RAD Thoughts

Rogers Cable has the following to say about the CRTC LPIF (Local Programming Improvement Fund):

New Fee on your Bill
Beginning September 1, 2009, customers will see a new line on their invoice called CRTC LPIF Fee, and a corresponding charge of 1.5% of their recurring TV monthly service fee. Rogers Cable does NOT benefit from the LPIF fees collected. These fees are directly remitted to the CRTC’s Local Programming Improvement Fund, for the use solely by broadcasters like CTV and Global serving markets with less than 1 million people.

The CRTC has the following to say about cable companies passing on the LPIF fee to customers:

Several cable and satellite companies want to increase their customers’ rates by 1.5%. Can the CRTC prevent this?

In Public Notice 2008-100 (paragraph 357), the CRTC indicated that in light of the performance² level of the cable and satellite sector and the benefits accruing to broadcasting distribution undertakings (BDUs) as a result of other changes being made to the regulatory framework, the Commission saw no justification for BDUs to pass along any increased costs relating to the LPIF to their subscribers.

This is an example of a non-intuitive economic principle. You can not tax companies. You can only force companies to collect tax from customers on behalf of the government. Not only do you have hidden taxes but you also have hidden tax collection.

Actually, Rogers is making it a little less hidden but the principle still holds. Consumers always pay one way or another.

In my proposed Gift Card Stimulus thought experiment, I already suggested that tax payers, both individuals and businesses, receive gift cards worth 1/3 of income taxes paid in 2007. This works more like a tax break except that the twelve month spend-it-or-lose-it rule ensures that the money is spent rather than stashed away. This helps address the one big advantage governments have over individuals/businesses, governments can spend like nobody’s business (no pun intended). The disadvantage  is that governments do not have the money to spend on long term infrastructure (e.g. transportation, health, communication, energy). 

So why not allow government organizations to submit project proposals, with costs attached, and allow the Gift Card Stimulus to be allocated to the project of the Gift Card holder’s choice. Would you choose to give to bridge maintenance rather than purchase a new 50 inch TV?

So what else can you spend it on? I think you need to start off with “everything”, that is, any product or service that you can normally purchase. You might want to disallow some but I’m not exactly sure if its worth the effort. Food, gasoline, and utilities are things people will spend money on anyway so you may want to exclude them though it does seem kind of mean to do so. So lets say anything that you normally pay sales tax on is allowed plus government projects.

Remember, you will have to pay back the stimulus in tax eventually (say over 5 years). Those that don’t spend their Gift Cards don’t have to pay anything back.

It makes it feel more real though doesn’t it? Your money that you will have to pay back. Your choice that you will want to make a difference. Your skin in the game and not someone else making all the decisions on your behalf. 

Actually it is a bit depressing. Maybe that is another advantage of government spending. President Obama is far more optimistic about spending your money in a way that helps the economy than I think you or I would be spending our share ourselves. Maybe ignorance is bliss.

Hugo Chavez has sent in troops to nationalize rice processing companies in Venezuela:

“This government is here to protect the people, not the bourgeoisie or the rich,” said Mr. Chavez, ordering military authorities to “take control of and intervene in all of these businesses that process rice in Venezuela.”

I’m guessing that there are employees from various industries that Chavez has nationalized that would jump at the opportunity to immigrate to the United States. The U.S. Census Bureau reports that there were approximately 19 million vacant homes in the fourth quarter of 2008. Why not open the doors to immigration for skilled individuals that have the means and are willing to put down 20% towards a new home?

It would certainly help the housing industry since there is no way housing prices can recover with so much excess inventory. The question is whether that type of immigration hurts or harms an economy in recession. I suspect it helps. I also suspect that the Lou Dobbs types would be dead against it.

In the United States, the total receipts for fiscal year 2007 was $2.4 trillion. The $800 billion stimulus bill, therefore, is approximately 1/3 of the total receipts for 2007.

1/3 is a nice number to work with. This $800 billion debt will eventually have to be paid back so let us say that all individuals and corporations will receive gift cards worth 1/3 of the amount of tax they paid for 2007. It is not a perfectly fair system but it is pretty close in my opinion.

So these are the rules we have so far:

1. all individuals and corporations that paid federal tax for 2007 will receive a gift card
2. the amount of each gift card will be 1/3 of the federal tax paid in 2007 by the individual/corporation
3. each gift card will expire twelve months after it is issued
4. not using the gift card is perfectly OK, just let it expire

Unlike a tax cut, the gift card stimulus must be spent and it arrives immediately as one big lump sum.

Here is a thought experiment. Imagine we are in a recession and the powers that be decide to spend 800 Billion to stimulate the economy. The 800 Billion will be in the form of Gift Cards that must be redeemed within 12 months. You have been named Gift Card Czar.

The remaining decisions you must make as Gift Card Czar are:

1. What stores/companies/organizations will be allowed to participate.
2. Who will get to spend the Gift Cards.

Can you structure the Gift Card Stimulus to help the economy?

Failures fascinate me, they always have. The current financial crisis is no exception. There is no shortage of opinion on the cause of this crisis. Housing, mortgages, financial institutes, and government regulation are all involved but I see little clarity or consensus on what caused the failure and what interventions might help alleviate the crisis.

I have wondered in the past what is different between the Canadian and U.S. systems. Recently a report claimed that Canada may be heading for an American-like meltdown. Although Canada’s economy is very much tied to the U.S. economy, the fundamental components of the meltdown are different, in my opinion.

I have heard the crisis referred to as a “perfect storm”. In my mind, the perfect storm analogy refers to a well understood system in which independent variables simultaneously reach a state that produce maximum nastiness. Watch the variables and you can predict when it is time to pray.

The U.S. financial crisis is not like a perfect storm. It is a classic nonlinear system in which we don’t understand the critical variables nor their expected behavior when these variables change. Here is my guess at what the critical variables are/were in this crisis:

1. Government policy/agencies that promote home ownership
2. Shift to mortgage-backed securities
3. Foreign investors (e.g. sovereign wealth funds) looking for safe U.S. money market investments
4. Lowest interest rate in history during 2001-2004
5. An oversupply of housing

Compared to Canada, the U.S. has many more incentives for people to buy homes. Fannie Mae and Freddie Mac with an implied government insurance policy, tax deductible mortgage interest, and laws that required lending to traditionally high-risk individuals.

Mortgage-backed securities for years were hailed as a major innovation in the financial industry (Canada lagged in this department). Risk was measured by 3rd party rating agencies and shifted in bulk to all the owners of the securities. The incentives in this system encouraged deceit and sometimes fraud by both lenders and borrowers. 

The incredible growth of China and other nations produced central banks and sovereign wealth funds that were flush with cash. There was a great deal of demand for safe money market financial instruments and mortgage-backed securities looked attractive compared to treasury bills at historic lows. Only the U.S. economy is large enough to meet the safety requirements these institutions demanded.

Some blame Alan Greenspan for this mess because he did not investigate the early signs of this crisis and because the historically low interest rate. This interest rate was set low to bolster the economy after 9/11 fueled the mortgage meltdown. Low interest rates together with government incentives for home ownership made buying a home seem “free”. Low interest rates made traditional money market products unattractive and a race was on to offer new alternatives (i.e. mortgage-backed securities). 

Finally, an over-supply of housing made sure that the housing bubble would eventually pop rather than deflate. 

Was there greed? Sure, pockets of it but it was not a key driver like it was for the Internet stock bubble. Fraud, again, pockets of it but certainly many orders of magnitude less than with Enron. Over enthusiastic investors? I find it hard to believe that anyone thought that mortgages were anything other than a safety play (but I certainly could be wrong). Regulators asleep at the wheel? Considering how complex this crisis is, I find it hard to believe that anyone could have prevented the crisis with prescient regulation. I doubt anyone can create new regulations now that would do less harm than good moving forward. 

So will the 700 Billion plan fix things? I dunno. It makes for good theater though doesn’t it. Who says government doesn’t support the arts.

Economist Steven Landsburg thinks Huckabee’s FlatTax plan is brilliant.

Basically, Huckabee’s plan is to eliminate the income tax and replace it with a national sales tax. To a first approximation, that’s not such a radical change. As long as you spend what you earn, a sales tax feels just like an income tax. If you earn $1,000 a week and spend $1,000 a week, it doesn’t matter whether I take 20 percent of your income or 20 percent of your spending.

Bottom line for Landsburg is that the FairTax is a sneaky way of getting an unlimited IRA. He likes the idea of an unlimited IRA because it encourages savings.

I think the brilliance of the FairTax is that it makes a number of sneaky changes without really stating that its doing so. As far as I can tell it eliminates corporate taxes, payroll taxes (i.e. social insurance), and progressive tax rates down to two (no tax and normal tax).

All these types of changes are fine in my opinion but I’m not fond of the sneaky nature of the change. If you want to eliminate existing tax categories I think it is important to make your case for each elimination.

There is also a fundamental flaw in the FairTax. Any savings that a person accumulated in the old income-based system will now be double-taxed using the new sales-based system (if the person chooses to spend that money). There is no way around this as far as I can tell.

Punishing retired people is not usually a good political strategy… even if its endorsed by Chuck Norris.