Conservative Logic

An economic guide to politics, designed for post-Baby Boomers

Archive for the ‘Taxes’ Category

Does Obama Understand Finance and Economics?

Posted by A Hamilton on April 1, 2009

I’m increasingly convinced that Obama doesn’t have a firm grasp on the basics of how our economy functions, how corporations do business, and how our banking system works.

Recently, Obama was speaking about the stock market and referred to the “profit and earnings ratio”, which doesn’t exist. Presumably, he was referring to the P/E, or price-to-earnings ratio, which measures relative stock value. It’s one of the first, most fundamental ratios any new investor learns about the stock market.

Obama has also commented on the strong dollar. But the dollar isn’t strong. True, it’s rallied recently, especially versus sick currencies like the GBP, but nobody even marginally familiar with this long term trend would think to call the dollar “strong”:

Weakening Dollar

Obama’s background and experience is politics and law. He’s never run a business, or even held an executive role in government. When he speaks on economic issues (particularly without his teleprompter), he looks about as comfortable as John McCain… In other words, not very comfortable.

It would be easy to assume that Obama was educated on finance and economics basics at Harvard Law School. But as a Harvard Law graduate myself, I know how easy it is to get through HLS without a working knowledge of business essentials. For every graduate who focuses study on contracts, corporations, and tax law, there are other grads (like Obama) who choose to focus on Constitutional law, criminal law, or human rights law. As a result, many Harvard Law alums would struggle to differentiate an income statement and a cash flow statement. I suspect Obama falls right in this category.

Why is this important? Surely Obama has advisors to guide him? Maybe. But at the end of the day, he’s the guy making decisions. He needs to be  able to listen to the self-serving statements of lobbyists, industry insiders, economists, and government bureaucrats, and separate the truth from the BS. Can he do it this effectively without the basic education he needs? Irrationally, he seems to think so. He’s decided to insert himself directly into American business (firing CEOs, setting bonus payouts, backing GM’s transmission quality with a government warranty). So now a guy who probably has a limited understanding of basic capital structure, the proper role of debt, equity, etc., and the functioning of credit markets is creating policy to recapitalize both the automotive and financial services industries!

Perhaps most importantly, I don’t get the feeling that Obama appreciates our corporate and financial institutions. Granted, our banking system is a disaster. And the economy is in bad shape. But a long term perspective is essential. And over the long term, the way that our capitalistic, market-driven system functions has created more good for more people than any other system in human history. Destroy the incentives that make the market work, insert government (aka political) influence into every nook and cranny of the economy, and you break that engine. The long term result is inevitably slower growth and less good for Americans. Does Obama understand that by breaking the American social contract, he ultimately ends up killing the goose that lays the golden eggs that (in turn) pay for the fat government he loves?

In the final analysis, if Obama doesn’t know the basics of economics, finance, and business, he can’t make good decisions when presented with alternative policy choices. He can’t anticipate the long term impact of his choices. He is liable to be susceptible to ideological or populist approaches (like big government bailouts), rather than relying on tried-and-true methods for resolving problems (such as bankruptcy proceedings). So far, this is exactly what has played out in terms of policy from the Obama Administration. Scary times for American capitalism, indeed.


Posted in Credit Crisis, Economy, Obama, Taxes | 1 Comment »

The Information You Must Understand

Posted by A Hamilton on March 29, 2009

This excellent slide show captures the essential information that every citizen needs to undertstand about our government. It is based on official Congressional Budget Office (CBO) information. It reveals a number of scary and appalling trends in our nation’s finance.

Here’s a little preview. The chart shows historical and CBO prohections of the federal government budget deficit as a percentage of GDP:

Budget Deficit

More on the implications of this later…. As well as an urgent policy recommendation from yours truly. Suffice to say, if the trend holds, future generations of Americans will suffer tremedously. Our current path simply is not sustainable.

Posted in Economy, Social Security, Taxes | Leave a Comment »


Posted by A Hamilton on March 22, 2009

I’m back.

It’s been almost a year since my last post. A lot has changed, personally and politically.

I have a new wife and a new mortgage. And my political philosophy — as documented on this blog — remains unchanged.

These things are good.

Obama is President. He has used the current economic downturn to grow government in historic and unprecedented ways, imposing policies that will inevitably result in greater burdens for the younger generation, and ultimately directly threaten the Amrican dream. I never thought it would get so bad so fast.

These things are bad.

In just over two months, between the TARP, the automotive bailout, the “stimulus” bill, and the bloated federal budget itself, Obama has increased the size of government spending by more than 30%. That’s more than George W. Bush spent in over eight years fighting the war in Iraq.

And there’s more. In addition to spending more, the government has printed money at an unprecedented rate. Here’s a quick look:


Money Supply


What does it mean? In short, it means that much, much more money is chasing a fixed quantity of goods and services.

Now, add this to the fact that the “stimulus” bill (plus, stimulus bill #2, coming soon!) — really a pork barrel of incredible proportions — will primarily start to impact the economy in 2010-2011, and we’re in for some serious problems. By that time, the economy will be on the upswing. The impact of additional government spending is likely to overheat the economy. Couple that to the money supply growth and we’re looking at the potential for extraordinary inflation, like we haven’t seen since the 1970s.

Welcome back, Carter years.

And by the way –guess who is paying for all this extra spending?

Not your parents. Not your grandparents. Not the 30%+ of the country that doesn’t pay taxes.

Yes — you guessed it. You are. Specifically, younger Americans. Because right now, we’re borrowing the money for all this government growth (primarily from the Chinese). Eventually, we’re going to have to pay it back. This won’t happen for years…. And by that time, the political leadership and the generation that incurred the debt will be comfortably retired, paying minimal taxes (actually, paying ZERO taxes, if Obama fulfills his campaign promises). The burden will fall on you. And it’s going to be crushing.

How do I know this?

You see, we’re racking up so much debt that even the “rich” won’t be able to cover the costs of paying it back. Right now, the top 5% of income earners in the US pay about 60% of all US income taxes. Even if we tax 100% of their income, at some point they can’t pay enough to fund the government. Then the tax man comes for you.

And by the way, taxing 100% of income over, say, $250,000 (Obama’s typical “rich” bogey) will basically shut down small business — and shut down the economy in turn. Why? Because most small businesses are set up as S-corps. If you raise individual income taxes, you effectively raise taxes on small business, which generates most of the growth (and employment) in our economy. Eliminate their profits, you eliminate their ability to invest in growing their businesses. Which effectively rips the heart out of our economy.

This is an epic economic disaster in the making, unfolding before our eyes.

Add to that Obama’s moves to increase protectionism, to add another effective tax on industry by imposing cap-and-trade (which incidentally, will also increase inflationary pressure), not to mention Congress’ apparent willingness to legislate bills of attainder to target high earners (bonus earners at companies that have accepted TARP money) and you have a situation where government is basically declaring war on business. Seriously.

But what about my “American Dream”?

Think about it for a second. Some day, you want to become rich, don’t you? But to grow your wealth, you’re going to need to make over $250,000 at some point. But how can you do this if the government is taxing away everything you earn above that level? Marginal taxes for people making north of $250,000 can already be well over 60% when factoring in state, local, city, federal, and other government taxes and fees. They’ll continue to rise as the need to repay the debt becomes more urgent, and as the size of government continues to swell as entitlement programs grow and metastasize.

What we’re looking at here is the end of the American dream. And above it all hovers the threat of inflation, which (if you’re not smart) will destroy what little wealth you’ve managed to create.

Tactical solutions

So, what can you do about it?

From a purely tactical standpoint, if you have any wealth or savings, don’t leave it exposed to inflation. Invest in assets that have constant real value if inflation hits.

It’s also a great time to borrow big, believe it or not. Interest rates are at an historic low. So now is a actually a good time to get a mortgage, assuming you’re in for the long term and can wait out any short term depreciation in property value. Borrowing at 5% when inflation is running rampant is a great trade if you can make it.

More later

More on all of these things later. There is a lot going on…. Too much for a single blog post. But keep one thing in mind:

Our government wants us to be afraid right now. That’s how they are selling their tonic of unprecedented govenment growth and intervention in the private sector. But if economic history tells us anything, it’s that recovery happens quickly after markets fail. That’s the entire economic history of the 19th century, and most of the 20th. Most economic collapses correct themselves within a year or two. That’s the dynamism of capitalism. The exception, of course, is the Great Depression — where government intervention prolonged the economic downturn.

Despite govenment policies that have the effect of undermining confidence in markets, creating uncertainty around the future role and burden of government on business, not to mention rewarding failure by sustaining business models that don’t work, I suspect we’ll be coming out of this economic downturn within twelve months. But we need to be concerned about what comes next.

Posted in Obama, Taxes | Leave a Comment »

Better Economic Growth under the Democrats?

Posted by A Hamilton on April 5, 2008

This recent blog post describes a chart from lifted from an upcoming book by Princeton political scientist (note — not economist) Larry Bartels. It purports to show that American economic performance under Democratic administrations has been superior to performance under Republicans, across all income categories.

Apparently, this chart has a lot of liberals very excited. Too bad that it is complete nonsense.

The chart is a gross oversimplification of how economic policy actually impacts economic performance. The root of its problem lies in the inane assumption that the effect of policy on economic growth manifests itself with a one year lag. In other words, the chart gives a political party credit for economic performance starting the year following it takes over the Presidency.

Let’s explore this assumption. A president comes into power. By the time his first budget goes into effect, it is already October of that year. Does anyone really think that that initial budget has any signifiant impact on economic performance of the following year? And that only the budget is responsible for that economic performance?

Just to show the arbitrary nature (and impact) of the one year lag assumption, I ran growth numbers for a two year lag based on Bureau of Economic Analysis data, from 1945 to 2007. In that time period, average economic growth (for all income categories, to keep it simple) resulting under Democratic adminstrations was 2.02%. From Republican administrations, 2.08%.

The other major assumption that the study ignores is that it is Congress, not the Presidency, that holds the power of the budget. Asking who controlled Congress and what those policies were has just as much (or more) bearing on economic outcomes as who was in the White House. Similarly, the Fed controls monetary policy, which potentially has a greater economic impact that fiscal policy. Who has appointed the Federal Reserve Chairman and its Board of Governors? Are they employing a conservative or liberal ideological approach to monetary policy?

Additionally, Bartels’ “analysis” just completely ignores history, again by making foolish assumptions about the data lag. For example, it’s pretty widely accepted that the economic downturn and stagflation of the early 1970s was proximately caused by the financial demands of the Great Society and the Vietnam War, coupled with exogenous shocks to oil prices. Both the Great Society and America’s deep involvement in Vietnam came courtesy of LBJ. So you can’tgive Nixon credit for bad economic performanceon his watch — the causes of rampant inflation and low growth at the time weren’t his fault.

In the final analysis, the success of economic policy of respective Democratic and Republican administrations must be evaluated based on their long term impact. This is very difficult to measure because there are so many dfferent factors at work — fiscla policy, monetary policy, technological innovation and impact on productivity, population and demographic change, commodities avilability, trade, etc.

Behind this complexity, however, the fact remains that basic economics tells us smaller government, lower taxes, and less wealth redistribution results in a larger pie for everyone. Nothing in the Bartels’ “analysis” as should cause a rational observer to doubt that simple fact. If there’s any doubt of this, compare the long term growth rates of the US versus Europe. Freer markets, smaller government, and lower taxes inevitably produce higher growth, lower unemployment, and lower inflation in the long run. If there’s any doubt, here’s a link to a recent speech from the President of the European Central Bank, Jean-Claude Trichet:

“Since 1996, the annual growth rate for the euro area has averaged 2.1% per year compared to 3.3% in the US.”

The speech goes on to propose structural reforms in Europe to increase competition and promote innovation (including tax reform and labor market reform) — the fundamentals of conservative economic doctrine.

Posted in Taxes, Trade | Leave a Comment »

Obama Panders to Senior Interests

Posted by A Hamilton on March 30, 2008

How about this kick in the teeth to younger Americans? Barack Obama’s platform calls for elimination of income taxes for seniors making less than $50,000. From the Obama web site:

“Obama will eliminate all income taxation of seniors making less than $50,000 per year. This will provide an immediate tax cut averaging $1,400 to 7 million seniors and relieve millions from the burden of filing tax returns.”

Now, I don’t want to sound mean spirited here, but what about the people who just graduated from high school or college that are trying to build a life? What about the young family trying to save money to purchase their first home, or build a nest egg to start a family? They are all still paying normal taxes while struggling to pay the rent; meanwhile Granny might be sitting pretty on hundreds of thousands of dollars in savings, a house that is bought-and-paid-for, and a nice stable income. And of course at least part of that income is paid for courtesy of younger generations via the Social Security transfers. Where’s the justice here? Can’t we just let everyone pay their own fair share?

Posted in Election 2008, Taxes | Leave a Comment »