President Obama’s home mortgage relief plan is the latest in a series of bad ideas. Like most government intervention, it sounds reasonable to the casual listener. But there are serious problems.

“Right now, there are more than 10 million homeowners in this country who, because of a decline in home prices that is no fault of their own, owe more on their mortgages than their homes are worth…It is wrong for anyone to suggest that the only option for struggling, responsible homeowners is to sit and wait for the housing market to hit bottom. I don’t accept that.  None of us should.”

As expected, the President’s speech was replete with blame for the “evil bankers” and did not reference entities such as the Federal Reserve, Barney Frank, or the Community Reinvestment Act. It might be convenient to blame Wall Street for the mortgage crisis, but this narrative is simply false (and has been debunked in earlier posts). Unfortunately, his proposal to resolve the crisis suffers from the same evasion of reality. The entire speech was flawed and worthy of analysis, but I will focus on three glaring errors in the above quote to remain brief.

1. Granted, a decline in housing prices are not the fault of homeowners, but risk is inherent. Nobody is required by law to purchase a home. Obama is asking all of us to accept responsibility for declining home prices. If it is not the fault of individual home buyers, it’s certainly not the fault of society in general.

2. When Obama refers to the “only option for homeowners” he clearly means the only government option. Once again, the President assumes that individual hardship necessitates government (collective) intervention.

3. Obama says he is unwilling to “sit and wait for the housing market to hit bottom?” By definition, prices that “hit bottom” are returning to a lower market level. By making this statement the President acknowledges that a housing bubble still exists. In effect, he is proposing to outsmart the market and keep prices artificially high by allowing homeowners to refinance at artificially low rates facilitated by the Fed and FHA (taxpayer) loan guarantees. Needless to say, homeowners who refinance would still owe more on their homes than they are worth. Besides, if we keep housing prices from readjusting now, when will we let the market take its course?

In a nutshell, the President’s proposal is a repudiation of free enterprise. He is arguing that society (through its elected representatives) should determine what is right and fair, and then intervene in markets accordingly. The fees passed along to “big banks” to help fund the program would come right back to consumers in the form of higher ATM and other charges. Every underwater home that is refinanced at today’s rates injects more air in tomorrow’s bubble. Central planners like Obama seem content to leave the aftermath of unintended consequences to the future taxpayers. We must rebuild our economy on market reality, not class warfare or social justice. There is no sustainable alternative.

Nothing is more central to Marxist thought than class envy. The argument is simple: The rich got what they have unfairly so a central authority is needed to make things fair again. This line of reasoning has been extended to other groups as well, especially women and ethnic minorities.

The problem with this thinking is that the central authority–government–must violate individual property rights to remedy the alleged unfairness. When the wealth one accumulates is subject to redistribution, the incentive to acquire it wanes. Many would-be productive citizens determine that it’s just not worth the extra effort to make their own way if the government will take care of them should they choose not to. Add to this the abilities of Congress to overspend and the Fed to inflate the currency and you have a good picture of the current “state of the union.” A lack of incentive has led to a decline in productivity.

Unfortunately, I suspect that President Obama will present a different picture in his State of the Union address. As you listen, I encourage you to track his effort to play the “class envy” card. Words and phrases like “the rich,” “fair share,” “playing by the rules,” “responsibility to others,” and “social justice” are subtle hints that you would have more if the “dog eat dog” world of capitalism were reigned in by government. If the rich would just “pay their fair share”…

This is not a joke. Class envy is a powerful political tool. The leftist candidate wants to convince you that your neighbor has a new car because “unbridled capitalism” enabled him to succeed at your expense. While attacking your neighbor’s lack of morality, he tugs on your own propensity for greed and envy. YOU deserve the car–not your neighbor–and if you vote for the leftist he will use the tax code or other government programs to redistribute your neighbor’s wealth and make things fair again. It’s an emotional argument and can be quite persuasive to those who don’t spend the time to give it serious thought.

Class envy is a key part of the foundation for the socialist economic agenda. We must to a better job of identifying and exposing this false premise to the electorate. The President’s speech this evening will probably give us a great text to work with.

I get lots of questions about the gold standard. Many ridicule the idea and infer that linking paper currency to a precious metal is an outdated concept. A detailed discussion on the gold standard would take volumes, but I will cover the basics in this post.

A gold standard means that all paper money can be exchanged for a given value of gold on demand. Presumably, the exchange level is fixed and the bank or central authority printing the currency would make the exchange if desired. A common myth of a gold standard is that individuals would be required to exchange physical gold in the marketplace. In such a system, however, paper money would represent gold and would serve as a more convenient means of exchange.

In contrast, a fiat currency is not backed by gold, silver, or anything else other than the good faith and credit of the central authority (government) that oversees its printing. FDR took the US off the gold standard in 1933 when he confiscated all gold, requiring that it be exchanged at the rate of $20.67 per ounce. This official exchange rate was changed to $35 per ounce in 1934, enabling the Fed to arbitrarily increase its holdings of the precious metal by 69%. The $35 “price” stuck until Nixon officially ended convertability in 1971. We have had a fiat currency ever since.

The argument for a gold standard is straightforward. If dollars must be convertible to gold, then currency can only be printed when sufficient gold exists to back it. Given the rarity and high costs associated with mining gold, expanding the money supply would be a difficult task. Inflating the currency by simply printing more of it—thereby devaluing what we already hold—would not be possible. Hence, a gold standard would make big government spending much more difficult.

Those who argue against the gold standard claim it’s not practical and is simply unnecessary. The practicality argument is weak given that gold has backed currencies throughout our history. The lack of necessity argument is equally invalid, as evidenced by the recent abuse of the printing press and massive budget deficits. Admittedly, a gold standard is less convenient than a fiat currency, but that’s precisely the point. It shouldn’t be easy for a government to spend now and pay later.

There are a number of side issues concerning a return to the gold standard, including physical storage, setting an exchange rates, and managing trades between gold-based and fiat currencies. I won’t delve into the details here. Suffice to say that while these are legitimate concerns, they can be addressed.

Raising the topic of sound money is not always easy, but the gold standard debate is really about serious fiscal responsibility. Those who scoff at it tend to be Keynesian, big-government spenders. The next time you hear the concept ridiculed, just look for this connection.

Recent economic data suggest a modest improvement in the job situation. While this news is nothing to celebrate–and overblown in my view–any positive movement in the economy puts those seeking to unseat President Obama in an interesting predicament. If the economy appears to be moving in the right direction around election time, the President could make the case to forgetful and less-informed voters that his “economic plan” is starting to work. Should the current strong economic case against Obama weaken a little, the President could find a way to survive in November.

It’s been said the best economists are right only 51% of the time. I agree and I’m not an economist, but one point is worth making. Recessions in the U.S. typically last less than two years and the current downturn is overdue for improvement. You can put off the purchase of a new car, a TV, or even a pair of jeans for a while, but over time things wear out and must be replaced. Markets still adjust some even in an anti-business climate. While a robust recovery is highly unlikely, the economy could improve a little in 2012. The present economic malaise is on Obama’s watch, but making that point isn’t good enough. Republicans seeking office in November should be prepared to provide clear conservative, limited-government solutions.

This is where the Republican primary gets interesting. Ron Paul is the only candidate who has laid out a clear plan to significantly shrink the size of the federal government. His foreign policy views don’t seem to click with enough primary voters to advance his candidacy, however, leaving Republicans without a consistent small-government option. I’ll leave the political analysis to others, but suffice to say that whoever survives the process will likely run against Obama as a right-leaning moderate (at best). This is where I start to get nervous.

I reject the notion that a moderate candidate has the best chance against the President. I fully expect Obama to campaign as a moderate, so its essential that the Republican nominee make a clear distinction between the two alternatives. Big government has failed us. We don’t need to slow the growth, but to make it smaller. A lot smaller.

I ran across an interesting blog today by Trevor Brookins on The Socialist’s Journal. Brookins contends that socialism is the natural extension of Christianity and challenges economic conservatives “who call themselves Christian” to point out the flaws in his logic.

http://www.eurweb.com/2011/11/the-socialists-journal-the-religious-imperative-for-socialism/

Brookins seems like a nice guy and I accept his challenge. His “Jesus in a socialist” claim is not uncommon and can be refuted without too much difficulty. A quick read of Brookins’ short post will provide you with the context of my argument.

Brookins quotes four Biblical passages that emphasize the emptiness of a life preoccupied with the pursuit of wealth. I don’t agree entirely with his interpretations, but his general premise is largely correct. Indeed, the love of money is the root of all forms of evil. Note that the reference to money is more broadly interpreted as material wealth. The accumulation of wealth is never challenged, only the love of it. King Solomon was definitely part of the top 1% in his day, but his wisdom is widely acclaimed today.

As with all such arguments, however, the transition from Biblical warnings about the proper place of wealth to a Marxist economic system is made without any serious critical analysis. As Brookins puts it, “Socialism as an economic philosophy safeguards against people being rewarded for their love of money and thereby disincentives a love of money.” We have now uncovered the major flaw.

Brookins is arguing that socialism actually helps Christians live out the Biblical admonitions about wealth by punishing its accumulation. Put another way, Brookins is arguing that it is morally appropriate for a government to steal from productive individuals for the express purpose of redistributing wealth to those who are less productive. This is theft pure and simple, something devoid of Biblical support.

From the Ten Commandments to the writings of the Apostle Paul, the Bible challenges us to help the less fortunate while also respecting personal property. Christians should do so voluntarily, both as individuals and as voluntary members of churches. Jesus never promoted the confiscation of wealth by a secular government as a means of achieving a more just society.

There are at least two more logical flaws as well. First, Brookins calls for socialism as a means of redistributing the wealth created by capitalism. Had his call been heeded from the founding of our nation, the U.S. would have little to redistribute anyway. Second, Marxism teaches us that those with less have a right to the personal property of others. This view is a disincentive to work and innovation, and has contributed to many of the social ills we experience today.

So how do Christianity and capitalism co-exist? Simply stated, Christianity is the glue that makes capitalism work. The teachings inherent in Christianity (with roots in Judaism) complement capitalism by encouraging believers to meet community needs government is incapable to addressing efficiently and effectively. When government is authorized to carry out this function, it fails miserably.

With this I close with best wishes to everyone for a Merry Christmas and a happy holiday season. And to Trevor, I wish you and your family much prosperity next year. If 2012 brings wealth your way I encourage you to spend it wisely. I won’t be campaigning for the government to pick your pocket.

The Euro is under a lot of pressure these days. The size of government has ballooned in countries like Greece, Italy and Portugal. Ordinarily this type of problem would be confined primarily to the profligate nations, but not when there is a common currency. The problems of several nations affect the entire continent, particularly the 23 that use the Euro. And what affects the Europe affects the entire world.

Investors fear government default in these nations, prompting the rest of Europe and even the United States to negotiate a bailout. The International Monetary Fund (IMF) is a key bailout vehicle, ultimately transferring a large percentage of the European risk to U.S. taxpayers. We have been told that a bailout is in our best interest, lest the crisis in Europe reap havoc on the U.S. economy. This might be true in the short run, but it’s definitely a fallacy over the long term.

The irony of the situation should be enough to raise your eyebrows. While our government must borrow from China to finance our own leviathan, we are being asked to help pay some of Europe’s. The common sense answer to the bailout question is an obvious “no,” but economists and politicians usually opt for expediency instead of rational thinking.

There’s a simple lesson to be learned here. A common currency is a horrible idea because it fosters a predicament economists call “moral hazard,” an arrangement where one party in a contract can benefit at someone else’s expense.  Health insurance is a good example of moral hazard. Individuals with low health insurance copays are more likely to visit the doctor for marginal ailments, thereby shifting some of the unnecessary medical costs to others in the pool. Each individual decries the system but has an incentive to abuse it. A certain amount of moral hazard is unavoidable, but socialism breeds it in massive quantities. Its effects are destructive, as we see in Europe.

When each nation has its own currency, the strength or weakness of the currency will depend on government and economic factors within the nation. Exchange rates can fluctuate and to punish those that are fiscally irresponsible. But when nations share a currency, their politicians have an incentive to game the system to their own advantage. Of course, member nations “agree” to follow certain guidelines designed to eliminate the moral hazard, but these are not airtight, as evidenced by the financial chaos on Europe. When Europe’s central planners originally promoted the Euro, they set the stage for the current crisis. It was only a matter of time.

Unfortunately we are experiencing the same type of problem in the U.S. States that overspend turn to the federal government for help, which directly or indirectly must come from other states that are more fiscally responsible. Liberals are happy to oblige, thereby creating greater dependency on Washington and ensuring more irresponsibility in the future. Of course, the root of this problem can be traced to Washington’s ability to churn out more dollars, but this angle has already been addressed in previous posts.

Whether it’s Italy or California, governments should be held accountable for their actions and must be required to make the tough decisions necessary to balance their own books. Bailouts simply breed more of the very behavior we are trying to eradicate. The antidote for moral hazard is personal responsibility, and it’s high time we got a good dose of it.

After years of promoting the development of electric cars, the federal government now finds itself in the position of investigating a key safety risk. Batteries in the Chevy Volt caught fire in three recent crash tests, prompting the NHTSA to investigate.

http://online.wsj.com/article/SB10001424052970203935604577064663206681538.html

But don’t worry. Both the NHTSA and GM stress that everything is OK. Instead of just focusing on the Volt, the NHTSA is also asking all electric car producers for information on steps recommended to ensure safety after a crash. The inference is that any problems are both minor and linked to the technology, not GM.

I’m not suggesting that the batteries are problematic; I don’t know. But it’s interesting to note that GM is not getting the Toyota treatment here. Ray LaHood hasn’t advised Volt owners to stay off the roads. Neither LaHood nor Congressional Democrats are demanding hearings. Nobody is accusing GM of scoffing at safety in an effort to produce a cheap car.

The reason that the NHTSA and GM are merely going through the motions is simple. Neither can afford to cross the other. With huge government stakes in GM and the “green” economy—not to mention the UAW’s ownership position—Washington can’t afford to damage GM. In need of tax credits, electric car purchase write-offs and other taxpayer giveaways, GM can’t afford to challenge Washington’s authority. In the end, investigators must be seen as thorough and GM must be seen as responsive. Both sides will work together to ensure this outcome.

The charade we are witnessing now is just another outgrowth of crony capitalism.

The debt reduction super committee must decide by Wednesday how to cut $1.2 trillion over the next ten years or face automatic reductions that include a hefty cut in defense. However this turns out, the upcoming week will remind us that the Democrats are simply unwilling to address the spending problem and the Republicans aren’t willing to go deep enough

The current impasse is largely about taxes. The Democrats want the “rich” to pay more as a big part of the package while the Republicans want to cut spending, mostly in non-defense areas. The Republicans are essentially correct here. The current debt is a result of profligate spending, not tax cuts for the wealthy. Nonetheless, there are two deeper problems here.

First, this committee only exists because Obama and the Congress couldn’t get the job done in the first place. Boehner blinked and both sides agreed to kick the can down the road once again.

Second, $1.2 trillion over ten years is only $120 billion a year. Not only is this much less than Obama wants to spend in his recent “jobs” proposal, but it represents less than 10% of the projected deficit anyway. Besides, the only cuts that matter are those that are in the present.

The key point here is a simple one. If the best negotiators in the Congress and Senate can’t agree on $120 billion in annual reductions, then any real cuts will be impossible without a strong shift to the right. Bi-partisanship won’t get the job done, and the problem is too big to grow our way out of. Keep this in mind as you sort through the group of Republicans seeking the nomination.

The flat tax idea must be gaining traction. Just take a look at former Fed vice chairman Alan Blinder’s op ed piece in Monday’s (November 14) Wall Street Journal. Blinder is a heavy hitter for the left-of-center Keynesians and he doesn’t waste time attacking ideas that don’t seem to be going anywhere. His piece, “The Folly of the Flat Tax,” contains everything we expect from the left. Blinder is right on several points, however, so let’s give him his due at the outset.

1. Blinder argues that “the flat tax alone” won’t simplify the tax system. Technically he’s correct, but I’ve never heard a flat tax proposal that hasn’t been attached to an overhaul of deductions and exemptions that will make the entire system much simpler.
2. He argues that a flat tax would make the system “far less progressive.” He’s correct again, at least to a point. The major problem with the tax system now is that it’s too progressive. I’ll return to this point in a minute.
3. Blinder also notes that every tax “gimmick”—like mortgage interest, state income tax, and other deductions—has a constituency that will fight it’s proposed elimination tooth and nail, making any real simplification of the system all but impossible. Again, he’s somewhat correct here, although I think a real overhaul is possible.

The problem with Blinder’s piece, however, is the leftist foundation on which it’s built. When I read op eds from the left, I always skip to the last couple of paragraphs where the logical flaws usually reside.  There, Blinder attacks conservatives for emphasizing that 47% of American households don’t pay income taxes. “They pay sales taxes, payroll taxes, and many others. The income tax and the estate tax are virtually the only progressive elements in our tax system. If you take away progressivity there, precious little remains.”

Since when is a progressive tax considered to be “precious?” Herein lies Blinder’s moral code—wealth redistribution.

And since when is a flat tax not progressive? I have never heard a flat tax proposal that doesn’t include a hefty standard deduction. Do the math. If you exempt a certain amount of income from a flat tax, then the system is progressive by definition.

When taxpayers pay the same dollar amount regardless of income—such as with a vehicle registration tax—we call that system regressive because the amount paid represents a lower percentage of earnings as incomes rise. You could argue the fairness of such a plan because everyone pays the same amount. It’s like a general admission ticket to a concert. You pay the ticket price and you get in.

The progressive tax is the opposite of the regressive tax. Here, those with higher incomes not only pay proportionally more in taxes, but they also pay a higher percentage of their incomes in taxes. The federal tax system is progressive in that higher wage earners move into higher tax brackets. In my view, however, confiscating a higher percentage of one’s earned income simply because one earns more of it is Marxism pure and simple. Most Americans accept this type of system because they envy the wealthy, and besides, the rich can afford it.

The irony here is that common flat tax proposals are progressive because—as stated earlier—they exempt a certain amount of income from taxation. The problem for Blinder and the left is that they are not progressive enough. In fact, the left has taken the notion of a progressive system to new heights with programs such as the Earned Income Tax Credit (EITC) where low-income earners not only pay no taxes, but they actually receive money from other taxpayers. Consider that the budget deficit has ballooned in part because of programs specifically designed to assist this same group of individuals and you can see why conservatives are fed up.

There’s no question that getting a simple flat tax will be an uphill battle. The only hope is to propose a complete overhaul with a low tax rate. When Americans see that they pay for their deductions with higher rates many will favor ending the scam once and for all. This type of reform could happen, but only with the right leadership in Washington.

Most of the economic proposals I’m hearing from the Republican pool have some merit, but they miss the mark. Simple plans like Cain’s 9-9-9 just don’t hold up to economic and political scrutiny. Complicated ones like Romney’s 59-point outline are too cumbersome.

For markets to be relatively free they must be relatively unencumbered, which means limited government intrusion. When government must be involved, it should do so in a simple and transparent fashion. The individual tax code is a prime example of failure in both respects; it’s overly confiscatory and impossible for most Americans to comprehend.

But a middle ground between simplicity and complexity is possible. Let’s start with a few basic facts:

1. The national debt and ongoing large deficits represent a serious problem.
2. Taxes are too high, so raising them to close the deficit isn’t a realistic option (even if this could work, which it couldn’t).
3. The federal government must get smaller if spending is to be controlled.
4. A serious reduction in the size of the federal government will not be painless.

Not surprisingly, the Republican candidates (save for Ron Paul) hesitate to address these head on lest they scare the presumed fragile middle-of-the-roaders. But real conservatives understand the nature of the problem and want real answers. They respect leaders who tell the truth. I’m convinced that most so-called independents recognize the seriousness of affairs as well, and they are willing to get behind articulate leader with real vision and solutions.

Fortunately, some of the necessary economic rebuilding doesn’t have to be painful. Obama has left two pieces of low-hanging fruit ripe for conservatives to pick

1. Taxes are too complicated.
2. American business is over-regulated.

Both of these represent win-win situations and must be leveraged as part of any economic recovery package. Revenue issues aside, a simpler tax system would save our economy billions of dollars in compliance costs alone. Cutting unnecessary regulations (i.e., most of them) would both reduce government spending and lift a heavy burden on the job creators.

This leads me to my economic proposal, which I’ll call CUT & SIMPLIFY:

1. A flat income tax. Exempt income up to the 125% of the poverty line. Keep the deduction for charitable contributions, phase out the mortgage interest deduction, and eliminate the rest. Let the economists calculate the rate that keeps government income tax revenues at the same level, and then cut it by 10%. For example, if a 20% flat rate is needed to retain current revenue levels, set the new rate at 20% less 2%, or 18%.
2. A flat corporate tax rate of 15%.
3. Elimination of the capital gains tax.
4. A pledge to veto any budget in the first year that doesn’t reduce federal expenditures by at least 20% from the previous year. This starts with overturning Obamacare and eliminating specific government agencies—like the EPA and the Department of Education— whose activities are inconsistent with the enumerated powers.

It’s my hope that the eventual Republican nominee will commit to and articulate this type of clear fundamental change to our economy, and that he can lead a tidal wave in House and Senate races that produces likeminded majorities in both bodies. Nibbling at the edges of leviathan just isn’t enough.