Life in a Banana Republic

One problem with hiding wealth is that it is difficult to keep it hidden. When the wealth is once again revealed, it could lead to suspicion. I don’t think hiding wealth is such a good idea. Moving it to different investments, or purchasing infastructure might be a better idea. Might be a good time to buy a new fancy laptop for instance, or get a new car while the demand is low.

I forsee the expansion of the underground economy, more people working for and paying in cash. Bartering and exchange volunteering – such as…I’ll change the oil in your car if you help my kid with econ homework will also rise.

The largest threat to the economy I see is the increased risk of investing. Why will investors put their money into a venture if the threat of increased taxation and regulation looms so certain? I think many investors will just take their money and go home. Investors can and will find another way to spend their time, like start and run non-profits.

Huxley, unfortunately there’s no guarantee that the government won’t institute a wealth tax. The effects on the economy will be devastating and I’m pretty sure (as a non-lawyer can be) that it would constitute double taxation and will be unconstitutional, but I don’t think the political class cares about the economy or the constitution. That’s another characteristic of a Banana Republic.

Oh come on, surely one of the typical features of banana republics is also extreme disparities of wealth and income and inadequate tax revenues. I know the GOP has tried very hard to make that happen, but it was only 8 years ago that the Federal Government budget was roughly in balance and people were worried about the disappearance of the Government Bond market.

I remember back in the first few years of the Clinton Administration some obscure undersecretary in Treasury gave a speech promoting the taxation of savings, not interest but principle. Fortunately, she promptly disappeared possibly to some room in the the Treasury building basement.

But the scent of money hasn’t been lost. California activists are trying to get a wealth and exit tax on the ballot.

The measure would impose a new 35% income surtax (in addition to federal taxes and the existing 10.3% top state rate), and penalize people who leave the state by seizing 55% of assets exceeding $20 million.

http://www.taxfoundation.org/blog/show/23538.html

Some prudence on the doom and gloom is called for for the time being. There are a few things we don’t know yet. We don’t know if Obama will be a partisan in the Pelosi/Reed mold. We don’t know if he’ll cut and run in Iraq or take stock of the situation and act responsibly in the region. We don’t know if the Senate Republicans will coalesce and obstruct Obama’s agenda, demand offsetting spending cuts, or capitulate.

Obama’s background, record, and associations point to an out of control bed wetting liberal. His quick rise from obscure state senator to President-elect, and his mastery of creating a campaign organization and assembling an impressive cadre of advisors suggests more of a pragmatist who wants to govern and will eventually want to be reelected.

If you think that “new” and “young” voters put Obama over the top, you have to realize that they are non-partisans. They don’t like war and the don’t like division. They would feel really good if Obama asked McCain to be SECDEF or SECSTATE. They would like to see more cooperation and less bickering. If we get the partisan Obama, these voters are the ones who will vote him out of office in 4 years and probably become permanent Republicans.

Arnold, I notice you didn’t even mention his name in your post, but between now and when the questions are answered, everything will be evaluated, fairly or not, in the context of “Obama”.

To “reason”…

Oh come on, surely one of the typical features of banana republics is also extreme disparities of wealth and income and inadequate tax revenues. I know the GOP has tried very hard to make that happen, but it was only 8 years ago that the Federal Government budget was roughly in balance and people were worried about the disappearance of the Government Bond market.

The budget was not in balance…they were busily spending the surplus of Social Security revenues
which were to be set aside for the future.

Remember ManBearPig’s “lockbox”?….get your facts straight…spending tomorrow’s mortgage payment today doesn’t make today “balanced”

Most federal government debt, and all state and local government debt is not indexed to inflation. So the easiest way for the government to steal wealth is to create unanticipated inflation. The great thing about this tax is that no elected official has to explicitly approve it, a few winks and nods to the Fed will do.

Brad,

His quick rise from obscure state senator to President-elect, and his mastery of creating a campaign organization and assembling an impressive cadre of advisors suggests more of a pragmatist who wants to govern and will eventually want to be reelected.

Campaigning is merely marketing and being good at marketing doesn’t make one good at governing. Plus, the media ran so much of that campaign for him. It doesn’t surprise me that academics stepped out of their ivory tower to advise him. Academics (love that and his advisers are no more impressive than Greg Mankiw. I’m sure he wants to govern but I’m also pretty sure he wants to govern like Mitterrand rather than like Thatcher. With a Republican congress, I wouldn’t be as apprehensive but with a liberal Democrat congress, I’m less optimistic. I hope you’re right and I’m wrong.

Methinks,

You make a very strong point that is consistent with mine that we just don’t know which Obama will show up to work. But there are issues that won’t go away. Think energy. If gas shoots back up over $4 next summer because the Dems have done nothing about supply, they will simply lose the House in 2010 because it will happen again summer of 2010 and Republicans will make it an issue of trying the same failed policy three years in a row.

I don’t worry a bit about card check or reviving the Fairness Doctrine. These were two very effectively deployed trolls by the Dems. Loud Republican constituencies were “pwned”, as the kids say, devoting a bunch of their time and outrage to non-issues.

Look to what the fruit and nuts crowd here in California did on renewable energy and alternative fuels yesterday. Voted down by 60-40 margins. The bullet train to Sacramento got just 52%. There is no way the country will stand for Obama’s silly green jobs plan. Enough people are annoyed with the curly light bulbs to not want to go full speed ahead on policy with pre-beta technology.

He’s got his hands full with current issues. If Pelosi can’t get a stimulus done before the end of the year, they’ll make that the first issue and he’ll be too bogged down and gridlocked before summer to do any more change.

Brad,

Good points. Thank you. I think I’ve become a bit unmoored lately as a result of my front row seat to socialization of the entire financial industry. I would never have imagined such a thing occurring as late as June of this year. Given the endless bailouts, I’ve begun to believe that almost anything is possible. I’m still nervous that if things get unpleasant enough people will vote for and demand outrageous entitlements. On the other hand, after getting over the shock, people may adjust their expectations and calm down as the recession deepens. Increased uncertainty leads one to factor in scenarios previously brushed off as bizarre.

Republican constituencies were “pwned”

Is that what the kids are saying? How do you pronounce that? God, I feel old.

“Don’t cry for me Argentina”

If you believe in Ricardian equivalence, then there is no such thing as fiscal stimulus.

Sure. And in the long run, we’re all dead. Fiscal stimulus is a short term measure to even out the business cycle. It does not follow that this does not exist from Ricardian equivalence.

But you already knew that, and were being disingenuous.

Hi, Andrew.

Arnold is completely correct that Ricardian equivalence rules out fiscal stimulus having any effect on the economy. Though the statement of the concept is attributed to Ricardo, it was understood long before he described it.

Here is Ricardian equivalence in a slightly more elaborate form than Arnold’s succinct explanation.

Suppose the government hands you–an average person in the economy–$100. The government has two ways to get that money. It can tax you $100 today. In that case, obviously you are not going to treat the money as a windfall and spend more–it just goes into one pocket and out the other.

Alternatively, the government can borrow the money–for example, a bank lends to the government by buying T-bills at, say, the going interest rate of 5%. If the government does that, it has to tax you $105 next year to repay the loan and interest.

In the latter case, since the money is going to come out of your pocket next year, you can do the sensible thing and put the money in your bank–that is, save rather than spend it–earning your 5% interest (or, if you don’t like that story, you can just buy a T-bill yourself for 5%). At the end of the year you simply hand over the $105 to the government to pay your taxes.

Either way, the way the government pays for it is a wash for you. You are kind of foolish to actually spend any more because one way or another, you have to pay the taxes. There is no actual stimulus to private spending because people know they have to pay the taxes. Even if Ricardian equivalence doesn’t hold exactly, the effect is not likely to be large. There can even be a perverse effect of people fearfully overestimating how much they’ll have to pay in future taxes–in which case they’d spend less and save more!

This doesn’t mean that the amount of government spending has no effect. The bailout was a big increase in government spending with big effects! It just means that for a given amount of spending, whether the government borrows and taxes later, or assesses the taxes today doesn’t matter for average spending in the economy. In fact, nothing real is affected–interest rates, employment, etc. don’t change. A so-called “countercyclical” fiscal stimulus–including any fiscal stimulus that is supposed to counteract business cycles without increasing total government spending–has no effect on the economy. At best it may have only a minuscule effect in the desired direction; and at worst, it may have a perverse effect that exacerbates the business cycle.

You can read more about Ricardian equivalence here: Does it Matter How You Pay for a State Dinner and Government Debt and Deficits.

@ Greg writes:

It’s pronounced “poned” or “powned.” It comes from online gamers mistyping things like, “I owned you.”

It may be pronounced “powned” but its meaning is akin to “pawned”, as in “stripped of collateral, which will be forfeited, for a puny stimulus payment, which will not be repaid.

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