Thomas Sowell, Clueless on Capital Gains

http://www.nationalreview.com/blogs/print/329110 

A lot of pop-economics writers have little to no education in the field of economics.  Think of Lawrence Kudlow, history major, Jerry Bowyer, accounting major and Bruce Bartlett, also a history major.  Thomas Sowell actually has an education in the field of economics as well as decades of relevant experience which is why it’s so strange that he is so clueless with respect to capital gains.

In a recent column about capital gains, Sowell reveals that he doesn’t even really know what a capital gain is.

Sowell describes a scenario where he spends ten years writing a book thenceforth selling it to a publisher for $100,000.  He argues that this constitutes a capital gain because there is no guarantee that the publisher will pay him after ten years.  In another scenario he describes a builder who spends ten years creating a housing development.  When he sells the houses, Sowell argues that the income constitutes capital gain because of risk.

When you write a book and sell it for royalties, it’s not a capital gain.  It’s compensation for the work you performed.  The fact that there is risk involved doesn’t render it a capital gain.  Yes, I agree that holding an asset with the hopes that the value will increase and thereby reaping a gain on the sale involves risk, but that does not mean that all income subject to risk is a capital gain.  When you build a house and sell it, any income is ordinary operating income.  If you sell the house at a loss, then it’s an ordinary operating loss.

There are legitimate arguments for taxing capital gain income below that of ordinary income.  But for crying out loud, educate yourself with respect to what constitutes capital gain income before you enter into the discussion.

The Invisible Hand Gives the Finger to Haiti

The free market is the best economic system we’ve been able to come up with so far. But it’s a mistake to believe that it’s a perfect system. One commentator believes it is a system bestowed upon us by God himself. What an idiot. The free market system is far from perfect, and it is important for us to continue to study it so that its limitations can be identified thereby contributing to a solution to its weaknesses. One area worthy of looking into is health care. There are various aspects of health care that we can consider.

An economic model is a method of allocating society’s resources. Take Snickers Bars as an example: a state controlled economy would dictate how many Snickers Bars are produced and who gets them. In a free market economy the producer would decide how many Snickers Bars to produce based on their estimate of the market. If inventory builds up, then they stop producing Snickers Bars and maybe produce something else like Almond Joys. If they’re flying off the shelves of stores, then they might increase production, add another shift or even build another manufacturing plant. Consumers would determine the distribution. If someone wants a Snickers Bar, then they can use their money to buy a Snickers Bar. If someone would rather have the Almond Joy, then they don’t buy a Snickers Bar. Someone with no money gets no Snickers Bar but is encouraged to work to make enough money to buy said Snickers Bar. It’s a pretty good system of distribution. He who wants a Snickers Bar pretty much gets a Snickers Bar. It works pretty good for Snickers Bars.

But is a purely free market approach the best method of distributing health care? Is it acceptable that wealthy people receive health care and the poor do not? First, let’s consider the distribution of health care. Who gets health care? In a free market system those that get health care are those that can afford it. In the United States with various state run Medicaid programs and Medicare and employer provided insurance not to mention more laws and regulations than one can reasonably digest, the distribution of health care in the United States hardly represents a free market system. The result is that health care is more evenly distributed in the United States. Most poor inner city infants can get emergency treatment if needed.

But consider the worldwide distribution of health care providers. To do this you don’t even have to look very far: my former primary care physician is from Bolivia, my current primary care physician is from the Philippines, my dentist is from Cambodia, one of my students is a certified nursing assistant from El Salvador, etc. There are countless medical professionals trained in poor countries who come to the United States to practice because the money is so much better. This is good for the United States. However, it is not good for the poor countries. Bolivia has one less doctor. Cambodia has one less dentist to treat the impoverished people of that beautiful country.

The question is whether this is the best distribution of society’s resources. Some may dare to submit that this is the best distribution of resources. I curse them. It is outrageous that a third world country like the Philippines use its limited resources to educate and train a person to be a doctor and then have that doctor leave and go to a rich country to practice. It’s good for the doctor. It’s good for me. But it is not good for the people that remain in the Philippines. I submit that this is not the most efficient distribution of health care resources.

What about research and development? The free market model dictates that private interests will invest in research and development with the intention of creating a product that can be sold at a profit that over time exceeds the cost of the research and development. Companies have invested in developing and producing medicines for high blood pressure, high cholesterol, diabetes and erectile dysfunction. Former Vice President Dick Cheney walks around with a heart pump. Artificial knees, hips and other body parts. [Last summer I was visiting my mom. We were at the pool. We were talking about health care, and I mentioned that they’ve got a pill for almost anything that ails you. My mom declared loud enough for everyone to hear that they haven’t yet developed a pill that will cure her diarrhea. Hold on, mom. It’s coming.] Not only have that, but drug companies produce these drugs in enough quantities so that everyone who can pay for it can had it.

But few private sector resources are devoted to drugs to fight malaria and dengue and other maladies that are unique to third world countries. Again the question is whether this is the best method of distribution of medical research. Some may submit that yes, the free market economic model is the best method of distribution of medical research that society has come up with to date. I question whether investment in cosmetic surgery and cholesterol drugs for those who have eaten cheeseburgers and French fries their entire lives is better than investing in producing and distributing drugs for malaria.

How can it be made better? Examples already exist. Government investment in research and development of treatment of AIDS has benefited untold numbers of AIDS patients in third world countries. Former President George W. Bush is rarely given praise for his initiative to fight AIDS in Africa. One estimate claimed that he may have saved as many as a million lives.

Another example is philanthropy. Many doctors donate their time, and many hospitals donate resources to provide health care to the poor in third world countries. Doctors Without Borders is a fine organization the provides medical treatment to people who otherwise would receive none under the free market. Dennis Quaid is a good example of an individual. He has escorted several patients from Central America to the United States and funded needed surgery. He also funded and helped establish the Ruth Paz Medical Center in San Pedro Sula, Honduras.

Another example is Cuba and its production of thousands of doctors. Medical schools in Cuba train doctors from both Cuba and other developing countries to practice in medicine with the intention that these doctors will treat patients who otherwise could not afford treatment. Cuban doctors and Cuban trained doctors can be found in various countries from Latin America to Africa.

The free market economic model is the best economic model that we have. However, it is not the most efficient method of distributing health care. That doesn’t mean that it should be abandoned.

This Was Intentional

In an episode of the popular 90s sitcom “Seinfeld”, Elaine suffered an injury to the neck. Kramer insists on helping her. Jerry joked, “His formal training is in pediatrics.” Not surprisingly, Kramer’s treatment ended up doing more harm to Elaine.

Bruce Bartlett has had a hand in developing the economic policy of the nation over the past three decades. In 1977, Bartlett went to work for Congressman Jack Kemp as a staff economist. He helped to draft the Kemp-Roth tax bill that eventually became the basis for Ronald Reagan’s 1981 tax cut. In 1983 he became executive director of the Joint Economic Committee of Congress. In 1987 he became a senior policy analyst in the White House Office of Policy Development. During the administration of George H.W. Bush he was deputy assistant secretary for economic policy at the Treasury Department.

Just as Kramer had no formal education in chiropractic medicine, Bruce Bartlett has had no formal education in economics. He majored in history. His master’s thesis was on the attack at Pearl Harbor. He obtained his knowledge of economics from listening to politicians and reading bumper stickers. And not surprisingly, his policy recommendations have done more harm than good.

In chapter 6 of his latest book, The New American Economy, Bartlett describes the “starve-the-beast” political strategy. It was believed that “tax cuts would channel concerns about budget deficits into political pressure to cut spending”. This idea had a lot of support, not just from political hack pop-economists like Bartlett but by none other than Milton Friedman himself who is quoted by Bartlett, “I have concluded that the only effective way to restrain government spending is by limiting government’s explicit tax revenue.”

In my opinion it’s a cop-out. Rather than roll up your sleeves and fight against overspending, they devised this method. It stems from weakness and cowardice.

This strategy was embraced by many over the years including Greenspan, Rick Santorum, Stephen Moore of the Club for Growth, President George W. Bush,William A. Niskanen, a member of Reagan's Council of Economic Advisers, and Richard Cheney. Barlett writes, “Instead of being viewed as the height of fiscal irresponsibility, cutting taxes without any corresponding effort to cut spending was now seen as the epitome of conservative fiscal policy.”

And it didn’t work.

Despite thirty years of outrageous budget deficits and a growing and growing and growing national debt, no significant spending cuts were ever implemented. Even when Republicans controlled the House, the Senate, and the White House, spending rose including the outrageous Medicare prescription drug benefit. Few made any effort to control spending.

We are faced with a national debt approaching 100% of GDP, and that national debt is dwarfed by continually rising unfunded Social Security and Medicare obligations. We are in a fiscal hole so deep that it will take generations to get out of. And it was all intentional. 

Kudlow Completely Clueless

http://tinyurl.com/7gamjj4

In a recent column Larry Kudlow seemed totally clueless about Alan Krueger's assertion that "problems built up over decades" are the direct cause of our situation today. “For nearly 25 years — during those bad old decades — the economy increased 3.3 percent annually. Unemployment dropped from 11 percent to 6 percent to 5 percent to below 4 percent,” Kudlow wrote.  Kudlow seems to think that just because economic growth was good during that period then all was well and that no adverse effects could have been accumulating.

While we did have economic growth and low unemployment, debt was building up.  In those 25 years we have accumulated so much debt that we can’t even count it.  We have gone from the world’s largest creditor nation to the world’s largest debtor nation with over $15 trillion in outstanding bonds and tens of trillions in unfunded Social Security and Medicare obligations.

And a diminished workforce is going to be saddled with those obligations.  Not only does the retirement of the baby boomers leave us with fewer workers per retiree, but those remaining workers are less educated, less skilled and less productive.  More degrees are awarded in the arts than for STEM areas.

But it hasn't been "problems" that caused this, but instead bad policy.  The most obvious cause is the buildup of debt, and, yes, Reagan is partially to blame. He taught us that the government can have low taxes and high spending meanwhile borrowing the difference with no consequences. Common sense tells us that this won't work in the long run, but people like Kudlow came along and told us not to worry about it. But it's not all Reagan's fault.

The government's financial position is but one factor. The savings rate has plummeted over the past 30 years as consumers hoped for Social Security, pensions and a windfall from selling appreciated homes and investments would provide much of their retirement income. A stock market crash and dismal recovery followed by a housing market crash and no recovery have left consumers up to their yin-yangs in mortgage debt, credit card debt and student loan debt. American consumers had been the engine of the world economy for so long borrowing to finance the appearance of prosperity.

The real problem is that no one is doing anything about it.  Paul Ryan had the most radical proposal, but even that his plan barely scratches the surface of what needs to be done.  People like Kudlow say that all we need is a tax cut and reduced regulations and everything will go back to the way it was before.  We need to live within our means, educate the next generation and invest in productivity enhancing R&D with our eyes on a return on investment, not by the next election cycle, but in the distant future.

Back in 2007 I predicted that it would take years to get out of this. Now I predict that it's going to take decades. Many of us will never live to see an economically healthy America.  And it is very possible that this is it.  It is very possible that our debt will result in permanent lower standards of living for Americans today and in the future.

Thirty years of irresponsible behavior isn’t corrected overnight or even by the next election cycle, and it isn’t painless.  It is going to hurt.  Some people are already feeling it.  Many government workers have lost their jobs, taken pay cuts or had their salary increases reduced or eliminated.  People in the private sector have it even worse.  Many seniors are reducing their lifestyles because the interest from their investments is next to nothing.  And the pain will get worse.  Putting it off will only make it worse.  Social Security will either have to be reduced or delayed.  Medicare will require higher premiums.  Many pension funds will not be able to pay.  Businesses that promised post-retirement benefits will not be able to fulfill the obligations.

Kudlow's attempts to blame Obama for our plight are ignorant. He should listen intently to those that argue that bad policy over decades cause this (i.e. real economists) and try to understand it.

Demand Side Economics

In the late 1970s Jack Kemp and others started an idea that Ronald Reagan made famous. They called it "Supply-Side Economics", and the general idea is that reducing costs to businesses (i.e. the supply side of the demand/supply equation) would stimulate the economy and result in economic growth. Tax rates were reduced, the economy grew, and Supply-Side Economics was credited for the growth. Since then it was believed that government policies aimed at stimulating the economy in this manner would result in more and more economic growth.

Some who identify themselves as Supply-Side Economists claim that the demand side of the equation doesn't even matter. There will always be demand, they say. Arthur Laffer, one of the most famous of the Supply-Side Economists, says that demand is not a problem. He includes this in a recent book "The End of Prosperity".

Convenient for people like Laffer, another phenomenon that is less often discussed that took place during the same period is the demand side of the equation (i.e. consumer demand). Consumer demand was seemingly insatiable for much of the past three decades. Consumers consumed. They used their savings. They borrowed. When they couldn't borrow anymore, interest rates were lowered, and new ways of borrowing more money were invented. Credit cards were offered to college students and others with little or no credit and even to people with bad credit, and limits were increased. People were permitted to borrow from retirement accounts. Home equity loans were nearly synonymous with ATMs.

This consumer spending by Americans was the root of much of the economic growth over the past several decades not just in the United States but in many other countries as well. In the 80s Japan's economy took off with much of the growth a result of sales to American consumers. In the 90s the Asian Tiger economies took off and in the aughts China's economy grew at double-digit pace every year.

By 2008 American consumers were tapped out. Housing prices had declined so home equity loans could no longer provide a source of funds for consumers. Consumers were also up to their necks in auto loans and credit card balances. When consumer spending declined, businesses stopped selling, and when businesses stopped selling they stopped making profits.

When you talk about economics, a lot of people automatically think of supply and demand. And they'd be right. There is the supply side, and there is the demand side. Both sides are equally important in the equation.