Friday, October 05, 2007


For a long time, it has been widely known that the educational system in America has been hijacked. The curriculum at the grade school level through high school no longer includes teaches the most basic truths. As a result, more and more adults live life with a mind set that is based on false premises . In terms of economics, the situation has gotten so bad that the schools might as well be teaching that money grows on trees.

House and Senate energy bills have been stalled for many weeks. The powerful Democrat from Michigan, Dingle, helped the senate pass a bill that is somewhat friendly to the auto business. The house bill is not so friendly. A battle has been fought in regard to who will sit on the conference committee. Of course, Dingle has nominated himself but other leaders desire to stack the committee with those who would support forced mileage regulations. The democratic leadership, and in particular the Senate Majority leader Harry Reid and the Speaker of the House, are basically socialist. They believe that central planning by the government is the way to "solve problems". They believe that the primary role of government is to take from the wealthy to give to the poor. Of course, if any person or group spends his wealth, future wealth is reduced.

At first, it is hard to understand how people can hold the attitude that the government is the answer when the record is one of failure. Socialistic schemes tend to help some people at the expense of others for a while but eventually the mis-allocation of resources results in damage to both the wealthy and the poor. The collapse of the Soviet Union did not just happen. Central planning failed. Many of the people who started out poor received a temporary break only to be thrown into real poverty. Free markets allocate resources well but government allocation leads to corruption (lobbying for earmarks) and ultimate disaster. Eventually, one can only hope that the "smart people" who "know" what is best for the rich and the poor will learn that the wisdom of the many is greater than the wisdom of the few. Given the opportunity, markets solve economic problems. Regulations should be kept to a minimum because all they do is get in the way of the final "answer". Trying to force a solution on a market works for a while but at some point the unintended consequences kill the goose.

It would seem that a lesson would have been learned after the most recent case of forced mileage standards. The congress tried to force people out of big cars and into little ones. The people did not want to be forced so they bought trucks instead of cars. After years of trying to force the issue, there are more gas guzzling SUV's on the roads than there were ever gas guzzling cars. The central planners would tried to force a government solution only made the problem worse. A similar series of events has occurred at the airports. The congress tried to force the big carriers to pay an unfair portion of the air traffic control system. They "succeeded" but the unintended consequences included the bankruptcy of several major carriers and then to having travelers sit in planes for hours while they circle the airport or sit on the tarmac.


The day before yesterday, the Wall Street Journal published a poll showing the majority of the people in America believe that free trade hurts Americans. It takes a whole lot of biased reporting in the "news" to convince people that basic truths are false. In case you have not heard, if a wheat farmer in Nebraska and an orange farmer in Chile are willing to trade some of their crops, both the wheat farmer and the orange farmer will benefit. Bread is the staff of life but what would life be like with no oranges?

Our children are not being taught the basics or they are being "re-programed" by a biased media. While I am concerned for the long term well being of our country, I take solace in the good news about our system of government, which is that it takes a solid majority to stay on a "stupid path". Our system includes many checks and balances. The framers of the constitution did a good job of setting up mind fields for those who would force through major change.

I must admit that the odds of passage of "my solution", a carbon tax offset by reductions to marginal tax brackets, has dropped. Key leaders in the democratic party are making an all out push to force new CAFE (auto mileage regulations) into law. The democratic leadership has shown the willingness to do "end around runs" to get what they want. Historically, competing bills passed by the house and senate have been reconciled by conference committee. The outcome of each conference is influenced heavily by the leaders who appoint the committee. Recently, the ox has been in the ditch with no progress being made to get bills passed bills to conference. The leadership has done an end run by taking parts of the house bill and parts of the senate bill and combining them into a new bill. The new bill, identical bill, was then introduced and passed in both the house and senate. In other words, some of the power of the chairs of the standing committees has been usurped.

The treat on the table now is to do an end run with the energy bill. Dingle knows he is out numbered so he has been dragging his feet before going to conference. He has tried to gain an advance agreement to protect the auto industry. As an alternative to CAFE standards, Dingle has asked for comment on his version of a carbon tax bill. Yesterday, Reid indicated that he will bypass Dingle if he must. There is huge potential cost to Reid for continuing to jam things through congress, turning your fellow party members who chair powerful committees into enemies is no way to win the majority leader popularity contest. Reid is not the first to rule the Senate with an iron hand. Such tactics work for as long as they work but if there is a failure all will know who is to blame.

So, what happens next. We all know that if a final bill includes new CAFE standards, the President will veto. In the mean time, Hank Paulson, Secretary of the Treasury, has been talking to the House Ways and Means Committee. Once again, we must appreciate the wisdom of the framers. The Senate is where most legislative power lies except that tax bills must originate in the House Ways and Means Committee. Once again, we see that even if Americans are brain washed, the country cannot go off on crazy tangents without first reaching a compromise between the well educated.


While it is certainly true that both the republican and the democratic members of the Ways and Means committee hold biased positions, they at least understand that money does not grow on trees. These members are at the heart of every battle to gore one mans ox in order to feed another mans ox. They understand the pain caused by distorted revenue collection policies. According to reports, yesterday, Hank tried to negotiate a reduction in corporate taxes. In case you have not heard, America is losing jobs and investments to over seas markets because our corporate tax rates are high and getting higher relative to other nations corporate taxes. Taxes on corporations in the US were set at 40% some years ago but over the past 25 years the rates in other nations have come down dramatically. As always, the markets find a way around problems. The solution to high taxes in America has been to shift more and more production over seas.

When Hank hit a brick wall at the committee, he made the recommendation that the committee once again pass just a one year patch to the AMT. Members of this committee, including Charlie Rangle, very much want to "fix" this silly law. It is never fully enforced but the annual patch grows larger. The recommendation by the Secretary is a bargaining position. He has in effect said that unless you give the President a good reason to go along with a change in the law, there will be no change.

The whole story comes back again and again to the fact that out tax code is complicated and out of sync. The USA needs tax reform. The majority leader is trying to force through an energy bill that will raise taxes on oil companies so that more money can be thrown as "incentives" to alternative sources of energy. As with all corporate tax bills, the public is stuck with the bigger portion of the tab. The difference between raising taxes on oil in order to raise money to subsidize alternatives and raising taxes on oil and giving the revenue back to the public in fair measure is that the first system leaves control in the hands of congress. Congress wants to decide who gets the tax breaks. If the gasoline taxes are raised, the public will not need the wisdom of the congress to decide to lower their fossil fuel consumption. They will choose how to spend the money and while much will be wasted, much less will be wasted than if congress decides.

The laws of economics tell us that artificial incentives are not needed because the least costly source will be selected by the market. The externalities must be taken into consideration. Every day, governments all across America and all around the world deal with externalities. For example, fire engines need to make a lot of noise to get to a fire quickly. The noise is a benefit for some and a detriment for others. Rules or regulations are necessary, but the rules should not force choices that are better made by markets. As a general rule, individuals must decide how close they want to live to a fire station.

Theoretically we live in a free country. To keep the country free, we need for our children to be taught basic truths. Money does not grow on trees! Trades are only consummated if both parties believe they will benefit. Big Brother cannot protect us all from each other. Each individual must be given equal opportunity. It is wrong to confiscate the wealth of one so that it can be spent by another. Religion needs to be "covered" in our schools. Separation of church and state does not require for the church or state to pretend that the other does not exist.


Even though the odds of tax reform in the near term seems to have fallen, I am not in a state of despair. Either major compromises between Bush and the Congress will be reached or only relatively modest changes will be passed. The idea of a carbon tax to support simplification of the tax law will be either an easy out or a home run.

In either case, the stock market is set up for a good run. The only fly in the ointment would be if democrats are able to muster a veto proof majority. They will continue to try to break the ice with the law about heath care insurance for children. The law is a silly, piece meal approach to health care reform but it is difficult for members to vote against a small government boondoggle for children's health. The two democrats from NC who voted against the bill are under going a good dose of arm twisting. I remain confident that the very unpopular Bush (31% favorability rating) will hold his veto proof margins against a very, very unpopular congress (24% rating). The passage of the 450 BILLION DOLLAR defense appropriations bill without cut backs to the troops shows that Bush still has the upper hand.