Capitalism, like a gun or a hammer or a nail, is a tool. It’s a system. It has zero inherent morality. Morality only comes into play when humans decide to use those tools. A hammer that is used to build a house through Habitat for Humanity would be a moral use of that hammer, most people would say. A hammer used to break your neighbor’s window is immoral, unless you are breaking the window to get him out of a burning house, in which case it is moral again. A gun used to commit a crime is used immorally, a gun used to protect yourself from an attacker is seem by most people as a moral use of a weapon. In all of these examples, the objects are just tools, free from goodness or badness until they are used in some manner by people capable of being good and bad.

The free market is the same way. It’s a tool. When it is used by businesses to make both the business and the customer better off, most people would agree that it is a moral transaction. When a private equity firm swoops in, liquidates a business, lays off all the employees, and enriches nobody but the initial investors, people may debate the morality of such a thing. It’s not an attack against the amoral system, it’s an attack against how the system is being used. Saying critics are “attacking capitalism” in this case is as absurd as saying people are “attacking cars” when they fault criminals for drunk driving.

As I’ve said many times before, I happen to think that the free market is a mighty useful system for a lot of things. I won’t, however, ascribe morality to it a priori. It’s not inherently moral; it’s not inherently immoral. What matters is what people do within and throughout the system. We can all agree to use a system while still debating the morality of using that system in certain ways. It’s perfectly acceptable to try to ban things largely considered “wrong” even if they are allowed within the rules of the free market. Defining “right” and “wrong” and getting that balance right is difficult, of course, but it’s a good and healthy debate. I welcome an honest debate about the merits of private equity firms, of CDOs, and of payday lenders, to name a few (and there are good arguments on both sides of the debate for those three examples). I shun, though, any attempt by people to close off the debate by claiming it’s an attack against the free market. And that is exactly what Romney is doing.

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• Currently Listening To: "Long, Long, Long", The Beatles
• Currently Reading: "The Compass of Pleasure", David J. Linden

Paul Krugman has a very good article on government debt. Government debt is not like owing a mortgage to the bank. For most government debt, the debtor and the borrower are one and the same. As a taxpayer, I am “responsible” for a portion of the U.S. debt. But I also own a portion of that debt in my retirement account. Much of that debt is similarly owned by fellow citizens. In addition, as the blog post points out, we own a lot of foreign government debt too, and overall, we haven’t had a huge net increase in foreigners owning U.S. debt. People may complain about how China and Japan “own” the U.S. now, but that’s not really true. We own ourselves.

Miniscule bond yields mean that nobody is clamoring for us to pay the bill soon. The best analog to the U.S. debt problem is not a family that is six months late on their mortgage payment. Instead, it’s probably the credit card that thinks so highly of us that they are going to extend our 0% teaser rate a bit longer. That makes a big difference as to what course of action to take.

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• Currently Listening To: "Take Me to the River", Talking Heads

Prior to this regulation, interchange fees were totally hidden from consumers. Retailers paid them but couldn’t charge customers more for using debit cards, and banks pocketed the money. Few people outside of the industry had even heard of interchange fees. When fees are hidden in this way, it is impossible for the market to work properly: consumers can’t decide how to best spend their money. If you didn’t use debit cards, you were essentially subsidizing those who did.

People are arguing that these news fees are a net negative for consumers, because retailers aren’t going to be lowering their prices due to lower interchange fees. In the short term, perhaps that will be true. But consumers will benefit in other ways. Some retailers who chose not to accept debit cards in the past due to high fees may now accept them. Those who never use debit cards will no longer subsidize those who don’t. Banks that charge fees for debit cards may lose customers to those that don’t.

It’s also important to remember that a lot of the perks that banking customers have received in the past have been ill-gotten. Critics of the new debit card fees argue that the change hurts low-income customers the most. Perhaps, but so did other bank revenue-raisers of the past, such as reordering transactions to maximize overdraft fees, or just charging high overdraft fees outright. All those reward cards and benefits cost money, and more often than not, the money has come from low-income consumers. It may not be fun to lose those rewards, but I’d rather lose rewards than let banks continue to prey on those people who live from paycheck to paycheck.

Finally, it should be noted that using debit cards is often the worst way to pay anyway. Credit cards offer far more protections in case the card is lost or stolen, and as long as you pay off your balance in full every month they don’t cost a dime in interest. For people who don’t want to use credit cards, just pay in cash: it’s essentially what a debit card allows you to do anyway. Since banks aren’t charging their customers when they use their cards to withdraw money from an ATM, just get the cash.

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• Currently Listening To: "Cosmic Charlie", Grateful Dead

There are really only two policy solutions to this problem. The first is inflation to erode the nominal value of this debt. Not just price inflation, wage inflation too so people take home more money and therefore their debt payments become a smaller percentage of their income. The second solution is some kind of debt forgiveness program. For example, mortgage cramdown in bankruptcy proceedings is a very easy one. I thought up another one today, this one a program to help underwater home owners refinance their mortgages. Say a person had a $160,000 mortgage on a home now worth only $135,000. No bank is going to refinance that, so the program would be for the bank to refinance the $135,000 and the government to kick in the other $25,000 to cover the original mortgage. That $25,000 would be a loan from the government to the homeowner, which would be forgiven if they stayed in their home for 7 or 10 years or whatever. Again, simple, relatively easy to implement, and effective.

The problem with these policy solutions is that they are not fair. To be specific, they “reward” people for buying too much how, being careless with their finances, and so on. To a certain extent, this is true. So understandably, many people who feel they made responsible choices with their money would not be thrilled about programs like these. Remember, the original Tea Party rant was Rick Santelli going off on just such a mortgage bailout (Once again, I’m going to sidestep the Tea Party issue for now). I bet that if such a program were polled, it wouldn’t receive majority support, although I may be mistaken.

Just because it isn’t “fair”, however, doesn’t mean it shouldn’t be done. As Paul Krugman and other economists point out, economics is not a morality play. The free market does not reward the virtuous and punish the wicked (incidentally, this is why believing in free market absolutism without any moral structure laid upon it is ridiculous). What we should be concerned about is not trying to be fair, but trying to get the economy moving in the right direction again. Fairness can wait for a bit, at which time it certainly should be addressed.

I consider myself to be pretty fiscally responsible (unlike this Tea Party congressman — sorry, couldn’t pass that one up). I don’t have any debt other than my student loan, and I stayed away from the housing market on purpose when I thought it was in bubble territory. I’m not going to get any direct help from a plan to reduce consume debt. However, I will get indirect help from a better economy, which is the point of programs like these. I’d rather live in an unfair world with 5% unemployment than in a world where the wicked are punished with 9% unemployment and foreclosures.

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But not all markets are as transparent or free. One in particular (that I’ve already complained about) is the financial market. It is for this reason that the Consumer Financial Protection Bureau (CFPB), so widely hated by Republicans in Congress, was created. Not to destroy innovation. Not to limit consumer choices. Instead, to make the market for financial products more transparent and to give consumers the information they need to make informed decisions.

Quick poll: how many of you with credit cards know your current interest rate? Late fees? Billing methods? Or, when it comes to mortgages, any early-payment fees? Points? If you have an ARM, how much can it go up each cycle? What’s the maximum rate? How much would you be paying in the worst case? These are big decisions, far more weighty than deciding whether to go to McDonald’s or KFC for dinner, but in reality consumers often have more information easily available for simple transactions. You’ll never buy a Happy Meal with a contract that has multiple pages of fine print. But credit card issuers often revise their Terms of Service and send out little booklets that just end up in the trash, unread.

One way to improve this state of affairs would be to require products like mortgages and credit cards to have short, standardized, and easy-to-understand summary reports that clearly explain all the terms and conditions. If I were king, I would create a one-page form for a mortgage that lists interest rate, term, early-payment penalty, total cost, total interest, and various scenarios if it is an ARM. And lo and behold, this is exactly what the CFPB is doing. About time, I say. In fact, there needs to be more of this.

Will requiring this information to be given to consumers destroy the financial marketplace? Of course not. The information is already there, just buried in the legalese; this will simply require the information to be consistently and simply presented. Which is the real reason the financial markets are against this: if consumers can easily compare products, then they may realize they can get a better deal elsewhere. Competition is great until you are losing your customers to another business.

For us consumers, though, it’s nothing but a benefit. The more transparency complex markets like the financial market have, the better.

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• Currently Listening To: "Let It Loose", The Rolling Stones

The Obama economic team hasn’t been hitting all home runs with regards to dealing with the current crisis. “Cash for Clunkers” and the new homebuyer tax credit weren’t exactly great ideas from an economic point of view. But even with Obama’s missteps, the comments of Will and Greenspan show that the alternative is much worse. It’s as if a large chunk of our political leadership wants to give Herbert Hoover a second try. This is what scares me the most about a possible Republican takeover in Congress this year.

Long-term unemployment is a crisis. Deficit chickenhawks (to borrow a phrase from the Iraq War) like to complain that budget deficits affect generations, but so does long-term unemployment. When people are unemployed for a year or more, they lose skills, they become less employable, and worst of all, their kids suffer. This leads to poverty, and more importantly, lower tax revenues, for years. How will we solve the budget deficit when everybody has to move to a $7 an hour job? How much in taxes does that generate?

We can put at least some of these people to work. Our national infrastructure is crumbling. Build some bridges, fix some sewer systems, create a smarter electric grid. Anything to get people back to work, maintaining their skills, and providing stability for their families. Hooverism didn’t work the first time around, why should we try it again?

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• Currently Listening To: "Crosseyed and Painless", Talking Heads

What’s the problem? To answer that, it helps to first get an idea of why the financial system exists. In the simplest of terms, banks and the entire financial system exist to help move capital where it can do the most good. That "capital" can be anything from my checking account to my retirement savings to the multi-million dollar revenues of gigantic companies, and, in turn, it can be used on anything from mortgages to student loans to bonds to venture capital, just to name a few.

If I have extra money lying around, I could seek out investment opportunities, maybe give somebody an educational loan, or a mortgage, or invest in a business startup. This would cut out the middleman, but it would also require a lot of work on my part: I’d have have to check these applicants out, evaluate their finances, determine what a fair interest rate or percentage of equity would be, stay on top of collections, initiate legal proceedings if they fall behind, and so forth. It’s possible to do this (and the internet has made it a lot easier, with sites such as www.kiva.org allowing for the matchup of lender to lendee), but for the majority of people, it’s not worth the hassle.

That’s where banks and other financial institutions come in. They serve as middlemen in this process. I give them money, and they loan it back out. A local bank or credit union is going to take my money and probably turn it into home mortgages or business loans. If I have more money to invest, I could do things like buy corporate bonds, stock, or invest in hedge funds that do the same. They handle the details, and often provide research, information, and advice. For these services, and for acting as middlemen, they get a cut.

In the process, the goal for everybody involved is to put that money to good use. My savings account money goes to a family’s mortgage so they can buy a house, live in a good neighborhood, and go to good schools (sounds very "Bedford Falls", doesn’t it?). Or it goes to somebody who is starting a new business and adding to the economy. These are small examples, but the process scales up to companies floating bonds to build a hundred-million dollar factory that will employ hundreds of workers. In all these examples, I get a return on my investment, the people receiving the money put it to good use to better themselves and the economy, and everybody benefits.

Of course, there is risk involved. Perhaps the mortgage is going to somebody who can’t pay their bills, or the small business goes under. Failures are inevitable, but even in failure there is knowledge to be gained. Failure tells us that a particular allocation of capital isn’t a good idea, and so tells the market to redistribute it to other, more beneficial areas.

Where did it go wrong? In in ideal situation, banks are supposed to only be the conduit, the pipe that moves money into productive activities. However, banks realized that they could get more money by not merely directing the flow of capital to other industries, but to themselves. The flow of money became not a straight line, but a maelstrom swirling from bank to bank. Money was not invested in new factories and new technology, but in new financial instruments like CDOs and creating algorithms to programmatically trade better than the competition. Finance, instead of being a means to an end, became an end in itself. That is the true source of these insane bonuses: with that firehose of money directed not at other industries, but at itself, there is simply too much money sloshing around. It is inevitable that much of the money will go to employees in the financial industry.

For this to change, and for those bonuses to become a thing of the past, banking must "become boring" as Paul Krugman argues. Instead of directing money towards financial "innovations", which are of dubious benefit to anybody not immediately involved in the financial sector, money should be directed towards those endeavors that provide profit and social benefit. There’s a whole host of things that we could to to push finance in this direction: regulation of some of the more dangerous derivatives, a tiny (such as 0.25%) transaction tax on all stock trades that would discourage the programmatic day-trading that is endemic, or perhaps a new, super short-term capital gains rate (say for assets held less than 30 days) that would discourage short-term speculation and encourage long-term investment, which is what the finance industry is supposed to foster.

Obviously, there will be plenty of people who will fight any attempt to roll back the huge gains in the size of the financial industry, which has more than doubled in relative size in the past 30 years or so. Resistance doesn’t just come from the people making those bonuses either: opponents of reform argue that regulations will do everything from eliminate credit card reward programs to make it harder to get a mortgage. To a certain degree, this is correct. However, I would gladly give up my credit card cash back program if it meant a return to a saner, less dangerous, and far more boring financial system.

Fortunately for all of us, the state of Minnesota is pretty good when it comes to collecting statistics on taxes and spending. One of the key measurements is what is known as the Price of Government. Simply put, this is the total of all state and local taxes (income taxes, sales taxes, property taxes, excise taxes, fees, the works), divided by the total statewide personal income. In short, it shows what percentage of Minnesota income is sent to all state and local levels of government in the form of taxes.

The Price of Government helps us understand whether taxes are “high” or “low” relative to previous periods in the state’s history, and what the trends are. This information is generated in the state economic forecasts. Here are the numbers for the November 2008 economic forecast, the most recent available with Price of Government Information:

From that graph, it looks like things bounce around a bit at random, mainly between 15.5% and 16.5% of state personal income. In general, though, on this graph it looks like if we were to raise taxes, it would push us above where taxes have been in the past, above that 16.5% threshold, the maximum on this graph. But is that the maximum? As a matter of fact, it isn’t. Let’s now look at the November 2002 economic forecast, which shows data going back even further:

Now this is interesting. Prior to 1999, and for much of the 1990s, the price of government was significantly higher, above 17% for every year between 1992 and 1998. It was only after the huge budget surpluses and consequent tax cuts in 1999 that the price of government fell substantially.

This demonstrates that taxes in Minnesota as a percentage of personal income are up to two full percentage points from their peak in the 1990s: it can hardly be said that the tax burden now is more onerous than it has been in the past. Even the recent peak of 16.5% in Fiscal Year 2006 is more than a full percentage point below the 17.7% peak in Fiscal Year 1994. Moreover, the 1990s were not exactly a period of low economic growth. In fact, as everybody remembers, it was a period of sustained growth. This puts quite a few holes in the “higher taxes would destroy economic growth” theory that many conservatives espouse.

So much for the aggregate tax total, now on to who is paying those taxes. For this, we can look to something called Tax Incidence. This shows us how much people pay in taxes based on their income. Every two years the state does such a study, and here are the results for the most recent, the 2009 Tax Incidence Study:

The first decile, the 10% of people who make the least amount of money, include many people such as teens and college students who work part-time; this is why the first decile is so clearly out of step with the others in terms of tax incidence. The rest of the deciles, though, show a pretty clear pattern. The group paying the highest percentage of income in taxes is the fifth decile, right smack in the middle (this group is made up of people making approximately $35,000 to $45,000 per year). As you make more money, the percentage of your income that you pay in taxes decreases, until you reach the top 1% of income earners, who are paying taxes at a lower rate than all other deciles.

Let’s state that again: If you make over $480,000 a year, you pay a lower tax rate than somebody making $20,000 a year when you consider all state and local taxes. The income tax is not progressive enough on the high end to make up for the regressivity of sales and property taxes on the low end.

This information may be somewhat technical in nature, and thus not reported in the media very often, but it is pretty important context for evaluating claims about taxation, especially taxation on the wealthiest people in the state. I think it would be helpful if all evaluations of tax proposals included this information so people could form educated opinions of them.

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