Tax Cuts are the Solution to Everything

Left-leaning commentators always like to make fun of the Wall Street Journal op-ed page and other such right-leaning outlets who are often quick to recommend a tax cut in the face of virtually any economic problem. Whatever pops up, the "rich people" are there with their tax cut plans. What a bunch of sleazeballs! President Bush still gets a lot of criticism for cutting taxes "for the rich" in 2003, although this was followed immediately by a fairly nice bull market and economic recovery -- and a rise in tax revenues, and a smaller budget deficit, if we ignore Iraq expenses.

Actually, a tax cut usually is about the best thing a government can do, in virtually all situations. Let's see what I mean.

What are some of the other things governments typically do in a recession?

Mail out "tax rebate" checks. This is not a "tax cut" even though it might be labeled a "tax rebate." The label is unimportant. Functionally, it is a "government check in the mail" no different than Social Security or welfare payments. The effects are very transient. Also, this tends to cost a lot of money.

Devalue the currency. This can provide some short-term effects which might seem positive, but the end result is further impoverishment. You can't devalue yourself to prosperity.

"Cut interest rates." Interest rates would fall naturally, in something like a gold standard system, to reflect the overall lower return on capital during a recession. This impulse to "cut interest rates" via artificial means is typically a masked desire to devalue the currency.

Raise taxes. This is typically to "close the budget deficit." Some states are considering this right now. The federal government is going to effectively raise taxes, by "phasing out" the Bush tax cuts. This "raise taxes to close the deficit" was a major cause of the Great Depression, and also many other economic blowups throughout history into the 1990s. Usually, government budget deficits aren't really that big a deal. The tax hikes to "close the deficits" can be a big deal, however. Ironically, the tax hikes often cause so much economic deterioration that tax revenues fall rather than rise, and the deficit gets bigger! This is especially true when the recessionary effect of the tax hikes causes further pressure on the government for welfare-type spending.

Welfare spending. Today's welfare spending, such as food stamps or unemployment insurance, are usually welcome in an economic downturn. However, they typically do little to resolve whatever caused the economic problem in the first place. Also, the combination of increased spending and depressed tax revenues (due to recession) tends to lead to a bigger deficit, and thus calls for higher taxes.

Public works spending. Military-related spending often ends up in this category as well. The idea is to create jobs via government funding. This is a welfare-type activity, and typically does little to resolve the underlying cause of the economic difficulties. Also, it tends to be very, very expensive, which results in "raise taxes to balance the budget" arguments. The effects are usually transient.

Reduce government spending. Usually governments are rather bloated anyway, and what better excuse to go through a downsizing than a recession? If there is a problem with this, it is that it piles government unemployment on top of private-sector unemployment. It would be much better to slim down the government during the boom (OK, that never happens), when government workers could easily find new employment in the private sector. Maybe if a government reduced spending policy were paired with something positive, like a tax cut.

So, you see, what else are you going to do besides cut taxes? A tax cut, in a recession, has some advantages:

If the recession was caused by a tax hike, at least in part, a tax cut is an excellent solution. Herbert Hoover raised the top income tax rate in the United States from 25% to 63%, plus additional taxes on inheritances and businesses. This definitely made the situation worse. Much worse! A good solution for Roosevelt would have been to go back to 25%. Yes -- sometimes it is that obvious.

If the economic problems have a weak-currency component, a tax hike would help the currency to rise. Especially in emerging markets, where a lot of financing can be in foreign currencies, economic problems often have currency weakness as a component. A significant tax cut -- such as the East European-style flat taxes -- would have a meaningful currency-supportive effect, in addition to their positive effects in allowing greater economic expansion.

If the economic problems have little to do with taxes, a tax cut would still be one of the most effective ways of inducing a stronger economy. The present problems in the U.S. don't really have a tax hike component, although they may in 2009 once there is Democratic leadership in Washington. However, if we look at the list of options above, I would say that a meaningful permanent tax cut is one of the best options a government has to create more economic activity. What would the U.S. be like if we enjoyed a Hong Kong style tax system, with a 15% top income and corporate tax rate, and no taxes on interest income, dividends, capital gains, or inheritances? It would probably be a lot more healthy economically. If something is good for an economy in the long run, like a sensible tax system, then it is probably good in the short run as well. Vladimir Putin passed Russia's 13% flat tax in 2000, the depths of a decade-long economic catastrophe. The result: POW! Galloping economic growth -- the most since before the First World War! -- and galloping tax revenues. This was no fluke, since many other moribund FSU countries did much the same thing in 2001-2008, with much the same results.

June 30, 2007: East Europe's Flat Tax Revolution

A tax cut works, not because of "putting money in people's pockets" or some such nonsense, but because it lowers the barriers to transactions in an economy. An economy is all about cooperation, and if there are high taxes, people are not able to cooperate productively. Russia's 13% flat tax worked because it removed all the "internal trade barriers" caused by taxes.

A tax cut helps dispel the urge to raise taxes. One of the most destructive things a government can do is to raise taxes in a recession. There might not be enough political will to cut taxes dramatically. However, if there is even an eeny beeny tax cut, too small to make any real difference, that would at least tend to cancel any urge to raise taxes. So, cutting taxes can be a useful political exercise, even if it fails.

A tax cut helps dispel the urge to devalue the currency. Once you've done what you can do with welfare-type spending, the next thing a government typically reaches for is currency devaluation. Much better to focus attention on a significant tax cut.

Today's economic problems in the U.S. are mostly due to the previous credit binge. The natural response to this is government bank recapitalization. The U.S. government is being pressed down this path by events as it is, just as other governments (Japan, Britain, France, Sweden, Mexico, Korea) have been pressed down this path in the past. Government spending -- the "tax rebates," welfare, military spending, homeowner bailouts, etc. -- has gone about as far as it is going to go. What comes next? Unfortunately, really bad economic problems usually have, at their root, high or rising taxes and monetary instability. It looks like we have both coming up. Bernanke is obviously a devaluationist at heart, who believes that the Great Depression was caused or worsened by the fact that the world's major governments -- every one of which devalued their currency -- did not devalue quickly enough or dramatically enough. The Democratic Party is anxious to rub out whatever tax-cutting legacy was left by Bush, plus pile on some additional taxes. The real crunch may come in a year or two, when the economy may be really coming apart and tax revenues at governments are sagging badly. A typical Democrat response would be: more devaluation, more government spending, and more tax hikes to supposedly pay for the spending.

This was not always the case. Roosevelt made arguments for a tax cut in the 1932 elections -- and promptly forgot them afterwards, although his Secretary of State Cordell Hull did make many efforts to reduce tariffs worldwide. John F. Kennedy enacted a big tax cut, on which the later Reagan tax cut was modeled. In 1974-1975, a terrible recession, the Democrats tried to push through a significant tax cut, and were indeed successful although the result was much watered-down (by Republican opposition). Jimmy Carter campaigned in 1976 on vague tax-reform promises (and did nothing afterwards). Bill Clinton promised a "middle class tax cut" in the recession in 1992, and soon forgot all about it. Now we have Obama making some suggestions about lower taxes for lower incomes. I'm all for a $40,000 per adult standard deductible. There are better systems (look at the East European examples), but that would help and it's something the Democrats might rally around. It would help get their mind off tax hikes at least.

It really irks Democrats when you remind them that John F. Kennedy was a tax cutter. And, it really irks Republicans when you remind them that Kennedy's tax cut plans were opposed by the Republicans, who were obsessed with "balancing the budget". A decent book on the Kennedy tax cut was written by Herbert Stein, called The Fiscal Revolution in America. It was published in 1969, and begins with this paragraph:

Herbert Hoover recommended a big tax increase in 1931 when unemployment was extremely high and a large budget deficit was in prospect.

John F. Kennedy recommended a big tax reduction in 1962 when unemployment was again a problem, although a much less serious one, and a large budget deficit was again in prospect.

The contrast between these two Presidential decisions symbolizes the revolution in fiscal policy that occurred in the intervening thirty-one years. . . . Hoover proposed a tax increase both to raise employment and balance the budget. Kennedy proposed a tax cut both to balance the budget and raise employment. [Stein's emphasis.]

And what happened? The Kennedy tax cut was passed posthumously by Johnson in 1964. An economic boom commenced, and in 1965, the government was on track to run a budget surplus -- if it had not been weighed down by Johnson's Vietnam expenses.

Surprised? Vladmir Putin wouldn't be.

"Why Not the Gold Standard?"

A website reader thought I should look at some commentary by Bradford DeLong, a U.C. Berkeley professor of economics. Usually, I don't bother commenting on other peoples' stuff because it is normally so convoluted that commentary isn't really useful. Just try commenting on Keynes' General Theory. What a pointless exercise.

However, in this case, DeLong has actually summarized a number of ideas in a nice concise package, which is a useful starting point for us. Like an encyclopedia, it is an excellent reference for "conventional wisdom" of the period, which is to say, the most popular economic delusions. Let's take a look, with my commentary in RED.

http://www.j-bradford-delong.net/Politics/whynotthegoldstandard.html

Now, it should be said that I am familiar with all these ideas, and actually addressed them in my book. If you read this, and then read my book again, you'll probably see what I mean even if maybe you missed it the first time. Most justification for floating, government-controlled currencies today is a reaction to the Great Depression. It's like a childhood trauma.

Why Not the Gold Standard?
Talking Points on the Likely Consequences of Re-Establishment of a Gold Standard:
Brad DeLong
U.C. Berkeley

Consequences for the Magnitude of Business Cycles:

Loss of control over economic policy. If the U.S. and a substantial number of other industrial economies adopted a gold standard, the U.S. would lose the ability to tune its economic policies to fit domestic conditions.

NWE: Well, at least they're honest -- it's all about "fine tuning the economy."

For example, in the spring of 1995 the dollar weakened against the yen. Under a gold standard, such a decline in the dollar would not have been allowed: instead the Federal Reserve would have raised interest rates considerably in order to keep the value of the dollar fixed at its gold parity, and a recession would probably have followed.

NWE: Actually, the dollar's value vs. gold was basically flat in 1995, with all the change in forex rates coming from the yen side. Keeping a currency stable doesn't necessarily produce an increase in interest rates.

Recessionary bias. Under a gold standard, the burden of adjustment is always placed on the "weak currency" country.

NWE: A gold standard's purpose is to produce money that is stable in value. Stable money does not have a "recessionary bias." Stable money allows an economy to avoid the effects of monetary distortion, which are indeed recessionary.

Countries seeing downward market pressure on the values of their currencies are forced to contract their economies and raise unemployment.

NWE: The proper response to sagging currency value is to reduce the amount of base money outstanding. This would likely lead to lower interest rates. A stable currency helps produce growing economies and typically low unemployment. You can also help support a currency's value with a significant tax cut, which would also tend to accelerate economic growth and lower unemployment. Besides, a government doesn't "contract their economies" like turning some knob. This is low-grade communist central planning.

The gold standard imposes no equivalent adjustment burden on countries seeing upward market pressure on currency values.

Hence a deflationary bias which makes it likely that a gold standard regime will see a higher average unemployment rate than an alternative managed regime.

NWE: Stable money does not have a "deflationary bias." If it did, it wouldn't be stable. I think that what he's getting at here is the risk of "beggar-thy-neighbor devaluation." If the dollar is pegged to gold, and the euro devalues, then the dollar-bloc countries will tend to suffer a "competitive disadvantage," with some recessionary implications. This is not a good reason for the dollar to be devalued, it's a good reason for the euro to stick to gold.

The gold standard and the Great Depression. The current judgment of economic historians (see, for example, Barry J. Eichengreen, Golden Fetters) is that attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929-1931 into the Great Depression of 1931-1941.

NWE: Actually, Germany, Austria, Britain and Japan (and all of their empires around the world) devalued in 1931, so how is it that NOT DEVALUING in 1931 created the Great Depression?

The purpose of a gold standard is to produce stable money. I don't know of any major negative economic event in all of history that was caused by money that was too stable. However, the gold standard did "keep governments from fighting the Great Depression" via currency devaluation, an economic band-aid that governments have reached for over thousands of years. Today's economists like to think they invented currency devaluation! And, like I said, when Germany, Britain and Japan (and many other parts of their empires like Argentina, India, Korea etc.) devalued, this created a "competitive disadvantage" for countries that remained on the gold standard, notably the U.S. and France.

Countries that were not on the gold standard in 1929--or that quickly abandoned the gold standard--by and large escaped the Great Depression

NWE: The only country of significance that was not on a gold standard in 1929 was Japan. The yen floated, but its value was reasonably stable vs. gold. This informal gold standard was replaced by a formal gold standard in 1930, but that was also abandoned in 1931, in a devaluation that was in response to the British devaluation two months earlier. The reason that Japan did relatively well in the Great Depression was that it refused to raise taxes, either tariffs or domestic taxes, and in fact reduced taxes significantly during the 1930s. There were huge tax hikes in the U.S., Britain and Germany.

Countries that abandoned the gold standard in 1930 and 1931 suffered from the Great Depression, but escaped its worst ravages.

NWE: Like Britain and Germany? Of course, currency devaluation does provide some short-term benefits. This is no secret.

Countries that held to the gold standard through 1933 (like the United States) or 1936 (like France) suffered the worst from the Great Depression

NWE: Actually, France was relatively immune from the slowdown of 1929-1931. It was enjoying the effects of tax cuts in the 1920s, and didn't hike domestic taxes in the way that Britain, the U.S. and Germany did. The devaluations of Britain and Germany put "competitive devaluation" pressures on France, which is why they devalued in 1936 to return forex rates to their pre-devaluation values, more or less. I think they're just making up history to fit their theories here.

Commitment to the gold standard prevented Federal Reserve action to expand the money supply in 1930 and 1931--and forced President Hoover into destructive attempts at budget-balancing in order to avoid a gold standard-generated run on the dollar.

NWE: The Fed experimented in 1930-1932 with expanding the money supply. They wanted to see if there was a problem of "insufficient money" -- which is what Milton Friedman accused them of thirty years later. They concluded, correctly, that there was no such problem. It's true that governments raised taxes in a belief that supposedly smaller government deficits (they never appeared in practice) may help the general situation. There is noting about a gold standard that demands such behavior, though. The proper response to potential currency weakness is an adjustment of base money, just as currency boards operate today. A tax cut would also help. What is a "gold-standard generated run on the dollar?" The purpose of a gold standard is to produce stable money. If there is a "run" on the dollar, it is because dollar holders suspect the government is not going to manage the currency properly -- suspicions which turned out to be true.

Commitment to the gold standard left countries vulnerable to "runs" on their currencies--Mexico in January of 1995 writ very, very large. Such a run, and even the fear that there might be a future run, boosted unemployment and amplified business cycles during the gold standard era.

NWE: For the most part, governments behaved themselves during the 1800-1930 period. Occasionally (early 1890s for example), there was talk about what amounted to currency devaluation, so it is no surprise that dollar holders took appropriate action in response. These threats of devaluation, and their corresponding currency crises (which never resulted in a devaluation like Mexico in 1995 -- duh!), did indeed cause some economic turmoil. Certainly the lesson must be that, having a stable currency pegged to gold, you shouldn't threaten to devalue?

The standard interpretation of the Depression, dating back to Milton Friedman and Anna Schwartz's Monetary History of the United States, is that the Federal Reserve could have but for some mysterious reason did not boost the money supply to cure the Depression; but Friedman and Schwartz do not stress the role played by the gold standard in tieing the Federal Reserve's hands--the "golden fetters" of Eichengreen.

NWE: The "standard interpretation" is bogus. The Fed did boost the money supply (just look at base money statistics from the period), in response to increasing demand for money. They also undertook some experiments to expand the money supply even further, just to see if they had missed something. The result, in these cases, was dollar weakness -- signifying an excess of money -- so they pulled back. Friedman really wished the Fed would devalue.

Friedman was and is aware of the role played by the gold standard--hence his long time advocacy of floating exchange rates, the antithesis of the gold standard.

NWE: Friedman never understood how a gold standard works, or what it is for. Just another devaluationist. He recanted later in life.

Consequences for the Long-Run Average Rate of Inflation:
Average inflation determined by gold mining. Under a gold standard, the long-run trajectory of the price level is determined by the pace at which gold is mined in South Africa and Russia.

NWE: This is baloney of course. The reason that gold makes good money is that it's value is NOT affected by the rate of mining, unlike copper or lead. However, this is a notion that is also popular among gold standard advocates, so it is not surprising that it pops up here among gold standard detractors. I call it "gold supply monetarism" -- the notion that the "money supply" would follow the course of gold mining, or about a 2% increase per year, which is exactly the same as Milton Friedman's proposal for a Constitutional amendment to keep the "money supply" (his definition) at a growth rate of 3% a year. Not only would such a system not work, but you wouldn't want it to either.

For example, the discovery and exploitation of large gold reserves near present-day Johannesburg at the end of the nineteenth century was responsible for a four percentage point per year shift in the worldwide rate of inflation--from a deflation of roughly two percent per year before 1896 to an inflation of roughly two percent per year after 1896.

NWE: Inflation according to who? Their "inflation rates" are basically measures of wheat and corn prices. Maybe wheat and corn prices were affected by things that affect wheat and corn prices.

In the election of 1896, William Jennings Bryan's Democrats called for free coinage of silver as a way to end the then-current deflation and stop the transfer of wealth away from indebted farmers. The concurrent gold discoveries in South Africa changed the rate of drift of the price level, and accomplished more than the writers of the Democratic platform could have dreamed, without any change in the U.S. coinage.

NWE: Bryan's calls for what amounted to a devaluation caused one of the the "currency crises caused by the gold standard" that DeLong refers to earlier. When Bryan lost the election, the crisis went away.

Thus any political factors that interrupted the pace of gold mining would have major effects on the long-run trend of the price level--send us into an era of slow deflation, with high unemployment. Conversely, significant advances in gold mining technology could provide a significant boost to the average rate of inflation over decades.

Under the gold standard, the average rate of inflation or deflation over decades ceases to be under the control of the government or the central bank, and becomes the result of the balance between growing world production and the pace of gold mining.

NWE: Baloney again, but baloney shared by many gold standard advocates.

Why Do Some Still Advocate a Gold Standard?
A belief that governments and central banks should not control the average rate of inflation over decades, and that the world will be better off if the long-run drift of the price level is determined "automatically."
A belief that bondholders and investors will be reassured by a government committed to a gold standard, will be confident that inflation rates will be low, and so will bid down nominal interest rates.
Of course, if you do not trust a central bank to keep inflation low, why should you trust it to remain on the gold standard for generations? This large hole in the supposed case for a gold standard is not addressed.

NWE: Historically, governments did stay on a gold standard for generations, even centuries, and interest rates did fall to very low levels.

Failure to recognize the role played by the gold standard in amplifying and propagating the Great Depression.

NWE: A gold standard creates stable money. Stable money does not "amplify and propagate" recessions.

Failure to recognize that the international monetary system functions best when the burden-of-adjustment is spread between balance-of-payments "surplus" and "deficit" countries, rather than being loaded exclusively onto "deficit" countries.

NWE: "Balance of payments" issues are irrelevant. When a currency is pegged to gold, it is stable (as stable as gold is), whatever happens to capital flows ("balance of payments imbalances"). Economists today still do not understand capital flows, although it is not very difficult. Actually, a gold standard makes capital flows ("balance of payments imbalances") easier, and thus usually larger, because it essentially puts everyone on the same currency.

Failure to recognize how gold convertibility increases the likelihood of a run on the currency, and thus amplifies recessions.

NWE: "Runs on currencies" are caused by governments threatening to devalue, or, also quite common, governments that show they are too incompetent to manage a currency properly. DeLong obviously does not know the principles of currency management. Look at it from his point of view: what if someone told you to operate a gold standard system? You don't know how to do it. The guaranteed result is a "run on the currency" and the failure of the gold standard regime, within a short period of time. Economists -- especially academics -- are desperate to avoid embarrassment. Thus -- blame gold! In all honesty, it is better not to even start, if the system would be operated by an incompetent and quickly blow up. That's why I focus on the nuts-and-bolts, the mechanical-engineering-like aspects of monetary management, rather than airy-fairy principles. Realistically, people like DeLong are no longer capable of learning anything, so it falls on the anonymous others -- people who read this site -- to learn how to do this stuff.

I often say that a gold standard is like a "currency board linked to gold." They work on the same mechanisms. However, there have been many "currency pegs" -- not currency boards -- managed by people like DeLong, which have tended to blow up due to mismanagement.

Well, we are now at the end of the essay. It turns out that there are no good reasons not to use a gold standard, except a) it prevents a government from trying to deal with an economic downturn with a currency devaluation, and b) it would be very embarrassing to mainstream economists charged with making it work, which is not something they know how to do.

The purpose of a gold standard is to create stable money. Stable money does not cause economic problems.

* * *

Le Corbu on Crack: Dubai. How could I have a discussion of the "Radiant City" and forget about Dubai? Now, I like Dubai. I think it is a wonderful example of what Hong Kong used to be, a center of small-government unfettered capitalism, and it is even better that it is in the Middle East and dominated by non-Europeans. The Arab/Persian world has a history of great wealth, commerce and cultural sophistication, and it is nice to see that make a bit of a comeback (even if it is fueled by oil money).

However, the city of Dubai is also an example of hypertrophied Big Building -- Big Roadway urbanism. Sort of like a financial Las Vegas. It is easy to give this sort of thing a pass, because people there are very wealthy. However, I think this will be looked on later as just more Pyramids in the Desert, rather than a city of human-scale life and excitement, like a Paris or a Tokyo.

I am not necessarily against high-rises. It is really the spaces in between the high-rises where the problems are. Instead of the "free-fire zone" plaza -- superhighway model, you could fill in these spaces with small-street traditional urbanism. Then, you'd have the best of both worlds. Wonderful street life, a pedestrian city, and penthouses on the 225th floor. Actually, maybe this will be fixed in the future. You can fix these things. You just build over the roads and plazas. They are basically empty unused space as it is. The idea of tearing down buildings and installing a big highway is very common. Did you know that Robert Moses wanted to tear down Greenwich Village in New York City and install a freeway? The failure of this approach (you end up with lots of freeways and no Greenwich Villages) became apparent by the end of the 1960s. How about going the other way -- tear down the highway and build Greenwich Village?

Dubai Is Nuts!!!

In fact, Boston is faced with this right now, following the Big Dig which put a concrete cover on the freeway that someone built through the middle of the central city some decades ago. In this case, they're not tearing out the freeway, but they now have a bunch of open space where the freeway used to be. A good solution would be to build something like the traditional Boston that was torn up to make way for the freeway decades ago. This means:

Really Narrow Streets

Or, something like Greenwich Village if you want to think of it that way.

Some people want to put in a park -- a big patch of grass. Not that Boston needs any more parks. A city should be a city, not a place to graze cows. I think they're reacting to the disaster of city design over the past sixty years. Nothing that has been built is any damn good -- and you're stuck with it for generations. Seeing this, the natural reaction is to put the land on ice (or under grass as the case may be) until someone in some more enlightened future generation is able to do what people in the 18th or 19th centuries had no trouble doing. Probably, they would end up with Big Streets and Big Buildings, like Singapore. That would make money for property developers, but it wouldn't be that much fun to walk around in. The "you're a cockroach at Stonehenge" effect.

High-rises tend to be boring corporate environments, even when they have some retail type stuff going on, but they can also become interesting "neighborhoods" in their own right. The famous (and famously scummy) "mansions" in Kowloon, Hong Kong are an example of this: Mirador Mansions or Chungking Mansions for example. As you walk down the corridors and up and down the elevators, you find restaurants, private apartments, small hotels and hostels, grocery stores, bars and clubs and all the other features of normal cities, in a vertical arrangement rather than a more horizontal one.

The Traditional City Vs. The "Radiant City"

I've talked about real cities vs. the suburban disaster. The basic characteristic of real cities is that it is easier to walk (or bike or take the subway/streetcar etc.) than it is to drive. People have been living in dense cities since the beginnings of recorded history. Only in the recent period -- after World War II -- have people begun to make cities which are near-impossible to walk in, essentially making everyone a handicap case requiring motorized wheelchairs to get around, and thus leading to a number of problems that won't be solved until this form of construction is abandoned.

Other posts in this series:

December 2, 2007: Let's Take a Trip to Tokyo
October 7, 2007: Let's Take a Trip to Venice
June 17, 2007: Recipe for Florence
July 9, 2007: No Growth Economics
March 26, 2006: The Eco-Metropolis

But what are the alternatives? There are two basic templates for "dense urban design" today. One is what I call the Traditional City. The other is the "Radiant City." The differences are:

The Traditional City: Many small streets, suitable for walking but hard to drive. Buildings usually built right at the edge of the street/sidewalk. Streets are plentiful and "blocks" -- the area between the streets -- are small (though there are typically some big ones too.) Buildings usually side-by-side, almost touching. Building height traditionally at the limits of stair-climbing, about seven stories maximum. Many parks, some stand-alone plazas, but no "landscaping." Little to no parking for cars. Streets are often crooked and non-rectilinear.

The "Radiant City": Very large streets, suitable for several lanes of automobile traffic. Very large buildings, typically glass-walled high rises of ten to one-hundred stories tall. Buildings are widely spaced. Buildings typically not built to the edge of the sidewalk/roadway, but rather surrounded by some sort of "landscaping," either grass or a paved "plaza." Streets are widely spaced, and "blocks" are large. Streets are often on a rigid grid design, or if not a grid, at least a pattern that looks very well-thought-out when observed in a scale model.

Remember my First Law of urban design:

Really Narrow Streets

It should be clear that I prefer the Traditional City to the "Radiant City." The Traditional City can be a cesspool, but it can also be a center of great life, art and excitement. "You can't keep them on the farm once they've seen Paris." The "Radiant City" may have some life, art and excitement going on, but the city design itself does not contribute to this, but rather prevents it. Whatever happens is in spite of the "Radiant City" design, which is contrary to such activities by its construction. It is vaguely tolerable. I do think it is possible to build tall buildings within the context of the Traditional City, with the New York City skyscraper construction of the 1920s and 1930s a pretty good example of this. The Empire State Building is a very tall building, but at street level, it fits right in. You'd have to lean back and look up to even know that you're looking at the tallest building in the city. Rockefeller Center also works quite well. Compare this to the typical "glass pyramid" construction of today -- surrounded by landscaping, parking, and large roadways.

Also, I think the "Radiant City" is better than the Suburban Disaster. But not good enough to bother with, really.

The "Radiant City" idea got started in the 1920s, as a response to the newfound ability to make very tall buildings, combined with a general discontinuity in civilization (in so many ways) in Europe following World War I. Also, there is a strong flavor of the rising influence of the United States in world affairs -- combined with a more "American" influence on urban ideals, which meant Small Town America. The "Radiant City" is basically "Skyscraper Suburbs." Just look at the list. Easy to drive. Free standing, surrounded by grass. Lots of parking. Big Big Big everything. If you take a suburb, and swap out the McMansions for glass high-rises, you pretty much have the "Radiant City."

I think the "Radiant City" ideal was sort of floating in the ether in the 1920s, but one guy who had his cultural antenna particularly attuned to this trend was a French guy who called himself "Le Corbusier" (born Charles-Edouard Jeanneret-Gris).

Wikipedia entry on Le Corbusier including his plan for the "Radiant City."

"Technological historian and architecture critic Lewis Mumford wrote in Yesterday's City of Tomorrow, the extravagant heights of Le Corbusier's skyscrapers had no reason for existence apart from the fact that they had become technological possibilities; the open spaces in his central areas had no reason for existence either, since on the scale he imagined there was no motive during the business day for pedestrian circulation in the office quarter. By mating utilitarian and financial image of the skyscraper city to the romantic image of the organic environment, Le Corbusier had, in fact, produced a sterile hybrid.

James Howard Kunstler, a member of the New Urbanism movement, has criticized Le Corbusier's approach to urban planning as destructive and wasteful: Le Corbusier [was] ... the leading architectural hoodoo-meister of Early High Modernism, whose 1925 Plan Voisin for Paris proposed to knock down the entire Marais district on the Right Bank and replace it with rows of identical towers set between freeways. Luckily for Paris, the city officials laughed at him every time he came back with the scheme over the next forty years ≠ and Corb was nothing if not a relentless self-promoter. Ironically and tragically, though, the Plan Voisin model was later adopted gleefully by post-World War Two American planners, and resulted in such urban monstrosities as the infamous Cabrini Green housing projects of Chicago and scores of things similar to it around the country. [12]"

"Identical towers set between freeways." Hmmmm. Five words -- that about sums it up! Which just goes to show that the failings of the "Radiant City" are well known. Today, we recognize Le Corbusier's "Radiant City" signature in all of the crapulous housing for the poor created during the 1950s and 1960s. And yet, people still keep building this garbage everywhere.

Okay, let's look at some Traditional Cities:

This is Paris. Buildings up against the sidewalk: check. Narrow streets, hard to drive, not much parking: check. Buildings under 10 stories, adjacent to each other: check. Parks and plazas, but no "landscaping": check.

I'll take the "City of Light" over the "Radiant City," thanks.

Rome.

Rome.

Rome.

Amsterdam. Nice!

More Amsterdam.

Innsbruck, Austria.

An older part of Shanghai, China.

Traditional Shanghai small street.

Shanghai.

Holy shit! That is some architecture.

Shanghai. Look at those buildings! Wow. And where are the CARS?

Prague, Czech Republic.

Hanoi, Vietnam

Hanoi.

Marrakesh, Morocco.

Well, you get the idea. But, it's important to have this little exercise, to consciously recognize what a Traditional City looks like, especially in the United States where it is almost nonexistent. Do you see that, whether Paris or Hanoi or Prague or (the older parts of ) Shanghai, they all have the same basic characteristic?

Really Narrow Streets.

And, of course, everything that goes along with that in the design of the Traditional City. You can sense, just from the photos, that if there is a reasonably good transportation system (subway, etc.), then you can get around and live there without a car, and even without a desire for a car.

OK, take a deep breath. It's time for the "Radiant City," if we can stand it.

The First Wave of the "Radiant City" ideal, public housing projects in New York. Notice, first, the tall buildings (in the lower left corner, not the office skyscrapers of Midtown.) Notice the Big Streets, the fact that the buildings don't abut the street, but are surrounded by greenery which is not really a park ... sort of a no-man's land. (Don't go there after dark!) Giantism everywhere. Architecture that tends toward simple boxes. From here on, you'll notice that we tend to get a "helicopter's eye view" of things, rather than a street-level, human size view. That's because all of this is designed from the helicopter view in mind, and the scale-model, rather than as real things in real life size. The result is that everything is giant-size. We've been trained to like this stuff for the last fifty years, so it may take a moment to overcome the "yes, I like that better" feeling that has been implanted in you by decades of condo salesmen.

New condo developments in Beijing. Once again, not only are the buildings tall and monolithic (no street level detail), but we have BIG streets with LOTS of cars, parking, and that landscaping everywhere which isn't really a park, but rather a sort of aesthetic buffer against the endless traffic and the Great Pyramid buildings everywhere.

Recent development in Shanghai. BIG BIG BIG everywhere. See all the weird greenery, serving as a sort of buffer between the CARS CARS CARS and the Great Pyramid buildings? Lots of cookie-cutter condo developments, which look just like ... housing for poor people in the U.S., or maybe army barracks.

Despite its apparent density, the "Radiant City" is designed for CARS CARS CARS, not people.

Singapore. Sort of a model for "Radiant City" development over the last twenty years. BIG BIG BIG. Giant streets. Mondo traffic. That funny landscaping crap everywhere. Imagine trying to walk to this place from your apartment!

More Singapore. OK, I know you're supposed to be impressed by the "skyline" -- woo! flashing lights!

Now, don't get me wrong. I like Singapore. I like it in spite of the "Radiant City" crap everywhere.

We've all seen enough of this stuff that I don't think I need to go on. It's everywhere!

One thing you will notice is that the Traditional City is vastly more sophisticated from an aesthetic standpoint. Just compare the photos above to the "concrete box with blinking lights" style below. Oddly enough, the "Radiant City" isn't even more dense than the traditional city, although it might seem that way because of the tall buildings. So much of the surface area is taken by that weird landscaping, and the giant roadways, that even though the buildings are tall they are spaced quite far apart. The small streets and 3-10 story buildings of the Traditional City are at least as dense, maybe denser.

Now, like I said, I am not necessarily against very tall buildings. They can be integrated into a Traditional City format with some success. Try Lower Manhattan for example. Another interesting example is Raffles Place in Singapore, the heart of the Financial District.

Raffles Place, Singapore

Here we have a real plaza -- it's a place you can sit and eat lunch, sunbathe etc. and many people do -- surrounded by high-rises. (Instead of a high rise surrounded by useless "landscaping", further surrounded by ten lanes of traffic.) This is a very traditional -- and successful -- format. The high rises are set very close to each other, and you can see that each one has a more traditional"shop front" on the ground floor, instead of just a glass wall. There are no streets between the buildings -- this is a pedestrian only zone.

Piazza del Campo, Siena, Italy

See the resemblance? Actually, once you get over twenty stories or so, the height of the building becomes very hypothetical. From ground level, a twenty story building and a hundred story building (the Empire State Building for example) are almost the same, except for the gloominess that results due to the blocking of sunlight.

Please, let's not build any more of this "Radiant City" crap. They laughed at Le Corbusier for forty years. Tear down the City of Light to build the City of Shit? Ha Ha Ha! Maybe only the French got the joke. As for the rest of the world -- the joke's on them!

Suckers!

What To Do About the Poor People

With a Democratic administration likely next year, it is a good time to think about traditional Democratic interests, which mainly circle around the lower 50% of income earners. These are the lower middle class and the lower-lower middle class, and the genuinely destitute.

I birng this up because most Democratic solutions -- dopey tax credits for daycare, for example -- don't really accomplish anything at all except serve as a Works Progress Administration program for accountants. Other "solutions" -- like taxing capital gains at 28% or higher with no inflation adjustment -- do absolutely nothing for those with lower incomes, but definitely impair economic progress, with the inevitable result of higher unemployment, declining wages, and all the other symptoms of economic stagnation. You need only look at Britain before Margaret Thatcher to see where all this ultimately leads. As for "tax credits," it would be much better to apply a $50,000 exemption, or a "tax credit for living." I mentioned $20,000 per adult and $10,000 per child, but why be so chintzy. How about $40,000 per adult and $20,000 per child? If you want to do something for those with lower incomes, here's an idea: don't take their money.

Most people with economic understanding tend toward the Republican stance, which is something like: "if the economy does well overall, it should be better for the middle and lower-middle class." Which is generally true, but that's typically about as far as it goes. There are many commentators who feel a great compassion toward the difficulties of what is really 50% or more of the U.S. population, but they typically have little economic understanding and come up either with ideas that make businessmen very nervous due to their potential negative economic effects, or amount to small-scale government handouts with little real effect at all. In general, the businessmen have it right -- you can't make the less-well-off better off by a method that cripples the economy as a whole.

One things about "poor" people today, in the U.S., is that they have vastly higher incomes than most people in the world, and enjoy a rather high standard of material abundance. Starvation is practically unheard of. If anything, obesity is a bigger problem. Most everyone has electric lights, hot and cold running water, and functional sewage systems. Even, despite the government's official "fork you" stance, a certain level of government health care, if you are poor enough and know where to look. And yet, there seems to be an experience of extreme lack.

Part of this seems almost entirely psychological in nature. A graduate student of marine biology might have an income that falls solidly in the second or even first quintile (bottom 20% or second 20% of income), but the graduate student considers himself (or herself) as a member of the intellectual elite. Even after receiving their degree, and becoming a junior adjunct professor of some sort, they may make less than many construction workers, but they retain their elite cachet. Plus, the work is a lot more fun. So, part of the experience of being "poor," is, I believe, the sense that you are a loser in a game in which there are winners and losers -- not so much because of physical hardship per se. If you were a cleaner of hotel rooms for example, you would probably have the daily experience of being rather badly treated by one boss or another.

Within this category of psychological issues is the notion of expectation or entitlement. Today, there are a great many immigrant workers who seem to be able to work low-paying jobs (drywaller, dishwasher, grass-cutter) but manage to save a quarter or even half their income, which they send back to their family in Guatemala or southern Mexico. Indeed, the savings rate in China is about 40%! A dozen may live in a three-bedroom house, in a suburb near you, which keeps individual rent down. They may not own cars, but ride a cheap Wal-Mart bike to work (if you're willing to work cheaply, usually you don't have to travel very far). And, they eat the simple rice/beans/corn/tomato based foods that they are already accustomed to. I get the impression that most illegal immigrant workers don't particularly like working in the U.S. -- they prefer their rural Mexican villages in terms of lifestyle. Plus, they tend to look upon the U.S. as a Nation of Assholes. Nevertheless, it has been an environment where they have been able to thrive, in their very modest way.

Then there are the dropout artists -- like Ran Prieur for example, who has carefully organized his life so that he needs only about $400 a month to live. Most of his time is spent lackadaisically enjoying his afternoons, much like any ski or climbing bum without the skiing or climbing. People have been doing this forever, such as this famous book published in 1978:

Possum Living

"Do you remember the story of Diogenes, the ancient Athenian crackpot? He was the one who gave away all his possessions because "People don't own possessions, their possessions own them." He had a drinking cup, but when he saw a child scoop up water by hand, he threw the cup away. To beat the housing crunch he set up an abandoned wine barrel in a public park and lived in that.

The central theme of Diogenes' philosophy was that "The gods gave man an easy life, but man has complicated it by itching for luxuries."

Apparently he lived up to his principles. But despite that handicap he seems to have had the most interesting social life imaginable. He not only lived in the center of the "Big Apple" of his day (5th century B.C. Athens), he also had the esteem and company of many of the most respected, rich and influential citizens, including that of the most expensive prostitute in town.

When Alexander of Macedon, the future conqueror of the known world, was traveling through Greece, he honored Diogenes with a visit. Alexander admired Diogenes' ideas to the point of offering him any gift within his means. Diogenes, who was working on his tan at the time, asked as his gift that Alexander move aside a bit so as to stop shading him from the sun. This to the richest and most powerful man in the Western world.

Parting, Alexander remarked, "If I were not Alexander, I would be Diogenes." Diogenes went back to nodding in the sunshine.

Diogenes was fair and just to all but refused to recognize the validity of man-made laws. He was a good old boy, one of the first back-to-basics freaks in recorded history. He lived to be over 90. Alexander, The Mighty Conqueror, drank himself to death at age 33."

Diogenes didn't have jack squat, but he wasn't poor.

One of the things that makes poor people poor in the U.S. -- not the only thing by any means, but we're going one at a time -- is the American Dream. Not the independent rise-to-success one, but the one that's all about ownership, of a single-family house that looks like a farmhouse, and of course a car or three. The American Dream is mostly just what people are told to buy by their television sets. For millennia, people got by by doing basically what everyone else was doing. If you were born in Switzerland, you probably raised cows and made cheese, or maybe chocolate or cuckoo clocks, because that is what everyone else was doing, and it worked, and it was too hard to figure out an alternative way. One of the reasons this monkey-see-monkey-do strategy worked is because it was based on reality. You could see that the cow raisers and cheese makers were more-or-less successful, because they were right in front of you and you could confirm it with your own eyes. Also, if you did figure out an alternative way, you might not be included in the social gatherings of the cow and cheese people, which could have been pretty tough in rural Switzerland of yore. I don't think Diogenes made it too well with the women, until maybe after he was famous and hobnobbing with Alexander the Great. Who wants to raise kids in a wine barrel?

This process has been co-opted somewhat by the marketing people. Instead of seeing a cow-and-cheese person, who is genuinely, in real life, satisfied with their situation, you see a person on TV -- an actor -- acting satisfied after their purchase of a plasma TV. After enough exposure to this sort of thing, a person concludes that everybody but them owns a plasma TV, and seems happy about it, so they should to -- even if this is not really the case at all. Over time, it actually becomes the case: people in the neighborhood own this or that, and act like they are happy about it, just like the people on TV.

There is no end to such things. I have an interesting little book called The Exurbanites, which is about the upper-middle-class people who live in the exurbs of New York City, most of whom commute to the city. It was published in 1952! The book is about the whole ring of residential communities, but it is especially about Westport, Connecticut, which is where the author lived (before moving back to NYC), and also where I lived for some time. As part of his research, he talked with the local accountants, who know better than anyone who is really making the dough and who is just putting on a show. The accountants told him that, such was the level of expenditure necessary to maintain this exurban lifestyle (and this is upper-middle-class, not upper class), that practically everyone making under $60,000 a year in 1952 dollars (about $750,000 today) was barely getting by! Westport is an interesting little study, because, in the author's day, it was a sort of model of the suburban, upper-middle-class ideal. (The rich are in Greenwich.) It still holds that mantle today, as it has long been the home of Martha Stewart, who exported a sort of Westport ideal across the United States and the globe during the 1990s. The author said the same thing of Westport in 1952. It was where the advertising people lived, and, whether consciously or unconsciouly, this ideal was transmitted across the country as What People Did. That's why people in Arizona or Nevada, places with no trees or water, live in wood-framed houses with a lawn in the front and back. In Connecticut, there are trees everywhere, and after you cut down the trees to make your house, a lawn remains.

The point is, we are drenched in a media creation which projects an image of a lifestyle that costs about $250,000-$500,000 a year to maintain -- not only through advertising, but through the television shows themselves, which generally portray people fairly close to the socioeconomic class of television producers. This is difficult enough for well-paid New York executives to maintain, and practically an impossibility -- even the KMart version -- for about 70% of the U.S. population.

There is no limit to where the "keeping up with the Joneses" game can go. I knew a fellow making about $3m a year who lived in Greenwich CT, which used to be a good Greenwich income, but who started feeling poor after a while. He flew commerical airlines, while the neighbors flew on NetJets, and raised his own kids rather than foisting them off on a platoon of nannies, tutors and governesses. Fortunately, he was of retirement age, and had the good sense to escape to Montana. Probably this is where some of the urge to tax the "rich" to oblivion comes from. (Most rich people don't pay much taxes -- they own companies -- so the high taxes mostly fall on the upper-middle clas.) Gotta slow down the Joneses.

The point is, one of the reason people feel "poor" -- this aching lack -- is that they are chasing an ideal that they can't afford, but what appears to be "what everyone does." One of the most absurd manifestations of this tendency is Rent-A-Center, a scarily-successful store where you can rent home furnishings by the month or week. It targets low-income people who can't scrape together $200 to buy a sofa at Ikea. You would think that the stuff at Rent-A-Center would be super cheap, sort of sub-Wal Mart. Not at all! These marginal low-income customers are buying -- er, renting -- stuff that would be right at home in the second living room in a Westport mansion. Look for yourself:

Rent a Center's Home Entertainment Center offerings

Actually, such is the material abundance of U.S. society today, that you can furnish a house for damn near nothing at all. Just browse around Freecycle or Craigslist. It is not hard to find someone who is happy to give away -- for free, or nearly so -- perfectly nice and functional furniture, simply because they have the urge to buy something new. It is piled up in every basement and attic from the Atlantic to the Pacific. The immigrants seem to understand this well. Last year, I gave a piano to a Chinese guy from Brooklyn, who had to bring along an interpreter because he didn't speak English. He wasn't the fastest, either -- I had it listed on Craigslist for weeks as a "free piano," but no English-speaking people showed up at my door with a truck. Maybe they're all renting pianos from Rent-A-Center.

I think the point of this is: the problem is not that many people are not participating in the "American Dream," as a "limousine liberal" might conclude, but that trying to live up to the marketers' fantasy makes people poor. The reason I bring this up first is: before you get into the details of how to achieve certain outcomes, it is good to think about the outcomes you want to achieve.

Okay, so far I haven't got anywhere beyond "poor people should suck it up," a typical Republican response, and this is supposed to be for Democrats. We'll work on this project more in the future.

* * *

Fannie and Freddie: Good job. Fannie and Freddie were always acccidents waiting to happen. They took on such absurd leverage -- about 50:1 -- that any significant housing decline would push them to the brink. While the situation with these entities was always rather dubious, with the shareholders in effect profiting from the implicit government guarantee, the Treasury's solution for Fannie and Freddie is about as good as can be expected in this situation. That's why it's nice to have a real banker, like Paulson, involved, rather than some politician who is in waaaay over his head. Could you imagine a solution desgined by Barney Frank? The Treasury is talking about a $15B recapitalization of Fannie and Freddie, which means that existing shareholders will probably get diluted into oblivion. As of the end of Friday, FRE had a market cap of about $5.0 billion and FNM had a market cap of about $10.0B. (There could be more than $15B coming in the future.) Which implies that, at $15B, the US government would own about half of these entities. Well, that's what should happen. They were government agencies to begin with, and could go back to that. The shareholders enjoyed the profits, now they get the risk. The libertarians would argue that the Fannie/Freddie bondholders, in other words, the holders of all that MBS, should also take a haircut. Maybe so, but we don't want mass chaos either.

A recap plan -- especially one where the errant management gets a swift kick in the butt, and maybe a perp walk on top of that -- is not a "bailout" in the classic stealing-from-the-government fashion that was common in the 1980s and 1990s.

Privatize the profits. Socialize the losses.

I would much rather see the U.S. government take an equity stake in Bank of America, diluting the existing shareholders and brooming top management, than the existing plan to bail out BofA by making them whole on their busted mortgages. Since the federal government is involved, you could even set it up so the top maangement gets booted with no payout whatsoever, and even that they lose 70% of all their previously-paid compensation of the last five years. (That would play well on TV, and if the management is smart, they'll take the deal and act like it actually hurts.) Remember, most of BofA's liabilities are to its depositors, which are mostly FDIC insured in any case. Thus, whether the US government backs up BofA's depositors via a capital injection or via insurance payouts in bank liquidation, the US government is picking up the shortfall in either case. Actually, the capital injection route is probably a lot cheaper overall, because in the chaos of a liquidation of a major entity, much larger losses are likely to occur. Not to mention that the broader economic effects would probably be worse. Also, the process of liquidation, as happened to the S&Ls in the early 1990s (or Indymac as we speak), is an avenue whereby a great many people with government connections got wealthy by scamming the government to sell them assets at stupid-low prices. And, an equity stake in Bank of America could be sold back to the market at some future date. The government might even make a profit from the deal.

S&P said recently that a federal government takeover of Fannie and Freddie would cost about $1 trillion. I doubt it. They have about $5 trillion of mortgage exposure, including guarantees, so that would mean about a 20% hit to their held and insured mortgages as a whole. These are fairly good-quality mortgages. Although the ones that foreclose might have a 20% loss rate, if that is 20% of the whole (a whopping huge number), that would imply about a 4% loss overall. Plus, the companies are still profitable on a pre-credit losses basis, so some of those credit losses would be offset by income. Maybe $100 billion overall, which is not really that much compared to what the government is sending up in smoke in Iraq.

* * *

Super high mileage car watch: Volkswagen 1L at 235 mpg!

From the company that brought us the Beetle duing the road-boat era in the 1950s, and the 50mpg diesel Rabbit in 1976, comes this two-person concept car that gets 235 miles per gallon on a standard (non-hybrid) one-cylinder diesel engine, which produces 8.5 horsepower. It weighs 639 lbs. (The Honda Goldwing two-seat motorcycle weighs about 900 lbs.) Now, 8.5 horsepower is arguably not a whole lot, but then, the Volkswagen Beetle had only 28hp, pushing 1,500 lbs. So, the power/weight ratio is about the same, especially taking the improved aerodynamics into account. Volkswagen is expected to start a limited production run in 2010. Chevy Volt? -- not a chance against this one. Okay, it has only two seats, maybe one-and-a-half seats really. But, most trips are with one person, and most of those that have multiple people are with two people. In practice, either a) the owner will have a second, four-seat car for use when needed, or b) if you have three or more people who want to go somewhere, at least one of the three will have a four-seat car, and you'll take that one. I used a two-seat Mazda Miata as an only car for four years, for my wife and I, and it was never a problem. Cars don't use gasoline when you don't drive them. Keep the Suburban in the garage, and put 2500 miles a year on it when you need to carry big loads or lots of people.

Volkswagen 1L info

More 1L info






* * *

Okay, now that we've had some car porn, it is time to balance out with some train porn! Trains are a much better solution than cars, even 250mpg cars. Not that you can't have a car -- Japan is a country with seven international car companies -- but it should stay in the garage, with most of the trips by train, bike or foot. At least in urban areas, which is where most people live.

This is a train map of the Greater Tokyo area. Wow! Much better than trying to keep the whole suburban disaster above water a little longer with higher-mileage cars.

http://www.u-bourgogne.fr/monge/g.dito/poisson2006/images/tokyo_trainmap.pdf

Obama's Tax Plan

I am a Barack Obama fan -- I'll vote for him in November -- but his tax plan, as presently conceived, is pretty ugly stuff. It is not only a marginal negative, but could add a whole new aspect of economic deterioration for the U.S., which is already struggling with monetary inflation and a credit breakdown. It will be interesting to see how this plays out in 2009 -- interesting in the way a train crash is interesting.

Economic Policy statement from Obama's website

Heritage Foundation on Obama's tax plan

Here's a summary of what's on the agenda (which could change).

Reverse the Bush tax cuts, which includes:

1) Increase taxes on capital gains from 15% to 28% or even 35%.

2) Probably make dividends (now 15%) taxable as regular income again.

3) Raise the top income tax rate back to 39.6% from 35%.

4) Remove personal exemptions and deductions for those with income over $250,000.

5) Make income over $250,000 subject to Social Security taxes, of 15.65% (including both employee and employer contributions). This would make the effective top income tax rate over 56%. When adding various state and local income taxes, this would mean top income tax rates over 65% in places like California and New York.

6) A tax credit of $500 per person, to offset payroll taxes on the lowest-income earners

7) Eliminate income taxes for seniors making less than $50,000.

An economy can function reasonably well under high income tax rates, if the rates fall on high incomes. In 1965, for example, the top income tax rate was 70%, but you needed to make $100,000 (about $1,500,000 today) to pay that rate. We're looking at rates near 70%, if the Social Security cap is eliminated (note that it was Bill Clinton that eliminated the corresponding cap on Medicare taxes), but on incomes of $250,000. In 1955, for example, the top income tax rate was 91% on incomes over $400,000, which is about $6,000,000 today. However, on incomes of $16,000 to $20,000 (about $240,000 - $400,000 today), the rate was 30%. Plus, payroll taxes (Social Security, Medicare didn't exist yet) were much lower. The original Social Security tax rate was 2% (1% employee and 1% employer). This was raised to 4% (2%+2%) in 1956, and to 6% (3% + 3%) in 1961. The rate today is 15.30% (7.65% + 7.65%).

IRS info on historical US tax rates and exemptions

Detailed info on historical US tax brackets

Capital gains taxes have some of the largest negative effects on an economy, since they so clearly obstruct the accumulation of capital which is so important for providing investment and good jobs for workers. We looked at the capital/labor ratio a few weeks ago:

The Capital/Labor Ratio

These capital gains tax hikes are bad in any case, but potentially more so in an environment of inflation. The capital gains tax is not adjusted for inflation. When the dollar falls to $0.50, investments need to double in nominal terms just to keep pace with the inflation. This phantom "gain" is taxed at a high rate, thus eliminating that much more capital from the system.

Indeed, a capital gains tax hike is also a very "1970s" element, as Richard Nixon signed a big capital gains tax hike in 1969. This was eliminated in 1979, producing a rather nice boom in certain subsets of the economy.

Info on the 1979 capgains tax cut

Much the same applies to the income tax. One of the difficulties encountered in the 1970s was "bracket creep." In 1970, the 70% tax bracket applied to income over $200,000, or almost $3,000,000 today. In 1979, the dollar's value had fallen by about 10x, but the 70% rate still applied to income over $215,400. Today, tax brackets are automatically adjusted to the government's CPI, but the CPI is such a fiction these days that we are rather close to having no inflationary adjustment at all. Thus, in effect we have a potential combination of both higher tax rates and bracket creep, which is potentially quite troublesome. We don't know today how far this inflation will go. Ten years from now, the highest tax bracket and its 65%+ effective rate might apply to the equivalent of $50,000 today.

The giveaways for lower-income workers are fine, but won't have much economic effect besides the welfare aspect. The $500 "tax credit" is essentially the same as the $600 check-in-the-mail that the government is presently handing out. Nevertheless, I support lower taxes for lower incomes. This is something that the Republican types have missed, I think. They have wanted to focus their tax-cutting efforts on the part of the tax code which has the most dramatic negative effects -- high income tax rates and taxes on capital. However, by doing so, they have justifiably been criticized for ignoring the lower income workers. I think they would find more political support if they cut taxes for everyone at the same time. Obama's plan to make $50,000 of income tax-free for seniors is fine, but I would expand it to all taxpayers. Give everyone a $50,000 basic deduction. (Or $20,000 per adult and $10,000 per kid.) Taxes paid by households with less than the median income (about $48,000 if I recall) account for only about 4% of income tax receipts, and of course an even smaller portion of total tax receipts.

The idea that the "distribution of income" can be resolved by high taxes on capital doesn't work well in practice. One of the reason that some European systems have worked passably well is that taxes on capital and corporations are low, which allows more capital accumulation, which provides the investment for a broader middle class. Germany, Japan, Singapore and Korea traditionally have not taxed capital gains at all. Nothing particularly bad happened. In fact, something good happened -- these capital-rich environments have plenty of good jobs available.

After raising taxes all over the place, much of the rest of Obama's "economic plan" (mostly it is a collection of irrelevancies that would have little economic effect) consists of -- tax credits! Tax credits for manufacturing, for children and dependents, for mortgages, for colleges, for clean technologies, for "locally owned biofuel refineries," and for R&D.

In practice, usually governments (and even venture capitalists for that matter) have little idea what the next avenue for economic expansion will be. The personal computer was poo-poohed when it was invented. So was the transistor, which engineers thought would be useful for hearing aids perhaps but would not replace the vacuum tube. It doesn't have to be technological either -- look at Starbucks' coffee business. Making lattes is just as legitimate a business as hard drive manufacturing and airlines, and probably more profitable too. Coca-Cola has been a bigger homerun than all the DRAM manufacturing of the past 20 years. Maybe the nexus of future activity will be railroads! If you simply remove the barriers to investment and commerce in general -- capital gains taxes or corporate taxes for example -- then people are free to experiment with all sorts of things, and find out what works. This is a far better method than having a government bureaucrat try to guess that "locally owned biofuel refineries" are the wave of the future. On a personal level too, if the first $50,000 of income was exempted from taxes, then people could spend their own money however they wish, on colleges, child care or whatever.

Of course, these are just plans and proposals at this stage. We could find that the electorate tries to block these tax plans by stuffing Congress with Ron Paul Republicans -- in favor of lower taxes, no wars, and police state rollback. So, if you're running for Congress this year as a Republican, that's the platform I'd choose. If you're running as a Democrat, you could adopt the same platform, come to think of it.

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The amazing thing about hyperinflation in Zimbabwe and similar cases, is that people even continue to use the currency at all. At some point long past, you'd have thought they'd go to black market euros, or cigarettes, or sacks of wheat or copper pipe or cowrie shells or AK47 ammunition or whatever. I think this is illustrative of the degree to which people are caught up in the fantasy that prices in a collapsing currency have any meaning at all -- the degree to which people continue to use money as a counting-unit even when it obviously is unsuited for the task. "The price of milk went up 1,000,000,000%!!!" Yeah, sure it did. Nothing at all happened to milk. The only difference is more paper. You'd think people would at least go to barter of some sort: I'll work for eight hours in return for five gallons of diesel. Something like that. In which case, the "inflation rate" would be irrelevant, just a game someone is playing somewhere. Milk would be milk, diesel would be diesel, and the paper money would be losing value as usual -- nothing new there.

We are still in the early stages of inflation in the U.S., but even later, when the inflation is perhaps more intense, people will tend to regard prices as changes in the value of goods, rather than the value of money. On Jim Puplava's radio show last year, I said that we could see oil prices of $1,000 a barrel before this episode is over, within 6-8 years perhaps. (This seemed rather reckless at the time, when even the bulls were whispering about $100 oil, but I think that mainstream Wall Street analysts have talked about $500 oil in recent weeks.) Most of this would be simply a change in the monetary counting unit. Some of it would be due to "Peak Oil" issues. It would be $100/barrel oil, up 4x from the $25/barrel oil of the 1990s, but the dollar would be worth only $0.10 -- or 1/3,500 oz. of gold, from 1/350 in the 1990s. I still think that could happen (though oil is due for a correction in the short term). Most people's eyes would bug out of their heads, but what did you think was going to happen when the dollar goes to $0.10? In the 1970s, oil went from $2.50 to $40. Nobody asks why it didn't go back to $2.50 afterwards, but stabilized around $25 or so. Maybe I should say: when the dollar goes from $0.10 to $0.01. At $18 silver, my 90% silver dimes from the 1950s are worth about $1.26 each today. Apparently, the dollar is already worth less than $0.10!

www.coinflation.com

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The Daily Reckoning was kind enough to publish an essay: "The Volcker Myth"

Privatize the Profits. Socialize the Losses.

Bank of America writes its own bailout. Privatize the profits. Socialize the losses. This has been the modus operandi of the big U.S. banks for decades. There hasn't been a domestic credit collapse of significance since the 1930s, but the U.S. banks have been getting into trouble regularly overseas. Remember the huge IMF loans of 1997-1998? The Asian governments had no debt problems. Thailand's total foreign debt was $4.8 billion, while it held foreign reserves of $37 billion. The problem was that the U.S. commercial banks had made loans to the private sector, which weren't being paid back in the environment of macroeconomic chaos. The IMF would lend money to the government of Thailand, and the government of Thailand would then pay off the private-sector loans to the U.S. bankers. This would bail out the U.S. bankers, and leave the Thai taxpayers to pick up the tab. I used this excerpt in my book. It is from an op-ed in the International Herald Tribune written by Hubert Neiss, the director of the IMF's Asia and Pacific department:

"The three crisis countries were also caught between a rock and a hard place because of the huge foreign currency debts of their domestic banks and corporations. Full debt service could not be maintained without some debt relief in the shape of loan rollovers and restructuring to allow more time for repayment.

Defaulting on debt service would have forced foreign banks and other creditors to suffer immediate losses ...

Each of the three Asian countries receiving billions of dollars in international loans marshaled by the IMF decided to support continued debt servicing while seeking to negotiate debt relief with creditors. The IMF arranged additional official inflows of money to strengthen national reserve positions. It also facilitated debt negotiations with foreign commercial banks to provide the necessary balance of payments relief and some burden sharing by creditors."

"In Defense of the IMF's Emergency Role in East Asia," International Herald Tribune, October 9, 1998.

The IHT, by the way, is an international english-language paper owned by the New York Times.

The funds from the big IMF loans to the Asian governments in 1997-1998 spent no time in Bangkok, Seoul, Manila or Jakarta. They were immediately sent back to New York to make the U.S. banks whole on their loans to the private sector.

My understanding is that much the same thing happened during the Latin American debt crisis of the 1980s -- U.S. bank loans to private sector, commercial entities in Latin America were replaced by sovereign debt, which evolved into the famous Brady bonds. In short, the U.S. banks were bailed out by the taxpayers of Mexico, Brazil, Peru etc.

I haven't been able to find a proper description of the U.S. bank bailouts on their Latin America commercial debt of the 1980s, organized by the IMF, but these two sentences from a description of the crisis about sum it up:

"The 1980s crisis, while sparked by the official default of the Mexican government, was generally a crisis of the private sector. The majority of the debt was held in non-guaranteed private sector loans which were eventually nationalized to meet obligations."

http://www.columbia.edu/~ad245/theberge.pdf

In the latest Bank of America-authored "homeowner bailout bill," we see that the Bank of America mortgage to a delinquent borrower is replaced by a mortgage from the U.S. government. BofA takes a small haircut, about 10%, which is much less than what they would face in foreclosure and liquidation, typically around 50% these days. Once again, we see the big U.S. banks' loans to the private sector paid off by the government. It's the same modus operandi. Here's a good description of the operating process, and Bank of America's involvement in it.

http://bigpicture.typepad.com/comments/2008/06/did-boa-write-t.html



While it appeared that this abomination would be vetoed by the White House, that is looking a little less certain at this point.

NY Times: Housing Aid Bill Passes Senate Test