The phrase “preaching to the choir” couldn’t be a better fit. Mackey’s opinion piece, which appeared today in the Wall Street Journal, is about as dead on as dead on gets. It centers on one thing: freedom.
Let’s take a quick look at some of these to see how they exist in today’s economic environment:
Minimal Governmental Regulation of Business: This one can be applied in numerous ways. I’ll focus on one: healthcare reform legislation and what it forces businesses to do. Prior to the government overstepping its bounds, if you were looking for a job, you marketed your skills and negotiated a full compensation package with your potential employer. If you didn’t like the salary and benefits they offered, you had the right to look for another employer that best fits your wants and needs. This was freedom.
How did the government mess this up? The new healthcare reform legislation imposes a $2,000 per employee tax penalty on employers with more than 50 employees who do not offer health insurance to their full-time workers. Prior to this, if employers had a difficult time attracting skilled workers, they would either increase wages, benefits, or both. It’s how the suppliers of labor and the demanders for labor meet to create the overall price (compensation) of labor. Now, the government forces employers to pay a cost for workers they employ that potentially exceeds the benefit they receive from those workers. For example, assume a large manufacturing plant has 300 employees and 30 of them are janitors. Say the average market wage for a janitor is $7.50 per hour with no additional benefits. Under the new law, if the plant is forced to provide medical insurance for these 30 employees, the plant will be paying much more in total compensation (wage plus health insurance would be say, $10.00 per hour) than it should. Why should a private company be forced to pay $10.00 per hour for something that normally costs $7.50 per hour? How is this freedom, and how does anyone expect this plant to survive, let alone compete? Obviously this is a simplified example, but the underlying theory holds true.
Relatively Low Taxes: Oh boy. Here we go. Taxes. Let’s focus on corporate taxes. The top marginal corporate tax rate in the U.S. is 35% for companies making more than $18,333,333 per year. This income level includes the majority of large companies and encompasses most employers with a significant number of employees. Add these tax rates to state taxes and many corporations’ tax burdens exceed 40%. How does help companies compete on a global stage? Does it surprise anyone that many American companies relocate overseas? And freedom? How can freedom exist when individuals and corporations must forfeit so much of what they earn to an oversized government?
Freedom to Fail – HA! This will be quick. One word: Bailouts. See the previous post “Too Big to Fail.”
There is another key aspect Mackey brings up that any reader of LME would realize is fully supported in this blog: flat rate taxes. He states “Many Eastern European countries implemented low flat tax rates in the past decade, including Russia in 2001 (13%) and Ukraine in 2004 (15%), and experienced strong economic growth and increased tax revenues.” He left out Estonia, but we will forgive him. But did you notice something in Mackey’s comment? Maybe you whizzed by it: “many Eastern European countries… experienced strong economic growth and increased tax revenues.” Maybe Western European powerhouses like, oh, I don’t know… Italy? France? Portugal? Spain? Ireland? etc. will realize their socialist, discriminative, highly progressive tax system has killed incentive and nationwide production so much that it has caused these countries to fall into the economic holes they are in.
All in all, this article is well written, and its points are clear. In order to get our country out of this rut we need to: restore economic freedom by reducing taxes, cutting government spending overall, and getting the government out of the business of over-regulating American companies. Unfortunately, and according to most recent polls Americans feel this way as well, the country is in decline and will continue to do so.
Thoughts?
Thoughts? Yes. A few.
ReplyDeleteLet me preface by saying that the American Dream is something that I roll out of bed and pursue every morning. It’s an ideal that separates us from the rest of the world and is something I'll instill in my children as they grow older.
When President Roosevelt passed the Glass-Steagall after the Great Depression, he did so with the intent of preventing banking institutions from becoming investment firms and to avoid any future catastrophic event. At its core, I think you’ll agree this is the definition of regulation. As a result, this was a bullet that we were able to dodge on several occasions. Granted, we experienced a number recessions between 1940-2007, but we were positioned in a way that prevented our economy from moving from recession to depression. After President Clinton, with pressure from Republican leadership, repealed Glass-Steagall, our fate was sealed. Your proof (again, because I know the question is coming):
1. Banks and investment firms became indistinguishable and in many cases merged to become one. By doing so, they began investing in and selling mortgage backed securities loaded with mortgages that never should have been written for individuals had no business in owning a home. How do I know this? I worked for Merrill Lynch and was ultimately laid off from Merrill when our division, which consisted of 1000+ employees, was closed. It’s shocking how many 100% and 125% loans were executed for individuals with 560 credit scores. The most shocking aspect of all this?? They were being sold as A+ rated investments!! Why…that’s easy…see below…
2. Their failure was insured (see AIG)!! So it didn’t matter if they failed because they would just make up the losses with the insurance that AIG provided. As a result, when they failed (see Lehman Brothers, Bear Stearns, www.Mortgageimplode.com) AIG went down with them. But don’t worry, because the executives who led the national economy down a path we haven’t experienced since the 1930s, walked away with their fortunes intact.
We, as Americans, have a responsibility to pursue the American Dream but we also have a responsibility to hold each other accountable. What angers many Americans, including myself, is the lack of accountability of corporate America and the fact that government officials allow themselves to be purchased by lobbyists. It’s been proven throughout history, when an individual in a “leadership” position is given unlimited power, they are doomed to abuse it to their own benefit…proof—Enron, Healthsouth, Halliburton, Lehman Brothers, Bear Stearns…and the list goes on.
My point…SOME regulation is a necessity that promotes safer (I stress the R on safe) economic growth.
mansfieldsig - Thank you for the well-thought post. I appreciate your opinion and the civility in which you present it.
ReplyDeleteSo... yes, I agree, Glass-Steagall was the definition of regulation. I would respectfully disagree that its repeal was the cause (you stated sealing our fate) for the great recession we're in. I'll get back to that.
1. Yes, banks did behave as you said. And you're right. They wrote mortgages to home buyers that, from a risk management standpoint, shouldn't have received them. To me, that's the risk the lenders took. It doesn't take a government regulation to oversee that. If they want to lend like they did, they bear that risk.
2. If a company like AIG wants to underwrite like they did, again, that's the risk they take.
I agree with all your facts (my education/background is in finance and economics). In fact, it's good to know that there is someone out there that has an opinion that is backed with sound facts (one of the issues you probably read about in my blog is my pet peeve is when people have opinions or claims on things without the facts to back them). The only one I don't agree with is when you say "the fact that government officials allow themselves to be purchased by lobbyists." I would say I respectfully disagree with this because while you can prove everything else you listed, the "bought by lobbyists" to me is one I've heard theorized about frequently, but I've never seen proof for.
With that, like I said, I agree with the other facts you said. My position is a little different, and the dropped ball comes from the government. If lenders want to make risky loans and not account for them with an appropriate interest rate, that's the risk they take. If AIG or any company wants to underwrite these risks (there is a price paid for the insurance, if a lender feels the insurance is worth the price, he buys, otherwise he passes) then that's the risk AIG and the other insurance companies take. The problem, to me, is that they should have been permitted to experience the negative side of risky behavior. The government shouldn't have stepped in. It doesn't teach anyone anything if they can have all risk removed (I wrote about this in a previous post). AIG and any risky lender should have failed (both the lender and the insurance companies that had to pay allllll the claims that ate through their reserves) and naturally, through structured bankruptcy, other financial institutions would have sopped up the failing company's assets and, after a small shock, things would have gotten back to normal.
My point... 1. There are many economists that say that Glass-Steagall wasn't the cause, and there are even some that say it wasn't a player at all in the great recession... 2. I completely agree with you that there needs to be SOME regulation. I do not believe there needs to be no regulation (there is nothing in this world that lives without rules), but some. A football game can't go on effectively without referees, and that's all the gov't should be: a referee. It should minimally regulate our markets, and through natural selection, failing companies should be allowed to fail.
I truly appreciate your very insightful post. I really hope you're able to contribute more, whether it's in line with what I believe or not. Your posts are meaningful and well thought out. I might disagree with you sometimes, but it will always be respectful. Thank you, and I hope to hear from you again.