more about the shooting

First referencing the previous post - the NRA doesn't get money from me. Not till I see them condemn the poor gun safety of Cheney. No noise, no money. I say this because I just got one of their fliers. On to the meat of this post.

Let me begin by saying I believe the incident was an accident. That is, the shooting of Whittington was not intended. It was the result of some stupid act on the part of the VP. However, just as with every shooting accident, the shooter should not get a free pass. I believe the VP should be required to take a gun safety class. And that he should not be allowed to hunt without a minder for at least a year - the minder having full authority without repercussion to take the gun away if he/she thinks the VP is on the verge of doing something stupid (again).

What I really find stupid, but no longer a matter of gun safety, is the 22 hour delay and the story used to explain it. Allegedly, everyone was so concerned about Whittington's condition that nobody though about the press. That'd be great, except Karl Rove got called within the first two hours. So, how many people honestly believe Rove was called because of concern over Whittington's condition? Uh-huh. Suddenly the smell of lying is in the air - and lying about a politician's actions (even in a non-political event) smells like coverup. Anyway, 20 hours after calling Karl, Ms. Armstrong becomes the spokesperson - raising the second thing bad odor. Ms. Armstrong reported everything as though she was an eyewitness. Bad thing, however, is that she wasn't there. Remember, she was in the car. The first she knew of a problem was that Secret Service and medical personnel were rushing toward the hunting party. Every part of her story between "they got out of the car" and "I saw people rushing to the party" is what she was told happened, except she passes it off as "what happened".

Two stories with equal proof at this point.
Cheney shoots Whittington, and is in shock. They all get back to the house and he mixes a cocktail in desparate hopes of soothing his nerves. He can't see anything but doom about it all, and goes into dithering indecisiveness due to it. Indecisive, that is, except an adamant statement that nobody does anything. It happens to a lot of people - a hope that it's all a bad dream and if everyone pretends hard enough it'll all go away. And it took almost a day before enough people could get the man in charge out of the loop enough to do what needed done.

Cheney drank a sixpack of beers at lunch, and brings a six to the car for the hunt. He sips them as he gets thirsty - about one an hour. About 5:30 he's halfway through the fourth when someone spots the covey, and they get out to pop them. Being a bit inebriated he loses a bit of control and gets stupid - he shoots the lawyer. Everyone's a bit flustered, but Cheney knows that if he's interviewed and tested for the next eight hours that the alcohol will show up - boom, his political career is completely gone is the best thing, and possible criminal charges are reasonable expectations. He clamps down hard to try and let the BAC drop to zero. Just in case - because Whittington might say something to the hospital staff - he drinks a cocktail for the classic "the BAC is from after, not before, the accident" defense. And everyone starts plotting stories - one if Whittington dies, one if he lives. A day later Whittington's apparently going to live and the BAC is clear, so off to the presses.

Both stories stand.

For what it's worth, this will be Cheney's albatross. It's Carter's rabbit and Ford's stumble and Clinton's stained blue dress. No matter that in relation to the position held and issues of much greater significance done both well and poorly, this will always sit in the room when Cheney is present. How heavy it weighs will depend on what Cheney does from here on, but he's made a very poor start if he wants it to be a feather instead of a stone.

NRA's turn

I donate to several political lobbying organizations as I support their stated objectives. When people see the list they get a little confused - I mean, who supports both the NRA and the ACLU - besides me, that is.

Not so long ago I told NARAL to not bother asking me for money. They hit a major crunch and folded. They failed to support their convictions.

It's the NRA's turn in the barrel. Will they condemn Vice President Cheney for poor gun and hunter safety? Or will they say, "accidents happen" and go on pleading for money to support gun safety (except for the powerful)? The answer determines where some of my money goes this year.

Rambling

wow, three in one day after so long away. Ah well, off we go.

Way back in the earlier posts I discussed planning for disaster - that is, I believed we're coming to some economic (among other things) hard times. Practical paranoia was the series, and looking I've discovered much has disappeared. That's both good and bad. Good because I said some dumb stuff earlier. Bad because I said some good stuff earlier, and this is supposed to stick around - that's a big reason I'm writing in blogs. Obviously, I'll need to do this again somewhere else. Anyway, wrenching back to the topic at hand...

My prognostications turn out to be decent - not great, but pretty good. (conservative if anything). I'm going to do it again - practical paranoia part six, sorta.

See, in PP5 I couldn't decide if our economic problems were going to be inflationary or deflationary. I think I've got a better handle, but will ramble to see if some other things make sense to me.

I anticipate the US to experience a set of economic doldrums, probably recessionary, within six months. Actually, I expect people looking back to say they began sometime in the next three months (if you can set aside the mixed tenses), but everyone will KNOW it's going on within six months. The process will be deflationary.

Some caveats. I don't know how severe or how long. It'll last at least three months, but could go on for a couple of years if people in positions to influence it act in the most stupid fashion possible. It could only deflate the value of our currency by half a percent. Again worst case it could deflate by half. My guess for the two is about six months duration with an effect in the vicinity of 2-3 percent, with the wild card being just what happens when credit clamps down.

OK, a bit of why. First (again) a "what is deflation". I find the easiest way to keep it straight is to remember who of a creditor/borrower relationship comes out advantaged if it's unexpected.

I borrow 100 dollars from the lender, and to keep it simple I owe him 100 dollars in one year. If it's inflationary, I win. That means that while I pay the 100 dollars, it won't buy as much as it does now. OTOH if it's deflationary the lender wins. That 100 dollars will buy MORE than it would a while ago.

Let's not get sidetracked - both inflation and deflation hit people close to the edge with their borrowing. Inflation hits them because there's a window in which they're paying new prices with old wages. In other words if they can ride out the early part they're fine, but that ride's going to be interesting. Deflation hits on the other side. For a while the borrower is doing better because he's still got old dollars and they're buying MORE short-term goods. Unfortunately (just as with the inflationary side) wages shift to be in line with value. Suddenly there's less cash coming in, and while it's buying as MUCH as it was for short-term goods (groceries and monthly goods) the long-term stuff's still on old values.

So, what should I be doing since I expect a deflationary cycle? Well, I need to decide if the house I bought LESS THAN SIX MONTHS AGO is worth the effective increase in payments. I'm pretty well ok right now - I can stand it if it only adjusts a percent or two. But if the deflation looks like it's going to move my monthly house bill to, say, 50% of takehome, then it's time to reconsider.

By the way, that's going to be chicken and egg with this cycle. I know that a lot of real estate is going to apparently deflate. Heck, it's already started with the Centrex ads (100,000 off a 500,000 house? riiiiight.) Some is just overvalued, but still... if people find they're paying a loan for $500,000 when the house is now valued at $400,000, they're not going to feel good about it. And as the house prices decline they're likely to trigger other deflations which will in turn deflate the house prices till... Yes, it's not perpetual, but for a while it'll feel that way.

I think the problem is that there's an excess of money right now. Deflation is what happens when the money supply tightens. Historically that's a fed control job. But the fed can't control a virtual money - credit. With looser lending restrictions the defacto money supply has gone nuts - with the caveat that eventually it has to be realized. As the realization fails to occur and people start to go bankrupt instead... there's the collapse.

I still think it won't exceed 5% - and actually will be less. I have two loans right now - the house, and a car that's half paid off. Assuming everything balances for a while I THINK I can withstand a 10% drop. More than that and I look at following others into bankruptcy. There's the negatives, now to the opportunities.

Opportunity one is a window mentioned already. For a while prices will deflate but wages will stay at the higher level. During that period the opportunity exists to leverage that margin. There are two basic methods. First, loan it out. Remember that basically the lender wins in deflationary windows. The risk is that the borrower defaults. Still, lending is a GOOD thing in that window. High grade bonds is the safest. Short term bank counterloans is another option. This needs thought.

The second thing is to buy something that will defacto appreciate in value, but which won't break me to hold or to sell. Classically this is gold, though I admit to having trouble seeing how it gets me past a deflation. See, if I buy $1000 of gold at ~500 per ounce today, and in six months everything has balanced, then it SEEMS to me that my two ounces will have the same nominal purchase power -- be worth $800. hmmm, nope. still don't see it.

OK, so practical paranoia says:
In the window where I'm still getting pre-drop wages but what I'm buying is dropping (I'm getting better prices on food and clothing and such) I take the slack and put it into bonds - how risky depends on my tolerance, but I'd be well advised to keep confidence the borrower WILL be able to pay on expiration. Anyway, after the drop I sell the bonds -- or if I can last it I keep them till things start turning around so I can maximize my practical profit.

Enough for now.

Tax cuts increase revenues? redux

One of the problems with those who make this argument is that they don't think it through - they take it almost as an article of faith. Some even misapply a step. Let's take a real solid look at how it works, and debunk a couple of arguments along the way.

Let's start with our sample company. It sells widgets. It has $100million in assets. Due to the odd nature of our business we can assume it makes gross sales exactly equal to its assets, which means it sells $100 million gross. We'll give it a healthy 10% profit margin, which gives it $10 million net profits. Unrealistically, we'll assume it pays 25% taxes on the profit, or $2.5 million in taxes, leaving $7.5 million to divide between saving for future operations and passing to the shareholders. Future operations is increase the business - for our model, it's overcoming the effects of depreciation so we stay at that magic 100 million. There's the background, now for the exercise.

We reduce the tax burden by 1%. This time they pay 24%, and keep $7.6 million. At bottom there are two extremes with the probable result being a compromise. Let's examine the effects of the extremes.

Extreme 1 - add it to "future operations". Since previously we just barely balanced, this means we increase our assets to $100,100,000. Our annual gross (due to the rules) goes up the same, and our profit margin goes up the same proportion. Thus the subsequent year after we sacrificed $100,000 of tax revenue we collect 24% of $10,010,000 or $2,402,400. Which is STILL LESS than the $2.5 million we were previously receiving. In other words, not only does our production not gain enough to overwhelm the initial loss, it keeps losing. Our slight increase has to significantly increase our gross (and net) income for it to have the claimed effect.

Extreme 2 - give it to our shareholders. Congratulations, we recover 15% of the $100,000 we gave up. And the money goes into other corporations' assets (investments) in the best case, or gets spent on various stuff in the worst case. If the latter, we get (depending on sales taxes) up to 10% of the remaining $85,000 that year, and the rest becomes part of the regular gross profits of other companies - a slight surge, which is either unsustainable or (at best) a repeat of extreme 1 but for a different company and with worse increases. If the former, skip the sales taxes and the rest is the same.

It takes some different assumptions for cuts in taxes to net increase tax revenues. The core is the one mentioned in the previous post: You must be to the right of the Laffer peak, at such point where the dollars not taken for taxes increase net revenues so much that there is a positive gain overall.

By the way, let me dismiss a parallel argument while I'm at it. It goes something like, "if the tax burden is too high people aren't willing to put in extra effort for no more than they get out of it." The statement is true. The use of the argument, however, is to allege that the present burden is already too high. In real-world terms, however, this isn't so for us at this time. The defense is simple: are workers unwilling to accept overtime as the net pay increase is too marginal? For the first 8 hours or so for most workers the answer is "nope, gimme my overtime." Equally valid argument: are stores unwilling to increase sales as the tax increase cuts too much? Again, let us laugh.

Theoretically the rate can get too high. It's been so in some nations - when it exceeded 90% income tax rate in the UK for some people is an example. The US isn't at or near that point.

Laughing at Laffer

Man it's been a long time. shrug - busy life. Anyway...

Recently I've been listening to people use the laffer curve to justify tax cuts. They're guilty of misunderstanding what the curve is saying, and it's such a pervasive misunderstanding that I'd like to make a general response.

Yes, the Laffer curve says that if you cut taxes you increase revenue. If you stop there, however, you're wrong. See, it is equally true to say that if you raise taxes you increase revenue.

Go look at the curve. As it goes right, it goes up, rounds out at the top, and goes down. The "going right" axis is the tax rate. The going up axis is revenues. What's not labelled is where the magic number is. What anyone trying to use the Laffer curve to justify cutting taxes to increase revenues must defend is the position that we are presently to the right of the peak.

Because if we're to the left, we decrease revenue.

Note, please, that this is government revenue. That gives us the ability to pay for things, which includes the ability to pay off our national debt.

So the next time someone uses the Laffer curve to justify cutting taxes, ask them to demonstrate we're to the right of the peak. And when they go "huh," laugh at Laffer. Then take a moment to teach them.