The Brothers Austrian

For those that do not follow David Rosenberg of Glusken Sheff (formerly the chief economist of Merrill…I wonder if Merrill Lynch management/board ever read his “Morning Market Memo”?…I am going speculate the answer is no!) had an observation today that I want to share in regards to Canada’s tax the rich policy in the 1990′s:

House Democrats, led by Charlie Rangel, are setting a course to apply a 1% surtax on married couples making $350,000 or more; raising to 2% for those earning in excess of $500,000; and 3% for anybody with audacity to be pulling in more than a cool million (someone has t o pay for Obama’s $550 billion health plan.) We saw this ‘soak-the-rich’ strategy happen in Ontario in the early 1990′s and it let to (i) the brain drain (ii) capital flight; (iii) eroding productivity growth and lower standards of living and (iv) a currency depreciation.

But then again who carries about productivity? The scary part is that the soak the rich legislation will surely pass through the House in whatever form it comes. Politicians, they are Robin Hood’s of the USA, playing the ‘good guy’ in their own a fairy tale.

MisesBeliever Government Spending, Taxes, Uncategorized brain drain, David Rosenberg, obama, Rosenberg

What haunted Henry Hazlitt, still haunts us today: Governments focusing on only what the immediate effects of a policy will be. He refers to their actions as “half truths”. The seen and unseen. The seen of this bailout is that a few hundred thousand auto workers are still employed and the employees/retirees will have benefits.

The unseen: What about the workers that are not part of the auto industry that did get laid off? What about the worker whose 401k is down 40% with no pension plan? What about the guy who saves and saves and saves, only to have the value of savings dwindle via inflation in order to pay for the bailout of the auto worker (I am sorry let’s be honest here, this is a bailout of a group of people that have political pull, not the saving of a so called iconic “American” industry)?  What about the capital resources that are redirected to the auto sector versus another, more viable sector? What about the effect on bond investors?

In a NYT op-ed piece James Glassman claims that this might  “Drive the bond market to ruin”. This is the what I call the “Obama Button”.  It’s like the reset button. What would happen if we pressed the reset button? Who knows right? All bets are off! If I am a bond investor I have to price in whether or not an industry will be “bailed out”.  While the immediate effect is saving a few hundred thousand jobs, the long term effect is that there will be more market volatility because we never no who is next to be part of our “bailout nation” or even how to price the possibility of a bailout. Will the bailout lead to the bonds being “made whole” like they were for Citigroup or will do I price in huge discount in case the government tries to super cede me in the capital structure (think Chrysler secured bondholders).

MisesBeliever Government Spending, Inflation, Interventionism, Taxes, Uncategorized auto industry, bail out, bond market, citigroup, henry hazlitt, obama button

Dear Mr. Obama

I truly believe that in terms of intelligence you are the smartest president we have had in very long time. HOWEVER, that does not mean your policies will work. Your policies are merely a continuation of what the establishment has taught you, after all, history is written by the victors and in this case the victors were Kenysians.

Have you read Henry Hazlitt’s Economics in One Lesson? If you haven’t I will summarize chapter 5 for you and the rest of your associates. Chapter Five: Taxes Discourage Production. Where taxation hampers growth and discourages investment. It is an astounding, 2.5 pages.

You seem to think that your stimulus package will “create investment and jobs” however Hazlitt would contend it does the exact opposite.

First and foremost, Hazlitt points out that many fail to think of taxes, when they are levied, as taxing (A) to pay (B), but that is in fact exactly what you are doing. In fact, you’re taxing those in the upper middle class (the entrepreneur) that provide the “jobs”. Now in this case you are taxing A (the entrepreneur making, let’s say, $300k) to pay B (Citigroup, AIG, Bear Stearns, and, soon to included, will be executives of our nation’s insurance companies). In this case, (B) took excessive risks and made excessive money by making loans with money they didn’t have (which is the nature of factional reserve banking) and paid themselves salaries that were up to 500 times what the masses (A) make.

Now when I read Chapter Five, I thought, well maybe (B) needs a helpful hand in certain situations. I mean, I am grateful for the Subsidized Stafford Loan that allowed me to attend Syracuse University. But my assumption assumes that you taxing (A) the rich to pay be (B) the kid trying pursue the American Dream. In my case that would be a young old from the middle nowhere trying to make my own version of the American dream. Mr. Obama’s version goes something like this: Tax(A) which is the so called rich (small business owner), to pay  bailout (B) the mega rich. Am I missing something here?

Next, Hazlitt comes with assumption that capital investment is needed for entrepreneurial growth. When someone invests they take a 100% downside risk with their cash receive a (assume 28% capital gains tax) 72% possible upside return. Hazlitt states:

If they (the investor) lose, they lose a whole dollar, and if they win, they win only a fraction of a whole dollar, they decide that is foolish to take risks with their capital. In additional capital available for risk taking itself shrinks enormously. It is being taxed away before it can be accumulated. In brief, capital to provide new private jobs is first prevented from coming into existence, and the other part that does come into existence is discouraged from starting new enterprises. The government spenders create the very problem of unemployment that they profess to solve.

From my perspective I am seeing smart money move into muni’s/corporate debt market and out of equities. Isn’t equity investment where the jobs come from? Should I not worry? Will you Mr. Obama provide the jobs so we then will be able to resume being a productive country? What about my American Dream? I am not sure being a government employee was part of that Dream? We all know that government is very efficient and productive so I hope you get this stimulus rolling. Now I understand why you  are not worried about the re emergence of a bull market in US equities, it’s because you plan on making a full blown bull market in Government employment.

God Bless Change, God Bless America, God Bless Mr. Obama.

Signed From the Grave

H.L Mecken

MisesBeliever Interventionism, Taxes entrepreneur, Hazlitt, Mecken, muni market, obama, Taxes