revenue that resulted from Reagan’s tax cuts.   Nevermind that the stock market rally that they helped fuel helped to make Buffett who he is today.  Buffett seems either genuinely embarrassed by the wealth he’s accumulated, oblivious to the reality of the Laffer Curve and how lower taxes on upper income earners would free up capital for investment, clueless that government could instead attack the expense side of the deficit equation, or all of the above.    Again, all harmless, if it weren’t for his role as the statists’ financial Pied Piper.

Buffett also couldn’t resist taking a swipe at the rising Tea Party-induced activism, and the resulting fear from the big government forces who perhaps sense their days are suddenly numbered:

…sentiment has turned very sour in the last three or four or five months.  It’s been generally sour on Congress and Washington, but it seems to have taken a turn for the worse.  I — I hope we get over it pretty soon, because it’s — it’s not productive.

Democracy-in-action “not productive”; what a segue for our other most-notable-billionaire, George Soros…

George Soros, anti-Capitalist

George and I have something in common:   In the early 1990′s, we were both trading currencies.   The difference is, I didn’t have a balance sheet gigantic enough to take on the Bank of England, betting that central control would never be able to overcome the forces of the free market.  Such forces wanted to make the Pound drop dramatically versus other currencies, and Soros knew it.  Soros positioned himself for the inevitable and it yielded him a billion dollars in profits.  Overnight, he became a celebrity in the hedge fund world.

So it is the height of irony that the man who foresaw the failure of price fixing, the man who experienced Nazi and Soviet rule firsthand, would now be pouring hundreds of millions of dollars into organizations that seek to dramatically grow the influence of government in our lives.   You’ve heard of the obvious ones:  MoveOn.org, Center For American Progress, the Democracy Alliance, all chronicled by DiscoverTheNetworks.org and elsewhere.     But how about Soros’ $50 million dollar check last fall, funding an effort to “purge economics of its free market zeal”?

Just over the last several weeks, Soros has helped launch a website seeking to discredit the Tea Party. What a great example of that great World War II pilot saying:  ”When you start taking flak, you know you’re over the target.”    As Stanley Fish writes, it’s an effort that may very well backfire, badly.   Clearly, the “height of irony”‘s twin tower is the stream of people complaining to Fish that the Tea Party is being funded by the rich, while they rally (literally) around organizations funded by Mr. Soros.   Now that is truly rich.

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Wealth-sucking creatures that will stop at nothing...

Just when you thought it was safe to get back into the economy...

Then there are those perennial horror favorites, zombies, that defy all attempts to do them in.

It seems like Congress is trying to capitalize on the craze as well.   Witness the up-and-coming,  back-from-the-dead behavior of the Estate Tax, also known as the Death Tax, coming soon to every estate-planner’s office near you.

I once heard the expression, “When is my money finally mine?”   Apparently our current Congress has an answer: never.   This Congress, gleefully implementing every supposed remedy for income inequality, hopes to allow the Estate Tax to come back to life at the end of this year, when it will make the astounding jump from 0% to 55% overnight.

In the strangest of ironies, the toughest vote here will be to not have one.   That is, thanks to the ridiculous implementation of the infamous “Bush Tax Cuts” of 2001, Congress simply needs to sit on their hands for the tax to kick in.   Perhaps the Republicans at the time assumed their rein would continue, and that they’d simply renew the tax.   Had they stuck to the previously successful strategy and principles of being the party of limited government, they would have had that chance.    Now the Democrats will need to look the public in the eye and attempt to convince them that allowing this tax zombie to return is exactly what the economy doctor ordered.

Treasury Secretary Timothy Geithner, leading a group of regulators created by the new “Fin Reg” legislation, has begun making the rounds.   He spoke with reporters in Washington DC on July 22nd, as reported in this Bloomberg story:

Geithner, responding to a question about the absence of a federal estate tax, said it is “a terribly troubling thing that the United States of America would let that lapse.” The tax should be restored to 2009 levels, he said.

That would remove this year’s unlimited estate tax exemption and restore the amount to $3.5 million, with any assets beyond that level being confiscated at the rate of 45%.   Believers in big government and practitioners of class warfare see no problem with that.

First of all, they look at the revenue potentially generated by the tax and think they can better put it to use than the deceased’s family would.   Second, they remind us at every opportunity that only a tiny fraction of taxpayers would even be affected by the legislation, a tyranny of the majority action if there ever was one.  Lastly, they see it as a natural opportunity to fight income inequality.    The problem, of course, is that they are demonstrably wrong.

Above all, keep this in mind:   An estate tax swiftly transfers wealth from a person with a proven track record of creating it, to an entity with a proven track record of destroying it.

When people fret over income inequality that would supposedly be exacerbated by inherited wealth, they forget that even more important than the wealth is the knowledge of how to put that wealth to good use.    As Arthur Brooks discusses in his recent book, “The Battle”, sudden influxes of wealth (think lottery winners) often enter into a world of hurt:  the knowledge of how to handle the money is not attached to the money itself, so it is typically squandered.

By contrast, any responsible person leaving substantial funds to their heirs will take considerable care to ensure that the funds are preserved.  If these funds are in the form of a family business, be it a farm, automobile dealership, or baseball team (witness George Steinbrenner’s sad departure), the knowledge embodied in the success of that business is typically passed to the heirs as well.   But in the face of an estate tax that might claim half of the value of the business beyond the state-sanctioned “exemption” (i.e., that which the political process deems “fair” for the owners to retain), the owners are often forced to sell substantial parts of the business, if not all of it, just to pay the taxes.   And with that, it is often the case that jobs are lost, and economic activity is arbitrarily curtailed.

Die Estate Tax, Die!

Of course, an entire industry exists to attempt to mitigate these effects:  the “estate-planning” business.   I welcome comments that will address how buying large insurance policies that serve only to pay the estate taxes create lasting economic activity.  Absent the estate tax, such policies and tax-dodging advice would not be necessary.   The current setup would seem to be more like a cushy arrangement between the legal and insurance industries, and government, something that aides the “corporate cronyism” atmosphere that creates so much cynicism about “free-market capitalism”.   Instead of purchasing new equipment or raising wages, the business owner instead spends substantial sums of money to ward off Dracula.   Should these products include sunlight, garlic and crucifixes in their advertising?     In any case, there is something perverse about a government tolerating private industry selling products that seek to ameliorate the effects of its laws.

Like so many public policy issues, the estate tax boils down to the simple question of Who decides? Will a family’s wealth be taken, redistributed and wasted by a political process, or will it be treated as the private property that it is and utilized according to the owner’s wishes?   As the American Family Business Institute describes, the ideological roots of the estate tax are found in Karl Marx’s Communist Manifesto:

In one word, you reproach us with intending to do away with your property. Precisely so; that is just what we intend.

Voters in the upcoming election will need to decide a question that is elemental to this country’s existence:     Will private property be predictably left in the hands of those that created it, or will it be arbitrarily bled by vampires and fed to zombies?

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In discussing income inequality, the liberal commentariat will invariably point to some kind of statistic showing that the gap between the people at either end of the earnings bell curve “has never been wider”.   Or put differently, “the rich are getting richer and the poor are getting poorer”.    What these people miss, as economists like Thomas Sowell and Alan Reynolds have repeatedly demonstrated, is that the people at any given percentile of the curve change over time.   As Sowell says when talking about supposedly stagnant household incomes:

“The problem is you’re talking about households, rather than flesh and blood human beings.   One of the real fallacies that runs through a lot of talk about income is confusing statistical categories with actual flesh and blood people.”

“Income Inequality Sowell vs. Krugman“

Essentially then, static comments made about a dynamic curve are meaningless.   By contrast, longitudinal studies following particular people over the course of their earning careers tend to show upward trends.

It turns out that one group of people, tracked longitudinally, have been on a particularly nice up-slope: public sector employees.   And within that group, unionized public employees enjoy the greatest income differences when compared to their private sector counterparts, with a big chunk of that difference coming from sweetheart benefits packages.

The Real "Income Inequality" Gap

Numerous reports and articles are finally presenting the blizzard of statistics that all point to the same conclusion:  public sector jobs, relative to their private counterparts, have become a great gig that are also bankrupting their financiers. The Cato Institute published Chris Edwards’ “Public Sector Unions and the Rising Costs of Employee Compensation” in their Winter 2010 Cato Journal.    Steven Malanga, Senior editor of the Manhattan Institute’s City Journal, chronicled the issue with specific regard to California.  It is a sorry tale. Even sorrier is that it has become epidemic amongst towns, cities and states across the country. Reason magazine’s excellent February 2010 cover story on the topic was entitled “Class War“.    And in a recent Wall Street Journal editorial, there is this eye-popping statistic:

What if government workers earned the average of what private workers earn? States and localities would save $339 billion a year from their more than $2.1 trillion budgets. These savings are larger than the combined estimated deficits for 2010 and 2011 of every state in America.

Zeroing in on New York’s infamously dysfunctional state government, one quickly encounters the union-front “Working Families Party”.  I’ve always wondered if a dual-income couple with a few kids in the public schools, working a combined 100+ hours a week but being in the top tax bracket, qualified as a “working family”.   The WFP was almost single-handedly responsible for getting the legislature to pass 2009′s tax hike for top earners, matching neighboring New Jersey’s top bracket of 8.97%: a true race-to-the-top-which-is-actually-the-bottom.   The tax hikes were ostensibly to avoid cuts to “necessary” state programs and services, often staffed, of course, by union workers.

New York’s Triborough Amendment, (a form of “evergreen clause”), allows unions to keep their existing contract terms if negotiations fail to reach a new contract.  In other words, a local school board, for example, has absolutely no ability to compel their teachers union to accept reduced raises or benefits in a new contract; the teachers can “fail to reach a new contract” and enjoy the more generous terms of the existing contract instead.

Then there’s the issue of pension liabilities.   In the private sector, if you have a 401K or IRA and you take a hit in the stock market or elsewhere, you’re stuck.   But in states like New York, with guaranteed pensions that can’t be reduced once payments begin, those losses need to be made up by the taxpayers.   A local school board can suddenly have a multi-million dollar swing in their annual contribution requirement to the state, potentially wiping out attempts to hold the line on other spending over which they have more discretion.   Reason magazine reports that “[i]n New York state, local governments may have to triple their annual pension contributions during the next six years, from $2.6 billion to $8 billion, according to the state comptroller.”

So in summary, we have unions using their members’ dues to lobby for maintaining the status quo, and being successful at that. All of this now takes place in the face of the weakest economic environment in at least a generation.    It would seem that this issue should result in disgust from the overwhelming majority of people, i.e., the group that does not belong to a union. Rather than the government serving the people, the people are serving the government, and (switching metaphors, I know) the government diners are super-sizing their orders when instead they should be counting calories.  Like some genetically doomed organism, this parasite is killing its host.    One wonders how this situation persists.

I’d suggest that non-reporting of simple math has a lot to do with it.

What a difference a few percentage points make

Albert Einstein is reputed to have said that “the most powerful force in the universe is compound interest”.    Likewise, the compounding growth of state and local deficits, caused in large part by Kevlar-encased union compensation contracts, is beginning to present itself like the smoking van recently found in Times Square.

At any given vote, a union pay raise of say, 4%, might not sound so bad.   But compared with a raise of 2%, over time, as the chart to the right shows, the magic of compounding is going to make all the difference.  And for illustration purposes only, by looking at 6%, it is clear that “reaching for yield” pays off handsomely (swap in the words “Retirement Account Balance” for “Annual Salary” and this one chart should motivate any new college grad to start saving early).

This week in New York, local voters will be entering their voting booths to decide the fate of their school budgets and other initiatives.    Let’s hope that they begin to diffuse a bomb whose fuse is already lit.

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Let me start of by saying that as I’ve written before, failing firms need to be allowed to fail.   Poor management needs to be separated from capital so that capital can find a better steward, and the genuine threat of failure is vital to ensure that proper risk management and operational caution is exercised at every step.   Likewise, I’d agree that for a company to be on the public dole and pay non-contractual, discretionary “bonuses” to any employee would be reprehensible.   That said…

In the fall of 2008, a group of supposedly very smart people decided that our financial system was on the brink of “collapse”.   Never mind for a moment that the long term demand for banking, capital raising and investment management would exist regardless of what particular firms were around to provide those services.  Hundreds of billions of dollars were assembled and in foie-gras style, crammed down the throats of companies that didn’t ask for it (just like the geese).

Firms like Goldman Sachs and JP Morgan have since been pretty clear that although they were sweating it, word of their demise had been greatly exaggerated.   At last Wednesday’s assembly of the Financial Crisis Inquiry Commission, Lloyd Blankfein of Goldman reminded his inquisitors that they had raised substantial amounts of fresh capital, and could have raised more,  prior to having the TARP money put to them, and JP Morgan’s Jamie Dimon stated in a CNBC interview shortly thereafter that they did not need TARP funds to ensure their survival.

It should be no surprise that in the volatile markets of 2009, containing one of the most ferocious upside moves in stocks ever recorded, Wall Street firms were fantastically profitable.    Most of the major Wall Street TARP recipients have paid back their cramdowns with interest, and yet there’s a lot of money left over.  But in an age of record-breaking deficits and politically-stoked class warfare, a demagoguing President Obama eying the money pot has the courage to say “We want our money back, and we’re going to get it”.    Why does he think it’s his money? I’ll also take the bet that you will never hear Obama utter those words to General Motors.   But I digress.

There are sorry parallels between what’s happening with employees of Wall Street firms and the minority communities that are the supposed beneficiaries of affirmative action, another quasi-bailout program with terrible unintended consequences.   Although filled with the best intentions for helping any particular needy minority individual, every person in these groups created solely by skin-color (thus perpetuating the need to categorize ourselves as such — take note of your upcoming census) must now face the occasional (or not occasional) silent wondering of their fellow students or co-workers:  “I wonder if he’s here only because of his skin color”.   That any member of such a targeted group might possibly endure that kind of unspoken criticism is disgusting.

Isn’t the same now possible towards employees in the banking industry?   “Yeah, the new neighbors both work on Wall Street.   I wonder if they’d be buying that house if it wasn’t for TARP?  We so bailed them out, and look at them now.” And a possible response:  “But we didn’t ask to be bailed out, and our departments made money.  We’re not investment bankers — we’re computer programmers.   Not to worry, with our 80 minute commutes and 50-70+ hour work weeks, we won’t see you too often.” I’m not sure it’s equally disgusting, but it is artificially divisive nonetheless.

I like to say that “honest achievement is the root of self-esteem”.   By stuffing money into the Wall Street firms, by having a Federal Reserve that can keep rates so low for so long that it’s hard for banks to not make money, but then railing about it when they do, our government has once again used its power to fracture civil society that much further.   It has now sown the seeds of doubt about that achievement, and with it, the self-esteem.

But what would Obama do with the money anyway?   It would get thrown into the vortex that is our Congress and spent on grand designs that can not work. By contrast, the voluntary spending and investing of Wall Street bonuses is for many regions of the country one of the primary economic engines, with ripple effects literally worldwide.  Ask the waiters at the Manhattan steak houses what they think of Wall Street bonuses, or the car dealers, or the home improvement contractors, or the real estate agents.    Ask them if they’d rather have some derivative scrap of a nanny-state program, fought for by political gamesmanship, or a bunch more customers fueled by Wall Street bonuses.

Obama’s problem is that he can not get away from the Wall Street vs. Main Street rhetoric.   When will he and his disciples own up to the fact that it’s all the same street? Something tells me that Obama and his staff, let alone much of Congress, have never read Leonard E. Read’s short but brilliant classic, “I, Pencil”. It’s never too late.

The more Obama and his ilk pursue the sort of vindictive, utterly unpredictable legislative and public-relation campaigns against Wall Street’s top earners, the more these earners will simply pull a John Galt and say, that’s it, it’s not worth it.   They won’t retire.  They’ll simply form or join private organizations that will do everything the public organizations do, but with the exception of not playing in the public arena.   And if we can assume that there is at least some correlation between compensation and talent, then by extension, returns in which the general public can participate will go down, while a separate caste of privately-accessible returns will increase in scope.   Civil society’s splintering will be furthered once again.

One of my most lasting lessons from college was an ex-Westinghouse executive-turned-professor describing the concept of a big company holding up a “price umbrella” for other smaller, more aggressive companies to get under.   Here we have our government calling out a supposed price umbrella.  So by extension, there would seem to exist an opportunity for one or more companies to swoop in and steal all of the customers being over-charged by these overpaid Wall Street types.   It isn’t happening.

In a recent column, John Tamny wrote the following:

So far, however, “discount” investment-banking firms and traders have yet to reveal themselves in a substantial way. That said, if what Wall Street’s myriad critics say is true about its employees being overpaid, it seems there’s a very real and enriching opportunity for these same critics to put up or shut up. If investment banking and trading are really as easy as they suggest, here’s their chance to prove it.

To those critics:  Please “put up” and prove your case.   Then spend the profits any which way you’d like, if they haven’t been confiscated first.

Imagine a scenario where a genuine solution to a long-time affliction against humanity could be reached simply by raising a large sum of money, but at the same time, there were no income taxes.   Say it was going to cost, in the form of a one-time payment, 10% of your annual income, to cure cancer.   To truly cure it.  To be able to relegate it to the proverbial dustbins of history.   Who wouldn’t gladly write the check?

By tremendous contrast, what form of government spending produces such a feeling?    I believe it is exactly this contrast that gets to the root of the anger we see today about a government running itself seemingly out of control.   There is a gut-feeling that much of our tax money, much of the costs of government, much of the regulatory barriers to whatever, much of the debt we’re incurring, just amounts to so much waste.

Try to think for a moment of the specific things that you think the government should be charged with doing.    Beyond the important but abstract things like enforcing the rule of law, most of us would consent to pay for some specific services, such as a national defense or even a public highway system.   But it’s tough for any one person to come up with a long list of things.     The framers of the US Constitution thought about such things and came up with their own list.   It’s very short, and it’s spelled out largely in Article I, section 8 This, of course only deals with the federal level, and notably, the tenth Amendment ascribes all other powers to the states.   Almost none of the issues that occupy today’s headlines remotely fit the list, and as of 2004 the Federal Register had nearly 80,000 pages. It’s safe to say there are more today.

So have we cured cancer?  Or hunger?   Or homelessness?  Is there a chicken in every pot?  How about an iPod? Can government succeed in such efforts?

To suggest that it can not is not to be pessimistic, or unpatriotic, or even anarchistic.    To suggest that it can not does not mean that individuals should not try on their own, or even in groups both big and small, to do what they can.  It boils down to a question of who decides. Who decides what problems should be tackled?   Who decides what should be spent on them?  Who decides what level of service or result is appropriate, and at what cost?

Are there incentives in place for government to succeed?   What happens when it fails?   In the private sector, capital is raised through voluntary means based on a  service provider’s potential to meet some need.   Often, but not always, there is a rate of return for the capital provider.   When the service provider succeeds it is rewarded with more capital.  If it should fail, capital providers look elsewhere.    No such feedback mechanism exists with government.  It’s worse than that, because with government, the capital raising process is involuntary.

Getting back to writing that one-time check,  I believe most of us would write it because most of us have a sense of genuine charity.  Faced with a genuine need and the distinct possibility of making a difference, we rally to the cause. Indeed, all of the major religions call upon us to be charitable.  And there’s the rub:  taxation, directed by politics, even when the proceeds are to be used for supposedly noble goals, is not charity.

What a great demonstration of how competition works at some of the highest organizational levels out there — entire states.   How much better off would we be if states took their relative economic strengths seriously?

But look at some of the reverse cases.  In the Northeast, we have New York and New Jersey racing each other to the bottom as to who can impose the highest income taxes on their upper income earners.   It’s a clear blindness to the Laffer Curve if there ever was one.

It’s also a wilfull ignorance of the concept of dynamic vs. static budget analysis, that is, legislators enacting laws and regulations as if there will be no behavioral changes by the players involved.   It goes something like this:   “Say, let’s raise taxes on the “wealthy” by 10%, and we’ll budget a 10% increase in revenue from them.   There aren’t enough of them to vote it down anyway, and then we can fund some nifty new programs in our budget!”

When will states like California, New Jersey and New York open their eyes to the cause and effect of bloated budgets and high taxes (note, they’re the same thing) leading to businesses and individuals seeking more welcoming pastures?   Do they need to make such complete economic basket cases of themselves before the causality is obvious?

The shame of this is that millions of people needlessly suffer the consequences in the meantime.