Category Archives: Government

General Dubik at Jefferson Erie Global Summit IX

These are my notes from General Dubik’s talk on Friday, November 17, 2017.
Gen Dubik is highly credentialed, including member of CFR.  His slides are all titled “Institute for the study of war.

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Fed Balance Sheet unwind

Michael Arone at SPDR Blog has added a bunch of global data to the info I posted previously regarding the Fed’s balance sheet.  He includes some information about current and future levels of required reinvestments (maturity dates) but really doesn’t touch on how equity markets might be impacted.

There are a bunch of cool charts (and one really, really dumb one, click on the link and you figure out which one).

Here’s a couple:




Importantly, he noted that the Chinese sale of treasuries was related to their desire to control the level of the yuan, not some general panic over US Treasuries, as that action is often portrayed.

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Tax on Robots

Oh, Robert Shiller.

The idea of a tax on robots was raised last May in a draft report to the European Parliament prepared by MEP Mady Delvaux from the Committee on Legal Affairs. Emphasizing how robots could boost inequality, the report proposed that there might be a “need to introduce corporate reporting requirements on the extent and proportion of the contribution of robotics and AI to the economic results of a company for the purpose of taxation and social security contributions.”

The public reaction to Delvaux’s proposal has been overwhelmingly negative, with the notable exception of Bill Gates, who endorsed it. But we should not dismiss the idea out of hand. In just the past year, we have seen the proliferation of devices such as Google Home and Amazon Echo Dot (Alexa), which replace some aspects of household help.

So much to mock here. Bill Gates? He didn’t propose a plan to tax use of computers and software that put lots of white collar clerks out of work (not to mention adding machine manufacturers). And replacing household help with Alexa? Are there employers out there who hire people to turn on their stereo and place orders on Amazon for them? I mean, it might results in fewer CIA lackeys to place physical bugs in targets’ homes.  It kind of seems like these guys don’t really understand what automation is or what it looks like, or its incremental nature.  It’s not “I, Robot.”

I think dismissing the idea out of hand is the best plan.  Any attempt at actually doing this can only result in rent seeking.

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Middle School Punishment Culture

Syracuse schools are trying to diffuse behavior issues rather than just punish the students.  They are doing it in response to racial disparity of punishment, but the solution will help all the students.  Story from ThinkProgress.

In middle school, as my oldest kindly phrased it “they want to keep us safe from everything, so we can’t do anything.”  My younger son was less generous in his characterization of middle school administration as “fascist Nazis.”  In reality, they described the same culture of forced acquiescence.

In Syracuse, they are trying to teach the kids to resolve their issues in socially acceptable ways without punishment being the first action.  They are also doing this in elementary school:

…a student, Josh, burst into the room. After the principal told him to close the door and knock, he came back in and said another student, Nathan, “was talking about my mom.”

“Nathan doesn’t know your mom and I will follow up with up him,” Reeve-Larham said.

“I’m going to punch him in the face!” Josh yelled, on the verge of crying.

“You’re not going to punch him in the face,” she said calmly before Josh slammed the door.

Although it may seem worrisome that one student said he wanted to hit another, the student only went to the principal’s office because she built a relationship with him and he trusts her. Josh anticipated that he would be angry and went to an adult for help.

My son did this in 8th grade.  The response from the vice principal was, “Well, now we know you have a problem with him so if there is any issue between the two of you we will know it’s your fault.”  That’s the difference between punishment culture and what Syracuse is calling “restorative practices.”

Not surprisingly, the middle school teachers are not at all happy with this new system, as they can no longer just send a kid away based on any infraction and not have to see them until (at least) the next day.  They report feeling less safe, and feeling that the students no longer face consequences for misbehavior.  That’s understandable, because it’s true, at least somewhat.

There’s a lot more to this, click the link.

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War on Cash

Ken Rogoff’s new book “The War on Cash” details how wonderful it would be if cash was totally or nearly totally banned, with all transactions being made electronically.  He thinks it would eliminate crime.  I have stated this before, but you can’t eliminate crime by eliminating cash.  Other forms of currency will be substituted, and this will have unintended and unforeseen consequences.  Yes, it will drive up the price of crime, but it will certainly not stop it or probably even slow it down much.

Ron Rimkus, CFA, has a piece at Seeking Alpha that details the real motives behind this move, and the real harm it causes non-criminals, and he thinks about his mom as an example:

In short, … a cashless society would enable central banks to produce negative interest rates at any level.

If a -1% rate doesn’t do the trick, maybe -5% will. If -5% doesn’t cut it, perhaps -10% will. In fact, there would be no limit to how low negative rates could go.

In essence, a cashless society gives governments an extraordinary new power: the ability to tax wealth – including my mom’s, even though she is not “wealthy.”

In practice, if the world converted to a cashless society, Mom could still choose what she buys, how she invests, what she does with her money. But she would lose the freedom to withhold her money from the banking system.

What is best for savers is high interest rates. What is best for borrowers is low interest rates – or maybe the ability to default with little or no consequence. What is best for banks is having more transactions performed through the banking system via credit cards, debit cards, or other bank-sponsored payment methods. What is best for governments is for every transaction to be monitored and every possible tax dollar collected. What is best for central banks is to fully control the money supply so that they can create negative rates at will. What is best for politicians is to grow the economy regardless of how costly their policies are.

What is best for my mom is to be able to save her hard-earned money without it being unduly depleted by inflation, taxation, or bail-ins. And, maybe, to be able to opt into or out of the banking system by her choice.

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Nobel prize in Economics causes harm – Edesess

Michael Edesess has written a review of The Nobel Factor: The Prize in Economics, Social Democracy, and the Market TurnThe history of this Nobel prize is fantastic:

The originator of the idea was Per Åsbrink, Governor of the Riksbank, Sweden’s central bank. For a variety of reasons in the 1960s the bank had accumulated a substantial fund from its profits. It decided to use part of it to create a “special jubilee” to take place on May 15, 1968, to celebrate the bank’s tercentenary (300th anniversary). About 100 central bankers and other dignitaries would be invited.

As the date approached, Åsbrink, in 1967, reluctant to hand the bank’s profits back to the Treasury, came up with the idea of using them to establish a Nobel Prize in economics. He discussed it with his young special advisor Assar Lindbeck, who pursued it from there. There were some objections from scientists, who didn’t believe economics merited such an award, and from the Nobel family itself. However, since the money didn’t come from Nobel family funds but from the Swedish taxpayer, they had little say in the matter.

The only concession to the family was made when its oldest living member, an 87-year-old woman, insisted on setting the prize apart by naming it “The Prize in Economic Science in Memory of Alfred Nobel,” versus the other, more simply named awards, such as the Nobel Prize in Chemistry. As Offer and Söderberg say, “This showed a remarkable presence of mind, since the awkward title has continued to tarnish the award ever since.” Peter Nobel, Alfred’s great-great nephew, according to Offer and Söderberg, later wrote that “The Economics prize has nestled itself in and is awarded as if it were a Nobel Prize. But it is a PR coup by economists to improve their reputation.”

That’s funny!  Seeing the role that VaR had in the global financial crisis of 2008, I would agree with the book’s premise that the Nobel prize in economics results in a net loss to the global economy over time.

Not sure if the book follows the same path as the review, but Edesess goes on to detail how in the US, what he calls market liberalism has caused great harm, with the other choice being social democracy.  That is, social security is more efficient and offers better returns than privately managed IRAs, single payer is implied to be a better health care system, etc.

One point is overlooked here, and that is that what has increased is not free markets, but corporate cronyism.  Free markets vs. socialized services is not a dichotomy, and what we have is neither.  Free markets are likely to be an improvement, and socialism would probably not be much worse, or not much different, at least as far as the amount of goods reaching the most people.

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Jared Dillian wrote a great piece about taxes in the US.  He did not touch on corporate taxes or on tax avoidance, which are also very important, but those issues do not diminish the points he makes:

The US Is Not a Low-Tax Jurisdiction

Trump has been going around running his mouth about how the US is one of the highest-tax countries in the world. This really makes the journalists upset. They say that it’s false. Every time he says this, they have a conniption.

How can it be true? How can we have higher taxes than Sweden1, where taxes are so high that everything is free, there are ponies everywhere, and everyone is happy2?

It depends on how you measure it.

The Wall Street Journal posted a piece about this Monday, offering the statistic (that most journalists have offered) that the US collects about 26% of GDP in taxes, compared to an average of 34.4% for other industrialized countries.

First of all, the fact that we collect 26% percent of GDP in taxes is crazy—for years, even decades, the total take would end up around 20% of GDP, no matter how high or how low the tax rates went. Tax collection has become much more effective in the last 10 years, and a lot of what the IRS would call the “tax gap” has been closed.

But yes, the amount we pay in taxes collectively is lower than most industrialized countries.

But there is another way to look at it.

What about tax rates? Who has the highest tax rates in the world?

The US is close to the top.

The top marginal income tax rate at the federal level is 39.6%.

Now, a lot of economists stop there, and say US taxes are 39.6%, Sweden’s are 59.7%, so the US is a low-tax jurisdiction.

But you have to take into account state income taxes, too. California is the highest, at 13.3%. Some municipalities and counties also have income taxes. When you take into account New York state and city income taxes, it’s also about 13.3%.

So 39.6 + 13.3 = 52.9%.

Catching up to Sweden!

We’re not done yet. We now pay a 3.8% surtax on investment income, which was intended to fund Obamacare. That makes it 56.7%.

Only four countries in the world are higher3. Sweden, Finland, Canada, and Belgium4.

We’re not done yet!

We also pay payroll taxes of 6.2% for the employee and 6.2% for the employer on the first $118,500 of income, plus Medicare taxes of 2.9%, 1.45% for the employee and 1.45% for the employer. Economically speaking, the employee pays both. So add 2.9% to the total, and then you get to 59.6%.

We’re not done yet!

In some localities (like New York), there is something called an “unincorporated business tax,” or UBT, so if you have an LLC or sole proprietorship, you pay another 4% on your net business income.


Not done yet!

We haven’t yet discussed property taxes. In high-tax jurisdictions like New York, New Jersey, Connecticut, or Illinois, you can easily have a tax burden of $20,000 annually on a middle-class home. I have heard that property tax bills of $50,000 to $70,000 are pretty common. Nobody takes this into account in the global comparisons.

Even where I’m from, in the impoverished eastern part of Connecticut, it’s not uncommon to see $4,000 property tax bills on houses that are worth about $130,000.

Now we’re done.

So is the US a high-tax jurisdiction or a low-tax jurisdiction? Or a better question might be: How can we pay so little compared to other countries if our tax rates are so high?

Glad you asked.

The Most Progressive Tax Code in the World

I think if I were an economics PhD student, the topic I would pick for my thesis would be to measure the progressivity of income taxes around the world. Like, how much people in low brackets pay compared to people in high brackets. This is an important question.

A lot of people spout off about taxes without really knowing what they are talking about. So let’s pull up the latest tax table from the IRS:

Source: Tax Foundation

So you might recall the Mitt Romney biff from the last election when he said that half the country pays no income taxes, and people thought this was a very tone-deaf thing to say. If you look at the table above, you can see that everyone pays at least some tax. So what gives?

Two points:

  1. Generally, people in the lower brackets get a lot of deductions and credits (like the EITC) that completely eliminate their tax liability, or even create a negative one. That’s right—not only do a lot of these folks pay no income taxes, they actually receive money from the government.5
  1. People still pay payroll tax, to fund Social Security and Medicare.

Our tax code is very progressive—the effective tax rate for millions of people is zero or negative, while the effective tax rate for rich filers is in the thirties (or much higher when you add in state income taxes and other items that we discussed before).

What about Sweden?

Here are Sweden’s tax brackets, in USD (from Wikipedia):

0%      $0 to $2,690
31%    $2,690 to $62,140
51%    $62,140 to $88,180
56%    $88,180+

So as you can see in Sweden, everyone pays a decent amount of tax. The rates are high, but the tax code is not all that progressive.

And this is how the OECD reports Sweden has a much higher tax burden than the US: the tax code is flatter, and everyone pays. Lower class, middle class, upper class—everyone.

Progressive tax codes are the worst things in the world.


With a progressive tax code, you can divide people into groups and turn them against each other. The rich aren’t paying their fair share. The poor aren’t either. There is a lot of hate and discontent.

A flat tax (or nearly so) solves these problems: everyone has skin in the game, and also, a flat tax is progressive anyway. If there is a flat tax of 20%, if you earn $100,000, you pay $20,000, and if I earn $1 million, I pay $200,000—10 times as much.

But really, it all comes down to incentives. High marginal tax rates create a disincentive to working hard and producing cool stuff.

If Joe Shlabotnik makes $25,000 a year and his marginal tax rate is 15%, he has no disincentive to go to work. He gets to keep 85 cents of every dollar.

But you don’t care about that guy. Actually, you do, but you don’t care about Joe Shlabotnik as much as about Elon Musk.

Elon Musk lives in California, so he pays that 13.3% state income tax, and very likely he faces the 59.6% marginal rate that we discussed earlier. So is the 59.6% marginal rate keeping him from going to work? No.

What if it were 70%, like under Jimmy Carter?

What if it were over 90%, like Bernie Sanders wanted? Would he still go to work then? He might not.

You want guys like Elon Musk to keep going to work6.

Nowhere in this essay have I said that these tax rates are unfair. They may very well be fair. I am not getting into a political discussion here, nor am I complaining about my taxes.

I am saying two things:

  1. That the US is not a low-tax jurisdiction, at least in the way that it counts.
  1. The top marginal rate is the one factor that is most (inversely) correlated to economic success.

I am no fan of Trump. And I’m not sure why he was complaining about high taxes, with all those NOL carryforwards. But as you travel around the world, taxes here are not especially low. The US has this reputation as this Wild West capitalist fantasyland, but nothing could be further from the truth.

1 We don’t, but it’s close.
2 Ranked 58th in suicides.
3 Not counting Aruba.
4 France got rid of their 75% top rate, for reasons you might expect.
5 In other words, a lot of people think they are taxpayers, but they aren’t. They have tax withheld over the course of the year, then get it all back (and then some) as a refund.
6 Musk would probably go to work if his tax rate was 100%, because that’s who he is, but most people aren’t wired like that. Certainly not me.


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Isolationism vs. Internationalism: False Choices

George Friedman has a thoughtful piece on US international relations this week, specifically the views of people in the US who are considered to be isolationists , via John Mauldin:

One side is committed to maintaining the institutions created to fight the Cold War. This includes NATO, various bilateral agreements, and economic structures such as the International Monetary Fund. The supporting argument is that these were successful in the Cold War, and they remain a useful platform for broad US engagement in the Eastern Hemisphere.

The counterargument is that the Cold War was a contest with a peer power, the Soviet Union. As such, it required the US to create a vast alliance web based on the United States’ guarantees. Today, no peer power threatens American interests. Therefore, the Cold War structures are irrelevant and too expensive. More important, they are no longer designed to deal with anything that is essential to the US.

World War II and the Cold War required maximum global effort from the US. That effort is no longer needed. What is needed is to clearly identify American interests and relationships, and forces tailored to those needs. Everything cannot be an American duty, since American resources are limited. Involvement in affairs not central to American interests strain the treasury, and cause wars that can neither be won nor abandoned.

I am not arguing which is the more persuasive view. There is, perhaps, even a third option. But to label as isolationist a view that argues for a shift in prior US policy is in error. The isolationists in the past may have been wrong, but they weren’t really isolationists.

The whole commentary is worth a read.

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Stiglitz on crony capitalism

Nobel prize winner Joseph Stiglitz, May 11, 2016, via Project Syndicate.  The article is about competing economic models and how they explain today’s inequality problems.  He also gets into crony capitalism and how it relates to these issues as well:

In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to Internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the “pure” competition depicted in textbooks. A few sectors can be defined as “price taking”; firms are so small that they have no effect on market price. Agriculture is the clearest example, but government intervention in the sector is massive, and prices are not set primarily by market forces.

US President Barack Obama’s Council of Economic Advisers, led by Jason Furman, has attempted to tally the extent of the increase in market concentration and some of its implications. In most industries, according to the CEA, standard metrics show large – and in some cases, dramatic – increases in market concentration. The top ten banks’ share of the deposit market, for example, increased from about 20% to 50% in just 30 years, from 1980 to 2010.

Some of the increase in market power is the result of changes in technology and economic structure: consider network economies and the growth of locally provided service-sector industries. Some is because firms – Microsoft and drug companies are good examples – have learned better how to erect and maintain entry barriers, often assisted by conservative political forces that justify lax anti-trust enforcement and the failure to limit market power on the grounds that markets are “naturally” competitive. And some of it reflects the naked abuse and leveraging of market power through the political process: Large banks, for example, lobbied the US Congress to amend or repeal legislation separating commercial banking from other areas of finance.

The only word I disagree with in the above is “conservative.”  I would just remove it because, for instance, the legislation referenced in the last sentence was pushed through by Bill Clinton, and Obamacare has created huge entrenched interests in both the pharmaceutical and insurance industries.  The political forces are strong for this on both sides of the aisle.

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Jarred Dillian published a piece on economic freedom at Mauldin Economics.

There have been some startling developments in the past few months. Like, did you hear the talk about getting rid of $100 bills?

It’s not just C-notes. 500EUR notes in Europe, 1,000CHF notes in Switzerland—everywhere people are talking about getting rid of large-denomination bills, because… some people use them to evade taxes or to commit crimes. You don’t pay your drug dealer with a credit card. So the thought is, get rid of the large-denomination bills and crime goes away.

This is scary. Part of economic freedom is the ability to transact anonymously. Take the extreme example where cash is eliminated altogether. Everything goes on a credit or debit card. Your whole purchasing history is stored on the Internet. Well, if you’re not doing anything wrong, you have nothing to hide, right?

Part of freedom (including economic freedom) is the ability to do bad things. Do you want to eliminate the option for people to do bad things, or do you want to give people the choice to do the right thing? All morality is meaningless if people are given no choice of whether to behave or misbehave. This is a deep philosophical issue.

Again, some people think a perfect world is a world without crime, but that’s not true. A perfect world is where people have the ability to commit crimes, but don’t.

But this talk about large-denomination bills is really gaining momentum, and honestly, I think it is at least half responsible for the run up in gold prices over the last couple of months.

There is quite a bit more to it, as well.  The whole article is thought provoking.

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