Gas Prices

Today we want to try to explain why rising gas prices are so hurtful to our economy.  On December 29, 2007 the average gas price in the United States was $1.59 per gallon.  Today that price has more than doubled to $3.81 per gallon.  There seems to be no will in our national capital to try to reduce the price of gasoline.  That is a mistake. 

It is costing the average driver almost $1100 more in 2012 to run their car than it did at the end of 2007.  Median incomes have stayed rather flat, when adjusted for inflation. When you add to it fee increases, taxes and inflation, our average driver has a lower disposable income than at the end of 2007.  What that means is for example he no longer can afford things like a new car, high end appliances, and even my industry's mattresses.  These hard line goods are generally the engine of our economy.  The average age of a car on our roads has risen to over 10 years, the highest since 1995.  GM and Chrysler filed bankruptcy.  Auto workers are out of work.  Appliance sales have decreased in 2011 by up to 21%, depending on the appliance.  TV sales are down from the peak in 2010.  All these manufacturers and those selling the products need less employees, and less selling space.  With the increase in the price of gas, oil companies employment has stayed stable.  The jobs lost in retail and manufacturing are not showing up in oil production.  $1100 would buy a really nice TV, or perhaps a new washer and dyer set.  Multiply this by the number of households in the country and it is easy to see why our economy is stagnant. 

Our political system seems to prefer pushing solar, wind and other 'green' technologies rather than concentrate on the existing technologies that drive the economy.  And that is not to say green technology is bad, it is proper to encourage it.  However, oil leases are down in the Gulf of Mexico.  Demand on a global basis is up, which is why gas prices have gone higher.  The Chinese, Indians, and Brazilians are all using more oil.  Oil prices are primarily supply and demand.  If our economy does improve, those prices will increase more, making it harder to sustain the improvement.

When the economy is under performing, there are certain good things that become too expensive to do, and if we do them, it drives up the deficit.  Things like the social safety nets, education, or infrastructure improvement are simply more expensive as a percent of taxes collected.  We could raise taxes, but that would exasperate the problem and the economy would sink more.

How can we reduce oil prices, and then gas prices?  The best and proven way is to increase the supply of oil.  OPEC resists that, they like the price to remain high.  There are several oil rich countries like the US and Russia, that if we worked together to up our supplies, might have an impact on overall prices.  We seem to not want to up our supply, and we are suffering a bad economy because of it.

The US national election is just 2 months away, will it hinge on the economy?  Or will it hinge on Social Justice.  If we base our vote on economics, then maybe we can eventually do both.  If we vote on social justice, the economy will continue to lag, making social justice items more and more expensive. 

In the early 1980's I worked for a company called F.W. Woolworth, that company was founded in 1874 and for generations it was near the top in retailing, much like Walmart today.  They had a division of big box discount stores.  They borrowed money to expand, then had to borrow more to maintain.  Finally the banks said no more money.  That day will someday come to our government, unless we get our economic house in order.  If that day does come the poor and minorities will be hit bad, to the point that you might see social upheaval or even revolution.  Our credit rating has already dropped, the problems cannot be fixed overnight, we cannot put off finding the solution. 

But by drilling here we will put people to work, drive the economy, and make us less depended on people who could care less if we survive as a nation.  Drilling will enable workers and consumers to have more expendable income further driving the economy.  And a growing economy usually increases the amount of taxes collected by government, helping to stabilize the social safety nets.

So, Who Built It?

There is a big political debate going on right now.  The Democrats, represented by President Obama are saying if you have a successful business it is because of government building roads and such.  The Republicans, represented by Mitt Romney say that's jut simply not true.  Who is right?

Technically both could be right, but technicalities make me crazy.  Sure the government contracted with road contractors, or hired highway department people to build roads.  However, how did they pay for them?  Was it not with tax dollars?  Who pays taxes?  53% of the population pays taxes currently, and most small, medium, and large businesses.  47% pay no taxes, and even get money back (redistribution, but let's save that for another time), yet they use the roads.  They have the opportunity to use that infrastructure to make money, and build a business.  Black Markets do not pay taxes, generally, but gangs still use the roads.  And frankly, when larger businesses open a head quarters many local laws usually require them or the building's owner to improve the roads going to their building. 

My wife and I own a small business.  I have yet to have a politician volunteer to work a day in our store, so we could have a day off.  We have had about 6 days off in the last two years.  We are open about 65 hours a week.  Our family does help, but not once has a public official even offered to help us meet the rent.  We are in our mid 50's, and have never been 'rich' by any definition.  In the 1980's we lived on as little as $13,000/ year.  In the early 2000's through 2010, our income did advance to the middle to upper $40's.  But we had a dream, a dream to leave our family better off, a dream to help people, a dream to control our own lives.  Owning a business, by the way, may not be the best way to do that, especially in the economy of today.  We work those hours, we push our business, to succeed.  If we fail, then no one else loses money but us.  We believe we are building our business, and we're damn proud of it!  But, we did not pay for the roads, or is it we did not contract to build the roads, you see we have paid taxes.

This debate does highlight the two major trains of thought today.  It can be summed up by answering this question:  Who is better able to effectively spend capital to boost the economy?  If you answer government, as the Democrats generally do, you believe that individuals are unable to make decisions to benefit society.  Individuals like Thomas Edison, or Henry Ford had ideas that did benefit society, Bernie Maddoff's idea did not.  If you answer individuals, then how can we make sure that these individuals do have our interests in mind?  Aren't there a lot of money grubbing scheming business people?  For most of the United States history, the latter answer has ruled the day, then laws were enacted to keep the individual honest.  Private organizations, like the Better Business Bureau were established, again to foster honesty and fair dealing.  Unlike the modern European model, based in part on the feudalistic societies their economies came from, where government can determine what is needed and where, then if you get their approval, and live within their laws can open a business.

So the last question:  Why has the United States in the 20th and 21st century been the largest economy?  We are blessed with resources, but others have more.  We have a lot of people, but other countries have more.  Perhaps it is our Constitution and the mostly hands off approach that has made us successful.  The Soviet Union's centralized government couldn't best us.  The English government was run over by us in the days after WWII.  The Chinese are the only centralized government that seems poised to overtake us, and that government, has allowed a fairly open reform to achieve that.  And, they haven't bested us yet, only time will tell.  Open government, that writes minimal regulations to protect the population from scoundrels, but otherwise butts out of business has worked here since the beginning, there is no other system that has worked as well, why would we change now?

The Federal Reserve

The Federal Reserve has developed into The United States Bank.  Since the very beginning of our nation, a central bank has been debated.  Thomas Jefferson and James Madison were opposed to a central bank.  They  saw it as an engine for speculation, financial manipulation, and corruption.  However in 1791, just a couple years after the Constitution was accepted, the first central bank was established.  That bank was wildly different from today's Federal Reserve.  The first bank was only responsible for creating 20% of fiat currency.  Private banks controlled 80%.  This first bank lasted until 1811.  The Congress sold the nation's interest in that bank.  The First National bank was partly owned by foreigners. 

In 1817 the Second National Bank was established.  It was modeled after the First, but was privatized in 1836, and liquidated in 1841.  The government was the largest stock holder in this bank, and it worked for the treasury to pay the bills of the Federal government.  There was major opposition to it and that is why its charter was not renewed.

From 1863 to 1913 National Banks performed those duties, and in 1913 our current Federal Reserve was established.  Over the years there has been changes, and today we find that the regionalized Federal Reserve controls our money supply and because of this can have an effect on our economy.  Today it was announce the Fed was beginning QE3.  What does that mean?  We are currently in a recessionary cycle, businesses are having issues selling their wares to the public.  The people have it in their heads that bad times are here for a while, and as such they have pulled back on spending.  When that happens then factories over produce, and eventually lay off workers.  The the cycle will repeat until some way is found to encourage people to enter the market once more.  It can be things like low borrowing rates, or as simple as printing more money.  That is what QE3 does, it is keeping interest rates down, and is buying government bond, which increases the money supply.

The hope is that this will encourage people to buy higher priced goods like house, cars, or appliances.  This will put people back to work making these goods.  Those people will be more open to buy other things, which puts more to work.  And then we will reach an expansion in the economy.  The most recent expansion period began in the early 1980's and ended in mid 2000's. 

The business cycle is just that.  It cycles from recession to boom and back again on a somewhat regular basis.  These cycles are not all bad.  As long as the people prepare, then actually recessions can help fuel the expansion.  That is not to say there is not pain, there certainly is, however, recessions do make companies more efficient, bringing down prices which does benefit all of us.

Today is interesting.  It seems the most volatile prices in our economy are fuel and food.  That makes what is happening all the more painful.  The food portion is primarily as a result of two things, the drought and federal policy that diverts food crops to energy (ethanol).  Fuel is another thing, see because of our dependence on outsiders, and the emergence of economies in China and India, global demand for energy is increasing even in this recession.

Until we get energy costs under control, I am afraid this recession will drag on.  Global production of energy has to increase to bring costs down.  OPEC, works to keep prices up in oil by controlling production.  We need non OPEC alternatives.  When oil drops in price, every corner will display it.  When energy costs fall, then production will increase.  We need to produce more of our own energy, making OPEC less important to the overall energy picture.  The side benefit might also help settle the middle east. 

The Fed believes QE3 will help.  QE1 and QE2 have not gotten us out of this recession, so why would this one?  Isn't insanity doing the same thing over and over again, and expecting a different result?  By the latest catch phrase:  I'm just sayin'.

Do You Remeber?

All wars are fought over one of two things, and both of those are economic.  All wars are fought over either territory, money, or both.  Do you remember where you were when the current war began?  When the planes flew into the World Trade Center, The Pentagon, and was crashed in that Pennsylvania field by every day hero's?  We are at another anniversary of that event, September 11.

I was at work.  On the Monday prior to this, I was at a meeting in the headquarters of the company I worked for in Nashville, Tennessee.  I was packing out my suitcase, and was in a hurry, so I didn't have the TV on.  As I loaded the suitcase into the car some people started talking to me.  Which is a little odd in a big city like Nashville.  They asked me if I saw it.  I said, no what happened?  A plane hit the World Trade center they said.  For some reason I went back to my room and turned on the TV.  News coverage was on, at first they thought it was a horrible accident.  But as the cameras were trained at the crash site, another plane came into the frame and flew right into the second tower.  My jaw dropped.  At that instant I knew we were under attack.  The American way of life was in peril.  Most of us, Americans, just want to be left alone, we have no ill will towards anyone.  Perhaps our Government is a different story, but every day Americans are doing what most peoples are, trying to do, make a living.  Tears started to flow.  I sat on the end of the bed for hours watching the coverage.  At some point I guess I realized that my way of life was being threatened.  And I remember making this promise to myself, I don't remember if I said it out loud, however, I was not going to let the bastards win.  I took a few minutes to compose myself, then I went out to the car, I had sales calls to make.  It was the hardest day of my life.  But my life went on.

My kids were 7 and 10 years old, they and my wife were 500 miles away.  Each mile closer to home had a certain apprehension.  Was there to be more attacks?  Where would the next one be.  I do remember feeling some security in that President Bush, at least at first did what I was doing, his job.  He was reading to some elementary students, a political event, but he didn't stop right away, that gave me some calm.  I never understood, how later that would be seen as uncaring.  For weeks or months after, I was worried that there was another attack coming. 

So much verbiage, but how does economics play in this?  The simple answer is that the terrorists want land, and they are jealous of our money or way of life.  They see us as an ally to Israel, which we are.  They think that if they hit us we will walk away from our friends.  They want them dead.  We must fight back, again to save our way of life.  America is unique in history, we really have no designs on territory, we just want to be left alone to live our lives in the land of relative freedom and liberty.  We rebuilt our friends and enemies after WWII.  We liberated Iraq, then gave it back to the people.  We are working hard in Afghanistan to help the Afghan people, but ultimately they must choose.  We did not even ask for any territory or payments to defray costs.  That's the American spirit of help and goodwill.  It is what our enemies don't understand.  We seek to spread liberty, that worries tyrants.

Now at the 11th anniversary of that attack, the mastermind is dead.  Life is still not normal in our country, but is closer.  Maybe it will never be like it was on September 10th, but I hope it will be.  It is in living the way we wish to live that causes those who would attack us to stay on their heels.  It is the retaliation, the eagles rage, that will keep us safe.  Some day, in the future, my great grand children will ask their grandparents "what were you doing on September 11th 2001?"  And they can answer, I was in school, living my life.

Let us not forget.  Let us honor those who died, and those who risked their lives to rush in and try to save lives.  Let us remember so that if it happens again we can be sure that we will survive, and thrive.  Liberty assures that.

Thank you for your patience.

Economics 2012

"Being asked to pay your fair share isn't class warfare. It's patriotism," said Newark Mayor Cory Booker, a rising star in the Democratic Party.

My questions are, what is a person's fair share?  How much of our incomes should we send to government?  Is the progressive tax system good?  Can we talk about tax rate separately from spending?  Is there a limit to how much in taxes and individual should be forced to pay?

Let's talk about each of these.  First, what is my fair share?  There must be a consensus.  Or is there.  Isn't that what most of the battle is?  Progressives and Liberals want a higher amount of taxes, while Conservatives advocate a lower rate, but working to grow the pie, thereby increasing the income to government.  In 1900 there were no individual income taxes on a Federal level.  There was an income tax passed in the late 1860's that was ruled unconstitutional by the Supreme Court.  It took the the 16th Amendment to the Constitution to bring Income Taxes to the masses.  In 1913 the tax rate was 1% for those earning more than $3000 for singles and $4000 for married couples.  (When you look at inflation $3000 would be a little under $67000 in 2012 dollars.)  If you were below that, you owed no taxes.  Was that their fair share?  Perhaps, but it was the amount the Government needed to stay solvent.  If the tax rules were still the same, then only 30,036,430 Americans would be paying taxes today.  181,217,561 Americans would not have to file.

How much of our income should the government be entitled to?  Perhaps many would agree that 1% is not enough.  And shouldn't all Americans contribute in some way to our national needs?  Is 10% fair?  15?  That is what our political system needs to determine.  On my part, my God recommends 10% as a thigh (or tax) to support the good works of the Church.  I have always felt if God can live with 10%, why can't man?

Is it fair to tax higher incomes at a higher rate?  This has always befuddled me.  On one hand, if you are a high earner, shouldn't more be expected?  But, if you penalize high earners, will they not find ways to shelter their money, reducing what they pay.  A big deal was made that GE didn't pay taxes for a number of years.  How can that be?  See a multinational company can shelter income in other countries were the tax rate is lower.  When they do that, it is natural to look at expansion in those countries, since the money is already there.  That means less jobs for Americans, and less taxes collected.  If we competed with those other countries, there would be no reason to leave the money there, and when a new plant was needed the money would be here.

Now on to the budget.  If the Government could function on 1% in 1913, why is 15% the lowest tax rate?  It is because Congress thinks their job is to spend money, our money.  Until there is a mandate to stop, they will continue to spend more and more, it gets them reelected.  For example, the health care debate over the last several years, do we need it?  Maybe, but know that the money comes from you, goes to Washington, pays government workers salaries, comes back in a benefit, that if any thing like other programs will be 20 cents on the dollar.  Insurance companies would go out of business if their expenses were that high. 

Fell free to disagree, but my conclusion is a low flat tax.  All we need to do is agree on what is 'low'.