Wednesday, September 30, 2015

Wealth and Poverty

Imagine two islands, islands A and B, located within a boat ride of each other, each having 10 people stranded on them. The people on island A and B are completely unaware of the existence of the other island and the people on them.  On island A and B some people are more skilled at fishing, or climbing for coconuts, or building huts or fire, or weaving clothing, as mentioned in the earlier post.  One day a ship has an accident, and two sailors are lost at sea. Sailor 1's wallet contains $150 in one dollar bills. Sailor 2's sea chest contains $3,000 in one dollar bills. Sailor 1's wallet washes onto island A. Island A's inhabitants find the money, and use it to help them trade their goods and services with each other, reaching a point at which each person on the island has money in the range of $10 - $20.  On island B, the sea chest washes up, and their inhabitants likewise use the $3,000 to help them trade their goods and services with each other, so that soon most of the inhabitants of island B have money in the range of $150 - $450. In both islands, members climb for coconuts, fish the sea, weave baskets and clothing, and build huts and fires, but use the money so that they are not limited to simple barter.

Now -- which island has wealthier people?

Imagine that one day after this, island A discovers island B and they send boats back and forth -- does island B, having far more money than island A, buy all of island A's coconuts, fish, huts, and assume mastery over island A?  Or does island A, realizing that their currency of trust no longer has the same value, adjust in a different way?

-- Should island A assume the money of island B has the same value after the merge as before, and give up their goods and services to island B believing in the intrinsic value of the money?

-- Should island A force the members of island B with the most money to give up some of their money to the poorest members of island A?

-- Is there another way for island A to maintain its quality of living in the face of the currency disruption?

 -- When members of island B visited island A and paid larger amounts of money for island A's goods and services than they were used to, was island A made richer or poorer?

Wednesday, August 19, 2015

The Myth of the Minimum Wage

   Mass Media trumpets a raising Minimum Wage as a boon for the low paid members of society, but in fact, it is destructive to the quality of living of the poor at every turn. It removes access to community resources and economies from the poorest communities and relegates them to government dependent environments.
  To explain this apparent contradiction between what is claimed and what is actual, consider a small population of eight people living together on an island with fish and coconut trees, and a few rare cowrey shells. 
   Two of the people are skilled at basket weaving, but are mediocre fishers, coconut climbers, builders or weavers. Two are skilled at building huts. Two are skilled climbers. The final two are not skilled at any of the trades, but can catch fish passably well. A skilled fisher can catch ten fish in a day.
   Instead of fishing, one of the weavers makes a deal to weave a basket in return for a fish to eat. The fisherman spends the time fishing, and trades the weaver the fish for the basket.  The next day the weaver would weave another basket for fish but the fisherman already has a basket. Why fish for the weaver? Once the coconut climber has a basket, why climb for coconuts for the weaver?  The hut builder would like a basket, but the weaver needs a fish more.
   Currency and economy solves the problem - the builder gives scarce cowrey shells to the weaver for the basket, the weaver gives some of the cowrey shells to the fisherman for a fish, and the fisherman collects cowrey shells together and pays the hut builder to build a hut. The currency and economy allows the society to create and enjoy surplus and the fruit of each others' labor, ultimately providing all the residents of the island with food, shelter, and clothing.
   A new person comes to the island from the mainland.  They plan to return but in the meantime notice that the poorest, the fisherpeople, only earn 3 cowrey shells on average per day, and institute a law requiring minimum wage of 7 cowrey shells per day. The more skilled fisherperson can fish ten fish per day but the economy is strained to pay the less skilled fisherman, and the other people no longer trade with them. The least skilled now have to appeal to the stranger from off island for sustenance.  The exchange rates have been shifted, but the poorest member of society has suffered.
   To bring this to the present reality, vast business and service deserts have appeared in the poorest communities in America since the Minimum Wage law was first instituted by Franklin Roosevelt, at $.25 per hour. In the South Side of Chicago and Detroit poor communities have lost all business to service their needs and to provide employment. Residents of those communities do not have legal businesses and trade - no legal business can profitably sell to poor people and pay the legally required minimum wage to employees, so they cease to exist.  The businesses that cease to exist no longer hire young people in those communities, who must then resort to either illegal businesses, government dependency, or leaving the community, to take care of themselves.   Over decades giant trade wastelands grow.  The surviving economies readjust and adapt, inflating the currency. The 'visitor from the mainland' again convinces the gullible that the Minimum Wage is insufficient, and increase it - multiplying the problem, destroying the beneficial economy for the people living at the bottom margins of the legal economy.
   Once people recognize the Emperor's New Clothes for what they are, perhaps they will throw off this perverse cause of so much misery in America - the Minimum Wage.

Wednesday, February 4, 2015

U.S. Taxes - a Solution

In 2014 the U.S. Federal government collected more taxes than all the U.S. states, cities and local governments put together. Meanwhile, people who work extra jobs to earn more money, to pay for a child's college education, to start or advance a business, hit the wall of increasing tax rates the harder they work. A person with one job that pays 25% of their income in taxes, working double time, realizes that suddenly the government collects 34% of their  newly increased income.  The 'Progressive Tax' system effectively disincentivizes people from growing. The only way for a person to realistically start or expand a business, or send their children to college, is to borrow from wealthy individuals or groups who control a large pot of cash (Think 'Shark Tank').  As a result, our entire economy is dependent upon a complex system of powerful lenders.  The very 'Progressive Tax' system that is touted as being protective of the little guy forms a straitjacket, bolstering the importance of the powerful money manager.

When George W. Bush was notified in his last months in office that the banking industry was under threat from insolvency, his advisors sufficiently scared him that he, a Republican, supported a private industry (banking) bailout.  In reality, our economy is like a heroin addict, completely dependent on the lending/controlling classes.  The concept of savings and personal growth is a myth in our current tax and economic system.

The fact that federal government tax revenues exceed the total revenues of all states put together, plus all cities and local governments, should make anyone pause. One can understand the need for the federal government to exceed the revenue of any single state or small grouping of states, as happened in the Civil War, but all put together?

Today we are disincentivized from working too hard, as we get put in a higher tax bracket as a result. Suppose we were to disincentivize excessive taxation instead?  

By passing a law that allows the federal government to tax subsidiary governments (States), and similarly allows states to tax a percentage of revenue of local governments, the federal government could create a tax disincentive.  A percentage tax (say, 30%) on state revenues (currently approximately $2 trillion) would create $600 billion + in revenue. Further, the states keep detailed records on their revenues, so millions of Americans would not need to stay up nights assembling records for those taxes.

If states in turn taxed the revenues of subsidiary governments (who earned about $1.5 trillion in 2014 in revenues), at 30% of revenue, the states would gain $500 billion from that taxation. Thus in this scenario State revenue would become $2.5 trillion, the federal government would get $800 billion, and the states would net $1.7 trillion.

Clearly, under this scenario, the states would be in the position to increase their taxes - however, by having 50 different states with competing ideas, States that come up with good taxing solutions would be most successful. States that have wasteful taxing strategies would be at a disadvantage and would be able to learn from the successful states.

Finally, in taking this strategy, by creating a 1 or 2% national federal sales tax, the federal government could have an additional revenue source which allows it to be independent, if necessary, from the state revenues.  Millions of Americans would save billions of dollars in labor, worry and sleepless nights in place of filling out tax returns; the American ideal of personal saving and growth would be reborn; the billions spent on the Federal IRS would be saved; and our toxic economic dependency on the very wealthy and powerful group of lenders would be reduced.