Monday, May 26, 2008
All of us serve or can serve in one way or another, and perhaps, for those who are gifted, in two or more ways. But if we serve we should serve well. We should put into our efforts the care, the preparation, the attention to detail, the dedication, and the courage that mark the actions of those who have committed themselves to protecting the nation and going wherever they are commanded to go, regardless of the risks or their personal perspective on the matter. They are heroes and heroines.
Those who are called to serve, or have campaigned to serve, in positions of high responsibility and in the halls of power have an even greater obligation to serve well. They have an obligation to serve with no less care, preparation, attention to detail, dedication, and courage than do those who serve and have served in the Armed Forces.
So it is deeply troubling to observe the Congress strike out in the space of a few days. Last Wednesday, in Tax Ignorance, I commented on the thoroughly incorrect articulation of a basic tax law principle offered by Senator Ken Salazar in defense of subsidies to wealthy farmers. Now two more embarrassing episodes in the adventures of the Congress have made the news.
The first gaffe is a serious one that some commentators think raise yet unanswered Constitutional law issues. Somehow, after Congress passed the farm bill, which is the legislation containing the farm subsidies to wealthy farmers that Senator Salazar tried to defend with erroneous tax law explanations, as I described in Tax Ignorance, it sent to the President a version that was missing Title III. So, technically, the President did not veto Title III, and arguably the veto override has no veto to override with respect to Title III. That leaves the question of whether Title III was enacted in the first place, or whether it remains in limbo. More details and analysis of the legal issues are in this story. Members of Congress from both parties are trying to use the goof as a way to position themselves advantageously. My concern is that someone goofed, no one picked up on the goof, and rather than fixing the problem, the politicians are trying to gain advantages from what could be a serious legal matter. Look, we all make mistakes. We can reduce mistakes by exercising more care, more attention to detail, more preparation, and more dedication. The more serious the matter, the more intense should be our commitment. I don't worry all that much about the few typographical and punctuation errors in this blog because those errors do little harm. At worst, they remind me I'm not perfect. On the other hand, a neurosurgeon doesn't have the sort of leeway I give myself. Nor should the Congress. Granted, it wasn't a member of Congress but surely someone on staff who made the initial error or failed to catch an error. Is there someone in position to review that person's work? As a matter becomes more important, and the consequences of error more serious, the number of layers of review need to be increased. If there is no one in place to review one person's work on the legislation, then fingers point to Congress, for it bears ultimate responsibility. If someone was in place, then TWO people goofed, and questions begin to arise as to how that can happen. One answer may lie in the way Congress operates. Things are left to the last minute, proceedings become chaotic, stress pervades the chambers and drafting rooms, and communication breaks down. Could the fact that this is an election year have something to do with staff attentiveness?
The second episode is even more troubling, because there is no mystery as to what happened. During a hearing held by the House Committee on the Judiciary with respect to gasoline prices, Representative Debbie Wasserman-Schultz said to the panel of oil company executives, "I can't say that there's evidence that you are manipulating the price, but I believe that you probably are." She then challenged the executives to prove that they were not manipulating prices. That sort of questioning is not what one would expect in a nation that is based on the rule of law, rather than the tyranny of sound bites. A good lawyer would know that one does not admit to not having evidence for a point that he or she is trying to prove. In Wasserman-Schultz' defense, unlike Senator Salazar, she does not have a law degree and has not had the benefit of a law school education. According to her official biography, Wasserman-Schultz has a bachelor's and a masters' degree in political science.
Had she offered evidence of price manipulation, she would have been in a good position to challenge the oil company executives to explain why that evidence meant something else. Even circumstantial evidence, though weaker and less persuasive, would have been better than a confession that she has no evidence. Surely she could have pointed to the rates of increase in oil company revenues as compared to the rate of increase in oil company profits. She could have put forward facts and charts illustrating crude oil price hikes, refinery capacity changes, oil industry labor cost increases, internal rate of return analyses, and other financial data from which logical analysis must begin. Gathering that information requires care, preparation, attention to detail, dedication, and courage. Walking in and asking witnesses to prove a negative after admitting an inability to offer any evidence is sloppy and disrespectful.
Imagine if someone turned to Wasserman-Schultz and said, "I can't say that there' evidence that you are taking bribes , but I believe that you probably are, so prove you are not." I am certain she would be outraged. Yet how is that any different from what she did? There's no question she was playing to the cameras, seeking to tap into the emotional reactions that people have with respect to gasoline prices. Perhaps her constituents think she is going to bat for them when she tosses out accusations and demands for negative proofs without having done her homework. As a leader, she owes her constituents more than playing to their emotions. She owes them quality representation, and that requires taking the initiative to become educated not only with respect to the facts but also on how to work with facts. Had she done so, she surely would have been quite effective, because there exist facts which when put to those executives would require them to respond with facts rather than with the general statements that most of them offered most of the time.
Yes, I'm picking on the Congress. It's a high profile body of politicians who actively seek the power and the attention. No one compels them to serve. They voluntarily seek the positions they hold, and they should be held to the same high standard to which people in other professions, including the Armed Forces, are held. Members of the military are dying, and have died, to protect what this nation represents. Surely this nation and its elected leaders must act in a way consistent with the principles for which so many have sacrificed. Offering erroneous statements of tax law, losing a title of a bill, and tossing illogical questions at witnesses are so very inconsistent with those principles. Is it any wonder that calls for change resonate throughout the nation? One thing that must not change is the deep appreciation and respect that this nation holds for those who have served well and who have sacrificed much, holding fast as careful, well prepared, dedicated, and courageous defenders of the freedoms we cherish. The best way to show that appreciation and respect is to emulate those values.
Friday, May 23, 2008
Dr. Maule worries about future resource scarcity, and he thinks the government should mobilize to do something about it. He says that the market can't be relied on to provide "essential" items.I do think that the market is not providing sufficient quantities of necessary goods, and explained in If Only It Were Prices Getting Depressed how shortages in various items were causing shortages, food riots, hoarding, and other behavior adverse to the well-being of the species. But I have not advocated the sort of government intervention that Joe seems to think I support.
In the post that started this debate, Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, I argued that the tax rebate, now with the fancy name of stimulus payment, wasn't going to do much of anything to fix the economic mess. If anything, my argument objected to the government rebate intervention in the markets. I pointed out that the rebates would make the situation worse in the long run, by increasing the federal budget deficit and the amount of debt owed to foreign investors. I then directed attention to the root cause of the current economic mess:
The impending shortages of critical goods and materials, including oil, clean water concrete, steel, natural gas, health care, copper, agricultural products, and similar life-essential ingredients, will only worsen the problem. An ever-increasing world population, seeking more and more quantities of these and other items, coupled with the emergence of a small creditor group and massive hordes of debtors, is a recipe for disaster. Somewhere along the way, these conditions will trigger armed conflict, pestilence and pandemics, civil disorder, and breakdowns in societal structures. No one ever promised that the Dark Ages were a one-time event.Nothing in that observation advocated government market planning of the sort Joe fears when he quotes an instapundit poster who argues "The last thing we need is the know-nothings in Congress pretending they have the expertise required to plan the future of a market segment as huge and critical as energy."
In response to Joe's Good Morning! We're All Doomed response to Can a Tax Rebate Band-Aid Stop the Economic Bleeding?, I explained, in Can Tax Rebates Help Prove Malthus Wrong? that there are shortcomings to the supply-demand curve theory of economics. I argued that if the government is going to borrow money to spend on fixing the economy -- and note that I was not advocating that it do so -- that distributing that money as tax rebates was far inferior to using it to deal with the underlying problem. I then suggested that "people and governments mobilize to deal with these issues while there still is time." To me, there is a huge difference between government dealing with the issue and "people and government" dealing with the issue. I know that, at least in theory, government IS the people, but as a practical matter, government has become an entity unto itself and those who control its powers. Thus, people alone cannot solve the problems if government stands in the way. Government alone ought not be entrusted with solving the problem, because government in its present state ought not be trusted. But someone must deal with these problems before they overwhelm the nation.
Joe, and others, think that the answer is in the market. I agree, but with a qualification. Only a FREE market can solve the problem. An unfree market, which is what currently masquerades as the market in our so-called "free market economy," cannot get the job done. The market is unfree because there are biases, there is corruption, there is bullying, there is cheating, there are monopolistic practices, there are all sorts of behaviors, characteristics, and practices that are inimical to the notion of "free."
My position, that the market is not a free market and that this condition is responsible for much of what plagues the economy and society in some direct or indirect way, is not a new one. Over the years I have repeatedly pointed out the shortcomings of the modern economic marketplace, and the need to restore its freedom. Who, I ask, protects the freedom of the free market?
For example, in Greed, Stupidity, Poor Judgment, and Taxes, I argued that much of the problem with the current housing crisis arose because "a free market was enslaved by the greed of speculators and gamblers who call themselves investors." In A View from Down Under, I responded to a respondent's observations on free market issues with this observation:"My concern is that influence has been flowing the other way, as the sort of entrenched, safe-from-dismissal public employee mindset has infiltrated the management levels of some private enterprises operating in a so-called free market that no longer is truly free. At least it's not free of incompetence, greed, cronyism, politics, and excuse manufacturing." In Can Tax Cuts for Shareholders Increase Employee Wages?, objecting to proposals to lower taxes on corporate owners and managers, I remarked, "To suggest that the corporate executives of the Fortune 500 should have even more after-tax money with which to control the economy is the very antithesis of a 'free' market."
The underlying problem was highlighted by another respondent, whose explanation I adopted in More Gasoline Tax Increase Chatter:
The commentator who suggested the standard argument against taxes then pointed out that failure to regulate one's self invites regulation by others, and the government is quick to step in when the market place fails. But, I ask, who is to determine when the market place has failed? Is the market place for operating systems working well because Bill Gates has made money or is it failing because Windows crashes and security lapses require the inefficient expenditure of huge amounts of time by the consumers in that market? The conundrum, as one poster noted, is that a free market does not necessarily support "fairness" unless one considers the outcome of a market to be per se fair, yet supporting government intervention in a market because the outcome does not meet some other definition of "fair" suggests that something is fundamentally wrong with the free market model. The gasoline user fee, however, is not, as this poster seemed to imply, a "fairness tax" designed to make the price of gasoline fair, but a charge for the imposition that gasoline use makes on public goods such as highways, bridges, and clean air. After all, governments intervene in markets because markets do not reflect the theoretical rational person contemplated by Adam Smith but the practical modern American consumer enticed by advertising and peer pressure to react with emotion "thanks to the dumbing down of our nation's school system." Gee, there's another person who's with me on that point.Every tax is a government intervention in a market. The notion that a society without government, or a totally unregulated market, can provide for the welfare of society is a proposition that has never been successfully applied in life.
In Planning: It Can Be Taxing, I shared a more extensive analysis of market freedom:
Before the "it's a free market" object is raised, let's examine the market and see how "free" it is. Is it a free market when the same folks sit on corporate boards, playing round-robin games with executive appointments, as insiders move from boardroom to boardroom? Is it a free market when labor and management conspire to portray a pension plan soothing to the union but in reality a paper configuration? Is it a free market when pension plans fall short of funding goals because the accounts are not invested consistent with secure long-term pension funding growth?That was back in 2005. Nothing that has since transpired has changed my outlook on the issue.
A market is not, and cannot be, free in the absence of truth and candor. Otherwise the market is deceptive, and deception is not free. That's the truth of this entire mess. And truth hurts. In this instance, it's going to hurt a lot. The debate will be intense, shrill, and frightening. Let's hope it gets straightened out before American industry crashes and tens of thousands or even millions of retirees are left on the very short end of a poorly planned stick.
I am not advocating government management of the markets. But I also do not support a "hands off" approach. As I explained in Using Taxes to Rescue a Non-Drowning Film Industry?, government market intervention is, at times, necessary and helpful, and defining those times is a delicate but essential task:
Conceptually, governments ought not to engage in business engineering. They've done enough damage and made enough mistakes with social engineering. The free market principle means "free of government interference" even if government involvement would be beneficial to some citizens. Only when business or other activity threatens the health or welfare of the jurisdiction should a government step into the market. So, if legislatures are looking for opportunities to interfere in the free market, they ought to stick to important safety and health concerns such as development of pharmaceuticals for avian flu, assistance to local transit authorities for security planning and operations, regulation of the sale of alcohol to vehicle drivers, and similar matters that concern the population and not a specially selected segment.Thus, though I object to government intervention to help professional sports owners build stadiums (see Tax Revenues and D.C. Baseball), and to rescue a film industry segment, I think it is necessary for a government to step into a market and preserve its freedom when the market fails to deliver food, fuel, and other essential goods. Given the choice between a market hijacked by speculators, cheaters, shoddy artisans, defective manufacturers, cronyism-afflicted traders, and others whose greed surpasses their respect for the market's consumers, and a market patrolled by representatives of the citizenry, I'll opt for the latter. Of course, it works only if those representatives are not themselves dishonest, shoddy, and inept. So if and when the people mobilize to deal with the current mess, one of the things that must be done is a reformation of government so that those in government, elected or not, who are more like those infecting the free market, are tossed out as quickly as their comrades should be tossed out of the market place. Market deregulation became a fashionable trend during the past several decades. "Trust us," said industry and commerce. Well, they had their chance. Short-term advances are now fading in the face of structural long-term disaster. Reform of government and reform of market are necessary, they go hand-in-hand, and if either fails to happen quickly, the issue is going to become much more serious for all of us than is this friendly dialogue between Joe in Iowa and Jim in Pennsylvania that gets the attention of perhaps several hundred readers.
Wednesday, May 21, 2008
Last week, Congress passed and sent to the president a farm bill that is packed full of goodies for constituents whose votes are sought by the legislators voting for the bill. Though the president has stated his intention to veto the legislation, it passed by such wide margins that a veto override is very likely.
Under current law, farmers can receive subsidies no matter their income. The administration proposed limiting subsidies to farmers with adjusted gross incomes of $200,000 but the Congress rejected that proposal. Eventually the administration modified its position and indicated it could live with a limit of $500,000 in adjusted gross income. The legislation that was enacted disqualifies individuals with more than $750,000 of adjusted gross income from farming, married farmers with more than $1,500,000 in adjusted gross income from farming, individuals with more than $500,000 in adjusted gross income from sources other than farming, and married individuals with more than $1,000,000 in adjusted gross income from sources other than farming. In other words, there will continue to be people with incomes higher than most Americans' incomes getting subsidies from the government.
Earlier last week, mainstream media picked up on the language of the bill and began to question the sense of handing out tax dollars to farmers with six and seven figure incomes. According to Plowing into the farm bill, a Denver Post article that came my way thanks to Paul Caron's TaxProf blog, one member of Congress defended the legislation in a very disappointing manner:
Sen. Ken Salazar, a Denver Democrat who supports the bill, disputed the idea that it pays rich farmers. The bill allows payments to farmers with adjusted gross incomes of $750,000 or less.Putting it simply, the Senator is flat-out wrong. The concept of adjusted gross income is so foundational in the tax law, and so easy to understand, that it is one of the benchmarks that I build into my exams to determine whether a student understands tax law well enough to earn a passing grade. Adjusted gross income DOES take into account the cost of running a farm, because farm expenses are business expenses deductible in computing adjusted gross income.
That number doesn't take into account deductions for the cost of running a farm, Salazar said.
"A farmer with an adjusted gross income of $750,000 might be losing his shirt" after paying for fuel, a new tractor and other expenses, Salazar said.
According to his biography, Senator Salazar is a lawyer. He has a law degree from an elite American law school. And he doesn't understand adjusted gross income? I don't know who's to blame, and I'm not sure it matters. Was he permitted to graduate without learning something that pervades all areas of law? Did he skip classes? Did someone do the unthinkable and teach the course without referring to adjusted gross income? According to the same biography, the senator has been a farmer. I'm going to guess he didn't do his own tax returns, or, if he did, he didn't pay close attention. Did someone on the Senator's staff misrepresent the bill? Did some special interest group or groups take advantage of the situation and circulate misinformation about what adjusted gross income represents? Considering that adjusted gross income is used in hundreds of legislative provisions each year to measure qualification for one or another benefit, it is not some obscure concept that pops onto the legislative stage every once in a while. No matter, when someone is elected to Congress, that person has an obligation to understand at least the basic principles applicable to the legislation on which they vote. We, the citizens, deserve no less.
In an ideal world, the tax law would be much less complicated than it is. But what tripped up the Senator isn't one of those obtuse, overly complex provisions that infects the Internal Revenue Code. I doubt I would have much sympathy even if it were one of those horrific provisions that did in a politician, because they're the folks who have allowed those terribly drafted provisions to become law. I'm sure my outlook is affected by the fact I'm currently writing about tax credits, and the new ones that have come into the Code during the past five years include some of the most abysmal drafting I've ever seen. There are terms that are not defined, and definitions for terms that are not used. Calling it sloppy would be too kind.
Someone on the ABA-TAX listserv called the entire situation outrageous. I am going to repeat my reply:
What should be outrageous isn't that this is being proposed.To leave Americans with the impression that the subsidies are going to poor farmers, when in fact farmers with six and seven digit incomes are getting them, simply is wrong. Either the Senator knew what he was saying or he spoke in ignorance. Neither explanation does anything to restore public trust in the American political process. Is it any wonder that calling for change attracts voters?
What's outrageous is that this is just yet another in a very long line of subsidies to the wealthy, either direct (as this one is) or indirectly (through "tax expenditures").
Perhaps the difference is that this one is (a) getting attention, (b) isn't as well disguised behind smoke and mirrors as are most of the others, (c) was defended in a totally ignorant way (literally), and (d) is sufficiently understood by the mainstream media to get attention.
The tough question is the one I posed the other day:
Ultimately, a simpler tax system requires a less tainted political system. That's a choice for citizens to make, but will they ever get the opportunity?Indeed, whether we will get the opportunity remains to be seen, but there's no question America wants that opportunity.
Monday, May 19, 2008
Why does a flat tax not make tax simple? A flat tax, that is, a tax imposed at a flat rate rather than multiple rates, makes the computation of tax liability easier, but that computation contributes little to the complexity of the tax law because once taxable income has been computed, the tax liability can be found in a table or generated by tax software. It is the computation of taxable income that is complicated, and playing with the tax rates does nothing to alleviate that complexity. A flat tax does not make any simpler the complex rules that determine what receipts are included in gross income, and thus taxed, and what receipts are not. A flat tax does not reduce the complexity in the numerous provisions that allow deductions and that impose limitations on otherwise allowable deductions. A flat tax does nothing about the impact of money's time value, which generally encourages attempts to delay income and accelerate deductions. All of the statutory, regulatory, administrative, and similar provisions, and all of the case law, dealing with these timing issues would be no less voluminous nor any less complicated.
The phrase "flat tax" makes for a nice soundbite. It serves well those politicians who seek votes by misrepresenting the impact of a flat tax, trying to sell it as a solution to a genuine problem when, in fact, it is at best the equivalent of using touch-up paint on an automobile that has been totaled in a wreck. What goes unsaid is what some mean by the phrase "flat tax," namely, a flat rate tax on wage and salary income. Yes, that would be a much simpler system, though not without complications. Think of the game by which investment bankers use partnerships to convert compensation for personal services into capital gains taxed at special lower rates. Worse, it would shift the burden of taxation even more heavily onto workers and give investors a free pass. The fact that something is simpler is insufficient to make it the chosen path to simplification. Have you seen the joke Form 1040 with two lines? The first one asks what the person received. The second one instructs the person to "send it in." Simple? Yes. Good policy? No.
The federal income tax can be simplified greatly without shifting the tax burden solely onto workers. All that needs to be done is to remove the special interest giveaways and the government grant programs that are hidden in the tax code but should be restructured as expenditures administered by the appropriate federal agency, where the nation can see them for what they are. Ultimately, a simpler tax system requires a less tainted political system. That's a choice for citizens to make, but will they ever get the opportunity?
Friday, May 16, 2008
Geoffrey notes that law faculty write all sorts of things, though he doesn't mention books or, to appease those who consider Tax Management portfolios something other than books, monographs. But his explanation on this point makes sense. Writing, particularly so-called scholarly writing, but often other legal writing, is rewarded. Deans approve research assistance for writing projects. Merit compensation committees take writing into account, though the pecuniary reward is far more symbolic than economically powerful. Writing brings attention to the author's law school, which affects rankings, and which accordingly makes deans happy. It is always good to have a happy dean.
So, asks Geoffrey, why do some law faculty choose not to write? He concludes that they are not lazy, and that the non-writers tend to contribute disproportionately more time and effort to committee work, other university service, additional classes, and even CLE program participation. Geoffrey explains why the usually reasons that are provided by non-writers don't justify the lack of writing:
1. I have nothing to say that would re-invent my field.Though Geoffrey makes good arguments - read his posting - I'm not unsympathetic to the claims of the non-writers. Law reviews are saturated with articles exploring all sorts of things, even issues of little practical use. Outside of the academy, most law review articles get little attention, as even judges are ignoring them in increasing numbers. There are all sorts of valid criticisms that can be leveled against student-edited law journals, particularly by those of us who write in time-sensitive areas where the usual student lag in getting things published turns great articles into yesterday's headline. And surely there are good teachers, and great teachers, who just aren't writers.
2. No one will read it anyway.
3. I object to student-edited law reviews.
4. I get more satisfaction out of service and teaching.
I'm going to focus on the second and third reasons. After all, if someone isn't a writer, or as once was said to me, "some people just HAVE to write and those are the people we want to hire," then that person isn't a writer. Writing something without having the desire to write is a recipe for a bland, weak, and sad work product. It is so true that great writing rests on the enthusiasm and energy that flows from that need to write, that desire to express one's ideas. I'm not convinced that everything that could be said has been said, else I'd be quite quiet, and so I'm in agreement with Geoffrey that it isn't a very strong justification.
For those who want to be read and who want to avoid the pitfalls of student-edited law journals, opportunities to write are plentiful. I've mentioned books and monographs. For example, there are several areas of tax law for which portfolio authors are needed. Professional journals pepper my in-box, both digital and postal, with requests for articles. Some CLE enterprises seek authors to write explanations and examples that can be used for educational purposes. As Geoffrey notes, blogs are open to anyone, and I add that well-written scholarly posts, or series of posts, are beginning to find acceptance and recognition in some circles as worthy writing. Often, the number of people reading portfolios and blogs are orders of magnitude larger than the number of people reading traditional articles published in student-edited law reviews.
The underlying question isn't why does someone write or not write. It is why the institution wants its faculty to write. Though it is claimed that writing makes a person a better teacher, there are people who contest that assertion. The reason institutions so value writing, particularly law review writing and traditional legal texts, is that it brings the school to the attention of faculty elsewhere, which theoretically boosts the institution's rankings. Law faculty at school A might know enough about the writings of faculty at schools B, C, and D, to mention one or another of them. How many faculty at school A know anything about the teaching quality at schools B, C, and D? In other words, when law faculty respond to the U.S. News questionnaire, their placement of a school is affected by that school's faculty scholarship and not by the reputation of its teachers. There is no question that law schools, when hiring, seek people who have published or who demonstrate significant potential when it comes to writing. Is this a good thing?
For me, it isn't essential that a school's faculty consist solely of people who are legal scholars, whatever that means. A faculty is not unlike a baseball team. It is impossible, I think, to field a lineup of players all of whom are base-stealing threats and 50-homers-a-season sluggers. A law faculty needs great teachers, and if the price that is paid for having them is to have a few who don't write, so be it. Similarly, among the writers on the faculty, it is beneficial to have not only those who pen law review articles, but others who produce books, write monographs, post blog pieces, and contribute editorials and essays. If a school is fortunate, it might have writers who do two or more of these things, and if a school is truly exceptional in its recruiting, it finds some writers who are also great teachers. The risk is that an institution which seeks only those who are great writers and teachers, it will struggle to find the balance that is required for a faculty that excels as a team.
The true concern is when a faculty member who does not write anything also does little beyond the usual teaching. Though Geoffrey claims that laziness is not an issue, there indeed are instances of law faculty who teach their classes, server on several committees as do other faculty, and don't do much else in terms of professional activities. Fortunately few in number and increasingly rare, they are the ones who fuel the popular misconception that law faculty "have it easy" because they're only in the classroom a few hours each week.
Geoffrey concludes that perhaps the reason some law faculty do not write is the avoidance of rejection and the need for "more immediate affirmation of worth." Yet, for me, that does not answer the question. One does not need the approval of a law student editor to publish a blog. Professional journals and publishers seek writers. The opportunities exist to make one's mark. I think it's something different. It could be that some law faculty don't want to publish because they don't want what they say to be criticized. They prefer a low profile. They feel safe in the classroom, because they are at the podium and the students are not, and because they are good or great teachers they know that student evaluations will be fine, or they adjust their teaching so that the evaluations are fine.
But as lawyers, why not run the risk of being criticized? There's always the opportunity to respond. Done well, and with respect, it is enriching, enjoyable, and enlightening. If that were not so, would I be blogging away? Nah.
Wednesday, May 14, 2008
Two and a half years ago, as I wrote in Happy Silver (Teaching) Anniversary to Me, I marked 25 years of law teaching. The first two and a half years were spent at The Dickinson School of Law, now part of Pennsylvania State University. Thus the two and a half year lag between the silver anniversary of teaching and the silver anniversary of teaching at Villanova.
And this year marks the thirtieth anniversary of my post-law school professional writing career. So although it is almost impossible for me to reach 50 years in law teaching, chiefly because retirement is around the corner if I have my way, it is not unlikely that I will continue writing for another 20 years.
When I noted my 25th teaching anniversary, I compiled some interesting but useless statistics about the number of courses and students that I had taught. For whatever it's worth, here is comparable information with respect to my teaching tenure at Villanova. I have taught the basic income tax course, under several names, 25 times. I have taught Partnership Taxation in the Graduate Tax Program 50 times, and in the J.D. Program 10 times. I have taught Introduction to Taxation of Business Entities 15 times. I have taught Decedents' Trusts and Estates 12 times. I have taught Digital Legal Practice Skills or its predecessor Computers and the Law 6 times. I have taught the J.D. Estate and Gift Taxation course once. In the Graduate Tax Program, I have taught the Taxation of Property Disposition course several times, the Taxation of Real Estate Transactions course several times, the Tax Policy course once, and several other courses once or twice. Between 4,000 and 5,000 Villanova University School of Law and Graduate Tax Program students have been enrolled in my courses.
This year, the Law School administration decided to initiate a program whereby they confer academic cords - part of the academic regalia worn at graduation and other academic convocations - on members of the faculty with at least 25 years of service teaching at the law school. Good timing, yes?
Monday, May 12, 2008
This legislation contains a variety of provision touted as remedies for the current housing market mess. As I pointed out a month ago in Preventing Foreclosure through the Tax Law? Not This Time, in which I addressed similar or identical provisions in its predecessor bill, The Foreclosure Prevention Act of 2008, this legislation does little to prevent foreclosures. In its present form, it does little to rescue housing. Why? Again, it fails to address the underlying issues.
The earlier version contained four tax provisions. Three remain, though in modified form, and one appears to have been ditched. Gone from the legislation is a provision permitted corporations to carry net operating losses back four years rather than two.
The provision increasing the limit on tax-exempt private activity bond authority remains, and is joined by additional provisions affecting tax-exempt bonds also designed to open up some funding for the refinancing of failed loans. These provisions might help clean up the mess, but they won't prevent foreclosures.
The provision that would provide a tax credit to encourage the purchase of homes in foreclosure has been replaced by a provision that would allow a tax credit to first-time home buyers. How this prevents foreclosures baffles me. How it rescues the housing market also baffles me, because the foreclosures are hitting higher-priced markets far more severely than they are affecting entry-level markets. With record numbers of Americans having acquired homes during the past decade, there aren't very many people remaining who would be first-time home buyers, and many of them either prefer to rent because at the moment it makes more sense in many instances, or cannot afford to purchase a home even with the benefits of the proposed credit.
The provision providing additional standard deduction for up to $500 of a taxpayer's real property taxes ($1,000 on a joint return) has been modified to a standard deduction for up to $350 ($700 on a joint return). This provision remains just as useless as it was a month ago. As I explained in Preventing Foreclosure through the Tax Law? Not This Time:
People who pay real property taxes usually pay mortgage interest. Those two items alone, to say nothing of state sales or income taxes, puts these people in a position to itemize deductions. So who would not be in that situation? People who don't pay mortgage interest because they own their home outright, usually after having paid off the mortgage. Those folks aren't facing foreclosure by lenders because they don't owe money on a loan secured by a mortgage. A few face seizure by local governments on account of non-payment of real estate taxes, but a $500 standard deduction isn't going to help them. If they're not itemizing, the odds are the $500 will save them $50 to $75 in taxes. So here's a provision that adds complexity without doing much of anything other than provide campaign trail sound bites. The solution, which would open the door to tax reform and thus meet much resistance in the Congress, is to abolish non-business deductions and make the personal exemption a sensible amount as it was when it was first enacted, namely, the cost of living (including rent, mortgage payments, whatever) for a person. But the bottom line is that this proposed standard deduction plan does absolutely nothing to prevent foreclosure, nor does it do anything to deal with people who have suffered through foreclosure and probably aren't paying property taxes.But it sure makes the tax law more complicated and the process of filling out a tax return more confusing.
The latest version adds more tax provisions. That's not a surprise. Once a bill begins to move through Congress, special interest groups persuade members that their particular provision must go into the bill for the bill to have any chance of success and that its omission spells doom for the economy. So we have an increase in the state housing credit ceiling for purposes of the low-income housing tax credit, adjustments in the computation of the credit rate, changes in the amount of eligible basis, and other modifications to the credit. Those changes might make more tax credits available to the wealthy who invest in low-income housing, but I cannot figure out how it assists middle-class taxpayers facing foreclosure when those folks don't qualify for low-income housing. Tacked onto the bill is a provision dealing with foreign exchange gains of real estate investment trusts. Nothing in the provision appears to do anything to prevent foreclosures or rescue American housing. Also tacked onto the bill, surely intended to raise revenue to pay for the tax breaks provided by the bill, are provisions that require brokers to report their customers' bases in stock and other securities. Another revenue provision involves increases in the payment of estimated taxes by corporations.
This bill is a classic example of bad tax policy and bad legislation. First, the provisions do not address the underlying cause of the housing market mess. Second, the provisions will not accomplish what they are marketed as accomplishing. Third, tax breaks wholly unrelated to the mess are tagged onto the legislation as it works its way through the legislative process, for a variety of reasons that are far more political than economically sound. Fourth, the legislation will make the tax law and tax return preparation more complicated. Fifth, it will make tax compliance and tax return preparation more difficult.
My suggestions, that Congress enact legislation penalizing loan brokers and loan merchants who induce people to take out loans they cannot afford, and funding high schools so they can teach their students some basic information about home buying to reduce the chances they will be bamboozled by loan merchants with more concern about their up-front fees than the economic well-being of their customers, have not seen the light of day. I wonder why.
Friday, May 09, 2008
Friedman's rationale for his proposal rests on this assertion: "Most law students study law in order to practice it." I heartily agree, though dissenters can be found, especially within law faculties. The reason I think Friedman's proposal doesn't go far enough is that it satisfies the following assertion: "Most law students study law in order to pass the bar examination." The glitch in Friedman's analysis is that another factor enters into bar passage rates, and that is the service offered by bar review courses. Surely some law school graduates are workout wonders, ramping up their intellectual efforts for several months to squeak by the bar examination, only to fall back into a mediocre experience when showing up at their first law job.
Though it might be difficult and expensive to get some of the following information, it surely would be revealing, in many ways. Is there some way to ask law firms to identify how many graduates they have hired from each law school during the past, say, 5 or 10 year, how many were asked to leave, how many left after being given hints, how many made partner, how many were helped find other employment, how many would have committed malpractice but for the sharp eyes of a reviewing attorney, how many demonstrated excellent writing skills, how many demonstrated miserable writing skills, how many could not do legal research, and so on? It would also be helpful to know how many firms have said to someone at a law school, if at all, something to the effect of "Please do not send us any more of your graduates, as the last three did not work out at all." Yes, that has happened.
Law schools understandably might argue that if under Friedman's proposal they ought not be given high marks simply because of high bar passage rates, they also should not be considered responsible for the failures of graduates who did not apply themselves while in law school, who carry some sort of baggage through law school and into practice, or who finally slid off the ice while trying to succeed in life by skating by. My response is that law schools are no less gatekeepers to the profession than are the bar examiners, and therefore have an obligation to put their students to the test. The goal is not to find a way to get students through, and, yes, that happens, but to determine if the student can hold up when subjected to demands that are equivalent to what the student will face in practice. These are matters not just of substantive knowledge and understanding, but of ethics, of time management, of diligence, of common sense, of team work skills, of compassion, and of creativity. On that side of the equation, law schools need to improve their filtering processes. On the other side of the equation, law schools need to identify where they are coming up short in educating their students to practice law. Ascertaining what sorts of mistakes and bad judgments are being made by graduates through surveys of employers is essential. It is particularly important to focus on the students who are not as gifted, because they are the ones for whom a law school can do much. As was said to me often by law faculty during my student days and in the early years of my teaching, it doesn't take much to teach the A students. How much credit can the teacher of a Michelangelo take? The greatest satisfaction in teaching is helping the average student develop, if not into a superstar lawyer, into a competent and reliable attorney.
Wednesday, May 07, 2008
The governor's motivation rests on several concerns. First, even though tens of thousands of eleventh graders fail one or more state school assessment tests, almost all receive diplomas at the end of their senior years. Considering that as many as 45 percent of juniors have fallen short on one or more of these tests, either an amazing amount of catch-up is being accomplished or students are graduating high school deficient in particular skills. Second, increasing numbers of college students are being funneled into remedial courses to learn what they ought to have learned by the time they graduated high school. Third, employers complain that many high school graduates whom they hire have little or no reading skills, are incapable of doing arithmetic, or both. Are these believable accounts? I think so. Why? Because among law students whom I teach, far too many cannot spell, cannot write well, do not understand grammar, and struggle with simple arithmetic. Considering that law students are drawn from college graduates with grade point averages on the high end of the scale, it is rather disappointing and worrisome that among the very best there is so much deficiency.
Opposition to the proposal is coming primarily from local school boards and, on their behalf, legislators. The argument that they raise is that local school districts "are the best judge of whether students are qualified to graduate." Local educators worry that the tests will encourage unaccomplished students to drop out of school. They also object to increasing the number of tests that students must take. Even though the superintendents of most of the state's larger school districts and the presidents of the 14 state universities support the proposal, its opponents dispute the notion that local graduation tests are "dumbed down." Opponents rest their arguments on the premise that "graduation has always been a matter of local control."
The proposal would permit a student to graduate if he or she passes six proficiency tests or demonstrates competence by passing the PSSAs, advanced placement exams, or international baccalaureate exams. Those who fail would be eligible to obtain educational assistance and to retest. The state board would provide model curricula and additional teacher training. Some opponents claim local testing is a better measure of student accomplishment than are the PSSAs.
Some of the opponents appear to be focusing on implementation rather than denying a problem exists. One school district board president admits that some graduates are not qualified for graduation but that before testing at the high school level, improvements must be made in elementary education. Others point out that students who do not do well on tests would be disadvantaged.
One college student, who passed high school algebra but failed the college course, expressed the opinion that high school had not adequately prepared her for college. She supported the idea of higher standards, but worried that unless students were educated sufficiently to meet those standards, they would fail the tests and drop out, or perhaps drop out before taking the tests because they feared that they would fail.
There is no doubt that there is a problem. There is no doubt that it varies from school district to school district. There is no doubt that over-valuing a student's academic performance sets that student up for ultimate failure, either in higher education or in the workplace. There is no doubt that for many students the difficulties begin at an early age and need to be addressed before those shortcomings blossom into full-fledged failure in high school. The issue is how students' progress should be measured and who should be doing the measurement.
Certainly there are many ways to measure a student's progress, and standardized objective tests are only one of them. Those tests work well for certain skills. Other skills, however, need to be evaluated in other, though admittedly more expensive and elaborate, ways. There certainly is an opportunity for everyone involved with the governor's proposal to sit down and work out effective and efficient testing mechanisms.
On the other hand, there is something troubling about the idea that the effectiveness of education should be tested by those providing the education. I am not persuaded that there is something wrong with the state evaluating the educational achievement levels of a school district's students. Though the state is in some ways an outsider, so too are the colleges and employers that will be admitting and hiring the school district's graduates. Ultimately, outsiders will evaluate how well a school district educates its children. Personally, I like the idea of outside evaluation. Having had students who arrived in my courses lacking the knowledge and understanding that should be acquired in a prerequisite course - because the students did not work as diligently as they ought to have worked, because they were awarded grades exceeding what they deserved, or because the instructor failed to cover critical components of the course - and having observed how much more difficult it was for those students to succeed in the course I was teaching - despite having to squeeze in remedial coverage - I can be tempted to support a mechanism that evaluates how well a precedent course is preparing students for subsequent courses or programs. Yet law faculty, and presumably faculty in other academic disciplines, almost universally oppose the idea of having their students examined by someone other than the person who teaches them. Why? The answer to that question is obvious, at least to me, and perhaps incendiary. So I'll just pose it and leave it.
I am not without sympathy for K-12 educators who struggle to accomplish their mission in the face of circumstances over which they feel powerless. In some school districts, the lack of appropriate funding is a principal reason that the students don't get the best opportunities to learn and to make progress. There surely is a correlation between success rates on graduation and other testing and the economic condition of the school system. In many, perhaps most, school districts, there are students, sometimes very many students, who do not receive educational affirmation at home. Without parents or guardians who encourage good study habits, who supervise homework, who engage children in activities and conversations that complement school learning, and who support the teachers as the educators try to shape the children's academic skills and habits, the teachers face a daunting task. They have only so many hours, and if they are put in a position of needing to do twice as much as can be done in the limited time available, perhaps it is expecting too much to expect most or all of their students to pass graduation and similar exams. In many respects, society ought to consider itself lucky that the teachers and school districts are accomplishing what they are accomplishing, considering the insufficient monetary support and inadequate home study reinforcement that society provides to school systems.
So, though the governor's proposal has much to commend it, there is room for improvement. Beyond that, the governor ought to expand the proposal so that it addresses the reasons so many students cannot pass what graduation tests would be if they truly tested for ability to do well in college or in a post-high-school job. Of course, such an expanded proposal would ruffle even more feathers, but that might be a price that needs to be paid if we want our high school graduates to compete in the global economy and to succeed in college. Do we not and can we not embrace standards that are sufficiently high to match the expectations we have for our nation and our lives?
Monday, May 05, 2008
The President's suggestion that the money will be used to pay for gasoline and food brought criticism from Senator Charles Schumer, who noted, "It's galling to think that taxpayers' stimulus checks will be lining the pockets of OPEC. The sad truth is that the average American family will spend almost their entire stimulus check on higher gas prices this year." Schumer may be overstating the case somewhat, because not all money paid for gasoline finds its way to OPEC nations. But surely some of it does. Consequently, the government is borrowing money from overseas investors to finance rebates that are used in part to move money to overseas investors who then await repayment of their loans. Something just isn't right about that. We're back to the need for government officials and politicians to take some basic courses in economics, finance, and international trade. And perhaps some science courses would be useful, for when Schumer claims that the only solution is for "the administration [to] get .. OPEC to increase oil supply," he demonstrates his membership in the "unlimited supply of oil" wishful thinking club.
It's no secret that I think the entire tax rebate gimmick is just that, a gimmick, as I explained, for example, in Can a Tax Rebate Band-Aid Stop the Economic Bleeding? And it will backfire. What happens when the tax rebate money runs out? Will the price of gasoline and the cost of food decrease? Will there be demands for yet another rebate? If the tax rebate money runs out in October, it's easy to imagine at least one, and perhaps two, of the Presidential candidates, so quick to get on the gasoline tax reduction gimmick bandwagon, as I noted on Friday, jumping on the "yet another rebate" bandwagon. Will the government simply issue rebate after rebate? Does no one understand that by dampening the message behind high prices that a government rebate program adds fuel (sorry, I couldn't resist) to the economic fires that are stoking the high prices?
In Getting Those Tax Rebates Might Not Be So Easy, I pointed out that one of the many administrative problems associated with the rebate gimmick was cost. I wrote, somewhat sarcastically:
And I suppose the Congress added to the IRS appropriations bill money to be used to mail the notices. I suppose the Congress has made funds available to the Treasury Department to process and mail the checks. Or, as often happens, will some other program, such as enforcement or taxpayer assistance, be cut in order to fund this election-year "I voted for a rebate" ploy?Now comes news that yet another cost has been imposed on the rebate, excuse me, stimulus, program. According to a frequent contributor to the ABA-TAX listserv, the IRS has responded to yet another problem that has cropped up. As discussed in Getting Those Tax Rebates Might Not Be So Easy, people who would otherwise not have been required to file a tax return but who are eligible for a rebate must file a tax return in order to get the rebate. If they want to file electronically, but have adjusted gross income of zero or less, they need to "dummy up" the return and add $1 of income to the return. Apparently, the IRS computer is treating the "false dollar" of income as earned income, is computing an earned income tax credit of $2, and is generating and mailing a $2 refund check to those taxpayers. Those taxpayers are confused. The IRS has issued advice, apparently to its employees, on how to deal with this mess:
If you receive a call from a taxpayer who has received a $2 refund check and research shows the refund was generated from an EIC credit (TC 768), assure the taxpayer this is not their stimulus payment. Most taxpayers will not know about the $1 reported as income because their return was most likely prepared by a preparer or software company. Explain that due to a processing error they received a $2 earned income credit and they will not need to pay it back.Here is my question: How many taxpayers are receiving these $2 checks? Ten? Ten thousand? One hundred thousand? A million? Ten million? If, as has been estimated, tax rebate checks will be sent to 130 million taxpayers, then it would not be a bad guess to conclude that the number of taxpayers filing returns in order to obtain rebates is in the millions or tens of millions range. So, where does the IRS obtain the $2 million, $20 million, or $40 million that it is accidentally sending out to taxpayers? What IRS services or programs get cut? This additional amount is added to the cost of administering the tax rebate computation and deliveries, so ultimately yet another price that is paid for this bad idea is a decline in IRS taxpayer services, or audits that could cause the payment of otherwise unpaid taxes, or some other IRS initiative.
To be fair, I should give this "stimulus" concept credit where credit is due. It has stimulated some of my blog posts that otherwise would not have existed. Unfortunately, stimulating MauledAgain posts does not increase gross domestic product nor reduce the federal budget deficit. But I do not fear that Congress will stop giving me things about which I can find something to write. No fear whatsoever.
Friday, May 02, 2008
Unfortunately, duping people into surrendering their votes for an bad idea hiding behind a sound-bite mask has been afflicting civilization since the first politicians arrived on the scene. Once upon a time it was bread and circuses, at times it has been total demagoguery, and too often it is the promise of government largesse for all matched with reduced or eliminated taxes. If the Congress is foolish enough to go through with this nonsense, will the proponents step forward when another bridge collapses because highway repair funding, which the gasoline tax supports, runs out? Or will they be running for cover?
Now, as reported in this CNN story, Hilary Clinton has jumped on the "suspending the gas tax will save the nation and its economy" bandwagon. One wonders if she truly believes it will, or is simply another way to scrape up some votes. Eight years ago, she opposed a similar proposal. Why is it now such a great idea? The answer is easy. Votes, votes, votes.
So of the three viable potential presidential candidates, only one is yet to get on the bandwagon. Yet Barack Obama not only takes the position he will not call for the suspension, but also opposes it strenuously. But how consistent has he been? According to this story, Obama voted for a suspension of the Illinois state gasoline tax when he was in the state legislature. When attempts were made to reduce the tax permanently, he voted against that idea.
Are there any politicians who understand economics to the extent the leaders of this nation need to understand the subject? Is the citizenry so gullible that a batch of empty promises is all that it takes to entrust the survival and well-being of the populace to those who proclaim those bad ideas?
So, let's see what happens if the gasoline tax is suspended. The price of gasoline drops, and demand continues to climb. At some point, the pumps will run dry. So will what will the geniuses then propose? Lowering the price to zero?
It takes courage to speak the truth and make the right decision. I'm not seeing much of that at the moment. I'm seeing a little bit. But it is in danger of being overshadowed. Empty promises might have much more appeal than tough talk, but empty promises are just that. Empty.
Wednesday, April 30, 2008
Dear Sirs,Now, let's assume that for some reason I, or a sensible tax practitioner or professional consultant, would decide to do business with a stranger who appears out of thin air with promises of, well, I'm not certain what is being promised, would we be delighted at the opportunity to rely on someone who admits that there is a lot of "rubish" going around in emails? Particularly when that stranger has sent an email that surely seems destined for the email folder called trash?
If you have a serious tax problem and you do not know what to do?
If you do not trust irrelevant professional that the claim to be gurus?
If you are fet up with talk and talk and talk with irrelevant consultants?
If you have unreported money and you want somebody to help you represent it the right way and report it to authorities in due time?
If you like any kind of inquiries relate to above then contact us at [removed] visit our web address [removed].
EMAIL OR CALL AS ON SKYPE-TALK DIRECT WITH EX INLAND REVENUE OFFICIAL WITH MORE THAN 20 YEARS OF TAX EXPIRIENCE AND GET OUT OF YOUR TAX PROPLEMS.
[sender's name removed]
In case your are and professional consultant read below:
I know that nobody reads emails today due to a lot of rubish going around, so do I unless:
When I found something that relates to my work in order to benefit.
If you are lawyer, accountant or business man this might me interesting you.
You can represent your selves as being the persons who can sell the following services although you might not have any knowlegde, do this simple thing. Go to our web www.successbuz.net register like an affiliate.
Make your orders your clients like to make and direct this order to us and sit back and enjoy your commission plus your local fees in the country of your consultation.
I know that nowadays global economic conditions have changed very rapidly that we have to adopt to the new global market rules .
We sell the following very specialised products and if you are in the same line of business then this can be very good business opportunity for you and your clients to LOWER YOUR LOCAL TAXES, EXPAND AND DO BUZZ WORLDWIDE 178 COUNTRIES, LEARN HOW TO FORM AN INTERNATIONAL OFFSHORE COMPANY AND BANK A/C, GET BUSINESS LICENSE ANYWHERE.....
JUST CLICK ON TO [removed] enters the magic ..........only 1 minute.
[sender's name and email address removed]
It's not just the horrific grammar and the spelling errors that alarm me. All of us, myself included, make mistakes, particularly when it comes to typographical errors. But, seriously, what conclusions should one draw from a sales pitch that claims "You can represent your selves as being the persons who can sell the following services although you might not have any knowlegde"? Wow. Maybe they could help me sell myself as a professor of biochemical engineering.
I removed the names, URLs and the email addresses because I don't want to encourage visits to the advertised site. But I did visit, chiefly out of curiosity. I can't tell if it's a scam, a joke, or a legitimate attempt to sell all sorts of software (ranging from carpet business templates to licenses and forms for doing business in 178 countries) by folks who don't do quality control analysis on their own website and email workproduct. It makes me wonder about whatever it is that's being sold.
There is no quick way to become a tax practitioner. Buying some software that is useful for doing something doesn't make the purchaser a professional in that something. The pathway to success is quality education and the investment of intellectual effort. I wonder how many people received the email and are getting ready to "sit back and enjoy [a] commission and ... local fees." Every quality tax practitioner with whom I've dealt has collected fees, but not by sitting back. They've earned them by working diligently and carefully. And they've never spammed me with an email.
Monday, April 28, 2008
First, it's tough to believe the nation's economy is in a recession. During the years I have been driving, there have been several certified recessions. One noticeable feature of these recessions was a distinct decrease in highway truck traffic when compared to truck traffic volume preceding the recession. This past weekend, the density of truck traffic was no less than what I have seen during the past 6 years and during the late 1990s. Those trucks are hauling goods of some sort, from one place to another. I doubt businesses are simply moving inventory. These trucks are moving items that have been sold, and parts for items that are being constructed.
Second, it's tough to believe that increases in the prices of gasoline and diesel fuel are having any sort of effect on driving or demand. Two things stand out. First, traffic volume, even at times one would expect it to be light, was heavy. A lot of people were going somewhere, or returning from somewhere. By a lot of people, I mean more vehicles than I have ever seen on I-95 late on a Saturday evening. Second, even though I was driving approximately five miles per hour above the speed limit, I was passed by most of the traffic. Many of the vehicles passed me at high rates of speed. Even truckers were moving along at a good clip. Considering that fuel economy is better at 55 mph than at 65 mph, and better at 65 mph than at 75 or 80 mph (for more, read this, for example), if the cost of gasoline and diesel fuel truly was having the harsh effects that we're told it is having, would not people slow down, and thus by cutting fuel consumption, cut total fuel cost? Perhaps what I am seeing is the impact of a have versus have-not economic separation, with the have-nots suffering from a recession and the haves zooming along oblivious and impervious to cost increases. If that is in fact the case, then perhaps most of the haves were on I-95 Saturday evening. Either that, or there are a lot more haves than I thought there might be.
Third, for the first time in several decades, I pulled into a gasoline station - something that I needed to do very infrequently on this trip thanks to the efficiencies of hybrid technology - and discovered all of the pumps with "out of regular" hand-written signs on them. Was it a spot shortage due to a delivery truck breaking down, leaving late, getting delayed, or getting lost? Was it a consequence of reduced refinery output on account of the winter-to-summer-fuel-mixture conversion? Was it a sign of times to come? Was it a miscalculation in the timing of the refill order caused by underestimating the number of vehicles that would stop for gasoline earlier in the day? With all of those vehicles, and with so many of them traveling at high-fuel-consumption-rate speeds, it very well could have been an upward tick in demand. Is it proof that even as price increases, demand does not drop as the classic theoretical supply-and-demand curve claims?
The other day, I noted a comment by someone observing how little most drivers understand about fuel consumption. The person explained how he had changed his driving habits after purchasing a vehicle with a real-time mpg display. He suggested that much fuel would be saved if every vehicle were required to have such a display. Considering that these displays can be acquired in the after-market and easily installed, the cost of such a requirement would not be severe. The benefits would be outstanding. I've had fuel consumption displays in both my current and previous vehicle, and they truly make me more aware of how driving habits, including significantly excessive speed, and dilly-dallying, reduces fuel economy. My only tweak to the suggestion is that the display should also include a "dollar equivalent" counter so that the impact of inefficient driving habits on the driver's wallet or pocketbook could readily be seen.
Borrowing from and modifying an old quotation, perhaps most drivers figure, "Top speed ahead, damn the cost." So they seem to be saying by their actions. And so it is so difficult for me to understand why they are griping about gasoline and diesel fuel price increases, and sharing how those increases have compelled them to cut back on other expenditures. But perhaps those weren't the truckers and automobile drivers I saw on the highway this weekend.
Friday, April 25, 2008
Joe points out that in my latest post I "correctly, if perhaps unintentionally, identified our salvation: the law of supply and demand." For Joe, that law means that as prices rise, demand will fall or, as he prefers, suppliers will "gear up to meet the demand." Here's my concern. The law of supply and demand works well for items that are not necessities, in other words, for luxury goods, and other items that have low levels of "essential utility." It may be annoying or frustrating for consumers to cut back on their purchases of diamonds, caviar, or vacations, but it's life threatening for many people to cut back on purchases of bread, milk, vegetables, heat, medicine, and similar hallmarks of survival. Worse, no matter how much someone desires to ramp up the production of a scarce commodity, it isn't going to happen if the natural supply of the commodity is fading away. The notion that any item can be supplied is a theoretical one that is subject to practical limits. No matter the demand for saber-tooth tigers, there aren't any out there to buy or to sell.
For Joe, the shortages that exist are the fault of the government. Which one, he doesn't say, but from the context I think he is referring to the one seated in Washington, D.C. He ascribes shortages of steel to protective tariffs, food shortages to government subsidies to burn food in our vehicles and on government efforts to block genetic modification of the food supply. Fuel shortages are put at the doorstep of those opposed to drilling off the Florida coast or in the Arctic, on government regulations on "what fuel can be burned where," and on government "hassles" that prevent the building of new oil refineries and nuclear power plants.
I agree that government intervention in the markets has, at times, contributed to shortages, but I think that contribution accounts for a small percentage of the supply deficit. In some instances, the intervention has been necessary to keep free markets free. If anything, there are instances where the government has failed to intervene and has permitted private cabals to generate fake shortages to drive up prices. One need read only the story of the Enron shenanigans to figure out how miserable a job elected officials have done in serving the people.
One could remove all tariffs and there still isn't enough steel, because the building booms in China, in southwest Asia, and in several other places requires more steel than can be produced. People started burning food as vehicle fuel long before the government started paying people to do what they would do otherwise. My objection to the government policy with respect to energy credits isn't that it generates shortages, but that it directs money in ways that are inefficient and somewhat ineffective to solve the problem. I'm just not into the "bribe people to change their habits with another tax code provision" approach.
I'm not convinced that genetic manipulation of the food supply solves the supply problem. Even if it did, I'm not confident that it will do so without long-term costs that aren't yet apparent. When thalidomide was introduced, it entered the market as a wonder drug. It left in shame, having deformed thousands of children. Considering what happens when private industry is left unregulated, we ought to be careful to chase the market supervisors out while the market bullies are defining "free" to their own benefit. I can't imagine trying to compel a government to supervise market places in the manner Beijing handles the production of lead-based children's toys, poisoned pet food, death-causing heparin, and other items that are designed, manufactured, and sold with no concern for long-term costs.
What is accomplished by drilling in the Arctic or near the Florida shoreline? Perhaps a year's supply of oil? Two years' worth? The world is running out of oil, and quickly. It is running out of natural gas, though not so quickly. And it will run out of coal. I do think there is a place for nuclear power, and I do think that current government regulation of the industry leaves much to be desired, but I'm very unwilling to let the free nuclear power market run unsupervised. Whether it's the incident at Three Mile Island, the catastrophe at Chernobyl, or any one of hundreds of other incidents in nuclear powerplants worldwide, the industry has demonstrated that it hasn't reached an acceptable level of "good enough" for the world to unfetter it from tight supervision. As for oil refineries, my understanding was that oil companies weren't building them because the profit margin on gasoline isn't high enough to finance the construction costs. If those costs are higher than they otherwise would be absent government regulation, then I ask, which regulations should be ditched? Hopefully not the ones that are designed to clean up the air and prevent it from returning to the miserable condition in which it was thirty years ago. Hopefully not the ones that minimize the risk of explosion and that maximize the facilities built to curtail the impact of fire and other calamity at a refinery.
Without government, I wonder what people would be eating, burning for fuel, or using in construction. My guess is that the strong would take from the weak. I doubt that things would be better than they are now. How free can a market be if there is no one policing it?
Where I do fault government is in its social and other policies that contribute to the increases in demand. Governments might exacerbate the supply problem, but it's far from the adverse impact that they have on the demand side. The message that everyone can have as much of whatever they want, which some governments and politicians use to get votes and to remain in power, is nonsense. Opposition to behavior, and to education about behavior, that can contribute to the easing of the supply problems is unwise. Government failure to insist on the teaching of economic principles, budgeting, long-term cost analysis, and similar concepts that would assist people in recognizing and solving the problems of the just-started economic storm might be one of its worst shortcomings.
This exploration of economic woes, and my suggestion that supply shortages are at the root of those problems, began as a criticism of the tax rebate as the solution. If the tax law is to be used for purposes of regulating the economy, it ought to be used to curtail demand so that demand abates to accommodate reductions in supply. The tax law as it currently exists tends to encourage demand, by providing deductions for interest, exemptions for dependents, and credits for all sorts of expenditures, only some of which have a long-term dampending effect on demand.
Joe noted that I continue to provide "unhappy forecasts for shortages of, well, everything but shortages." Ah, Joe, there are quite a few things of which, unfortunately, there are no shortages. Homicides. Car thefts. Abandoned babies. Embezzlement. Tax fraud cases. New diseases. Fortunately, though, there's also no shortage of people trying to make the world a better place, including those who are grappling with the present state of the world economy and looking for ways to help people understand what is happening. In that regard, in my attempt to turn on the spotlight, I'm helping out, by doing my best to make certain there's no shortage of words.
Wednesday, April 23, 2008
This nation has been living beyond its means for far too long. Most people, though not all people, in this nation have been living beyond their means. Some people need to live beyond their means simply to survive. A family of four trying to live on income of $25,000 will be racking up some of that credit card debt that has reached a total of almost one trillion dollars. Some people live beyond their means because they simply must have what they want. A very small slice of the population does not live beyond its means because its means are so huge that the limits of time and space prohibit a person from spending that much money. So these folks join the creditor nations in making most Americans their economic vassals. And to think we concluded the middle ages ended a few centuries ago. What a surprise!It didn't take long for Joe Kristan, who writes the Roth & Company, P.C. Tax Update Blog, to react in horror at my going "all Malthus" on the world, in a post whose headline still makes me chuckle, GOOD MORNING! WE'RE ALL DOOMED!. I responded, in Can Tax Rebates Help Prove Malthus Wrong?, pointing out that "Once upon a time, I was an optimist. Then I became a guarded optimist. Then I began to worry. And now, I am beginning to wonder. I would like to agree with Joe, as I once would have" and concluding "I would like to be wrong. I would like Joe to be right. And he well could be, if people and governments mobilize to deal with these issues while there still is time. Dishing out tax rebates isn't going to get the job done." Well, the rebate spigot is about to open, so let's see how the economy has reacted.
The impending shortages of critical goods and materials, including oil, clean water concrete, steel, natural gas, health care, copper, agricultural products, and similar life-essential ingredients, will only worsen the problem. An ever-increasing world population, seeking more and more quantities of these and other items, coupled with the emergence of a small creditor group and massive hordes of debtors, is a recipe for disaster. Somewhere along the way, these conditions will trigger armed conflict, pestilence and pandemics, civil disorder, and breakdowns in societal structures. No one ever promised that the Dark Ages were a one-time event.
We could begin with rising crude oil and gasoline prices. Only those living in some remote wilderness aren't aware of the almost daily record-setting increases in the price of crude oil and gasoline, and similar increases in the price of natural gas. The title of this article, No respite in rising price of crude oil, seems to say it all, but it doesn't. It doesn't mention gasoline. The story does. It also describes decreases in supply. In other words, the prices will continue to increase.
Or we could focus on something that poses a more immediate threat. Throughout the world, food shortages are beginning to pop up, not only in areas torn apart by war, drought, and other externalities, but in areas where food production cannot keep pace with demand. Sunday, according to Bloomberg's On the Economy, "United Nations Secretary-General Ban Ki-moon said he will form a task force to address the global food shortages and rising prices that have sparked riots in poor nations." Yes, folks, hungry people are desperate people. And their numbers are growing. They are growing not only abroad, but here at home. Part of the reason is that we're beginning to consume what could be used as food for other purposes, chiefly fuel. In The Growing Oil and Food Crisis, U.S. News and World Reports suggests that as bad as the oil and gas price problem might be, the food shortage crisis is worse, quoting the Guardian to the effect that the crisis poses "grave implications for international security, economic growth and social progress."
Don't care about oil and gasoline prices? Not affected by food prices? Perhaps steel is your thing. Recently, according to a National Railway News story reported here, the Southeastern Pennsylvania Transportation Authority was compelled to extend the delivery date for new railcars, in part because of steel shortages. The demand for steel is outpacing supply. Similar shortages have been cropping up with respect to lumber, timber, and polyvinyl chloride pipe. Prices for these items have increased at rates exceeding the inflation rate, even if not quite at the rates oil and gas prices have increased during the past several years.
Why? There simply is more demand for these items than the supply. Ultimately, there is a finite supply of oil and gasoline, and there even is a finite supply of annual crop yields. There doesn't seem to be a finite limit on demand.
But if news of food riots, thefts of fuel trucks, construction site pilferage, and other manifestations of the inadequacy of supply aren't sufficiently alarming, let's turn to what might hit home. According to a story reported throughout various news sources, such as this Charleston City Paper story, there now is a worldwide shortage of hops and barley malt. Prices for beer prices are headed up. If people are angry and upset about what they encounter at the pump, imagine what will happen when they walk into the tavern, the state store, or the wine and beer store. Although other factors, such as the devalued dollar and transportation cost increases, also factor into the price of beer, the primary cause is, once again, a shortage.
Turning from something that I don't buy to nutrition that really matters, it's only a matter of time before an extremely serious shortage sets in. What does one do when the headline reads, World chocolate shortage ahead? That's news from a year ago. Chocolate prices have been increasing. Several months ago, Hershey's announced an increase of 13 percent. The law of supply-and-demand is making itself known in every corner of the economy.
We've seen what happens when housing prices rise at a pace that outstrips the increase in individuals' incomes. Houses are abandoned, neighborhoods decline in value, former homeowners seek government assistance, creditors incur economic losses, the stock market plunges in reaction to the bad news, and people's economic well-being suffers. What happens when the prices of oil, gasoline, and food continue to climb at rates exceeding income growth? The answers that come to mind are depressing, aren't they? And don't worry, Joe Kristan, I'm not depressed. There are other things in life than the economy and fortunately, most of them are going quite well. But I do worry that for many people, the economic news and their economic experiences are getting them down.