Opinions

WILL THE FEDERAL GOVERNMENT BE THE NEXT COMPANY STORE?

WILL THE FEDERAL GOVERNMENT BE THE NEXT COMPANY STORE?

Professor Bob

 Decades ago it was not uncommon for mining companies and even some manufacturing companies to have what was known as “company stores” or even company towns. The businesses were located outside of town as to make it difficult for employees to shop in town. The businesses then created what became known as the company store for people to do their shopping and company housing for the people to live. The companies usually did not pay the employees in money. Instead they paid the employees in scrip which could be used to pay the rent on the housing and to shop at the company store. Of course the price of rent and merchandise was so exorbitant that it was impossible for employees to save. This made it virtually impossible for them to ever improve their lot in life. This got me to wondering if maybe the federal government will become the new company store. Last spring several articles appeared on the subject of delinquent student loans. These articles were about the fact that it had become necessary for the government to garnish the social security checks of people in their 60s, 70s, and even 80s for unpaid student loans. These articles also addressed the issue of delinquent loans of people much younger—those that had incurred what amounted to student loan balances into the six figures for degrees in disciplines that would not pay enough to enable repayment of the debt. This is not the only burden that the public has involving the federal government. There is the horrendous national debt, the effect of quantitative easing, anticipated inflation as a result of quantitative easing, and future increases in interest rates to curb inflation. Then throw in the direct and indirect projected impact of Obamacare on the pocketbooks of the public, the increasing burden of social security being created by the unfunded expansion of unearned benefits, and the rising cost of Medicare and the problem is greatly compounded. Obamacare has a truckload of taxes built into the bill. (Obamacare is not about healthcare.) Some of these taxes/penalties fall on the individual, like the 3.8% tax on net investment income on the profit arising on home sales. But most of the taxes fall onto businesses. Obamacare defines a full-time employee for the purpose of health insurance as one that works more than 30 hours per week. So businesses are doing the same thing they did when the government required retirement plans for those employees working 40 hours per week. They cut the hours of employees. In the case of retirement plans low margin businesses like grocery chains cut employees to 37.5 hours per week. Under Obamacare low margin businesses like restaurants are cutting employees to 30 hours per week. This will mean that health insurance does not have to be provided for those employees but the business must pay a hefty penalty for not doing so. But the penalty is much cheaper than the cost of the insurance. The problem is that those taxes and penalties that fall onto businesses must be passed along to consumers in the form of higher prices. Businesses have to earn a rate of return in line with the risk level of that business in order to attract investment capital. This means that the taxes and penalties from Obamacare cannot be absorbed by business. You and I will be paying those costs in addition to providing our own coverage or paying a penalty. This also includes the health insurance companies which will have to increase rates in order to compensate for the increased coverage. The CEO of Aetna recently projected a doubling of health insurance rates over the next year. Others project an even greater increase. Some healthcare professionals anticipate that Obamacare will eventually make it unprofitable for private health insurers to exist. The end result being a single payer system with premiums paid to the government with care provided on the model used by the VA. The impending social security problem which is several decades down the road will require an even greater contribution to the program. Medicare costs will also continue to rise (14% increase in Part B for 2014) and the Medicare tax will probably increase, possibly to the point where it becomes necessary to replace Medicare with Obamacare. Then throw in the increases in the income and death tax (plus a host of others) requested by the current administration. Increasing the burden on the wealthiest taxpayers will not provide enough to cover Obama’s vacations. This means that rates must eventually go up for even more people. Maybe, in the not so distant future, the federal government will become the new company store. We will simply have our paychecks direct deposited to the U.S. Treasury in return for housing, higher education vouchers, health insurance, retirement, disability, child care vouchers, food stamps, etc. One stop shopping at the company store.

 

SO-CALLED ASSAULT WEAPONS

SO-CALLED ASSAULT WEAPONS

 

Professor Bob

 

In the debates President Obama called for renewal of the assault weapons ban. This was followed by the Oregon mall shooting after which the media ran a story about the confusion over whether the gunman had an automatic or semiautomatic rifle. It was also followed by Bob Costas’ rant which indicated a lack of understanding of firearms and the gun culture. What do all of these things have in common—ignorance of the subject. During the push for the Clinton assault weapons ban (which was only cosmetic in nature) the media repeatedly referenced “assault weapons” while showing footage of individuals shooting machineguns. First, I am not sure that the term assault weapon makes sense as “assault” is an act and a weapon can be anything from a vehicle to a baseball bat. Second, a big part of the problem with the gun discussion is that there are no real or workable definitions for terms such as assault weapons or Saturday night specials or small cheap handguns. Third, there is much confusion among the media and lack of knowledge about the difference between automatic and semiautomatic firearms. Based on my research the Nazi’s were the first to use the term “assault weapon” in the late 1930s. The Germans equipped crack infantry troops with light machineguns. This term was then resurrected by the Democrats and the media in the late ‘80s and early ‘90s but was used to refer to semiautomatic firearms instead of machineguns. A machinegun is commonly referred to, today, as a fully automatic weapon. One pull of the trigger fires multiple shots until the trigger is released or the magazine runs dry. Based on what is on television and in the movies it would lead one to believe that machineguns are everywhere. Even in the movie version of John Grisham’s book a sharecropper had a machinegun. Really? Machineguns are regulated by the National Firearms Act, sold only by Class III dealers, require a complicated purchase procedure, and are very expensive. The last full auto Uzi I saw was priced at $17,000. The last I read Florida had more legally owned machineguns than any other state at more than 20,000. A small number when you consider that Florida has over one million people with concealed weapon permits. Semiautomatic weapons, on the other hand, fire one round each time the trigger is pulled. A semiautomatic may be more appropriately called an autoloader as what it really does is simply load the next round for the shooter. The semiautomatic came onto the scene in the late 1800s and became popular with the military during WWII. Since then the semiautomatic has become the most popular shotgun used for hunting, skeet shooting, and trap shooting. Additionally, there are some very popular semiautomatic hunting rifles and for at least three decades semiautomatics have taken every national match in the target shooting arena. What the media and politicians refer to as an “assault rifle” is simply a semiautomatic firearm that is made to LOOK like a full auto military firearm. The Clinton gun ban was not really a ban at all. It simply made them look less like a military weapon. Today, the top selling rifle in the U.S. is the AR15 style of rifle which is now commonly used in hunting and competitive shooting. Also of interest, is that the standard cartridge fired by the AR15 style rifle is typically much less powerful than the predominant rifle cartridge used in WWII. The question is are the media and politicians simply ignorant of firearms or whether they deliberately mislead people to believe that semiautomatic firearms are machineguns in order to scare them? Either way, having accurate information reported about firearms would go a long way.

 

TRICKLE DOWN ECONOMICS

 

TRICKLE DOWN ECONOMICS

 

Professor Bob

 

 

 

Trickle-down economics is the derogatory term given to “supply side economics” by liberals, progressives, elitists, democrats and other lefties. Somehow this group cannot seem to get that it has been proven to work multiple times since 1960. The theory behind supply side economics can be found by putting Laffer Curve into your preferred search engine. Supply side economics advocates that there is an optimum income tax rate whereby the government will collect the most income tax revenue. If rates are raised above that point, the government will collect less tax revenue and if lowered below that point the government will collect less tax revenue. This theory bears out in practice because taxation takes place in a dynamic environment. People change their behavior as tax policy changes. If federal tax rates are increased, then taxpayers earn less taxable income by working less, deferring income, investing in investments that yield tax free income, or investing in assets like land and idle real estate because it does not generate income. (In those states that keep increasing taxes, the residents simply move to a state with lower taxes.) Additionally, the higher the tax rates the more incentive there is for people to cheat via under the table cash transactions and bartering. Basically, by increasing taxes the government entity ends up with less tax revenue and a shrinking economy. On the other hand, if rates are lowered, people will try to earn more income because they get to keep more. They are more likely to invest in the most profitable investment vehicles because they get to keep more of their income. Working more and investing in the private sector grows the economy and generates jobs. Since 1960 three major tax cuts have been implemented. The first was during the Kennedy administration where the maximum marginal income tax rate was reduced from 90% to 70%. The second was during the Reagan administration where the maximum marginal income tax rate was reduced from 70% to 50% and then from 50% to 28%. The third was during the George Bush administration which affected items such as capital gains and dividend income and reduced the Clinton’s maximum marginal tax rate from 39.6% to 35%. In all three cases the aggregate income tax revenue collected by the government increased and the economy grew. On the other side, we have the 1969 Tax Reform Act which increased taxes by trying to tax the wealthy (and is responsible for the alternative minimum tax affecting middle class taxpayers today), the 1976 Tax Act, and the Omnibus Budget Reconciliation Act of 1993. All resulted in the government collecting less taxable income and in slowing down the economy. The latter which went into effect in 1994 increased the maximum marginal tax rate from 28% to 39.6%, increased the motor fuels tax, and increased the taxable portion of social security benefits among other tax increases. The latter act was under Clinton’s watch. While he often gets credit for generating a budget surplus which is arguable and was not because of anything he did. The fact is that he was simply in the right place at the right time. Clinton inherited the most robust economy in history as a result of what is called the Reagan-Bush (really the Kemp-Roth) tax plan. His so-called surpluses were ten year projections based on a static analysis (no change in human behavior because of the change in the tax laws). The Congressional Budget Office is not permitted to consider changes in human behavior when making projections based on changes in the tax laws. When Clinton took office, his transition team recommended no change in economic or tax policy for fear that it would have a negative impact on the economy. If he had left well enough alone we could have had overwhelming economic growth. Even though Clinton inherited the most robust economy in history his tax legislation did begin to slow down the economy after it was implemented. Generally, the impact of tax legislation is not noticeable immediately. It takes several years for the impact to show up in the economy. Several years later it was clear that we were headed toward a recession (which is often blamed on the dot com bubble). So much so that in 1997 the Clinton administration signed into law the Taxpayer Relief Act of 1997 in an effort to curb the tide. It was too little, too late. Regardless of what proponents of tax increases want to argue, (1) the amount of income tax revenue collected by the government increases when income tax rates are reduced and (2) there are not enough wealthy people to solve the budget problem. Based on IRS data the so-called Bush tax cuts increased the tax burden on the wealthiest taxpayers from 35% of the total income tax revenue collected by the government to 39% while reducing the burden on lower income taxpayers. If the Democrats really wanted to increase the amount of tax revenue collected by the government, they would reduce tax rates and not increase tax rates. This tells me that their motive is not to generate more revenue--but to penalize successful taxpayers.

 

 

 

 

 

WHY THE STIMULUS FAILED

WHY THE STIMULUS FAILED

Professor Bob

Obama’s trillion dollar stimulus bill was to have turned the economy around and reduced unemployment to an acceptable level.  Unfortunately it failed to accomplish either.  The government manages the economy through monetary and fiscal policy.  The Federal Reserve (Fed) handles monetary policy, much to the chagrin of many.  To those who would like to eliminate the Fed, remember that the duty falls to Congress if the Fed is eliminated.  Fiscal policy includes actions such as the stimulus bill and the tax laws.  During the Great Depression the government used fiscal policies without any significant impact.  Unemployment remained relatively stable and the economy did not come out of the tank until the country geared up for WWII.  In short, there was no sound economic history behind Obama’s stimulus bill to indicate that it would pull us out of the economic doldrums.  The GDP, the measure of economic output, is measured by summing Personal Consumption (C) plus Business Investment (I) plus Government Spending (G) plus net Exports (E –I): 

GDP = C + I + G + (E – I)

Funds for government spending must come from taxes provided by individuals or businesses or C and I.  So the only way that increased government spending can significantly add expenditures is to reduce the contribution of both individuals and businesses to GDP by increasing taxes on those two groups.  A major problem with trying to use government spending to stimulate the economy is that government is a non-profit entity.  Economic growth comes from profits generated by the private sector.  The only way that government spending can stimulate economic growth is for those funds to be funneled to the states and then to private sector entities such as road and bridge contractors.  The problem is that the stimulus bill did not do so.  Yes, the stimulus bill was sold to the American public as a bill to fund shovel-ready infrastructure projects.  In truth, only about five percent of the funds went to infrastructure.  The bill was largely a political vehicle used to payback Obama/Democrat supporters and had little to do with stimulating the U.S. economy.  A significant chunk went to fund an electric auto plant in Finland and several GM plants in China (the government outsourcing of jobs).  Money went to fund green energy companies of which more than a dozen have gone belly up (no clue who ended up with the money).  The real winners in the stimulus bill were labor unions and, in particular, state governments (and government employee unions).  It has been reported that the stimulus bill created 400,000 government jobs at the expense of 1,000,000 private sector jobs.  If the bill had gone to infrastructure it would have been wisely spent on needs of the country and the funds would have gone to private contractors who bid on infrastructure jobs.  Profit making firms would have benefitted which would have added jobs and the increased profits would have provided much needed tax revenue.  (Contrary to the logic of some, tax revenue is largely raised by economic growth which expands the tax base and not by increasing tax rates.)  The stimulus failed mainly because such a large portion of the funds went to state governments.  Of the money that most went to education, colleges and universities, research grants and other research funding.  The problem is that none of these areas of funding generate profits (thus, economic growth) and tax revenue.  State agencies are tax-exempt agencies that pay no federal or state income tax nor do they pay state sales tax.  So the bill actually harmed both the federal and state governments by inhibiting or curtailing much needed tax revenue.  The expenditures did not live on through profits which are reinvested by private sector business and promoting economic growth.  In other words, it was not possible for the bill could generate anywhere near enough tax revenue to pay for itself.  What is even worse is that monies went overseas, to failed enterprises, and to small operations that could not possibly have any positive economic impact on the U.S. economy.  If that money had simply gone to the public or to private sector businesses it would have had a more positive impact on economic growth and tax revenue.

THE DOWNSIDE OF CORPORATE AVERAGE FUEL ECONOMY STANDARDS

 

THE DOWNSIDE OF

CORPORATE AVERAGE FUEL ECONOMY STANDARDS

 

Bob Fahnestock

 

During the Obama administration there have been two increases in the Corporate Average Fuel Economy Standards (CAFES). In the first instance auto manufacturers were required to meet a fleet average of 35.5 mpg by 2016. More recently this was upped to 54.4 mpg by 2025. Additionally, in President Obama’s State of the Union Address he touted the race to have “green energy” in place by 2035.

The Department of Energy was created in the mid ‘70s for the purpose of developing a national energy policy including the development of alternative sources of energy. Unfortunately it has accomplished nothing with regard to energy while becoming a bottomless pit for taxpayer dollars. Congress’s idea of a solution has been to prohibit exploration and development of existing energy reserves, subsidize the conversion of food into fuel (ethanol), and to enact CAFES. CAFES were a good as a first step with regard to the energy problem because it got the public and automakers to think about fuel economy and energy resources. However, the initial CAFES should have been replaced by a sound long-term energy policy--not continually increased over the years.

In response to the CAFES for the automobile fleet manufacturers had to build cars lighter and smaller to achieve the stipulated mileage requirements within the time frame allotted. The first unintended consequence of CAFES meant the end of the station wagon. But it did not mean the end of consumer demand for the station wagon. The market place has a way of satisfying demand with supply and consumers replaced the station wagon with the SUV. Prior to CAFES each of the Big 3 U.S. automakers built 20,000 to 30,000 SUVs a year, which, were primarily sold to sportsman. After CAFES were in full swing, automakers were building hundreds of thousands of them. Yes it was government regulation that spurned the SUV explosion and not the Have’s showing off to the Have-Not’s as the class warfare crowd would like you to believe.

The problem with all regulation is that it begins with good intentions but eventually becomes an entity onto itself. Regulation eventually exists for the regulators and not for its intended purpose. In fact, CAFES have morphed into a set of regulations that resemble the Internal Revenue Code. This situation opens the door for manipulation. Chrysler engineers actually designed the PT Cruiser to meet the definition of a truck as defined in CAFES. This permitted Chrysler to continue to market the less fuel efficient Hemi powered trucks while still meeting the mileage requirements for its truck fleet.

CAFES force auto manufacturers to build smaller and lighter vehicles in order to meet the fuel mileage requirements. Recent data suggests that this has resulted in an upward spiral in the number of automobile fatalities. It seems that vehicles can be made smaller and lighter but cannot be built to avoid the laws of physics. Vehicles may have gotten smaller but trees, power poles, bridge abutments, and retaining walls are still the same.

Electric vehicles do not meet the demand of most drivers in the U.S. Electric cars have limited range, require the use of fossil fuels to recharge the batteries, and there is the unknown factor regarding the long-term effects of battery disposal. Additionally, the production of fuel efficient vehicles requires the use of fossil fuel. Some engineers argue that the production of a Prius requires twice as much energy as it will save over its life. Battery vehicles are supposed to run about 100,000 miles. But if they don’t, replacing the batteries in an electric vehicle can run up to $7,000. It is cheaper to junk the vehicle and buy another one.

Both smaller gas-powered, hybrid powered, and electric powered vehicles lack towing and payload capability. People with boats and campers must still rely on the more traditional full size tow vehicle. Without these vehicles there would be massive layoffs in the boat and travel trailer industry.

We also have to consider the cost of CAFES to the taxpayer. Law enforcement agencies utilize vehicles in a way that most of us never dream of. As a result, heavier vehicles hold up better, last longer, and have lower maintenance cost. Agencies such as the Fish and Wildlife Commission must tow vessels and require full size trucks or SUVs. We are seeing an increase in the number of trucks and SUVs utilized by sheriff departments and by state police. The problem is that trucks and SUVs are more expensive than the cars that these agencies used in the past.

Hydrogen vehicles are often touted as a solution to the energy problem but present different problems. One report that I read stated that to drive a hydrogen powered vehicle from Mobile to Montgomery would require a vehicle the size of a Hummer towing a 3,000 pound fuel tank. Then there is the issue of refueling hydrogen vehicles. Refueling stations are not only scarce; refueling itself can be a tricky process.

So, if CAFES are the future of our energy policy, the country is in trouble. Basic economics indicates that countries utilize their natural resources to their benefit, either as consumable goods or to trade for resources that the country needs. In the U.S. we have a bounty of natural gas, coal, and oil. In fact, estimates indicate that we have enough of these three resources to meet all of our energy needs for the next 200-300 years.

According to T. Boone Pickens, if all of the 18-wheelers in the U.S. were converted to natural gas, there would be no need to import oil from the middle-east. Already we have cities and counties converting school buses, garbage trucks, and fleet cars to natural gas. Yes there are limited refueling locations, but if we can put a man on the moon this does not appear to be a serious issue.

So-called Green Energy calls for great technological strides. It is basically the development of an energy source starting from scratch. We already have the technology to utilize natural gas, coal, and oil. It is much easier to develop technology to make the use of fossil fuels cleaner and more efficient than it is to invent some entirely new energy source. Plus, in Europe, data suggests that for every Green Job created, two non-Green Jobs were lost. Something we don’t need given the present economy.

Last, the issue of global warming or climate change supposedly caused by fossil fuels. It is doubtful that climate change is a real phenomenon because the climate change models tend to lack validity. Models should be developed from past data. The validity of models is usually tested on a sample of past data and the higher the level of prediction, the better the model. But this is not so with climate change models which have nowhere near acceptable levels of validity. There is actually more evidence to indicate that climate change is nothing more than natural cyclical patterns in the weather that are not influenced by man. If by some remote chance climate change is real, technology will defeat the problem as it has defeated some many others.

The U.S. needs to develop a comprehensive energy policy using the resources that we have available to us. CAFES are a dead end.

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