In a post on Argmax the author described the current situation in which the IRS outsources debt collection. Within the next two weeks the IRS will turn over the tax information for over 12000 individuals who owe $25000 or less in tax debt. The IRS will still employ their own agents to collect larger debts, but they say that outsourcing the smaller debts to private sector companies is necessary because of constraints imposed by congress. Congress has told the IRS that they can not hire any new employees, which is why they are forced to outsource. They say that this will be much more expensive than using in house debt collectors.
The company that the IRS has hired to do most of the debt collection is the law firm of Linebarger Goggan Blair & Sampson. This firm has previously been under investigation for their collections practices. It is curious why the IRS would hire a company with a less than perfect track record. It is possible that they are having the word done at a low price due to so type of plea bargain or agreement resulting from the investigation. The most likely explanation for the outsourcing is that it is temporary. The immediate cost of hiring an outside firm is greater in the beginning, but these employees will only be paid until the debts are collected. If the IRS were to hire more employees they would have to keep them permanently and pay them even after the debts were all collected. The current program implemented by the IRS seems like an economically prudent solution.
Wednesday, April 25, 2007
The U.S. Economy
President George W. Bush had the following to say about the economy on Wall Street in New York City Wednesday, Jan. 31, 2007.
This statement speaks volumes about the current state of the economy in the United States. The three characteristics that the president mentioned are some of the most important factors in any formal economy. Each of these figures has a different and equally significant importance.
Keeping inflation low is important in any economy. If inflation is too high the value of the currency will decrease, prices will rise, and money shortages will occur. During the European hyperinflations of the early 90's several countries' economies were completely destroyed when the value of their money fell to near nothing. Unemployment level is also an important figure because it is usually an indicator of the strength of the economy. High umenplyment implies that the Fed is implementing a tight money policy and the money supply is low.
"When people across the world look at America's economy what they see is low inflation, low unemployment, and the fastest growth of any major industrialized nation," said the President. "The entrepreneurial spirit is alive and well in the United States."
This statement speaks volumes about the current state of the economy in the United States. The three characteristics that the president mentioned are some of the most important factors in any formal economy. Each of these figures has a different and equally significant importance.
Keeping inflation low is important in any economy. If inflation is too high the value of the currency will decrease, prices will rise, and money shortages will occur. During the European hyperinflations of the early 90's several countries' economies were completely destroyed when the value of their money fell to near nothing. Unemployment level is also an important figure because it is usually an indicator of the strength of the economy. High umenplyment implies that the Fed is implementing a tight money policy and the money supply is low.
The Real Bills Doctrine (Paper 3)
A great explanation of the real bills doctrine is delivered in the writings by Mike Sproul. He gives a watertight argument for the theory complete with background information about the terms associated. This article is divided into eight sub categories which each provide useful information. The author discusses the history of money and how it relates to backed money, fiat money, and the real bills doctrine. This website is especially useful because it gives a complete discussion of the real bills doctrine. The author even included response from his colleagues which both agreed and disagreed with him. This source is much more reliable than most others on the web because it focuses on more than one specific aspect of the theory. Mr. Sproul has covered all aspects of the real bills doctrine and gives a compelling argument. He believes that the failure of economists to understand the real bills doctrine is what has led to economics catastrophes such as recessions, depressions, inflation, and currency crises. There is already a post on my blog about this theory, so I will not bore you with details. Anyone interested in understanding monetary policy and inflation should begin with reading this paper.
The Quantity Thoery of Money (Paper 3)
The article "The Quantity Theory of Money" discusses the history, rationale, and founders of the theory. This writing first gives an example of the equation that represents the quantity theory. It then lists some of the famous economists that have backed this idea. The person who gave the most validity to the quantity theory was Irving Fisher, who is considered the father of modern economics. There is a lengthy explanation as to why the equation for the quantity theory works. The problem with this article is that the author is approaching the problem from a quantity theory perspective.
The flaws in this piece of writing begin with the equation MV=PT where "M" represents the money supply, "V" represents the velocity of money, "P" represents the price level, and "T" is the level of transactions. This equation assumes that "V" and "T" are fixed, and that an increase in the money supply will result in an increase in the price level which represents inflation. Some economists argue that "T" is not fixed. It could represent the amount of a product that is purchased with the new money plus old money, rather than the total amount of product purchased. For example, if a person received $500 in extra cash they would buy the same amount of toilet paper, but thy would use cash rather than a credit card or check. That would mean that "T" is not fixed and an increase in money supply would not necessarily result in an increase in price level. It is reckless for the author to prove his point based on an equation that has not been proven, therefore this entire theory should be discredited.
The flaws in this piece of writing begin with the equation MV=PT where "M" represents the money supply, "V" represents the velocity of money, "P" represents the price level, and "T" is the level of transactions. This equation assumes that "V" and "T" are fixed, and that an increase in the money supply will result in an increase in the price level which represents inflation. Some economists argue that "T" is not fixed. It could represent the amount of a product that is purchased with the new money plus old money, rather than the total amount of product purchased. For example, if a person received $500 in extra cash they would buy the same amount of toilet paper, but thy would use cash rather than a credit card or check. That would mean that "T" is not fixed and an increase in money supply would not necessarily result in an increase in price level. It is reckless for the author to prove his point based on an equation that has not been proven, therefore this entire theory should be discredited.
Wikipedia Entry
While searching wikipedia I found that there was no entry for a commonly used trem in economics. I started a page for the term and this is what I wrote.
A T account is a chart frequently used in accounting and economics. The name is derived from the distinctive T shape. This account lists the name of the account on top, assets or credits on the left side, and liabilities or debits on the right side. The goal of a t account is for total assets to equal total liabilities. For every adjustment made to one side there must be one or more equal adjustments made to the other side.
Example:
Receiving a bank loan of $100 would require two records on the account. The $100 cash received would be listed as asset on the left side, and the $100 owed back to the bank would be listed as a liability on the right side.
Alesina and Ichino: Women Should Pay Less Tax
The idea of raising taxes for men and lowering them for women is ridiculous. There are several problems with the logic presented in this article and I will explain each of them.
This sentence makes two unfair assumptions. The idea that changing taxes would discourage gender discrimination is a nice thought, but unrealistic. I hate the idea that only certain groups can be discriminated against. It is true that men dominate the workforce, but that does not mean that they cannot be discriminated against. Raising the tax for men and lowering it for women would further gender discrimination in another direction. If anything, this would draw a bold line between men and women in the workforce and cause tension.
The other unfair assumption is that women “bear the brunt of maternity.” This statement makes it seem as though women have no choice but to have children. Childrearing is a choice and should be treated as such. Women who decide to have children should be respected, but they should not be treated as victims. Having children may affect their professional careers, but this is a decision that each woman is free to make for herself and should be respected as such.
This statement can easily be refuted by a statement earlier in this same article. The author states that the labor supply of women is more sensitive to their after tax wage than men. If lowering the tax rate is expected to increase the labor supply of women, then raising the tax rate should be expected to lower the labor supply of women. The method described in the above statement would bring the workforce back to its current state.
It would also make gender discrimination more costly for employers and would be fair because it would compensate women for bearing the brunt of maternity and for the fact that the possibility of having children can negatively affect their career prospects.
This sentence makes two unfair assumptions. The idea that changing taxes would discourage gender discrimination is a nice thought, but unrealistic. I hate the idea that only certain groups can be discriminated against. It is true that men dominate the workforce, but that does not mean that they cannot be discriminated against. Raising the tax for men and lowering it for women would further gender discrimination in another direction. If anything, this would draw a bold line between men and women in the workforce and cause tension.
The other unfair assumption is that women “bear the brunt of maternity.” This statement makes it seem as though women have no choice but to have children. Childrearing is a choice and should be treated as such. Women who decide to have children should be respected, but they should not be treated as victims. Having children may affect their professional careers, but this is a decision that each woman is free to make for herself and should be respected as such.
If and when a change happens (and many social activists consider that a desirable goal), the response of male and female labor supply ... may become less different from each other... At that point, one may need to reconsider the differences in tax rates, precisely as the basic principles of optimal taxation suggest.
This statement can easily be refuted by a statement earlier in this same article. The author states that the labor supply of women is more sensitive to their after tax wage than men. If lowering the tax rate is expected to increase the labor supply of women, then raising the tax rate should be expected to lower the labor supply of women. The method described in the above statement would bring the workforce back to its current state.
Tuesday, April 24, 2007
Taxation Is Robbery (Response)
In his article "Taxation is Robbery," Frank Chodorov claims that when the government collects taxes it is committing robbery, and that a government is largely unnecessary. I strongly disagree with this point of view.
It is ludicrous to believe that taxation is robbery and unnecessary. It is true that tax revenue is taken from individuals unwillingly, but that revenue is used to pay for benefits that are necessary and would never be paid for voluntarily. I find it perplexing that the same people who are against taxation and government are the same people who promote universal health care and government assistance. Before anyone claims that taxes and government are unnecessary, take a moment to think about what this country would be like without the luxuries that are paid for with tax revenue. Developed cities, environmental regulations, trade agreements, the military, and the space program are all products of tax revenue. It is easy to see the benefit of abolishing tax because it is immediately gratifying. Extra money in your pocket would be nice, but that would come with a high price tag. Taxation is the price we pay for the freedoms that we enjoy. I agree that taxation might be excessive, but it is not unreasonable.
As far as the economy is concerned, taxation and government are absolutely necessary. Government funding has been used to subsidize everything from agriculture to the airline industry. It is the government’s ability to collect taxes that has spared this country from what may have been multiple recessions.
It is ludicrous to believe that taxation is robbery and unnecessary. It is true that tax revenue is taken from individuals unwillingly, but that revenue is used to pay for benefits that are necessary and would never be paid for voluntarily. I find it perplexing that the same people who are against taxation and government are the same people who promote universal health care and government assistance. Before anyone claims that taxes and government are unnecessary, take a moment to think about what this country would be like without the luxuries that are paid for with tax revenue. Developed cities, environmental regulations, trade agreements, the military, and the space program are all products of tax revenue. It is easy to see the benefit of abolishing tax because it is immediately gratifying. Extra money in your pocket would be nice, but that would come with a high price tag. Taxation is the price we pay for the freedoms that we enjoy. I agree that taxation might be excessive, but it is not unreasonable.
As far as the economy is concerned, taxation and government are absolutely necessary. Government funding has been used to subsidize everything from agriculture to the airline industry. It is the government’s ability to collect taxes that has spared this country from what may have been multiple recessions.
Comment on Angry Bear
It was easily predictable that at the end of the housing bubble, we’d see a lot of homes getting foreclosed. But there is nothing inherent in the end of a bubble that requires vast numbers of foreclosures. The reason we see them is that lenders made imprudent loans, and of course, that many people took those imprudent loans.
I have to slightly disagree with what you are saying. I see little relation between the current U.S. housing situation and the South American debt crisis. The idea that risky loans were given to South American countries is reasonable. The bankers that issued the loans would be immune to any repercussion long before the loan defaulted, because the terms on these types of loans span decades. The housing market in the U.S. will likely not see many foreclosures because the terms on home loans are much shorter. If a home loan defaults, it is likely that the issuing banker will still be employed at the bank when this occurs. This potential risk would cause bankers to be prudent in their lending practices. Hopefully most of the loans made during the housing boom were sound. If this is true there should be few foreclosures. The problem with the South American loans is that they were not used for their intended purpose. Based on the recent housing boom in the U.S. one could conclude that most of the home loans issued were actually used to purchase homes. These borrowers used the money to produce something of value that can be taken away if they default. This is not the case with the South American countries.
Monday, April 23, 2007
My Position
After studying the different points of view it has become apparent that the amount of money in circulation has nothing to do with inflation rates, and the quantity theory of money is false. There is a lesser known theory that I believe presents a much more reasonable explanation for inflation. The real bills doctrine is a theory that describes inflation as a product of improperly backed money. According to the real bills doctrine, if the backing for a currency is sufficient there will be no inflation. Under this model there is no limit to how much money can be created. This school of thought believes that anything that has value is acceptable as backing for currency. IOU’s, collateral, or anything that has value equal to that of the currency issued is sufficient backing for money. The backing for money is what the currency is exchangeable for. The real bills doctrine is in contrast to the quantity theory which supports the idea that gold is the only acceptable backing for currency. Violating the real bills doctrine is a more logical explanation for inflation than the quantity theory of money.
Web 2.0
Today's internet is an interactive, userfriendly environment. It has allowed individuals to work, socialize, and collaborate more effectively than ever before. Almost any task can be completed with one of the many prams available online. Moneytrackin' is one of the most usefull new programs available on the net today. It is a free online accounting software which is available to companies and individuals. Moneytrackin allows users to manage several different projects and accounts. The owner of an account can invite other users as collaborators. This allows projects teams with a grouop budget to manage their finances collectively and efficiently. The best feature of Moneytrackin is that it requires to program installation and can be accessed from anywhere. This feature enables individuals to uplaod their Quicken files to Moneytrackin and access them over the internet. Features such as this are unique to web 2.0. The archaic form of ledger accounting has been replaced with a more convenient and universal alternative.
Real Bills Doctrine
In my recent studies I have come accross a theory that has not recieved much recognition. I have since become deeply interested in the real bills doctrine. In order to explain the real bills doctrine I will give a hypothetical example. Imagine that there is a small town where every person uses gold as currency. If a person gives $100 worth of gold to the bank and receives $100 in paper money there will be no inflation. The $100 worth of gold is the backing for the $100 cash and gives it value. Any individual that is holding a paper dollar has the right to go to the bank and exchange it for a dollar worth of gold. Now assume that the bank lends $100 cash to a citizen who uses his house as collateral. The $100 that the bank lent would be exchanged for the citizen’s IOU and insured by the house. The IOU and the value of the house are backing the $100 dollars cash. The bank’s assets are increased just as much as its liabilities and there would be no inflation (Sproul). Either gold or bank loans can serve as a basis for money creation (Timberlake). This small town bank can issue as much currency as they would like as long as they have sufficient backing. Anything that is of value can be used to back currency. Another example of backing is tax revenue receivable. Assume that the town is certain that they will collect $500 in tax revenue within the next year. The town bank could issue $500 of cash and back it with the $500 in taxes receivable. The real bills doctrine would say that this town bank can continue issuing money in this manner without experiencing any inflation. Anything that the town can claim on a balance sheet as an asset is an acceptable form of backing for currency. The only way that inflation would occur is if the bank issued money that they did not have any backing for.
Literary Review
In the article “Predicting Inflation: Does The Quantity Theory Help?”, the authors give their opinion from a quantity theory perspective, which is one of the most popular schools of thought. This article discusses studies in which mathematical forecasting methods were used. The authors believe that the supply of money in circulation is positively related to the price of goods and the inflation rate. This is the popular belief amongst economists today.
Another source that I found was “The Evolution of Money.” This article takes a harsh stance against the current US monetary policy and the creation of paper money. The author states “for money to have worth, it must be relatively scarce, which explains why today's dollar is so unstable.”(McManus). The author tries to state his opinion as a rule, but he fails to give any reference or support for his claim. This article makes some other unsubstantiated claims.It says that whatever is used as money must possess a tangible value. Gold is the best material to use as money. Silver and platinum could be used, but they are not as good as gold (McManus). It is unreasonable to assume that gold is any better than platinum as currency. Platinum is more scarce and more valuable than gold. According to the logic that is presented in this article, platinum should be a better material for currency than gold. There was one other quote that was ill used. Irving Fisher said “"The quantity theory of money thus rests, ultimately, upon the fundamental peculiarity which money alone of all human goods possesses - the fact that it has no power to satisfy human wants except a power to purchase things which do have such power". This quote was intended to support the quantity theory, but I see it as the opposite. If money can only be used to purchase goods that satisfy wants, then paper money is just as valuable as gold. These are just some examples of the way quantity theorists defend their position that gold is the only suitable backing for money. The quantity theory of money has been seen as the correct explanation for inflation for many years. It is believed that increasing the quantity of money will cause inflation even if the money is backed. Most of the articles that I read stated that the quantity theory, unemployment rate, or other factors were to blame for inflation. Most textbooks promote the quantity theory of money and do not even mention the real bills doctrine. The ones that do mention the RBD usually discredit it (Sproul). I found very few articles that promoted the real bills doctrine. It is a lesser known theory and is not widely accepted in the economics field.
Another source that I found was “The Evolution of Money.” This article takes a harsh stance against the current US monetary policy and the creation of paper money. The author states “for money to have worth, it must be relatively scarce, which explains why today's dollar is so unstable.”(McManus). The author tries to state his opinion as a rule, but he fails to give any reference or support for his claim. This article makes some other unsubstantiated claims.It says that whatever is used as money must possess a tangible value. Gold is the best material to use as money. Silver and platinum could be used, but they are not as good as gold (McManus). It is unreasonable to assume that gold is any better than platinum as currency. Platinum is more scarce and more valuable than gold. According to the logic that is presented in this article, platinum should be a better material for currency than gold. There was one other quote that was ill used. Irving Fisher said “"The quantity theory of money thus rests, ultimately, upon the fundamental peculiarity which money alone of all human goods possesses - the fact that it has no power to satisfy human wants except a power to purchase things which do have such power". This quote was intended to support the quantity theory, but I see it as the opposite. If money can only be used to purchase goods that satisfy wants, then paper money is just as valuable as gold. These are just some examples of the way quantity theorists defend their position that gold is the only suitable backing for money. The quantity theory of money has been seen as the correct explanation for inflation for many years. It is believed that increasing the quantity of money will cause inflation even if the money is backed. Most of the articles that I read stated that the quantity theory, unemployment rate, or other factors were to blame for inflation. Most textbooks promote the quantity theory of money and do not even mention the real bills doctrine. The ones that do mention the RBD usually discredit it (Sproul). I found very few articles that promoted the real bills doctrine. It is a lesser known theory and is not widely accepted in the economics field.
Subscribe to:
Posts (Atom)