What Is Wrong With This Picture?

Somedays you just have to scratch your head and wonder at what we have become as a society. Our attention inevitably is drawn to the latest shiny object, to fascination over the personal failings of other human beings, and what is happening with this celebrity or that celebrity.

At the moment the popular attention of society is focused on Bill O’Reilly having lost his gig at Fox News due to alleged unsavory behavior in the workplace. Bill O’Reilly is ubiquitous in the news and in social media.
In the meantime there are actual events occurring in the actual real world which will have an actual effect on your life.
The International Monetary Fund is warning that 20% of the corporations in the United States are at risk of default should interest rates rise. You can read about this here and here.
Meanwhile, the Federal Reserve is declaring that rate hikes are ‘necessary.’
Let us get this straight: a talking head lost his job and the world goes crazy about it. The IMF says that if interest rates rise then up to 20% of U.S.corporations are at risk of defaulting on their debt and the Federal Reserve consequently says “Hell yes we are going to raise interest rates” and the popular response in the news and social media is crickets.
You do not have to be named Keynes or von Mises to figure out what is wrong with this picture.

Colorado’s Abusive, Intrusive, Counterproductive, Sacred Cow: The Business Personal Property Tax

Among Colorado state government policies, probably none is more hated and criticized but more entrenched and unassailable than the Business Personal Property Tax. That levy amounts to government’s demand that businesses pay the state an annual ransom based on the value of everything they own that isn’t real estate.

It’s an irrational tax based on nothing more than ownership of objects that do not drive any particular need for government services. The accidental or deliberate genius that protects the Business Personal Property Tax, or BPT as insiders call it, is that the majority of its revenues go to the local governments where the business operates. This creates an iron coalition of Democrat lawmakers who tenderly love and protect any and all revenue sources, and local government officials—even Republicans—who also tenderly love and protect any and all revenue sources.
 
In this correspondent’s 14 years as a Colorado State lawmaker, there were many spirited efforts to whack the BPT. The score is BPT many; whackers zero.
The familiar pattern is that a newly elected Republican lawmaker gets an earful from business people about the hated BPT. He enthusiastically responds by introducing a bill to kill or cut it. Then the iron lobby goes to work. All the Democrats are already in the bag. Local government officials, usually Republicans, descend on their local lawmakers. “This will hurt schools. This will hurt parks. This will hurt community services. This will hurt children. This will hurt seniors. This will hurt women and children. This will hurt unicorns.”
 
Enough Republicans can’t withstand the onslaught that the measures always die a tortured death.
One memorable assault on Mount BPT came from a fresh, talented new senator who was sure he had the logic, the skills, the coalition, and the darn rightness of cause to conquer the BPT. By the time the negotiating and amending was over, he had a bill with a 40…yes forty…year phase in to allow local governments to weather the shock of reduced subsidies from a state tax. It still faced significant opposition and died a quiet death on the calendar.
 
The fresh, talented senator has since concluded his public service and returned to his professional career. The BPT stands unmoved and untouched. There have been two whack-it proposals this year. Both aim to increase the base amount of property exempt from the required annual tribute from the laughable $7,300, one to $10,000 and one to $50,000. The iron lobby is warming up for batting practice.
 
Among many problems with the tax, it bears no connection to any economic theory of taxation beyond brute state theft. It does not tax profits or even revenues. It does not tax anything related to the need for government service, like a gas tax for roads, or a property tax for police and fire protection. It is simply a demand that businesses pay government an annual exaction for things businesses own. But, business—its consumers, really—already paid sales tax on the newly purchased property, and pays income tax on any profits it makes using the property. Worse, the BPT is a disincentive to invest in new property and equipment, because it adds cost permanent annual cost to everything a company might buy.

In this age of heightened concern about government surveillance and reasonable privacy interests in the private sector, one argument surprisingly has not played a major role in the debate: the strip search nature of the Business Personal Tax. In order to pay or enforce the tax, business must inventory, and revenue agents must audit, all the property a business owns. Computers, servers, networks, phone systems, software, files, desks, shelves, furnishings, cars, vans, shuttles, utility vehicles, scooters, forklifts, warehouse storage shelving, tractors, harvesters, tools, machinery any and everything that is used in an industry, trade, or field.
 
Someone needs to take up the argument that it is none of government’s money-grubbing business what a company owns. Government might tax accounted profits, but it has no legitimate business looking down companies’ shorts that way. Well, a Republican can dream libertarian dreams, can’t he?

Chinese Banking Corruption

It appears that China’s largest private bank defrauded investors of three billion yuan.

You may want to review my post yesterday concerning rising risks, one of which is the opaqueness of Chinese banking and corruption in the Chinese banking system which exceeds the most lurid accusations leveled at Wall Street.

This incident is a prime example of the systemic risk in the Chinese banking system – and that this was a pathway to the Chinese shadow banking system further illustrates the risk China presents the world.

Returning To Equilibrium

“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” – Ronald Reagan

“We’re broke. We’re basically living off of debt. We’ve had a huge transformation of the American economy. Look at all the Americans now on food stamps, on disability, on unemployment. The whole economy has imploded… the bottom hasn’t dropped out yet because we’re able to go deeper into debt. But the collapse is coming.” – Peter Schiff

Government and government-sanctioned entities distort the economy. They distort the economy in order to obtain a political, economic or social outcome that they find desirable. They do this by setting cost, setting prices, setting quantity and either preventing you from engaging in commerce or compelling you to engage in commerce or sometimes both at once.

When government and government-sanctioned entities engage in these activities it produces misallocated capital – that is the point to politicians doing this in the first place. They want you to engage in commerce that you otherwise would not engage in, prevent you from engaging in commerce that you otherwise would engage in, and control the quantity, cost and price of that commerce as well as who does or does not get to engage in that commerce. This is the primary tool by which they attempt to fulfill all of these political promises these politicians make.

Government and government-sanctioned entities can control the quantity, cost and price of that commerce through a variety of means – legislation, regulation, taxation, subsidies, providing credit, denying credit, setting the cost of credit, injecting liquidity, and controlling the exchange rate.

These folks attempt to destroy equilibrium in order to make society what they wish for it to be. At the end of the day, a free market economy is nothing more than two people voluntarily agreeing to buy and sell for a price that they both voluntarily agree on. When the government interferes and makes one or both parties buy or sell at a price and terms the government mandates then it is no longer a free market economy. It is then a distorted economy. In this distorted economy people are coerced, compelled or forced to engage in commerce that they otherwise would not engage in or at a price or terms that are involuntary to them.

When the government does this it destroys that vital information which can only be obtained by voluntary commerce, i.e. what is the appropriate price and quantity for any specific good or service? When commerce is no longer voluntary then it is no longer possible to determine the proper price and quantity of any product. This forces a misallocation of capital, in other words people invest money and resources in goods and services that typically become under- or over-produced and are not priced at what the market will bear or in the quantities the market demands.

Everything we know about economics, human behavior, and history tells us that market distortions inevitably unwind. Equilibrium is the point at which two people voluntarily agree to buy and sell for a price that they both voluntarily agree on with no coercion or compulsion involved. Markets will always eventually return to equilibrium – even if that return is microscopically brief. Misallocated capital always eventually unwinds and reallocates. Markets are always more powerful than politicians.

The current market distortions will unwind as well.

Distorting the economy in order that politicians may attempt to fulfill promises in order to obtain a political, economic or social outcome may be enticing but it is inevitably temporary.

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