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Friday, July 29, 2011

An open letter to President Obama -- How to solve the national economy and debt limit

An open letter to President Obama:

Mr. Obama:

I am writing to talk about the debt crisis. I understand that many programs are referred to now as "Entitlements", and that this has become a bad name.

I want to give them another name: Promises to pay from the government.
And yet another name: Just compensation for a past taking.

You are a lawyer. You know that the taking of private property (including money) for the public good (including retiring older workers to make sure that newer workers have job opportunities) without just compensation is unconstitutional. The federal government has engaged in a taking, and has undertaken a promise to pay. The federal government has no authority to reduce the payment without risking lawsuits about just compensation for a forced taking (social security is an example of a forced retirement and disability insurance program). For all the talk of forcing people to engage in private insurance, consider that if the federal government cannot keep its insurance promises, why would anyone expect private insurances to keep their promises? (And look at Katrina, Louisiana, and the private insurance companies there).

Based on this, I must ask you to reconsider any cut in payouts to people currently in the social security program. It may make sense to say that people that have not yet started will have lower payouts (and lower taxes). But you cannot change the payouts of those that are in the system already.

Nor does it make sense to talk about social security running out of money. As a promise to pay, with a constitutional backing, it becomes backed by the full faith and credit -- namely, the general fund. It cannot run out without the federal government going bankrupt.

When all the fancy talk is removed, the bottom line of the current dispute is this: The Republican party is saying that promises to pay should be honored for foreign banks, large companies, rich investors -- all of whom have promises in the form of "bonds" -- and ignored for the poor people -- who have promises in the form of "entitlements".

A promise to pay is a promise to pay. The federal government has debts to lots of people. The concept of running a large corporation on cash accounting instead of accrual accounting is considered silly -- yet that is what the federal government is doing here.

The only way out of this mess is to increase taxes. It happens that I consider the free trade agreements to be disaster number one (and we should have import tariffs based on the amount of labor in the products imported), and the effective deflation of the economy based on Federal Reserve practices to be disaster number two. Solving the deflated economy requires the federal government to create new money from nothing, instead of the current system that only creates new debt. The "punch line" (bottom line summary without the explanation of how it is developed) is: In out current system, bankruptcy is the only way that new money is added to the economy. Bank loans have to be priced high enough to pay for those bankruptcies. Banks have to treat themselves as loan insurance agencies, and by having "premiums" so low that the banks ran out of money is just one more proof that private insurance cannot work in serious disaster -- not natural hurricanes, not man-caused (see 9/11/2001), and not "Gotta cut prices to compete, now we can't pay our bills" (see everything from private pension funds, to the auto industry, to investment banks, to normal banks, etc.)

My recommendations to put on the table:
1. Pick a value for minimum wage, and keep it fixed. Raising it causes problems. If you don't believe this, consider what happens if you multiply it by 100. I would actually recommend rolling it back once -- we had a long (10 years?) period with no change in the minimum wage recently.
2. Recognize that "1099" workers need the same minimum wage guarantee. But because 1099-ers get significantly less benefits and protections, the actual "minimum wage" for 1099-ers needs to be 150% of the base minimum wage. Companies must take steps to ensure that at least _X_ percent (and I'd recommend 80%) of their 1099 employees make at least that level, and must either fire those that do not, or raise wages to bring people in compliance. Note that for many companies that use 1099-ers, it is near impossible for any significant number of employees to make even normal minimum wage -- as an example, a company that pays workers 10 cents to answer questions -- including internet research, searching, and documenting the answer.
3. Foreign job tax:
A - Any job moved overseas has a tax of 300% of the "1099" minimum wage.
B - Any U.S. based company that employes overseas workers has a tax of 200% of the "1099" minimum wage.
C - Any imported product has a tax of 100% of the "1099" minimum wage for the total labor hours in that product. (As a possible exception: Agricultural products that cannot be commercially produced in this country).

Basically, the idea of this tax is to say that if you are going to use the resources invested in the country by the government, by the people, etc, to benefit yourself at the expense of the workers and people of this country, then you have to pay those workers for that. See below.

4. The federal government becomes the employer of last resort. If you want a job, then the federal government can employ you at minimum wage. You may be a paper pusher. You might get on the job training. Etc.
5. Start suing companies for past problems. The idea of saying that regulatory agencies will not get involved in individual problems is crazy. If a company is breaking the law, then requiring individuals to bring lawsuits on their own is broken -- breaking the law is always the government's option to pursue. And if the lack of workers is a problem, see item #4 above. Lawsuits for punitive damages on behalf of individuals who cannot afford to sue on their own can be a big source of income, and will force companies to obey the laws.

Most important, and to solve the deflation problem, are these:

6. Recognize that the single best thing that can happen to the economy is a higher demand for a product than the current supply, as this is what causes increased employment. At the same time, the higher demand shows up as inflated prices -- so seeing price inflation is a good thing, as it is the first step in increasing employment. Note that the Federal Reserve's current action -- regarding inflation as bad and moving to slow down the economy -- is one of the worst possible reactions, and one of the main causes of the current economic disaster. This means that in the process of getting the economy running again, price inflation will happen.
7. Recognize that the only way to get money into the economy is for the federal government to just put money in, directly. The current system -- a private bank ("Federal Reserve") issuing both money and debt to privileged companies (ordinary banks) when those companies have already failed (see credit crisis; home loan robosigning; the failure of the home loan restructuring program; banks choosing to foreclose on homes that were in the restructuring process; banks deliberately going slowly on the restructuring to increase the amount owed; etc.) is itself a failure.

The idea is two fold.
First, the federal government gives direct payment to citizens of the United States that are subject to federal jurisdiction. The amount would start at $250 per person, would be adjusted up or down every quarter by $250 per person, have a maximum payout of $2,000 per month, and would have the target of saying that the typical(*) person sees an average income of _X_ per year. This is not a borrowing; this is direct creation of wealth from nothing. This is intended to remove "adding money to the economy" from the Federal Reserve (and note that it is impossible for the F.R. to actually add money; it can only add debt). Also note that it will probably be necessary to reduce the bank loan money multiplier factor -- currently 10 times -- as more base money is added to the economy. While this may seem strange, the ultimate idea is moving the economy to a "fountain and sink" model -- fountain money directly to the bottom of the economy, and then sink money out with taxation (see the foreign job tax item above). Fountain and sink model economies do work. See "EVE Online" for what is probably the best current such model. Consult with their staff economist (probably the only person in the world with the actual hands-on experience that this will require).

What is the value of X? A good guess would be around $36,000 per year. The better answer is: It depends on the minimum wage. If a normal yearly salary is 2,000 times minimum wage, then perhaps 4,000 times minimum wage is a good goal.

The real answer: It's a lot more complicated, and beyond my ability to tell. Total compensation is the key here -- and that's a lot more than just bare salary. Perhaps the real answer is something like 5,000 times the 1099 minimum wage. Perhaps putting the total compensation as some multiple of the 1099 minimum wage is the best answer. I have no clue as to what this should be. The idea of $36,000 per year is based on the fact that this is about the typical average wage seen at sites like over the last few years.

So what is a typical person? And what is a person? Does a 1 year old child get the same income as an adult? What about a 17 year old?

I'm going to give a tight, precise definition of typical, with one variable.

Take the total population, sort it by the item in question. Take the N-sigma distribution around the median (50% point). This subset is the set of "typical", and the average of this is the typical average.

Lets look at income. Take all the incomes of people in the country. Do not take the average. We might want to use the 1-sigma (66%), or the "1.5-sigma" (approximately 80%). So, we line them up. We find the median (50%) to be around 28,000. We look at the central 66%, or central 80%. This means that the bottoms (lots and lots of zeroes) are tossed out, as are the tops (all the rich, all the high income people).

The result is the typical -- depending on what percentage you are using, you'll look at 2/3rds, or 4/5ths, or some percentage of the american population, centered around the middle. What percentage do you use? I'd recommend around 80%. I'd recommend asking a graduate math professor about the 1.5 sigma level versus 80% (they are close, but not identical). I do believe that both 1-sigma (66%) is too few, and 2-sigma (95%) is too many.

How do you decide to include someone with a zero? Probably the simplest answer: If they want to work, and cannot find a job (includes disabled people), then they count. If they are full time students, then they may not have time for a job, and they count.

What income do you use? If someone works more than 40 hours, you only consider the amount earned in 40 hours -- the goal here is that as a society, we say that 40 hours is all you need to work (you may work longer if you want, but you are not required to). This is why full time students -- who put 40 hours or more into school work already -- count as zero.

Second, the federal government needs to provide loans to people. Right now it has a privileged corporation giving loans to privileged companies (federal reserve to normal banks). Loaning direct to people permits people to start up companies, etc. My recommendation here is as follows:
1. No loans to people that are also corporations. Examples: Most professionals -- doctors, etc -- are incorporated people. There are too many loopholes that I do not know how to close. No loans to people that control a corporation, that are on the board of a corporation, that have a controlling interest or influence in a corporation, etc.
2. No loans to people that are in a fractional reserve loan. The exception is that if you are going to pay off all your fractional reserve loans, then it is ok. Note that if you have one of these direct government loans, then you cannot take a fractional reserve (normal bank) loan unless that loan is going to pay off the direct loan. Note that house mortgages count -- people with a home loan cannot participate in this.
3. The maximum amount would be $50,000 per person. In most cases, two or three people would go into a partnership together to get the money needed to start up a business
4. Repayment would be based on 1% APR if you paid last month on time, or 1.5% APR if you did not pay last month on time. That's not that far off from what banks pay (zero percent). No punitive penalties, no 6 month penalty APR, etc.

While this may seem odd, consider what has been spent on all the various bailout programs. 700 billion here, 750 billion there, etc. As far as I can tell, three different program at about this funding level -- that's about two to two and a half trillion.

Of the 350 million people in the US, lets say that 50 million wanted to borrow -- that's $2500 billion (2.5 trillion). Of this, even if half was not paid back, that's a total stimulus spending of about 1.25 trillion -- or about what has been spent on large companies to try to stimulate them. Since people getting these loans are not borrowing from fractional reserve banks, banks now have money to lend, and a desire to lend -- suddenly, rates paid by people who do borrow goes down, just like the rates paid by banks have gone down.

There's a LOT in here that I don't have answers to. There's a lot of things in here for the two parties to argue about. But this is the framework needed to solve the problems of the economy:
1. A federal reserve that has deflated the economy in terms of hours of work that can be supported by money available compared to the population (if population increases, and wages do not change, then the total money needs to go up as fast as population. If wages go up, then money needs to go up faster. The actual increase in money has been slower than the increase in population times the increase in minimum wage.)
2. A shortage of money, to the point that the economic assumptions of both micro-economics and macro-economics are completely broken. Both of these systems assume that there is sufficient money in the system that money itself is not a scarce good.

Let me repeat that point. Economics assumes that scarce goods -- resources, labor, etc -- will go to the most valuable usage, and that everyone has money available to bid on those resources that they want. The current system has money so concentrated, and missing from so many, that this assumption fails completely.

3. The lack of demand that is the ultimate drive on hiring -- if there is no expectation of increase in demand, then there is no increase in corporate spending (both directly in labor, and indirectly in new machines that require labor to build); the lack of an increase in total wage income in turn means a lack of increased future demand.

I am a strong believer in that demand side economics is a better match to reality than supply side economics.
I do not believe that either is a perfect match for reality.

Thank you.

Michael Gersten
A California born citizen

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