FedUpUSA

Archive for August 16th, 2011

Let’s talk taxes.

Everyone says we need fundamental tax reform.

Ok.

I prefer The Fair Tax, but recognize that many others do not.

But what if we don’t want to do The Fair Tax?

Let’s look at a clean, progressive and simple tax instead.

We’ll use two basic metrics – the first is that the median household income is approximately $50,000.  The second is that the gross PCE (personal consumption expenditures) is, as of the present time, approximately $10,656 billion (that is, $10.7 trillion) and residential investment (that is, personal spend on residences) is approximately $330 billion, for a total of $11 trillion (out of our $15 trillion GDP.)

Therefore, let’s presume the following:

• Three tax brackets: 10%, 20% and 30%.
• NO deductions of any sort, and no “zero” bracket.  Everyone pays from dollar one.
• NO other federal income taxes.  That is, payroll taxes are subsumed in these rates.  We quit pretending that FICA and Medicare are some sort of “lockbox” when in fact we know damn well they’re not.  FUTA and other “parasitic” federal taxes on employers and persons are also eliminated.
• Long-term capital gains are only personal and at-risk investments held for three years, excluding carried interest or other “combined-risk management activities”.  These qualified capital gains are taxed at 50% of your marginal rate and accreates after ordinary income.  In other words, if your cash income puts you into the 30% bracket, all of your long-term capital gains are taxed at 15%.  All other income is taxed as ordinary income including carried interest.

Now let’s look at the BEA’s personal income tables.  They disclose that we have $8.23 trillion in employee salaries, $1.60 trillion in supplements (that is, the current payroll taxes), $1.11 trillion in proprietor’s income, $397 billion in rental income and $2.345 trillion in transfer receipts (payments from government social insuance payments – all of which are taxable since we exempt nothing.)

This totals $13.68 trillion in money and transfer receipts.  The remainder ($1.8 trillion) is receipts on assets – that is, capital gains.  I’ll presume that half of that would qualify for long-term treatment (which is probably way, way too high – today – but won’t be in the future with these changes.)

Unfortunately Census and the BEA only has quintiles through 2009.  It is what it is, but we’ll use what we can get.

We count 121 million approximate household units according to Census.  Unfortunately Census only accounts for money income – they claim (as of 2009) $7.596 trillion in total!  That’s crap, so let’s fix it – we’ll bump all categories by 64% (to account for the difference as of 2009 BEA GDP tables), since we’re taxing all income with no deductions of any sort (including Social Security and similar transfer payments.)

We will break the tax percentages as follows:

• First and second quintile (through $35,598) are taxed at the first rate (10%)
• Third and fourth quintile (through $93,784) are taxed at the second rate (20%)
• The top quintile pays 30%.

All are marginal rates and quintile breakpoints will be adjusted annually.

Note that since all other federal payroll and similar taxes are eliminated those in the first two quintiles pay less than what they pay today in payroll taxes alone, but there are no refundable credits.  That is, everyone pays something, most-specifically for those social programs everyone thinks they’re “entitled” to.  In addition, the progressive nature of the tax code is retained and for most people through the bottom three quintiles they will pay less.  The exception is those who are getting a “free ride” from refundable credits – they will pay something, but only to the extent that their “free ride” ends, and in fact their burden will not exceed that which would be paid only in payroll taxes alone.

So the first bracket earns $238 billion and the second $657 billion, for a combined $895 billion (adjusted $1,467 billion).  They will pay $147 billion in income tax.

The second bracket earns $2,887 billion (adjusted $4,735 billion).  There are 48,376 such households; on the first $1.722 trillion they will pay $172 billion in income tax, and on the remainder ($3,013 billion) they will pay $603 billion, for a total of $775 billion.

The third bracket makes a lot of money.  There are 24,196 such households.  They earn on average $157,631, for a total $3,808 billion (adjusted $6,244 billion).  On the first $861 billion they will pay $86 billion in tax, on the next $58,186 in income (or $1.41 trillion) they will pay $282 billion in tax and on the remainder ($3,973 trillion) they will pay $1,192 billion in tax, for a total of $1,560 billion.  That’s a shitload of tax; on a per-household basis they pay four times the “middle income” people’s burden and ten times the bottom two quintile’s burden.  If this isn’t progressive enough for you then you need to replace your brain with one that actually works.

Oh yeah, this totals $2,482 billion in taxes on incomes.

If we assume that most of the $1.8 trillion in returns on assets goes to the top marginal rate, and half is accountable as long-term capital gain, then we have ($900 billion * 15%) + ($900 billion * 30%) = $135 + $300 billion, or another $435 billion.

We thus have $2.917 trillion in tax revenue.

Oh, this understates the revenue, since according to BEA the numbers are somewhat better than this today, but we’re using 2009 figures.  If you want to be entirely accurate you can add about 10-15% to those numbers, but I like being conservative and recognize that we have an economic adjustment to take – so I won’t.

There are no taxes on corporations under this flat tax and no deductions of any sort.  Your tax return fits on one sheet of paper, except for stock trades and such where you must show basis and acquisition date.  The Internal Revenue Code fits within a dozen pages of legislative-laid-out text.

The Federal budget, as of 2005, was supportable in full at this level of revenue complete with our current interest payment requirements and a a hundred billion or so of actual debt retirement.  Since the goal is to actually retire debt we will drop spending to 2003 federal spending levels, which totaled $2.160 trillion, effective this September.

As the debt is retired (it will take 20 years) we can advance spending by the amount of the interest on the retired debt.  You now fix Health Care using the formula I’ve previously put forward, and index Social Security over five years to the actuarial improvement in life from the inception date of Social Security to today.

Problem solved.

You want a monster economic recovery?

ENACT THIS WASHINGTON OR SHUT THE FUCK UP AS FAILURE TO BOTH FIX REVENUE AND SPENDING ON THIS MODEL MAKES CLEAR YOU HAVE NO INTENTION OF ACTUALLY FIXING ANYTHING.

According to a whole host of polls and surveys, the American people are incredibly angry right now.  The American people are hopping mad at the government, the American people are hopping mad about the economy and the American people are hopping mad about the direction that this country is headed.  Never before in modern U.S. history have the American people been this angry.  There is vast disagreement about what the solutions to our problems actually are, but what everyone can agree on is that the American people are absolutely seething with anger right now.  The statistics that you are about to read are mind blowing.  We used to be such a happy country.  Once upon a time we were one of the happiest places on earth.  But as the economy has fallen to pieces anger has been steadily growing.  If something is not done to turn the economy around eventually this anger is going to erupt in frightening and unpredictable ways.

The American people are not equipped to handle hard times.  We are incredibly spoiled.  Most of us have only known good times, and most of us have been taught that we will have endless prosperity all of our lives because we live in the greatest nation on earth.

Well, “the greatest nation on earth” is about to get a massive wake up call.  We are up to our eyeballs in debt and we are bleeding jobs, businesses and wealth at an astounding pace.  Our economy is dying right in front of our eyes, and most Americans have been so “dumbed-down” that they don’t even realize what
is happening.

But what most Americans do know is that things are “bad” and they want someone to “fix” things.  They know that something is “not right” and they want things to go back to the way things used to be.  The longer it takes for things to return to “normal”, the angrier they are going to get.

The following are 16 statistics which prove that the American people are absolutely seething with anger right now….

#1 A new Washington Post poll has found that a whopping 78 percent of Americans are dissatisfied “with the way this country’s political system is working”.

#2 That same poll found that only 26 percent of Americans believe that the federal government can solve the economic problems that we are now facing.

#3 Gallup says that Barack Obama’s job approval rating has hit an all-time low of 39%.

#4 According to a recent CBS News/New York Times poll, Congress has a disapproval rating of
82%.

#5 A new Rasmussen survey has found that 85 percent of Americans believe that members of Congress “are more interested in helping their own careers than in helping other people.”

#6 That same survey found that 46 percent of the American people believe that most members of  Congress are corrupt.  That figure was a new all-time high.

#7 According to a different Rasmussen survey, only 17 percent of Americans now believe that the U.S.
government has the consent of the governed.

#8 A recent Reuters/Ipsos poll discovered that 73 percent of the American people believe that the nation is “on the wrong track”.

#9 A recent poll taken by Rasmussen found that 68 percent of Americans believe that we are actually in a recession right now.

#10 According to Gallup, the percentage of Americans that lack confidence in U.S. banks is now at an all-time high of 36%.

#11 U.S. consumer confidence is now at its lowest level in 30 years.

#12 According to a recent Washington Post-ABC News poll, 90 percent of Americans believe that the economy is performing poorly.

#13 That same poll found that approximately 80 percent of Americans believe that it is “difficult” to find
a job these days.

#14 According to one recent poll, 39 percent of Americans believe that the U.S. economy has now entered a “permanent decline”.

#15 Another recent survey found that 48 percent of Americans believe that it is likely that another great Depression will begin within the next 12 months.

#16 According to a brand new Rasmussen survey, 48% of Americans believe that reductions in government spending are “at least somewhat likely” to result in civil unrest inside the United States.

So why doesn’t the government step in and spend a whole bunch of money and make everything all better?

Well, the problem is that we have done this time after time before and now we are broke.

We have been living way, way beyond our means for decades and now the bills are coming due.

David Walker, the former Comptroller General of the United States, has been warning about our debt problem for years.  Walker says that the United States is heading for a “sudden and very painful” economic collapse….

“Here’s the bottom line. If you take the total liabilities of the United States – public debt, unfunded pensions, retiree health care, under funding with regard to social security, with regard to medicare, a range of commitments and contingencies – as of September 30 2010 we would have had to have had $61.6 trillion dollars in the bank in order to be able to defease those obligations.”

The cold, hard truth is that the U.S. national debt should have been addressed many years ago when it was still relatively small.

At this point, there is no solution to our national debt problem under our current financial system.

Most state governments are also facing huge financial problems.  The state government of Illinois is so broke at this point that it can’t even afford to bury the poor people that are dying.

But Illinois is not alone.  All over the country, state and local governments have been implementing austerity measures.

According to the Center on Budget and Policy Priorities, state and local governments have slashed more than half a million jobs since August 2008.

That is a whole lot of good jobs that aren’t there anymore.

But government debt is not the only debt problem that we are facing.  Personal debt is also a raging crisis.

According to USDebtClock.org, the total amount of personal debt in the United States is now over 16 trillion dollars.  The exploding levels of personal debt have created a tremendous amount of stress in
households from coast to coast.

When I was growing up, it seemed like almost everyone was in the middle class.  But today the middle class is shrinking at lightning speed.

According to author David DeGraw, 17.3% of all Americans were living in poverty during 2009.  Not only that, DeGraw also says that 9 major U.S. cities have a poverty rate of over 25 percent.

Can you imagine that?

In fact, there are some cities such as Detroit where the poverty rate is over 35 percent.

It is hard to believe what is happening to America.  Today, there are over 45 million Americans on food stamps.  That number has increased by approximately 12 percent in the last year alone.

There are currently 34 million Americans that need a full-time job.  Unemployment is rampant and there is intense competition even for part-time jobs that pay minimum wage.

So where did all of the jobs go?

Well, as I have written about previously, globalism is absolutely devastating our economy.  Millions of our jobs have been shipped to countries where labor is far, far cheaper and they aren’t coming back.

In addition, millions of Americans that do still have jobs are also deeply struggling right now.  There are millions and millions of Americans that are working part-time jobs because that is all that they can find right now.  Millions of other Americans are flat broke and are discovering that their paychecks are “shrinking” due to inflation.  Wages have barely risen while prices for food and other necessities are
skyrocketing.

Most families are really struggling to get by right now.

According to the Washington Post, the average yearly income of the bottom 90 percent of U.S. income earners is $31,244.

It is really hard to pay a mortgage and feed a family on that income.

The only people that seem to be doing well are at the very top.

The average yearly income of the top 0.1% of U.S. income earners is 5.6 million dollars.

Not that making money is a bad thing, but when an economic system funnels all of the rewards to the very top you know something is deeply broken.

The poorest 50% of all Americans now own just 2.5% of all the wealth in the United States.

A lot of poor Americans have literally fallen off the map.  The Daily Mail recently did a feature on one tent city that has been constructed deep in a forest in New Jersey….

In scenes reminiscent of the Great Depression these are the ramshackle homes of the desperate and destitute U.S. families who have set up their own ‘Tent City’ only an hour from Manhattan.

More than 50 homeless people have joined the community within New Jersey’s forests as the economic crisis has wrecked their American dream.

You can see shocking pictures of this tent city right here.

So it is no wonder why so many Americans are so angry.

If you lost your job or your home you would probably be angry too.

Most Americans just want to be able to go to work, make a decent living, pay the mortgage and provide for their families.

But in America today that is becoming increasingly difficult to do.

Our economy is a giant mess and the American people are becoming very angry.

If the economy gets even worse, they are going to become even angrier.

Storm clouds are gathering on the horizon.

Things are about to get very, very interesting.

The Economic Collapse

The idiocy of the day comes from Finnish Finance Minister Jutta Urpilainen regarding loan guarantees for the bailout of Greece.

Please consider Finland and Greece agree on loan guarantees

Finance Minister Jutta Urpilainen said in a Tuesday press conference that Finland and Greece have reached common ground on loan guarantees demanded by Finland for its participation in the Greek bailout package. The agreement still requires approval from other eurozone states.

The Finnish and Greek Finance Ministries have agreed that the Greek state will transfer a sum to the Finnish state, which, together with interest on that sum, will serve to guarantee Finland’s share in the bailout loan to the troubled southern state.

The guarantee sum would, however, be only a fraction of the money that Finland is contributing to the rescue package.

Urpilainen has not divulged a concrete sum, because that is still being negotiated.

Got That?

If not, let me explain by an two-point analogy.

• You agree to give a homeless drug addict on skid row $10.
• In return, he immediately hands back to you $1 as a “guarantee” he will pay back the other $9, with interest, at an agreed upon rate.

Clearly there is no guarantee of anything. Rather the initial effective loan amount is reduced by the amount of the alleged guarantee.

Urpilainen is looking for approval of her nonsensical proposal from the rest of Eurozone states. I hope they have enough sense to laugh in her face. However, the proposal is so stupid, EU officials just might seriously debate it

Mike  “Mish”  Shedlock

Global Economic Analysis

We have or will soon have 20-25 million unemployed people with few prospects for a job. This is a problem we cannot and should not dodge just because it’s inconvenient to our cargo-cult political Elites. There is a low-cost solution that everyone will dislike.

America has a systemic problem which it refuses to recognize because the usual Left-Right ideologies would all be revealed as complete failures.Here is the problem: there are 15 million officially recognized unemployed, and another 5 million zombie-unemployed who have dropped off the government’s tabulation because they are politically inconvenient.

The other half of this problem is that the nation’s job-creation machinery is completely broken for structural reasons I have described many times, most recently inYou Want to Create Jobs? Here’s How (August 2, 2011) andYou Want to Create Jobs? Here’s How Part II(August 4, 2011).

The hard reality is that the U.S. economy must be re-ordered from the ground up if we are to revive the job-creation machinery.This will require many systemic changes, the two key ones being A) breaking the death-grip of the top 1/10th of 1% financial/political Elite’s grip on the throat of the economy and central government, and B) transitioning the entire economy from a bloated, inefficient, rigid, high-cost, crony-capitalist, monopoly/cartel-dominated, credit-based consumerist economy to a productive, capital/savings based economy based on the  rule of law, community governance, individual rights and decentralized competition.

The current model of pretend-Capitalism and extend-and-pretend debt consumption is falling apart due to intrinsic, structural reasons.Rather than add jobs, the U.S. economy will shed another 4 to 5 million jobs in the next few years. While our government will gerrymander the statistics, the bleak reality is that there will be between 20 and 25 million unemployed Americans with essentially zero job prospects by 2013/14.

Neither the Left nor Right is willing or able to face this reality.This is because ideologues are like alcoholics; getting drunk every night “works” because it’s easier than facing up to failure and wrenching change. Ideologues turn a blind eye to the failures of their chosen political faith because it’s easier than facing their failure and having to toss their cherished ideological security blanket on the trash heap of history.

The fervent proponents of Left and Right  are all alike in cherry-picking evidence to support their own  rigid orthodoxies and ignoring any evidence that the “big ideas” of their faith  are not just failures in the real world, but actively pernicious and counter-productive.

If we dare to set aside our ideological blinders for a moment, perhaps we can deal honestly with the reality that the job-creation machinery of the U.S. economy is fundamentally broken.Left and Right ideologues are in effect adjusting the rear-view mirror on a car with a blown engine, hoping that adjusting our view of the past will magically fix the destroyed engine.

Reduced to their essence, the “big ideas” of Left and Right are: government control and spending fixes everything (Left) and lowering taxes and boosting corporate/banker/Wall Street welfare fixes everything (Right).

The Bush Administration squandered trillions of borrowed dollars implementing the Right’s “big idea,” and the Obama Adminstration has squanderd $6 trillion of borrowed money pursuing the Left’s “big idea.”  Both have undermined the economy and burdened future generations with a criminally large debt/claim on their earnings, yet all we hear from both camps of cargo-cultistsis that we didn’t do enough of their magic.

They are just like alcoholics who are “gonna quit right after I get drunk one more time.” It never happens, because they’re in denial and can’t bear the pain of their failure.

The job machinery is broken for a lot of reasons, and most of them are not explicitly political.If you are unfamiliar with the concept of “the end of work,” please read these previous entries to get an understanding of the global, systemic and technological reasons why the machinery which “worked” during the post-war boom no longer works.

The “End of Work” and the Coming Revolution in Education  (June 7, 2011)

End of Work, End of Affluence   (December 5, 2008)

  End of Work, End of Affluence I: Cascading Job Losses(December 8, 2008)

  The End of (Paying) Work (January 21, 2009)

There are eight pages of entries on “the end of work” in my archives; just enter “end of work” in the custom search box in the upper left sidebar to view them all.

What few are willing to discuss is what we as a nation should do with 25 million people with few job prospects in a broken economy.The economy could be fixed, but it will require from-the-bottom-up changes that will up-end all the Elites and fiefdoms which currently benefit from the Status Quo Central State/Cartel-Capitalism partnership.

As a result of the immense power and resistance of these corporate cartels and Savior State fiefdoms, structural change is politically impossible.  The only politically “possible” action is to keep adjusting the rear-view mirror on the broken-down car while chanting tired old incantations.

The Right’s cargo-cult fantasy is that cutting taxes will create 20 million jobs.The Right is beholden to cartel-Monopoly Capitalism, a.k.a. Global Corporate America, and Corporate America views competition as the one great evil that might limit vast profits. So it has enlisted the Savior State to decimate competition. Whatever can’t be quashed is snapped up to preserve the highly profitable monopoly/cartel.

The Mainstream Media loves to hype the story of three college kids who start a multi-million dollar Web 2.0 business in their cramped San Francisco apartment,  but as I constantly remind readers, Twitter has about 300 employees and Facebook around 1,700.  The reality is that Web 2.0 businesses are all about lowering costs (free software replacing employees) and attracting eyeballs, i.e. marketing, which pulls revenues from old-line media and causes cascading job losses in those industries.

Life is good for the top 1/10th of 1% of America’s entrepreneurs, but for real-world small business, prospects are bleak and getting bleaker:Shrinking in a Bad Economy: America’s Entrepreneur Class.

I often summarize the reality thusly: you have to be insane to start a business in the U.S., unless you’re the proverbial smart kid with a Web 2.0 idea you can monetize in a few years and then sell to Global Corporate America for tens of millions of dollars.

If the ranks of the jobless are set to swell by millions, and the job machinery is broken for reasons that are politically impossible to fix, then where does that leave the 25 million unemployed, and where does it leave the nation?

I have a solution, but since it’s practical and doesn’t fit every ideologue’s narrow view, then everyone will find plentiful reasons to dismiss it, Left, Right and Libertarian alike. So then the question to ideological purists is: what’s your solution?Doing nothing doesn’t work, cutting taxes doesn’t work, and propping up the Corporatocracy with trillions in Status Quo Savior State spending doesn’t work, either.

The London riots have triggered avalanches of hand-wringing, stern lectures and pontificating, and at the risk of oversimplification I think we can boil the riots down to a simple but profound concept: the disenfranchised no longer have a stake in the Status Quo or in their communities.

Here is the ugly truth about the Savior State, welfare state, social welfare state, or whatever you choose to call the Central State: The Savior State displaces and destroys community and social capital.By making individuals dependent on the Central State for free money, free food, free housing, etc., then the State has taken over the natural function of community.

Being part of the community is no longer a requisite for social capital, employment or meaning.Free money is not a positive, it is a force of destruction for the individual and the community.

One thing I have noticed about ultra-orthodox Liberals/Leftists: they are rarely self-employed in the private sector, rarely own a small business with actual blue-collar/pink collar workers, and they have little actual experience with the systems they ceaselessly hype as “positive solutions”: unemployment lines, emergency rooms, applying for SSI, a.k.a. “crazy money” permanent disability from Social Security, Section 8 housing, food stamps (SNAP), finding a doctor to extend your workers compensation stress claim, or any of the other ways that the “poor” either navigate the system or game it.

The Left’s cargo-cult fantasy is that giving tens of millions of people free money is going to “tide them over” until some magical return to 1999 occurs and 20 million jobs arise out of nowhere.Since nobody on the Left has ever started a small business or hired anyone, then the job creation that will someday arrive to save us (cargo-cult!) truly is inexplicable “magic.”

On the Right, most of the cheerleaders of lower taxes/cartel-capitalism/Central State spending on Global Empire, etc., are safely perched in some protected fiefdom sucking off the very State they piously deplore. Very few have started and operated a small business from scratch; those few who claim business experience usually inherited the business from their family.

Thus both sets of ideologues are like car owners who are anxious to tell a mechanic how to fix the blown engine even though they’ve never even picked up a wrench or changed a spark plug.

Here’s the deal with humanity: we will exploit whatever windfalls are offered to us.Windfall exploitation is a key concept in Survival+, and it is value-judgment neutral, meaning that it is a trait that has been selected as extremely helpful; saying it’s “good” or “bad” is meaningless.

Left and Right ideologues turn a blind eye to the windfall exploitation that doesn’t fit their views.If I am a very wealthy person, and I can invest $300,000 in tax attorneys and shell companies that save me $3 million in annual taxes, then that is a windfall I would be foolish to pass up.

If I an CEO of a Global Corporate America company, and spending $3 million in campaign contributions will reap my firm $300 million in tax breaks or government contracts, then I would be foolish to pass up such a windfall.

“Poor” people are no different; if being “poor” is incentivized, then remaining “officially” poor is a modest but very real windfall. If being a single Mom is incentivized, then the obvious choice is to avoid marriage to collect the windfalls that flow to single moms. If workers compensation can be gamed via a “stress claim” for a long “free” vacation, then  it’s foolish not  to exploit the windfall.

The Right is blind to the windfall exploitation of the financial Elite, and the Left is blind to the windfall exploitation of those with access to Savior State free money. Those of us with actual experience in blue-collar/pink-collar America and “poor” communities are keenly aware of this because we know dozens of people who are scamming the system.

The tragedy of “free money” is that the subtext of this “help” is so perversely negative.When you get free money or equivalent, rather than an opportunity to contribute, what you’re  being told–and recipients understand this quite well–is that you’re not worth any real investment or effort. The “free money” is a bribe to keep quiet and invisible. Those skimming the benefits of the Status Quo don’t want you pestering them or upsetting the apple cart, so they give  out enough free money and goodies to buy everyone off, making them complicit in the  whole rotten system. The real message of free money is this: you’re worthless.

And because we’re designed to take free money, or free anything, we take whatever’s free: the $3 million tax break, the $300 million government contract, or the food stamps and unemployment.  But there is a cost, of course: in taking free money from the Savior State, as corporate or individual welfare, we have sacrificed our autonomy for our yoke of dependence on a disembodied, distant State.

If we want to get 20 million people back to productive work, we need to incentivize productive work and stop incentivizing unproductive gaming the system. I already laid out some structural steps in You Want to Create Jobs? Here’s How (August 2, 2011) andYou Want to Create Jobs? Here’s How Part II(August 4, 2011), but these are all politically “impossible” at this time.

Maybe in five years things will be different, but in the meantime, what do we do with 20-25 million people with nothing to do? Answer: we put them to work.

Before I describe how, let’s be honest about how destructive it is to sit at home doing nothing, contributing nothing and being utterly unproductive.  People who are denied a chance to contribute and be part of their community are unhappy people. People without productive work are so unhappy that many people who retire to an unproductive life simply die.

I think the evidence is profoundly obvious that paying people to sit at home watching the telly is profoundly destructive.  It is no wonder that people paid to do nothing, people dependent on the Central State for handouts, are filled with resentment; nobody likes to be worthless or dependent, and yet this is precisely what “free money” does to the human spirit.

Free money destroys the value of social capital, community, and the fabric of community, which is responsibility and reciprocity. With Free Money, there is no need to engage in social capital building, because the State check comes regardless.

There is a deeply pernicious political agenda to free money: it atomizes people, and this makes them much easier to control.By issuing individual checks and benefits, the Central State has set up a diabolical social Darwinism, in which competition for entitlements creates a dog-eat-dog environment in which community is discounted to zero and gaming the centralized State bureaucracy is highly rewarded.

Once you discount community to zero, it unravels.  Poverty is not just a lack of money, it is a lack of social and human capital, a topic I address in An Unconventional Guide to Investing in Troubled Times.

The only way to restore value to community and social capital is to require every recipient of State welfare/free money/free benefits to contribute time and effort to their community, and cut off the benefits/free money if they choose not to. With choice comes responsibility.

(For obvious reasons, the working poor with full-time jobs drawing benefits would be excluded from community work. The idea is to reward productive work, not punish it.)

Since we’re giving people free money and free goods/services anyway, why not enable them to be productive, build social capital and keep their skills sharp, or learn new ones?The net additional cost is essentially zero, as all we’d be doing is leveraging systems which already exist.

This is not “national service,” because it’s not controlled by the Central State. It is a form of “workfare,” which is positive for the individuals being given the choice. Why is workfare positive for the unemployed?  The best way to acquire valuable skills and valuable social-capital contacts is to enter the workforce and start doing something productive.  Once a person is needed, and contributes something positive to their community, their self-worth rises and the community gains the benefits of their labor.

The transition from incentivizing doing nothing to incentivizing productive labor on behalf of community will be difficult for many; even though it is terribly debilitating to sit at home doing nothing, it is certainly “easy,” just like it’s easy to live off government contracts (corporate welfare) as opposed to actually having to compete in the real world.

We don’t need to reinvent the wheel to put 20 million people to productive work in their communities.There are  a million churches, community groups, non-profits,  service clubs, garden clubs, etc. in the U.S. (not to mention state and National Parks desperate for motivated volunteer labor). Giving 20 million unemployed a choice of places to contribute to their community would eventually distribute about 20 people on average to each organization.

The vast majority of these organizations are already set up to put volunteers to work. They already exist; there is no vast machinery to invent at the Savior State level. The decentralized machinery already exists to do everything that Global Corporate America can’t do for stupendous profits.

As cities, counties and states trim their workforces to align expenses with their tax revenues, then community tasks like maintaining parks will devolve to volunteer groups.  Rather than pay 20 million people to sit at home doing nothing, why not engage them in their community, and get them back into the positive world of contributing and being valued?

Those collecting food stamps and Section 8 housing can also contribute, in proportion to the benefits they’re accepting.  Free anything is debilitating, and it’s crazy to be giving tens of millions of people money to contribute nothing while the nation falls apart out of neglect.

Global Corporate America will only do and only go wherever it can reap staggering profits; that is its raison d’etre. Thus most of the real work of the nation is of zero interest to Global Corporate America and its politico toadies.

Here are the numbers.I have sourced these many times so look in my archives:

Corporate profits: $1.4 trillion, or 10% of GDP.

The Free Money programs: extended unemployment: $160 billion, SNAP food stamps: $60 billion, Section 8 housing vouchers: $10 billion, total around $230 billion, or 8.4% of annual Federal spending of $3.8 trillion, and less than 2% of GDP.

Let’s be honest: it’s easy to pay people to do nothing.Requiring people to be productive is fraught with challenges: liability issues, oversight, lack of training, and a thousand other problems.

It’s easier to pay people to do nothing than give them an opportunity to contribute and improve their skills and social capital.

That’s too bad, because the machinery is already in place:we already have a vast system in place for teaching new skills called adult education and community colleges. We have a vast decentralized system in place to serve and nurture communities (community and non-profit organizations), which are ultimately the lifeblood of the nation. We already have a bureaucracy in place with systems for tracking and monitoring unemployed people called the state unemployment system.

Paying people to be idle and unproductive is destructive and debilitating; giving them a chance to contribute and become valued would be hugely positive, for the idle and for their communities. The message would change from: you’re worthless, just stay home and fade away, to: you are too valuable to pay to sit at home doing nothing.

I know this idea goes against every ideologically pure ideal out there; it is simply too practical, too cost-effective, too positive and too unrewarding to Central State fiefdoms and Global Corporate America cartels to gain any support from the financial and political Elites.

So instead we’ll watch our Elites fiddle with the rear-view mirror to “fix” the jobs machine which has a blown engine and frozen transmission, and as the unemployment lines lengthen by millions, we’ll continue paying people to sit at home rotting away and feeling worthless while the country falls apart at the seams. And why? Because it’s easier than giving them a chance to be productively useful by contributing to their community.

Charles Hugh Smith – Of Two Minds

Once in a while you sit up when an investment advisor speaks and pay attention.  That’s because unlike the pablum served up by most, you actually read something that is both factual and makes sense.

Today’s lesson in this quaint little oddity is from John Hussman.

Without question, one of the notions buoying Wall Street optimism here is the hope that the Fed will pull another rabbit out of its hat by initiating QE3. That’s a nice sentiment, but it does overlook one minor detail. QE2 didn’t work.

That, of course, depends on who you are.  It certainly “worked” for market speculators.  It “worked” for certain people in the political class who were about to see their careers go down the toilet after advocating for saving financial institutions through the promulgation of fraud in 2008 and 2009.  And it “worked” for Obama, who crowed about how it was “time to buy stocks” in 2009 as well – as that fraud was being promulgated.

But that “working” was fleeting, as all the “gains” from said manipulation disappeared in less than two market weeks, leaving one to wonder: What the hell was that?

But this is not worthy of a Ticker – I’ve spilled so much digital ink on this that the only point to be made is that despite screaming of the media about “inappropriate comments” one Rick Perry actually put the correct sentiment on the table yesterday:

Speaking just now in Iowa, Perry said, “If this guy prints more money between now and the election, I dunno what y’all would do to him in Iowa but we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in history is almost treasonous in my opinion.” Treason is a capital offense.

Please?

But then John comes up with this – the only correct use for credit in an economy – and defends it:

During the 1930′s, the Austrian economist Joseph Schumpeter captured the importance of productive investment nicely in his discussion of credit. The goal of lending activity is not the stimulation of demand per se, but rather the temporary relaxation of constraints in order to increase the stream of goods and services available to the economy:

“By credit, entrepreneurs are given access to the social stream of goods before they have acquired the normal claim to it. It temporarily substitutes, as it were, a fiction of this claim for the claim itself. Granting credit in this sense operates as an order on the economic system to accommodate itself to the purposes of the entrepreneur, as an order on the goods which he needs: it means entrusting him with productive forces. It is only thus that economic development could arise from mere circular flow in perfect equilibrium. And this function constitutes the keystone of the modern credit structure.

Exactly.

There are four uses of capital: Productive Investment, Speculative Investment, Consumption and Ponzi Investment.

Only one of them should ever be undertaken with debt – that is, leverage.  That’s the first on the list.

Why?

That’s simple, really: Only the first has a reasonably reliable set of odds in returning more economic output than both the principal and interest.

The latter two never can over the intermediate and longer term.  Consumption is nothing more than pulling forward tomorrow’s demand for goods and services into today through speculative means – the promise to produce tomorrow without proof that one can do so exactly as was lampooned by Wimpy in the Popeye cartoons while Ponzi Investment can only return a profit if one can find a bigger sucker upon which you can offload your purchase.

Note that trading – which I engage in – is the latter of these.  That is, my “investment” only has value to the extent that someone else will buy it from me (or sell it to me) at a price more favorable to my account than my original act.  On-market transactions are always of this character.  A speculative use of capital only occurs when one invests in an IPO (or secondary offering) in the capital markets (stock or bond) and the invested funds go directly to the person or firm being invested in – that is, you’re betting on their ability to productively use your capital (as opposed to using it yourself.)

Should credit ever be used for those last two purposes?  No.  But will it?  Yes, in any free society.  The problem is that the use of credit to consume or engage in Ponzi investments, in a free marketplace, is always expensive because it is inherently dangerous and everyone understands that there is a great risk that you will not pay and the lender will lose their money!

This is where the problem comes from with the so-called “backstops” and machinations of The Fed and other policymakers in preventing those losses from being realized.  Credit becomes inappropriately cheap and thus replaces production as a means of creating “advance” in output.

But that output advance is illusory.  It is in fact a public fraud, in that we “report” and then make economic decisions based on things that but for the backstop of speculators and consumers that would otherwise be forced to pay an extremely high price commensurate with their risk of failure would not happen.

Worse, these policies must eventually fail, because the ability to provide that backstop is not unlimited, and when, not if, that capacity is exhausted all of the combined and compounded damage that has been loaded into the economy as a consequence must come back off.

It is rare to see someone in the investing world speak to this truth.  Yet this is not, as some assert, about “economic theory” (e.g. Austrian, Monetarist, etc) – it is about cold, hard mathematical facts.

Indeed, it is exactly to those basic facts – so often overlooked and dismissed, and only rarely if ever mentioned by an investment house – that prompted me to write Leverage.

Investors would be wise to read Mr. Hussman’s missive, and contemplate both its message and implications.

Clearly, he “gets it.”