Sunday, December 18, 2011

Phased-in state tax cuts would boost capital

Published in The Tennessean, Sunday, December 18, 2011

by Richard J. Grant

Economists call it the “shortsightedness effect.” Government decisions tend to be biased against actions with easily recognized current costs and less-obvious future benefits. Politicians prefer it to be the other way around. They prefer the benefits to show up before the next election — the costs later.

It also applies to tax policy and the timing of tax revenue. Such is the dilemma faced by the governor of Tennessee. Gov. Bill Haslam is worried about a legislative proposal to eliminate Tennessee’s estate tax and its Hall Income Tax on dividends and interest. The governor knows that both of these taxes hurt the state’s economic development. As he put it, they “chase capital away from the state.”

Enough capital is chased away by these taxes to have reduced Tennesseans’ income growth measurably. Recent research by economists Arthur Laf-fer and Wayne Winegarden compared Tennessee to other states with similar policy characteristics. In general, they found that states with the lowest personal and corporate income tax rates had the highest rates of employment and economic growth over the past decade. This high-growth effect was especially pronounced for right-to-work states.

But Tennessee tended to lag in economic performance when compared to other states in each of these categories. Laffer and Winegarden identified Tennessee’s estate tax and the tax on investment income as the main culprits.

So why is Haslam worried? The issue is timing. The governor knows that states without personal income taxes have more stable tax revenues. Also, the elimination of estate, gift and Hall taxes would result in higher economic growth and higher total revenues from sales taxes. These tax cuts would pay for themselves, but not instantly.

State tax revenues fell significantly during the recent economic downturn, and the recovery has been slower than expected. Although the estate and Hall income taxes combined contribute only 2.8 percent of the state’s total revenue, Tennessee has depended on federal transfers to maintain budget balance. When every dollar counts, the governor is right to worry about short-term revenue needs. He also needs to worry about excessive government spending.

Here’s the trade-off. The trouble with waiting for better times is that it delays the income growth that would result from the tax cuts. It also delays the growth in sales tax revenues that would more than make up for the tiny estate and Hall tax revenues. The sooner the cuts are legislated and brought into effect, the higher will be Tennesseans’ lifetime earnings and their spending power.

Proactive legislators should be able to construct a bill that incrementally reduces the tax rates and raises the exemptions. The phase-out of the taxes can be timed according to estimates of net revenue needs. The important thing is to get the legislation enacted so that everyone can make firmer plans and markets can adjust to the state’s improved investment environment.

For many reasons, Tennessee is a fine place to live. But for those who do well in business, and for those who build their investments, incentives change as they grow older. States with lower tax rates on dividends and interest attract more investors. States with neither gift nor estate taxes are more family-friendly. Fewer family farms and businesses are sold to pay taxes.

Shortsightedness is expensive. The legislature can give the governor the tax cuts he needs when he needs them, which is now.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, December 11, 2011

Progressivism is not progress

A shortened version was published in The Tennessean, Sunday, December 11, 2011

by Richard J. Grant

“What does not kill him makes him stronger,” wrote Friedrich Nietzsche. This oft-quoted phrase, usually out of context, is misunderstood almost as often – for it is not necessarily true. That which does not kill him leaves him stronger than he would be if he were dead.

Thus history is presented to us as a string of non sequiturs dressed up as a necessary unfolding of events. We look back fondly at our leaders of the past assuming that, if we survived the crisis of that time, whatever our leaders did must have been wise.

We know better, but are sometimes susceptible to rhetoric that reaches into the haze of history to retrieve moral authority from precedent. So it was that President Barack Obama arrived in Kansas last week in search of reflected glory, invoking the memory of a speech by Theodore Roosevelt a century ago.

That President Roosevelt served as a Republican is useful as a rhetorical wedge to drive into the philosophical cracks of present-day Republicanism. Roosevelt did not invent the regulatory state, nor was he the first with a predilection to impose his conception of the good on other people at home and abroad. But Roosevelt was the first president to launch a conscious attack against private property and free markets.

Historian Daniel Boorstin saw Americans’ lack of interest in political philosophy as giving us an advantage over Europe. We were less likely to be led astray by rousing ideologies. But the progressive movement that captured the mind of Theodore Roosevelt was often recognized, indeed praised, as an import of German socialism. German influence on the American college system in the late 1800s is well-known. Philosophical imports were part of the package.

In his 1910 speech, Roosevelt showed a greater philosophical confidence than he had during his two presidential terms. Laying out what he called a “New Nationalism,” he claimed that “We are face-to-face with new conceptions of the relations of property to human welfare.”

Anticipating Obama, he invoked the false opposition of “the rights of property as against the rights of men,” and then claimed that supporters of property rights had pushed their claims “too far.” He showed Obama how to create a strawman, the man “who holds that every human right is secondary to his profit,” and then oppose it with a similarly deceptive construct, “the advocate of human welfare,” who maintains that every man holds his property “subject to the general right of the community to regulate its use to whatever degree the public welfare may require it.”

But who is to decide what constitutes the “public welfare”? That is always the question left open by the authoritarian mind. Roosevelt continued, again anticipating Obama, “Let us admit also the right to regulate the terms and conditions of labor,” in essence claiming to government the right to control all human relations.

Roosevelt's Progressive Party failed, but the philosophical damage was widespread. By the time that government policies had precipitated the economic crisis of 1929, American voters were unequipped to choose wisely. The era of big government had begun: two steps forward, one step back. Now we have a president who is trying to leap forward.

Roosevelt's progressivism did not kill us, nor did it make us stronger. The Obama presidency could make us stronger; but only if we have now learned our lesson.



Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, December 04, 2011

Estate, gift taxes are a drag on economy

Published in The Tennessean, Sunday, December 4, 2011

by Richard J. Grant

Some taxes are just not worth the trouble. There are many ways in which a tax can end up costing us more than the revenue it generates. This is especially true when the tax rates are high and the tax base is narrow enough that people can shift to other activities that are less heavily taxed. Resources shift into second-best uses.

Taxes reduce the ability of individuals to accumulate capital. Although some government spending is devoted to long-term capital projects, such as roads and bridges, most of it is shifted into consumption. As social programs become a larger proportion of governmental spending, governments increasingly inhibit our ability to maintain and create capital. With less capital, our future incomes will unfortunately be lower than they would have been.

While this implies a lower future standard of living for individuals, it also implies a lower capacity for the future provision of government services. With less capital and lower incomes than we might otherwise have had, the tax base is lower. Future tax revenues cannot be as high as they would have been.

Perhaps the purpose of the tax is not to raise revenue but to discourage the activity that is being taxed. To discourage officially undesirable activities such as smoking and certain types of industrial pollution, we can estimate the amount of taxation needed to reduce these activities to acceptable levels. We know that when we tax something we tend to get less of it.

This is why a particular tax usually generates less revenue than its governmental sponsors had hoped to receive. People really do work less when they no longer believe that their next dollar of after-tax income is worth the effort. People really do shift their capital away from highly taxed investments. People also move themselves to other countries or states, albeit reluctantly, when the tax savings make it worthwhile.

Such mobility is most feasible for people with higher levels of wealth or income. This is what makes the estate tax one of those not worth the trouble.

Arthur Laffer and Wayne Winegarden of Laffer Associates have recently concluded a study on “The Economic Consequences of Tennessee's Gift and Estate Tax.” Tennessee is one of only 19 states with a separate estate tax and one of only two states with a gift tax. Tennessee has the single lowest exemptions for both its estate tax and its gift tax, which makes them more burdensome.

Gift and estate taxes contribute less than one percent of Tennessee's total tax revenues. They also make Tennessee less attractive to high net-worth people, many of whom would be inclined to invest and build businesses locally. Pennies gained, dollars lost.

Laffer and Winegarden estimate that had Tennessee eliminated its gift and estate taxes 10 years ago, Tennessee's economy would have been over 14 percent larger in 2010 and there would have been more than 200,000 additional jobs in the state. Also, the greater prosperity would have brought state and local governments more than $7 billion in extra tax revenues.

Although Tennessee is a right-to-work state with no income tax (except on interest and dividends), low corporate taxes and a low overall tax burden, its economy has significantly underperformed other states that can boast the same advantages. The difference seems to be Tennessee's gift and estate taxes.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, November 27, 2011

Recent financial crises and economic stagnation are symptoms of constitutional failure

Published in The Tennessean, Sunday, November 27, 2011

by Richard J. Grant

The progressives among us often insist that we need stronger laws and greater regulation. But they don't really mean it – at least not in any consistent sense. While happy to load us up with regulations at all levels of government, they do so only by either ignoring or defining away any limitations on government at the constitutional level.

If we are now dogged by a flourishing pack of sharp-toothed regulators, it is because the constitutional leash intended to limit the range of politicians’ powers has been loosened from its anchor. The U.S. Constitution was intended as a conservative document that would give the national government a few defined powers and no more. Government was constitutionally limited to protect citizens from the whim of the aspiring oligarch and the appetites of the mob.

The Orwellian phrase, “living constitution,” really describes a constitution that is moribund. Any constitution that is dislodged from its roots and ceases to be an effective anchor on the actions of the government that it once defined will also cease to be worthy of the name “constitution.” If its words can be interpreted to mean whatever our political leaders choose them to mean, then it would be at most a set of rules through which we choose our de facto rulers.

The recent financial failures and economic stagnation, as well as the cynically polarized political environment and increased systemic economic risks, are all symptoms of the process of constitutional failure. They are symptoms of unfettered government and politically empowered greed. Each of us is ever more at the mercy of the vagaries of the political market.

It is a sign of intellectual confusion when people use military terminology to describe business. Such terms as “captains of industry” or “robber barons” or “market power” all imply some coercive command over competitors, employees, and customers. But the defining feature of business is the voluntary exchange of property rights. Power, in the coercive sense, has nothing to do with it except when necessary to defend legitimate property rights.

A constitution that protects property rights from confiscation or arbitrary diminution is a constitution that protects a free people. A person's property is a product of that person's life; and a government that fails to protect that property from predation fails to protect the fullness of that life. This remains true whether people control their property as individuals or in voluntary associations such as cooperatives or corporations.

Such cooperation under well-constructed constitutional rules enables people to improve their property and their lives. This explains the exceptional history and economic development of the United States. Perhaps the exceptional moral leadership that arose in the 18th century was an accident of history, but its constitutional product served to shape the moral destiny of its citizens and to make them better able to withstand future historical accidents.

The progressive breakdown of this morality is manifested in an anti-constitutional mentality. It is now confusing when the President of the United States preaches to the Chinese about “following the rules of trade” as well as the need to “respect intellectual property rights” and have a sound currency. The Chinese need to hear it, but not from a president who is uninhibited in his ambition arbitrarily to redistribute the property of his own citizens, to force them to purchase prescribed products, and to regulate how they live.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, November 20, 2011

For supercommittee, cuts are all in the details

Published in The Tennessean, Sunday, November 20, 2011

by Richard J. Grant

During the past week, the total debt of the U.S. government surpassed $15 trillion. This brings the total debt up to about 99 percent of the annual production of the U.S. economy. Given that the debt has been growing more than four times faster than the economy, it should cross the 100 percent barrier by the end of the year.

Meanwhile, in Washington, the congressional “supercommittee” is supposedly working on proposals to reduce, if not eliminate, the annual budget deficit. We know for sure that they have no intention of eliminating the deficit. Their assigned task is to reduce the deficit by $1.2 trillion over the next 10 years.

This leaves two big questions: What is the benchmark from which the cuts will be made, and why will it take 10 years to reduce the deficit by an amount that is less than the last annual deficit?

As for the benchmark, the usual trick is to use projected spending, rather than actual current spending, as the starting point for cuts. Given that projected spending will always be set higher than current spending, it is possible to “cut” projected spending and then ignore the fact that actual future spending will still be higher. Rumors have it that the supercommittee will treat the reductions of planned future war spending as if they are real cuts.

A 10-year time frame allows politicians to spread any big-sounding cuts, real or otherwise, across the years such that the cut in any one year is minuscule. Ten years is also longer than any election cycle, putting any real results safely beyond the next election. The next Congress must deal with the mess left by the previous one, but it is not bound by its predecessor’s decisions. It can then proceed to shift its mess onto the next Congress, and so on.

This cycle will continue until a sufficiently high portion of voters comes to understand that higher government spending guarantees a higher total tax burden. Those who are most likely to believe that someone else is bearing that burden are those who are least likely to have the aptitude to understand that the burden really is being shifted onto them. They are the ones who don’t understand why their salary is so low or why their job has been outsourced or eliminated.

Half of the supercommittee is determined to raise taxes. They like to call this “revenue enhancement” in the hopes that you won’t understand that they really mean to raise your tax burden in order to buy your vote with your own money. But they can’t even be sure that raising tax rates on you or your neighbor will really bring in more tax revenue, at least not in the long run.

Whatever they say, they must know that higher tax rates reduce long-term economic growth even when we’re not in a recession. If your politicians were serious about increasing tax revenue in order to reduce the deficit, then they would look more seriously at reducing the regulatory burden that is crushing the tax base. That is, the regulatory burden that is hindering business and your ability to make a living.

As we let government spend more of our money for us and to tell us what to do with the rest, the more trouble we will have paying our bills.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, November 13, 2011

Even China seems to have learned welfare state flaws

Published in The Tennessean, Sunday, November 13, 2011

by Richard J. Grant

Of those people that I have met who express an aversion to the welfare state, those who express the strongest feelings are often those who grew up in the system but worked their way out and escaped. They recognize the perverse incentives that separate sustenance from any thought of production.

Charity without thought is unlikely to edify the recipient; and this describes the destination, if not the beginnings, of governmental welfare systems. When charity is transformed into entitlement, any moral obligation to lift oneself up is no longer enforceable by those who pay. To call such payments “a gift” is to insult both parties to the transaction. Society has lost something.

There are those who, like Blanche DuBois, are content to depend on “the kindness of strangers.” But someone must do the world’s work, and societies that understand this are those that survive and prosper. Welfare states throughout history have tended to waste away both morally and materially.

Weakness has always reduced one’s options in the community of nations. When a government runs out of its own citizens’ money, it must either economize on its own profligacy or become dependent on the finances of strangers.

Given our record-high budget deficits and accumulated national debt, the attitude with which the U.S. treasury secretary recently visited Beijing was no doubt very different from that of his predecessor 10 years ago. We can only imagine the thoughts of the Greek finance minister during visits to Brussels.

As the European Union begins to wither from the south up, its various finance ministers look longingly outward for “investment.” But societies that increasingly specialize in consumption are not what investors are looking for.

One such investor has shared his thoughts in an interview with Al-Jazeera news. Jin Liqun, the chairman of China Investment Corp., China’s sovereign wealth fund, makes it clear that his assigned task is to manage a profitable business. In other words, he must be a good steward of the resources that have been entrusted to his care.

If European leaders were listening, perhaps they could take it as a lesson in sustainability. Said Jin, “I think what is most important is to have an appropriate incentive system. We should not follow some of the bad examples as these kinds of so-called welfare societies in which hard working is not encouraged. Now if people who do not work make as much as those who work hard, of course this is an invitation to indolence. This is not what we want to see.”

This is not his father’s communism. Europe’s troubles are “the accumulated troubles of the worn-out welfare society.” Jin adds, “I think the labor laws are outdated. The labor laws induce sloth (and) indolence, rather than hard working. The incentive system is totally out of whack.”

A society that is built around featherbedding and early retirement is not a society that is built to last. It is a society disinclined to provide for itself; and it is a society not yet ready to accept the moral obligations of a recipient of charity.

Mr. Jin is well aware that China has its own troubles. He is not preaching; he is speaking as a steward of property. Whether his motive is profit or pure charity, he has the right to expect the best from those with whom he deals. We do, too.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, November 06, 2011

Feds lead public back toward mortgage trauma

Published in The Tennessean, Sunday, November 6, 2011

by Richard J. Grant

At a young age I was taught that, were a fire to break out in the stables, I should first cover a horse's eyes with a blanket before leading it to safety. A horse, like other animals and humans, will in a time of trauma have an urge to flee to the familiar, to the formerly safe.

Such human behavior is evident at the time of economic crises. There is a tendency to run to the apparent safety of the very institutions that caused the crisis, some of which continue to burn.

It should be no surprise that Freddie Mac (Federal Home Loan Mortgage Corporation) is asking taxpayers for another $6 billion in bailout money to cover its losses in the July-September quarter. Since the beginning of the 2008 financial crisis, Freddie Mac and its older sister Fanny Mae have burned through at least $169 billion of bailout money. It is estimated that they will come begging for at least another $51 billion in the next three years.

Both of these institutions are creations of government. Freddie Mac was created in 1970 to provide “competition” to the recently, and ostensibly, privatized Fannie Mae. Neither of these companies has ever been truly private. Nor could they be when their core product derives from their power to grant mortgage guarantees backed by the federal government.

Any attempt to insure the uninsurable will, especially when the force of government is brought to bear, lead to loss and corruption in the supposedly insured market. Those who blame the mortgage crisis on “Wall Street greed” are naïve. Greed has always been with us and is benign when the law protects property rights and allows free competition. It was government guarantees and government regulations that encouraged risky behavior and removed the natural checks on greed.

The belief that government can somehow decree an end to scarcity and the risks of life is a symptom of what the late Nobel laureate Friedrich Hayek called the “fatal conceit.” At the heart of this conceit is the belief that some central planner, some governmental institution, could possibly have the knowledge necessary to coordinate all the actions required to achieve their desires.

This is the error of the socialists and all those who assume that government officials have the knowledge necessary to regulate the actions and interactions of individuals in a community. The aspiring central planners seem not to understand that knowledge is dispersed throughout the community and does not exist independently, but is created through the actions of those individuals over whom they presume to rule.

Those who suffer from the fatal conceit are incapable of understanding the damage caused by interventions such as the Community Reinvestment Act. They do not understand that no outside observer, let alone a government official, has the knowledge necessary to direct the lending activity of a private financial institution. Accusations of “discrimination” against banks presume the possession of knowledge that the accusers cannot possibly have.

Eric Holder's Department of Justice, as if to double down on this conceit, has created a “fair lending” unit to toughen enforcement of the laws that pushed banks to increase their subprime lending in the run-up to the previous mortgage meltdown. It is a gift to that subset of voters who are still naïve enough to believe that there must be a horse in there somewhere.


Richard J. Grant is a Professor of Finance and Economics at Lipscomb University and a Senior Fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 30, 2011

Choice, not federal gifts, boosts school outcomes

Published in The Tennessean, Sunday, October 30, 2011

by Richard J. Grant

The Obama administration recently nationalized the college loan industry. Then this week the president announced an income-based cap on the repayment rates of student loans. After 20 years, any unpaid portion of the loan would be forgiven, that is, paid by taxpayers.

The net effect of this policy will be to encourage disproportionately those students who are least likely to benefit either themselves or taxpayers in the pursuit of higher education. The most heavily subsidized students will be those who enter the lowest value-adding professions.

In the world of educational subsidies, higher education has always offered the lowest returns to taxpayers. This effect is merely exacerbated by the involvement of the federal government. But none of this matters to those who know that the real name of the game is No Vote Left Behind.

In contrast, some state governments have been moving their educational policies toward greater efficiency and better outcomes. After more than a century of increasing state involvement in schooling, they are acting to benefit from decentralized decision-making and the freedom to choose in education. That century of experience has demonstrated that governments are not particularly good at education. They are not even good at picking winners in vocational training.

Perhaps the kindest explanation for why governments got involved in schooling was to ensure that all children, regardless of family circumstances, were introduced to reading, writing, and arithmetic. This could easily be organized at the local level. But as the curricula grew more ambitious, and providers saw gain in political organization, the spending power of state governments was recruited.

The trend toward school choice for government-funded students reflects the recognition that governments have a knack for raising funds but a poor record in running schools. When states such as Indiana, Wisconsin, Ohio, and Florida introduced school voucher programs, they empowered families to find and select their own educational opportunities. The state got out of the way except to ensure adequate funding and the prudent use of those funds.

In Tennessee, State Senator Brian Kelsey is sponsoring a bill called the “Equal Opportunity Scholarship Act,” which would give low-income families the power to send their children to the schools of their choice. Students in the four most populous counties would have available to them vouchers amounting to half of what the state and local school systems would have spent on them. In essence, these are scholarships that can be spent at any approved private or government-run school.

The effect, when tried elsewhere, has been improved student performance. When families are free to choose, and schools are free to compete, the schools have an incentive to be better and the families get to choose what works best for them. To attract and better serve their students, the schools will necessarily direct their resources to those uses that best serve their needs.

School choice depoliticizes the school environment and reduces the need for cumbersome administrative structures and bureaucratic assessment systems. It would also reduce the need for state and local governments to be involved in the expensive construction and management of school grounds and buildings. And it works better when more students are eligible.

Ironically, the acceptance of freedom in education will require education. Special-interest groups, such as teachers unions, will argue against any change that allows families alternatives to unionized schools. Families have something to teach the teachers.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 23, 2011

'9-9-9' would shine light on true tax burden

Published in The Tennessean, Sunday, October 23, 2011

by Richard J. Grant

Decades ago, while riding an overnight train through Italy, a fellow passenger offered a warning. He had heard that organized criminals would wait until passengers fell asleep and then spray anesthetic into the compartment to deepen that sleep. With the passengers now safely oblivious, the thieves could help themselves to unguarded valuables.

Although almost certainly untrue, this story does serve as a neat allegory for the real-life relationship between taxpayers and tax legislators. It is much easier to get voters’ support for a tax-rate increase when taxpayers are unaware of their true position in the political food chain.

We know that, all else equal, income earners and property owners are happier the more of their income and property that they are allowed to keep. The higher the tax rate on each additional dollar earned, the less likely it is that a worker will put in the extra effort to earn one more dollar. Other activities become relatively more attractive. These might include leisure or the pursuit of some other less-taxed income opportunity.

When taxpayers perceive their own tax rates to be rising, they are likely to offer resistance in their role as voters. But if they believe that someone else is paying those taxes, they are more likely to be neutral or even supportive – especially if those perceived to be bearing the burden are seen as rich or undeserving.

Few people are aware of the difference between the “incidence” and the “burden” of a tax. Although one person is seen to be paying the tax to the government, this does not mean that no one else bears the burden.

Even children are affected. When I was a young teen, an old man once remarked that I did not pay taxes. When I insisted that I did, he laughed. That was until I pointed out that, if my parents did not pay such high taxes, my life would undoubtedly be different.

Many people believe that their Social Security payouts are half free because their employer pays half the tax. They are unaware that the portion of the tax paid by the employer adds to the cost of hiring that employee. This draws away resources that could be used to bid against other employers for the services of that worker. The employer would be just as happy to give the money to the employee as it would be to give it to the government. The employee might, if aware of the trade-off, have a stronger bias in the matter.

Government programs are easier to sell to voters when the full costs are hidden from view. It is well known that the bottom 40 percent of income earners pay no federal income tax. But they would be fools to believe that they bear no burden from the taxes paid by others. The tax disincentives facing investors and the resources taxed away from employers render employees less productive and therefore less valuable. The tax burden is borne as lower wages or, for some, as unemployment.

One of the criticisms of presidential candidate Herman Cain's 9-9-9 tax plan is that it would create a federal sales tax that might later be increased by Congress. But the plan eliminates an array of currently hidden taxes and replaces them with simple taxes that voters can see. Congress would have to operate without anesthetic.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 16, 2011

U.S. economic freedom falls, China rises

Published in The Tennessean, Sunday, October 16, 2011

by Richard J. Grant

Since June 2010, the Chinese currency has risen in value by about 7 percent compared to the U.S. dollar. This has not stopped accusations of “currency manipulation” from the U.S. and elsewhere. Such accusations are politically useful since not one person in a hundred understands what the charge means and it vaguely sounds as though the accuser has the best interests of U.S. workers at heart.

The U.S. Senate has just passed a bill that would require the U.S. to impose tariffs on goods imported from selected countries in order to punish currency manipulators and to counteract perceived underpricing. House Speaker John Boehner has already indicated that the bill will not proceed in the House. He sees punitive tariffs as harmful to trade relations. But few dispute the charges of currency manipulation.

This is interesting because, of all the problems that Chinese actions might present us with, currency manipulation is the least of them. Of far greater importance, and a prerequisite for civil relations between individuals and nations, is respect for individual property rights. Governments that never come to terms with such basics will always present a threat to their citizens and to international peace.

China is not a free country and, although it is opening up, its people have paid a high price for past repression. According to the Economic Freedom of the World: 2011 Annual Report recently published by the Fraser Institute and the Cato Institute, China now ranks 92nd out of 141 countries studied in terms of economic freedom.

To the extent that economic freedom is a predictor of economic progress, then China has a long way to go in relative terms. But in absolute terms, its score on the freedom index has improved greatly over the past 30 years. This freeing up of economic relations explains the tremendous increase in China's productivity and standard of living.

Any neighborhood is made better by the presence of neighbors who are self-supporting and respectful toward other people and their property. It is in the interests of the Chinese people themselves to become such neighbors. To the extent that they retain state ownership of their enterprises they hurt themselves more than they hurt us. When they subsidize their industries, they hurt their own potential domestic production more than they hurt ours.

Most people can't figure this out for themselves; they must be shown. But what kind of example is it to the world, and to ourselves, if we reject our own economic freedom? Over the past 15 years, the United States has fallen to 10th place on the Economic Freedom of the World index; and in absolute terms, we have shown one of the most significant decreases in economic freedom.

After many years of single-digit growth, since 2008 the U.S. Federal Reserve has tripled the quantity of base money. It has also pushed its target interest rates down to record lows. Does this qualify as currency manipulation? Is not currency manipulation the purpose of all central banks that manage a fiat currency?

After its 20-percent inflation in 1994, China adopted our monetary policy by periodically fixing its currency to ours. But as we expanded our money supply, China had to do the same and suffer price inflation. To avoid this inflation, it was in China's own interest to allow its currency to rise relative to the dollar.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 09, 2011

Wal-Mart can't join, tries to beat banks

Published in The Tennessean, Sunday, October 9, 2011

by Richard J. Grant

There’s an old joke about a senator who, when told that his idea won’t work because of “the law of supply and demand,” retorted, “Then we’ll just repeal that law!” As if to remind us that truth is stranger than fiction, Sen. Dick Durbin, D-Ill., was recently shocked to learn that it really was just a joke.

It was Durbin who inserted the amendment into the 2010 Dodd-Frank financial-regulation law that capped the transaction fees that debit-card issuers could charge retailers. He and his colleagues apparently believe that the forced reduction of prices is the same thing as the reduction of costs. He thought he could get something for nothing.

To recoup revenues lost from debit-card interchange fees, many banks have announced increased monthly fees on debit-card accounts. Real costs didn’t shrink. What changed was the pricing structure through which we bear those costs.

The debit-card interchange fees were invisible to consumers, but the new account fees are not. Just as politicians prefer that you not see the taxes that they impose, Sen. Durbin was doubly outraged that the new fees have been dubbed the “Durbin fee.”

When Bank of America announced a $5 per month fee, Durbin lashed out from the Senate floor and urged a boycott.

But while he and his Democratic colleagues cannot be absolved from responsibility for the law, we can still ask what motivated them.

Columnist Timothy Carney asserted that “the real culprit is Wal-Mart and the retail lobby, which used government to squeeze banks and fatten their own bottom line.”

But why stop there? What motivated Wal-Mart? During the past decade, Wal-Mart has tried to reduce its costs by directly offering credit services to its customers.

It has applied at least three times for an industrial loan charter, but each time has been met with intense opposition and lobbying activity from banks and so-called consumer groups.

The banks are rightly terrified by the prospect of competition from a company with the retail expertise and customer base of Wal-Mart. But reliance on government regulation to thwart competition is to take the road to serfdom; and what goes around comes around.

When market relations become fused with politics, then, with apologies to Clausewitz, politics becomes market competition by other means. Legal obstacles limit our choices and channel us into second-best survival strategies. Resources are diverted from the core business into defensive lobbying.

That is how it began for Microsoft, which, until the mid-1990s, tended to stay out of politics. While Microsoft was focused on serving customers, jealous competitors joined with the U.S. Justice Department in attempts to break up Microsoft. Once “blooded” with its first “hunt,” Microsoft learned to lobby with the best, and the worst, of them.

Wal-Mart’s ventures into politics might have begun the same way. But what kind of worldview would encourage Wal-Mart’s endorsement of the “employer mandate” in the recent health-care reform law?

The mandate would increase Wal-Mart’s employee health-care costs, but its competitors would be forced to pay even higher costs per employee. That’s competition by other means.

With determination and a clear assessment of the legal terrain, Wal-Mart can reduce costs by integrating banking functions into its operations.

Although itself “blooded,” it might be Wal-Mart that shows us that banking is not as different from other types of business as once believed.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays.

E-mail: rjg@richardjgrant.com .

Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, October 02, 2011

Individual choice, not government, fuels prosperity

Published in The Tennessean, Sunday, October 2, 2011

Richard J. Grant

In the 2003 movie, Master and Commander, a British warship during the Napoleonic Wars is rounding Cape Horn when a severe storm rises. The mizzen-mast breaks and falls into the sea with a square sail and parts of the mast, still held by several lines, dragging behind the ship.

A popular midshipman has also been swept overboard, and his only hope is to swim to the trailing rigging. But the wreckage is acting as an anchor that threatens to sink the ship. The storm won’t wait for the unfortunate midshipman; the commander must choose between losing one man or the possibility of losing everyone.

Suppose that the commander had waited in hope for the man overboard to swim to the rigging, and in the waiting lost the ship. Other than the loss of a military asset, lost also would be the men and their future descendants, as well as all the experience and survival lessons that might have been passed on to the benefit of future colleagues and generations. By that small increment, progress would be slowed, and more losses would be suffered in the relearning.

Such stark examples are not uncommon in life, but most parallels are obscured by complexity. We dream of “no child left behind,” and in so dreaming become a drag on the entire government education system. Rather than quickening the stragglers, we are turning the schools into slow heats that fail to challenge those who are truly educable. By not-so-small increments, each generation starts from behind what might have been passed on by those who went before.

We dream of universal health coverage, and in so dreaming restrict and retard progress in the entire health-care process. So afraid are we that someone might not get the best available care or insurance coverage, we force everyone into the same regulatory egg crate.

But professional licensing and regulation are rarely harbingers of innovation. We have less healing capacity now to the extent that previous generations allowed government officials to decide for them what the future of medical care should be.

In each of these examples, the political battles that arise are less often over the desired ends than over the means of achieving them. Only party hacks would make political campaign commercials in which Grandma gets pushed over a cliff. The rest of us want what’s best for Grandma and for everyone else. But a desire to have everything for everyone now puts future grandmas at risk.

Present-day grandmas have been put at risk not only by the politically motivated programs of the past but also by the continued weakening of those best able to provide services needed by everyone. At any age, those who are unable to take care of themselves are better off in societies where those around them have the capacity to give care. And the surest way to retard the development of that capacity is to have government force everyone into the same kind of program.

If we truly wish to provide the poor and the helpless with better services — medical, educational, housing or financial — then we need to allow greater individual choice, not less. It is precisely that freedom that allows good people to build a better and more prosperous society. But when government programs crowd out or absorb private initiatives, they risk dragging down the entire ship.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail: rjg@richardjgrant.com . Twitter: @RichardJGrant1

Copyright © Richard J Grant 2011

Sunday, September 25, 2011

Protecting postal service while harassing Google is twisted

Published in The Tennessean, Sunday, September 25, 2011

by Richard J. Grant

While financial markets focus on the latest version of “Operation Twist” in which the Federal Reserve attempts to “twist” the yield curve by reducing long-term interest rates relative to short-term rates, there is another kind of twist going on between businesses that are owned or favored by the government and those that are private. One group is subsidized or protected while the other is taxed or harassed.

The U.S. Postal Service is in serious financial trouble. Like any spoiled child of government, it just can't get the hang of acting like a real business. Despite its privileged position, it faces the prospect of cutting service and very likely defaulting on obligations promised to employees.

Article I of the Constitution gives Congress the power “To establish Post Offices and post Roads;” but it does not give it the obligation to do so. Also, there does not appear to be any command in the Constitution that requires Congress to ban private businesses from delivering first-class mail. But Congress has done just that, thereby giving the U.S. Postal Service a monopoly.

Perhaps Congress should think about this, especially in the wake of Senate hearings held to interrogate Google chairman Eric Schmidt over allegations of anticompetitive behavior. While none of us can remember a time when there was no U.S. Postal Service, most of us had never heard of Google a dozen years ago. Another dozen years from now, neither of these businesses is likely to be operating in the same way if at all.

Whenever a company offers its services with a high-enough quality and a low-enough price to attract the majority of customers in a particular market segment, there is a temptation for politicians and even competitors to hurl charges of monopoly. If “monopoly” means merely “single seller,” then historians would be hard pressed to find any example of a private monopoly that is not protected by government. Certainly Google has a “monopoly” in the use of its name and any technology that it has patented or is able to keep secret. But the same can be said about its competitors in the past, the present, and the future.

The first company to introduce an internet search engine could be said to have had a monopoly at that moment, but it sure didn't last very long. And where is that company now? The freedom to bring your ideas to market means that all existing companies must strive unceasingly to serve their customers better or risk losing them to you. “Lock-in” is never guaranteed when innovators are free to compete.

Ironically, Google offers services that compete with those of the Post Office. But there is a moral dissonance in the different ways that Congress treats the two companies. The Post Office is protected by statute from direct competition to its core product. Until this is changed we will never know how a private entrepreneur might have served this market. Meanwhile, Google faces this threat of competition every day; and a group of senators seem to believe that the company's chairman has nothing more productive to do than to ward off their attempts to look tough on monopoly.

Instead of looking tough and perpetuating the anti-monopoly charade, congressmen would better serve us by focusing on the refinement of laws that actually protect us from theft, force, and fraud – and from twisting.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Beacon Center of Tennessee. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, September 18, 2011

Good economists warned Obama against stimulus

Published in The Tennessean, Sunday, September 18, 2011

by Richard J. Grant

When you wake up on the road to Hell, it matters which way you choose to walk. The Obama administration never ceases to remind us that it was their predecessor that dropped us off on that road. But at some point, the not-so-new president needs to take notice of which way he is leading us.

Whatever starting point we might have wished for, as my old professor James Buchanan would say, “We start from here,” and not from someplace else. Call it our “inheritance.” But that's where we started, so get over it.

If everything had been wonderful in the year 2008, then candidate Obama probably would not have stood a chance of becoming president. As it turned out, many years of copious and perverse regulation, unnecessary and excessive government spending, and an unnatural interest-rate policy all began to unwind in a perfect financial storm.

Now, after two and a half years in power, the Obama administration is feeling the political heat. If we are all now sweating, it is not because of CO2 levels but because of the administration's policy direction. They have doubled down on the worst of the Bush administration's policies.

Good economists warned them that “stimulus” programs, whether through high government spending or low interest rates, would fail. Everyone else had to see it before they could believe it. Even now there are apologists who insist that there wasn't enough government spending and that not enough money was created.

Good economists warned them that the subsidization of “green jobs” would be no more productive than any other attempt by government to pick winners. Not only did this over-investment in green dreams drain resources from other more-promising uses, it rendered many “green” projects unsustainable. Easy government money always attracts politically connected hucksters, so we should not be surprised when subsidized industries become corrupted and when taxpayers must pick up the tab for bankruptcies.

Good economists warned them that the subsidization of home ownership and the intimidation of banks into granting mortgages to those with a weak ability to handle debt would result in more foreclosures and losses. But rather than learn from the poor example of the previous two administrations, the Obama administration is once again forcing banks into subprime mortgage lending.

Good economists warned them that declaring medical care to be a “right” and increasing government control over healthcare provision would neither improve service nor reduce costs. Heavy-handed regulation of medical insurance would destroy the risk-reducing character of that industry and ultimately shift more of the risk burden onto taxpayers. But shifting risks and costs onto taxpayers can barely hide the fact that it raises the burden of both.

The Obama administration is either short on good economists or short on its ability to listen to them. What it seems not to be short on is psychologists. But psychology is just not a substitute for good economics.

Calling something a “stimulus” does not make it a healthy economic policy. Calling something “green” does not make it good for the environment or a wise use of resources. Calling something a “right” does not create the resources necessary to satisfy it, nor does it justify confiscating those resources from their legitimate owners.

Perhaps the psychologists could explain to the administration that good intentions are not a substitute for good results – or for road pavement.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, September 11, 2011

Our choice to be strong

Published in The Tennessean, Sunday, September 11, 2011

by Richard J. Grant

Ten years ago today, I happened to be living in the Middle East. It was early evening, the end of the workday, when I arrived home to see the television on with the image of one of the twin towers burning.

When the second plane hit, we knew that a bigger story was unfolding. The more we learned, the more we had to question the reality of our surroundings. But it was to our surroundings and the events in them that each of us had to react. In some places more than others, we could be reminded of Robert Browning's words, “For sudden the worst turns the best to the brave.”

Watching from 6900 miles away gave an odd sense of safety despite being closer to what might well have been the source of the problem. What soon became apparent, in a land where appearances are always deceiving, was the difference in deeper sentiment. But strength is always respected, especially when applied wisely.

Many shared the thought that we cannot let “them” stop us from carrying on with life. For that evening I had planned to get a haircut, and despite several hours of unplanned television, I still had time to do so. A routine, tedious task had suddenly taken on the aura of defiance. But when I realized that I was sitting in a chair with my Muslim barber standing behind me holding a long blade, it took on the aura of an IQ test.

I already knew about “known unknowns.” Profiling works both ways. Personal relationships give mercy an edge over justice; and slicing customers is bad for business. It is also frowned upon by the local rulers who provide effective incentives to refrain. Even for most sympathizers, martyrdom is no more than a spectator event.

The barber watched me curiously as I met a colleague outside the shop; he seemed puzzled by my hand gestures as I described to my colleague my theory of how the towers collapsed. My colleague and I now had reason to forget that it was also one year since one of our colleagues had been murdered.

Our lost colleague and friend had been in Vietnam in the early days. He described the uncertainty of what he was up against in those days when he worked on the insertion and extraction of special-operations troops. Though he spoke of carrying out injured colleagues and of patching up the helicopters, his only malady was hearing loss from the heavy use of the 50-caliber tools of his trade. Perhaps that is why he did not hear his attacker approaching decades later.

In happier times when asked if he had any desire to go back to Vietnam, he replied, “I didn't leave anything there that I need.”

Another close friend, who had recently headed home by sea, was in the Atlantic on September 11. He did not get caught in the disruptions of air travel, but his ship was compelled to land in Boston rather than New York. A few weeks later, he was back in uniform ready for his fourth war.

Enemies limit our choices. But they can never stop us from choosing wisely. First and always, we must choose to be strong.

When we leave the Middle East and Central Asia, we will see that we didn't leave anything there that we need.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, September 04, 2011

Justice Department a flop on business competition

Published in The Tennessean, Sunday, September 4, 2011

by Richard J. Grant

It is often said that “a little bit of knowledge is dangerous.” An excellent illustrator of that statement is the U.S. Department of Justice, particularly its Antitrust Division.

Last week, the Department of Justice filed a civil antitrust lawsuit to block the acquisition of T-Mobile USA by the much larger AT&T. According to its own press release, the department said that “the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers who rely on mobile wireless services in their everyday lives.”

In this, the Department of Justice (DOJ) claims for itself not only the knowledge of good and evil but also the knowledge to manage entire industries, if not the entire economy. Were we so rude as to ask where it gets that knowledge, we would be disappointed to learn that it gets it from textbooks that suggest that competition can be measured by the number of “competitors” currently active in a market.

Thus we get the judicial equivalent of painting by numbers. The Antitrust Division has a long history of counting heads within an industry, and if it deems that number to be insufficient, it either breaks up one of the largest companies or, in this case, prevents a merger.

T-Mobile is losing customers and might not survive unless it can add such capabilities as those that AT&T could bring to it. It has been operating for little more than 10 years, which makes it quite old for an industry that is supposedly rather dynamic.

To the Antitrust Division, one less company means less competition. Despite reminders that true competition comes not from total numbers but from the freedom of entry and exit by potential new competitors, the DOJ actively ensures that government remains the biggest entry barrier, and the biggest wet blanket, to innovators in business.

The Antitrust Division is a throwback from the Progressive Era, a period that turned Washington, DC into a sort of Jurassic Park that clones and protects the institutional dinosaurs that continue to stalk us. Central planners are supposed to be extinct, but these wannabe gatekeepers have decided that “AT&T had not demonstrated that the proposed transaction promised any efficiencies that would be sufficient to outweigh the transaction's substantial adverse impact on competition and consumers.”

What the DOJ demonstrates is the assumption that somehow government can have market knowledge that no one else has. This is the assumption that presaged all the interventionist failures in history. Witness our current economic stagnation.

Even if it doesn't stop the merger, the DOJ lawsuit has hurt both companies. They have expended resources to anticipate DOJ objections and weakened their business plans accordingly. Resources needed to innovate and to serve customers in the market have been dissipated once again by government interference.

If we are unhappy with our wireless service, perhaps we should ask ourselves who has monopoly control over the spectrum. Who are the gatekeepers that stand between us and our service providers?

If the DOJ were sincerely interested in promoting competition, then it would disband its Antitrust Division and request that Congress repeal the Sherman Act and reduce its budget accordingly so the funds could be relinquished to the private sector, where the real competitors live.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011


Sunday, August 28, 2011

Tax a moving target?

Published in The Tennessean, Sunday, August 28, 2011

by Richard J. Grant

The pattern of migratory flows throughout history suggests that people move from situations that they perceive to be relatively unsatisfactory to destinations where the living conditions are expected to be better. In a big world there will always be someone traveling in the other direction, but the greater flows of people tend to be toward those areas perceived to be better-suited to their survival, prosperity, and sense of life.

Border controls are in place to manage the flow of people in both directions. But some borders are particularly geared to controlling traffic in one direction rather than another. That is why Hong Kong had to devote more resources to controlling inward-migration from Canton than did the People's Republic of China have to devote to controlling traffic coming the other direction. China's concern was with losing people, especially the most talented or productive.

The same was true at the Berlin Wall. People of similar culture, language, and history were separated and forced to live under two very different systems of government and economic organization. As long as those differences were enforced, the greatest migratory forces pushed toward the West. People knew that they could live more free and fulfilling lives in an environment where they were treated with individual dignity, and where their choices and productivity were respected.

We see similar migratory flows within the United States. There are no “pass laws” that control migration within the US, but it does matter which state you live in. Each state differs in its level and structure of taxes, the severity and type of regulations, and the types of spending projects it supports. This is why some states tend to be more prosperous or more resilient during recessions, and why they tend to attract people from other states.

Some states resort to gimmicks to attract companies that will supposedly “create jobs.” But the premature promotion of fad-industries, such as solar or wind energy, is based on wild assumptions and takes huge risks with taxpayers’ money. Narrow interest groups visibly benefit while the taxpayer vaguely perceives a net loss. In other words, such projects generally destroy wealth. When the subsidies stop, the wasted effort is revealed.

State governments that commit themselves to unsupportable spending plans often see as their only way out the expansion of the tax base and the increase of tax rates. In January, Illinois increased its income tax rates by about 67 percent and increased corporate tax rates as well. Perhaps the governor now wishes that he could put up a fence around his state much as East Germany had a fence along the entirety of its border with West Germany. Illinois is losing job creators and some of its most productive people.

Even if there were such a fence that could keep the people in, reducing people's disposable incomes is not a way to promote productivity. Taking resources from those who are the most productive stewards of those resources, especially when those resources are transferred to unproductive projects and less-productive people, is a recipe for reduced standards of living.

When the most productive people in a society depart or slow down, it is the least-productive who suffer the most. For they are the ones, whether they know it or not, who benefit the most from their association with those who are wiser or more productive.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011


Sunday, August 21, 2011

Berlin Walls, real and metaphorical, fail

Published in The Tennessean, Sunday, August 21, 2011

by Richard J. Grant

When I passed through Checkpoint Charlie for the first time, the Berlin Wall was already 19 years old and its final construction had just been completed. It was more than just a wall. Physically, the 12-foot-high concrete slabs that formed the Wall's face to the West were paralleled on the East side by smaller walls, fences, and buildings. In between was the 100-yard-wide “Death Strip,” with various obstacles and little cover for those daring enough to cross it without authorization. East German and Soviet troops patrolled the strip.

Looking beyond the physical, West Berlin was like an island of freedom surrounded by a prison. The Wall was designed to keep East Germans inside East Germany. Before the barriers went up, millions of East Germans had “voted with their feet” and crossed to the West through Berlin.

The contrast between East and West Berlin reminded one of the sudden change from black-and-white to color in the Wizard of Oz movie. The streets and buildings in the East wore a drabness that reflected the sense of life. Food stores offered mostly beets, potatoes, and shriveled apples. Soft drinks contained un-aesthetic sediment. Bookstores offered rows of Marx and Lenin before one found a few other selections at the back.

Passing a pair of soldiers on the street, it was hard not to return their cold stares. I was fresh out of the army and still looked it – a Westerner at that. Their uniforms bore, not coincidentally, an unmistakable resemblance to those that we saw in training films and to those on the pop-up targets that I once happily perforated.

Looking at life in East Berlin, even as a tourist, would make one wonder how it could possibly last. The contrast was too great, and the flow of information could be hampered but not stopped. In the East, the people were forced to live political correctness to its logical conclusions. They lived in a philosophical reign of terror that played out like Muzak in their lives and became the theme for the economic stagnation that eventually, and invariably, comes with it.

As it turned out, the Wall did fall nine years later. I couldn't know then that, 25 years later, I would have an office in the former Communist Party headquarters of a breakaway Soviet republic, and that my home would look across at a former Soviet army base, complete with an old MIG on a pedestal.

Had West Germany continued the price and product controls of the postwar military administration, its economic future might have differed little from the East's. But on the initiative of Ludwig Erhard, many of those controls were removed, clearing the way for the German “economic miracle.”

It was a miracle only to those who did not understand economics; but those were the people with whom one had to compromise. Thanks to Erhard, the “social market economy” that later emerged retained a respect for private property and free enterprise. That made all the difference.

Construction of the Berlin Wall began 50 years ago this month. It was knocked down 28 years later by a people no longer afraid of their Communist masters who were rendered impotent by decades of having their own socialist way.

The Berlin Walls that we face in daily life are not made of concrete. Let us recognize them for what they are.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011


Sunday, August 14, 2011

Brits arm themselves in face of PC government's failure

Published in The Tennessean, Sunday, August 14, 2011

by Richard J. Grant

If you manufacture aluminum baseball bats, you probably noticed an unusual increase in orders this past week.

Then you noticed the demand is coming from Britain, where one thinks first of cricket, not baseball. You might have wondered why, but were only too happy to increase production to meet this new demand. Markets work.

We often hear about “market failure.” What’s that? Just imagine something that is not provided in the marketplace but you feel should be. You can call that “market failure,” if you wish. The classic example was lighthouses. Surely they couldn’t be profitable, right? This was taught to an entire generation before someone decided to check history and discovered that lighthouses were, indeed, provided by private companies long before governments stepped in.

You don’t need to know what’s happening in Britain to be able to supply them with more bats. But it helps to know more about your customers, so you check the news and learn that violent riots have been breaking out nightly in cities across England. Shops have been trashed, looted and burned. People have been robbed, beaten and even killed.

Where are the police? They are overwhelmed by the volume and brazenness of the outbreaks. They are also constrained in their response by what appears on the surface to be modern Western restraint, but is in fact a symptom of the modern evasion of social realities that we lamely call “political correctness.” The British welfare system has bred personal responsibility out of the class that has become dependent on it; and the shortsighted immigration system has failed to integrate the foreign communities it has created within.

With seriously deficient police protection, victims see themselves at the mercy of the mobs. The victims are also unarmed. The average Brit sees this and exclaims, “That’s not cricket!”

It’s not baseball, either. It is government failure. A succession of left-drifting governments has failed to focus on a government’s primary duty to maintain law and order. They have been too busy protecting their public from all the imaginary market failures they can dream up, especially those that serve as an excuse to redistribute income to their favorite constituents.

Governments like to imagine they have a monopoly on the use of force. Not true. If the police are not there when you need them, it’s up to you. But Brits do not enjoy Second Amendment-type protections; and those who have used firearms in self-defense have sometimes found themselves in jail.

This explains why sales of baseball bats in the U.K. suddenly increased by over 6,000 percent last week. While government fails, the market provides.

Governments also imagine that they have a monopoly in the production of money. That is why gold sales are soaring and the price is reaching record highs. That is also why we suffer repeated booms and busts in all markets. We face unemployment, budget deficits, and over-regulated medical care.

Government has struck out.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011


Sunday, August 07, 2011

Anti-tax pledge is just good shorthand for voters

Published in The Tennessean, Sunday, August 7, 2011

by Richard J. Grant

Economists call it “rational ignorance.” We all do it; we economize on information. Not only that, we economize on knowledge and education. All these things cost us something and at some point we deem increasing them not to be worth the extra expenditure of time, effort, or money.

Things that are important or interesting to us get more of our attention. If we have a goal, whether it's earning income or helping a friend, we have a strong incentive to learn what is needed to succeed. But if the decision is unlikely to have any effect on our income or on our friend's welfare, then we have little incentive to put more effort into learning about it or even taking any action.

We are helped by anyone who can save us time and energy in learning what we need to know. Often we'll even pay these information-providers, just as we pay the producers of the technology that helps to deliver that information.

In life we can't master everything, so we seek out specialists and those we perceive to be offering useful services. The more complex the product we want to buy or the more complex the organization that we are trying to run, the more willing we are to purchase from, or to hire, those who supply a product or service that relieves us of some of that complexity.

This is easy to see in our private lives and in the private marketplace. But when we step into the realm of government and collective decision-making, our information problems and the corporate governance problem multiply drastically.

It is hard enough to figure out how big a mortgage, and what terms, you can afford. But at least you get to control one side of that transaction. When it comes to the national debt, few people have the ability or the time to understand it. Their vote gives them but a fly speck of influence over it. So, political decisions get less attention from individuals than would private decisions.

At the store, we get the product that we pay for. But when we go to the ballot box, we do not necessarily get the representative that we vote for. The payoff is less certain, the information we acquire is of less direct value than that acquired in our private affairs.

Grover Norquist, president of Americans for Tax Reform, has been both praised and vilified for providing a service that gives voters useful information about the future actions of their elected representatives. He has given these representatives the opportunity to sign a well-publicized “Taxpayer Protection Pledge” that reads as follows:

“I ... pledge to the taxpayers of [my state], and to the American people that I will: ONE, oppose any and all efforts to increase the marginal income tax rates for individuals and/or businesses; and TWO, oppose any net reduction or elimination of deductions and credits, unless matched dollar for dollar by further reducing tax rates.”

This simple statement is a promise to taxpayers and voters. A breach would be publicized. It is information that helps us to monitor the important actions of our representatives.

In the recent negotiations to increase the debt ceiling, representatives on both sides of the argument knew that voters were watching to see who would keep their word. Good information makes a difference.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, July 31, 2011

While similarities exist, Obama is no Ronald Reagan

Published in The Tennessean, Sunday, July 31, 2011

by Richard J. Grant

In recent days, President Barack Obama has become quite fond of quoting his esteemed predecessor, President Ronald Reagan. We all know the dangers of quoting out of context and of misunderstanding quotes, but it is also rumored that Obama has been studying Reagan's career.

Perhaps he came across this 1986 Reagan quote: “Government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” Given President Obama's record so far, it seems that he mistook this for advice.

Superficially, the two men do have some similarities. Both share the same job title and both inherited very poorly performing economies. Both saw unemployment rise during their first two years in office.

At no time during Reagan's two terms did Republicans control both houses of Congress. The Republicans never had a majority in the House of Representatives. The “Reagan revolution” occurred despite this, and sometimes despite the Republican establishment. We never did get to see what Reagan would have done with a less hostile Congress, but we were never in doubt as to which direction he wanted to go.

President Obama began his term with Democrats controlling both houses of Congress. But after 22 months of experience, voters decided to take away that luxury. If we are still in doubt about which direction he wishes to take us, then it is only because it is so hard to believe. He is no Reagan.

Reagan understood that there is pain even when healing from a wound. The transition from bad management to good management means change; it means disruption. To the untrained eye, the initial stages of making things better will appear little different from making things worse. This explains the superficial resemblance between the first two years of the Reagan and Obama administrations.

President Obama uses the nice-sounding words “balanced” and “compromise” as often as possible. By focusing on the budget deficit rather than the total size of government, he implies that tax increases are somehow needed to “balance” spending cuts. By emphasizing compromise, he implies a moral equivalence where there is none. He likes to remind us that President Reagan compromised and agreed to raise taxes on occasion.

In 1982, the Democratic leaders in Congress promised Reagan three dollars in spending cuts for every dollar in tax increases. Reagan agreed. The tax rates increased, but the spending cuts never happened.

Later, President Reagan achieved significant tax-rate reductions. By 1986, the income-tax base had been broadened and the top tax rate had been reduced by over 40 percentage points to 28 percent. He also continued to push deregulation, which allowed oil prices to fall and businesses to serve customers and to grow accordingly. The economy boomed, unemployment fell, and tax revenues increased.

Our current president should study this.

He, and we, might also think about the universal applicability of these words that Reagan spoke in 1983: “I urge you to beware the temptation of pride, the temptation of blithely declaring yourselves above it all and label both sides equally at fault, to ignore the facts of history and the aggressive impulses of an evil empire, to simply call the arms race a giant misunderstanding and thereby remove yourself from the struggle between right and wrong and good and evil.”


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, July 24, 2011

Higher tax rate won't guarantee more revenue

Published in The Tennessean, Sunday, July 24, 2011

by Richard J. Grant

It is often said that business taxes, such as the corporate income tax, are simply passed on to consumers through higher prices. But it is not that simple. If companies could just raise prices to cover their higher costs, why didn't they just put their prices that high in the first place?

When a company raises its prices, some customers stop buying and others cut back on the quantities that they purchase. This is especially true if competitors do not raise their prices. But even if all businesses are affected by rising tax rates, or any other cost, the company cannot assume that it can raise its prices without losing sales. This is why companies don't like taxes: it hurts them. It hurts their owners by reducing profits, and it hurts their customers because they pay more for less.

Just because a company sets its price does not mean that customers will come forth with the predicted levels of spending. The sales of some products are less sensitive to price than others, so companies might be able to pass more of the burden of rising costs on to customers. But if customers are not willing to pay what the company needs to cover its costs, then that company will need to change or it will go out of business.

The point is that a company cannot raise its prices and expect everything else to stay the same. Customers and competitors react to the changes. The company can set its price, but it cannot set its revenue. And the same is true for a government.

Congress can set a precise dollar debt limit on the U.S. Treasury. Congress can also appropriate a precise number of dollars that serves as an upper limit for total federal government spending. But Congress cannot levy a precise number of dollars in tax revenue.

What Congress does is to designate a tax base and to specify a schedule of tax rates associated with that base. The base might be personal income, corporate income, imported goods, capital gains, or a gallon of gasoline. Although the tax rate and the nature of the base can be specified in advance, the size of the base cannot be known with precision until after the taxable activities occur and incomes are earned.

Projections can be made, but these are based on assumptions about the future. If economic growth is lower than expected, then incomes will be lower than expected. Gasoline sales might also be lower than expected. That means that the projections will turn out to have overestimated the revenues received from income taxes and gasoline taxes.

Taxes always hurt economic growth. The question is whether an increase in the tax rate will bring in more revenue per dollar taxed than is lost due to the shrinking number of dollars in the tax base.

High U.S. corporate tax rates cause businesses to produce less here and to produce more in other countries where the conditions are more favorable. Increases in capital-gains tax rates tend to result in lower tax revenues.

Within the United States, people tend to move to lower-tax states. This might be to protect their personal incomes, or it might be to go where the jobs are.

Raising tax rates is not the same as raising tax revenues. Sometimes more means less.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011

Sunday, July 17, 2011

President lets truth slip out about Social Security

Published in The Tennessean, Sunday, July 17, 2011

by Richard J. Grant

Did President Barack Obama just admit that Social Security adds to the deficit? In an interview about the debt ceiling with CBS News last week, the president said, “I cannot guarantee that those checks go out on August 3rd if we haven't resolved this issue. Because there may simply not be the money in the coffers to do it.”

Clearly it was not the president's intention to admit that Social Security payments are inextricably entwined with the federal budget. His intention was to score political advantage by scaring a politically active voting bloc, composed largely of seniors, into pressuring Republicans to raise the debt limit unconditionally.

There never has been any chance that Social Security payments to current recipients would be missed or even reduced. Although Congress is not legally bound to continue such payments indefinitely, it has a strong political motivation to do so. Over the past 70 years, people have made retirement plans based on a promise, however vague, that they would receive certain payments. No congressman wants to be the first to stand in the way of those payments.

That is precisely why President Obama brought it up. There was no threat to Social Security, so he had to invent one. The hoped-for political payoff would be to panic seniors, a large portion of whom vote Republican, to put pressure on their congressmen to acquiesce in a debt-limit increase.

For many months, Republican House leaders have made it clear that they are willing to raise the debt limit provided that there would also be budget cuts of at least the same magnitude. They even passed a budget that included a deficit, but reduced projected spending. If anything, they have been too soft.

The president's words demonstrate the real political purpose of Social Security. No, it is not to make the elderly more financially secure – and it doesn't really do that. The real effect has been to make the elderly dependent, to some degree, on the political class.

Throughout their working lives, people are required to pay the FICA tax, which is really an income tax paid on the same base as the official income tax. For most people, the FICA payments are at least as large as the income-tax payments. These payments are then channeled into the same uses as any other tax.

Had the working people been allowed to put their FICA payments into personal investment accounts, they would almost certainly have entered their retirement years with much greater and more dependable financial security. A reader, who has the aptitude to make the financial calculations, has provided details showing that private investment of his FICA payments would have yielded him a monthly retirement income over three times larger than the Social Security payment he is now eligible to receive. He is not alone.

Had everyone been allowed to invest privately, then the economy would now be much larger and retirement incomes would be far more than three times current Social Security payments. If President Obama were serious about fulfilling the intent of Social Security, he would give future generations a private option. Instead he is squandering their inheritance with current government spending that is 60 percent higher than revenues.

President Obama has run out of our money, and now he is trying to scare us into giving him more.


Richard J. Grant is a professor of finance and economics at Lipscomb University and a senior fellow at the Tennessee Center for Policy Research. His column appears on Sundays. E-mail: rjg@richardjgrant.com

Copyright © Richard J Grant 2011