George Rebane
The growth of central government is now at a gallop. Anti-capitalism that was rampant is accelerating even more. Some of us are quietly observing the anniversary of the arbitrary abrogation of contract law when Obama took over Chrysler and gave all its corporate bondholders a haircut. For those not familiar with lending money to a corporation by buying its bonds, that is the most secure form of corporate debt. By law, the company must pay it off, even if it means liquidation. Hence, that level of security, bolstered by the law of the land, rewards the lender with the lowest interest rate.
In one Zimbabwe style sweep, Obama swept that away last year. Now after many court cases and appeals all the way up to the Supreme Court, all the non-socialists are wondering how corporations are going to borrow money for the long term to support growth and jobs. The socialists don’t have a clue about the problem they have created.
Scott Davis, CEO of UPS, seems to have missed this point (here) as he argues for lower capital gains rates for long term investments. As an investor, my question is – who is going to trust a growing, fiscally insane, and confiscatory government in the future? There is no guarantee that any seemingly sane capital gains tax rate will remain on the books over any planning horizon. The engine of America’s growth has always been fueled by eager investors (domestic and foreign) putting their money to work in a secure investment environment that appropriately balanced risk and reward. Apparently those days are behind us as we adopt the European style of economic stagnation.
A reminder to all is that capital gain rates will jump from 15% to 20% on 1 January 2011, and then to 24% in 2013. All of this will guarantee that this recession will be with us for a very long time. But when such capricious investment environment is viewed in the larger context of national and states’ deficits, debt, and unfunded obligations coming due, perhaps it doesn’t matter. For example, take a look below at the growth of current entitlements in the federal budget.
As this is happening, the feds will guarantee that there will be no place to hide for wealth creating enterprises. Obama and cronies will accomplish this by doing away with what has been known as fiscal federalism intended by our Founders and enshrined in a now-trashed Constitution. V. de Rugy and S. Haeffele-Balsch of the Mercatus Center in George Mason University (here) explain –
Fiscal federalism is the idea that, acting under some federal constraints, states should set their own economic policies rather than follow directives from the central government.3 A limit on federal power, fiscal federalism theoretically pro¬duces one main benefit to individuals: it increases competition between states. If states differentiate themselves on the bases of taxes, spending, and regulation, Americans have more freedom to decide the rules under which they live. If citizens are dissatisfied with the state in which they reside, they can register their discontent by voting with their feet and moving to another jurisdiction. This competition for residents helps keep lawmakers in check, giving them an incentive to keep taxes, regulations, and other intrusions modest.
The business exodus from California to Nevada and points east will then be halted when all states become uniformly mired in the national socialist slagheap. The policy implications of this transformational change are many and hard to contemplate. The report concludes with –
In theory, fiscal federalism is a great tool that holds state and local governments accountable for their policy actions. In practice, it hardly exists. The increasing scope of federal programs and grants has largely eroded its impact on policy decisions by state and local government to the point that tax considerations become almost irrelevant in people’s decisions about where to live.
We should mourn the death of fiscal federalism. While fiscal competition between states gives an incentive to policymakers to keep taxes, regulations, and other intrusions modest by fear of losing taxpayers to another tax jurisdiction, homogenized, top-down policy removes the constraints on the states to fight to keep its residents.
But again, all this might not matter. There will come a time when even the most magnificent bread and circus diversions will not serve the citizens who today continue to believe that Washington DC is a manna factory of infinite capacity. It’s then anyone’s guess as to when the National Guard will be called out to provide security in our large metropolitan areas.
But in the interval let’s continue with business as usual, and take a look at the progress of the ARRA stimulus to our beloved Nevada County (here).
H/T to RR readers for sending me some of the above materials.
Comments