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Archive for March 18th, 2013

Maybe actors and other Hollywood types are only acting when they embrace statism?

We’ve already seen Hollywood liberals like Rob Schneider and Jon Lovitz complain about class-warfare policy.

And Gerard Depardieu moved out of France to escape the suicidally destructive taxes being demanded by French president Francois Hollande.

But the most shocking news is that even Bill Maher is getting irked that he’s being treated like a pinata.

Take a look at this short video. Ignore the first 2/3rds, which is Rachel Maddow making inane comments about the Ryan budget, and notice what Maher says in the final part.

Wow. He notes that the rich pay the overwhelming share of the federal tax burden (hmmm…I wonder if he watched this video).

And he’s not overly happy about California raping him with a new top tax rate of 13.3 percent.

Closet libertarian?

So now he’s saying he may move out of the state, just like Phil Mickelson. I won’t believe it ’til I see it, but for every well-known celebrity who publicly speculates about migrating to a zero-income tax state, there are probably dozens of investors, entrepreneurs, and small business owners who actually take that step.

And this, folks, is one of the reasons why class-warfare tax policy is so pointlessly destructive.

Reagan showed us in the 1980s that lower tax rates on upper-income taxpayers can generate more tax revenue. California is doing the same experiment, but in reverse.

Magnitudes matter, so we’ll have to wait and see before determining the net impact of Jerry Brown’s tax hike on California tax revenue. But I will blindly assert with confidence that revenues will be far below what politicians are hoping to collect.

In other words, we will see the revenge of the Laffer Curve, regardless of what Bill Maher decides.

P.S. I can’t help adding that Rachel Maddow doesn’t know what she’s talking about. The Ryan budget does not propose a net tax cut, so it’s absurd to claim – or even imply – that there will be “tax cuts for the rich” financed by changes to healthcare. That budget does propose reforms to Medicare and Medicaid, but those changes are to salvage the programs by making them sustainable.

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It doesn’t create a lot of confidence in Europe that tiny little Cyprus, with a GDP less than Vermont, is now causing immense turmoil.

Though to be more accurate, events in Cyprus aren’t causing turmoil as much as they’re causing people to examine both government finances and bank soundness in other nations. And that’s causing anxiety because folks have taken their heads out of the sand and looked at the reality of poor balance sheets.

Looking closer at the specific mess in Cyprus, an insolvent financial sector is the cause of the current crisis, though the problem is exacerbated by the fact that the government has dramatically increased the burden of government spending in recent years and therefore isn’t in a position to finance a bailout.

But that then raises the question of why Cyprus is bailing out its banks? Why not just let the banks fail?

Well, here’s where things get messy, particularly since we don’t have a lot of details. There are basically three options for dealing with financial sector insolvency.

  1. In a free market, it’s easy to understand what happens when a financial institution becomes insolvent. It goes into bankruptcy, wiping out shareholders. The institution is then liquidated and the recovered money is used to partially pay of depositors, bondholders, and other creditors based on the underlying contracts and laws.
  2. In a system with government-imposed deposit insurance, taxpayers (or bank consumers via insurance premiums) are on the hook to compensate depositors when the liquidation occurs. This is what is called the “FDIC resolution” approach in the United States.
  3. And in a system of cronyism, the government gives taxpayer money directly to the banks, which protects depositors but also bails out the shareholders and bondholders and allows the institutions to continue operating.

As far as I can determine, Cyprus wants to pick the third option, sort of akin to the corrupt TARP regime in the United States. But that approach can only work if the government has the ability to come up with the cash when banks go under.

I’m assuming, based on less-than-thorough news reports, that this is the real issue for Cyprus. It needs taxpayers elsewhere to pick up the tab so it can bail out not only depositors, but also to keep zombie banks operating and thus give some degree of aid to shareholders and bondholders as well.

But other taxpayers don’t want to give Cyprus a blank check, so they’re insisting that depositors have to take a haircut. In other words, the traditional government-imposed deposit insurance regime is being modified in an ad hoc fashion.

And this is why events in tiny Cyprus are echoing all over Europe. Folks in other nations with dodgy banks and unsound finances are realizing that their bank accounts might be vulnerable to haircuts as well.

So what should be done?

I definitely think the insolvent institution should be liquidated. The big-money people should suffer when they mismanage a bank. Shareholders should lose all their money. Then bondholders should lose their money.

Then, if a bailout is necessary, it should go only to depositors (though I’m not against the concept of giving them a “haircut” to save money for taxpayers).

But Cyprus apparently can’t afford even that option. And the same is probably true of other European nations.

In other words, there isn’t a good solution. The only potential silver lining to this dark cloud is that people are sobering up and acknowledging that the problem is widespread.

Whether that recognition leads to good policies to address the long-run imbalances – such as reductions in the burden of government spending and the implementation of pro-market reforms – remains to be seen.

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