Thoughts on the role of government and life

The argument is often made that we don’t really mind paying taxes. Unfortunately, we all have an incentive to not pay taxes.

Google, the owner of perhaps the biggest computer server “farm” in the world, is looking at ways to put their computer servers on barges 7 miles out to sea. Because they would be in international waters, they would not have to pay taxes. Here’s the Google story.

The point, of course, is that if taxes get to high, we will find ingenious ways to avoid them.

Gas Prices.

They are a hot topic these days, as they have been for the past year or so.

As I write this, Hurricane Ike has blasted through Texas, leaving 4 million people without power, and leaving the oil rigs and refineries in the area shut down. If oil can’t be refined into gasoline, there will be a shortage of gasoline, and as any first year economics student will tell you, a shortage of supply will increase prices.

Of course, as we now know, we are long past the point of Peak Oil. There have not been any new significant oil discoveries for decades. Oil is a finite resource. We are running out. It is projected that within two or three years Mexico will no longer export oil; they will need all they can produce for internal consumption. The giant Saudi Arabian oil fields are long past their peak. There is still lots of oil underground, but unfortunately a lot of it is in hard to reach places, or trapped in shale, so it will be difficult and costly to extract.

Practically speaking, we are running out of oil, and as the emerging economies of India and China switch from bicycles to cars, demand is increasing while supply is reducing. Oil prices will continue to increase.

So why, then, when I turn on the radio, do I hear the talking heads talk about how “consumers are being gouged” by the oil companies? Yes, it’s very frustrating that in advance of hurricane Ike the price at the pump in my part of Ontario, Canada jumped from around $1.20 per liter to around $1.35 per liter overnight. Does that mean consumers are being gouged? Perhaps, but as a consumer, I have a choice.

I don’t have to buy gasoline. Or, I can reduce my consumption. I don’t have to buy an SUV. I can buy a smaller car. I can drive less. I can car pool, or take public transportation.

Of course the talking heads want government to regulate the price of gasoline, so that we poor consumers won’t be gouged.

Not surprisingly, I believe that government regulation is a very bad idea.

First, how can you regulate the world price of a commodity? How can the Canadian or American government decree that the price of oil will be $X per barrel? They can’t.

Of course the government could pass a rule that the price of gasoline at the pumps can only increase by 1% in any given week. Or they could put a tax on the profits of oil companies. (Of course in Canada and the USA the price at the pump is largely made up of taxes anyway, so the government is already regulating the price; they are making it higher). But how would that help us?

In the short term, the price would go down, or at least not go up by as much. In the long term, explorers, refiners and sellers would make no money, so they would no longer explore, refine or sell, and there would be no gasoline.

Here’s a more bizarre way of looking at this: the average person pays, let’s say, $1,000 per year for gasoline. A doubling of the price will increase the cost of gas by $1,000 per year. The price of a new car, is, let’s say, $20,000. If the car lasts for 5 years, the cost of a car is $4,000 per year. If the government really wants to save consumers money, perhaps they could regulate the price of a new car; perhaps cap it at $1,000. That way instead of a car costing $4,000 per year, it would only cost $200 per year, so consumers have saved $3,800 per year. That’s a lot better for consumers than legislating the price of gasoline.

Of course that idea is idiotic. If car companies could only get $1,000 for a car, they could not sell cars. They would only sell bicycles, and eventually there would be no cars.

Alas, that’s the slippery slope we walk down when we let the government run the economy. So, next time you hear a commentator or a politician talk about how the oil companies are gouging consumers, remember that the solution is NOT to let the government regulate them, which will only serve to gouge us more. The solution is to take care of yourself: buy shares in oil companies if you think they really are gouging us, and drive a smaller car, and drive less. It’s better for you to be in control; it’s not good for the government to have more control.

On Sunday the U.S. government took control of Fannie Mae and Freddie Mac.

The two government-sponsored firms own or back about half the mortgage debt in the U.S., and have lost billions in the housing market collapse.

So, why is the federal government involved in the U.S. mortgage market?

It all started back in 1913, when the U.S. Income Tax rules were amended to make mortgage interest payments tax deductible. Of course back then the maximum tax rate was 6%, and everyone paid cash for their houses anyway, so it didn’t have any immediate impact.

But then, in 1938, Franklin Roosevelt’s “New Deal” created the Federal National Mortgage Association (Fannie Mae) to guarantee mortgages. This government guarantee made mortgages cheaper.

As income tax rates rose, mortgage interest deductibility became more valuable, so buying a house became a good tax savings strategy.

Then came 1968, when Fannie Mae became a public company, with directors, shareholders and a stock market listing. Since the government started the company, and since everyone assumed the government would never let Fannie Mae fail, there was an implied guarantee on all of Fannie Mae’s debt. This meant that big institutions could invest in Fannie Mae debt without fear of loss.

So Fannie Mae management, with access to cheap money, began using that leverage to write an increasing number of mortgages. The balloon kept getting bigger and bigger.

Unlike most bubbles that eventually burst, the housing bubble kept growing. Mortgage rates were cheap, and to save taxes and protect against inflation, buying a house made sense. And, when this millennium started, the Fed kept lowering rates, encouraging even more people to buy houses, blowing up the bubble even more.

Until now.

The sub prime crisis of 2007 meant that mortgages were harder to get. Fannie Mae’s books got so bad that the government finally had to step in. There are now over 1 million homes in the U.S. that are under foreclosure. Things look bleak.

So here’s the million dollar question: Would the bubble have gotten so big without the involvement of the federal government? If the feds had not encouraged excessive borrowing with the creation of Fannie Mae, and artificially low interest rates, the bubble would never have formed, and one million Americans would not have lost their homes to foreclosure.

Just one more example of why the government should stay out of our lives.

So here’s the thing:

I work very hard for every dollar I earn, and I believe that gives me the right to decide where I should spend each dollar.  I object to handing over a large number of dollars to the government in taxes, because I don’t believe the government is as smart as I am.

To be clear, I don’t object to taxes.  I realize that the only way for the government to be able to pay for essential services, like the judicial system, is by collecting taxes from me.  I just don’t want it done to excess.

But how, you say, can we help the unfortunate in our society?

Here’s a quote, taken from dooce.com:

But what about the family who cannot afford [medical] insurance for their child? The family who can barely make rent, and if they stretch the budget they can eat three meals a day all week, let’s hope nothing bad happens to their kids because then they’re screwed. Kids, go hug your father, he’s off to one of his three jobs, none of which provide him insurance. And it’s not because he’s lazy or unwilling to work, it’s that his family couldn’t afford to send him to college, or he came from a family that didn’t know they should encourage him to go to college because they were busy trying to survive. If giving up more of my paycheck could help get this family adequate healthcare, then PLEASE. TAKE MY MONEY.

And there’s the rub.  The tough guy in me says that the problem is lazy people, not the people who are working three jobs.  But what about it?  What about the person who works very hard, and still can’t make ends meet?

I’m afraid there are no easy answers.  I suppose if taxes were really low, we wouldn’t need to work three jobs to earn enough money to pay for things like insurance.

Here in Canada, where I live, health care is “free”.  But of course it isn’t really.  We pay for it with our taxes, and because health care is provided primarily by the government, there aren’t enough doctors.  There is no point in free health care if you can’t actually get health care.

The answer, I believe, is to have the government pay for health care, but have it provided by the private sector.  More on that in future posts.

Welcome.

If you want to read a bunch of jibberish, you have come to the wrong place.  On this blog I plan to discuss whatever strikes my fancy.  Specifically, I want to discuss what we need to do to get the economy back on track.

Why now?  Because we are getting ready for federal elections in both the United States and Canada this fall, so now is the time to discuss the issues that will effect us all.  Stay tuned.