Interpretations of the April 29th FOMC Statement

There are a number of ways to interpret the April 29, 2009 FOMC Statement. Below is the first paragraph of the FOMC Statement followed by two different translations. The literal translation is perhaps the most accurate.

First Paragraph of the April 29th FOMC Statement:

"Information received since the Federal Open Market Committee met in March indicates that the economy has continued to contract, though the pace of contraction appears to be somewhat slower. Household spending has shown signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Although the economic outlook has improved modestly since the March meeting, partly reflecting some easing of financial market conditions, economic activity is likely to remain weak for a time. Nonetheless, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."

A rosy interpretation of the FOMC Statement:
The contraction of the economy has slowed. Household spending is stabilizing. The economic outlook has improved since March because of easing of financial market conditions. The committee anticipates a gradual resumption of sustainable economic growth.

A literal interpretation of the FOMC Statement:
The economy has continued to contract. Household spending remains constrained by ongoing job losses, lower housing wealth, and tight credit. Weak sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories, fixed investment, and staffing. Economic activity is likely to remain weak for a time.

When criticizing the FairTax plan, be sure to avoid these nonsensical arguments

I have heard a lot of arguments against the FairTax plan. Some of the most common arguments are so nonsensical they can make you come across as being either uninformed or unintelligent. Below are some arguments you want to avoid when criticizing the FairTax.

Don't criticize the FairTax for being tax revenue neutral. The FairTax system doesn't necessarily have to be tax revenue neutral. Criticizing the FairTax for being revenue neutral is as nonsensical as criticizing a new thermostat because it can be set to the current room temperature.

Don't complain that the FairTax is not progressive. The prebate makes it so the FairTax plan is highly progressive. The prebate makes it so people spending less than the poverty level will pay zero federal taxes. It is also interesting to point out that one of the taxes the FairTax is designed to replace is the highly regressive payroll tax.

Think before you complain about how the FairTax hurts certain groups. Keep in mind that the FairTax would be introduced as revenue neutral so for every hurt you complain about there is an equal benefit given somewhere else. Also, groups that currently get special treatment in the current tax code are most likely to be among those who make out slightly worse. Do you really want to defend the special interest groups politicians have catered to in the current 60,000 page tax code?

Don't complain about how people will cheat the FairTax system. There will be people who cheat the FairTax system just as there are people who cheat the current system. The real question is which system will result in less overall cheating and easier monitoring. Strong arguments can be made that the FairTax system will be superior in this regard because the number of tax collection points to guard against cheating would be reduced from all people and all businesses down to just businesses selling retail.

Don't debate whether the consumption tax rate is 23% or 30% unless you side with the FairTax position. The FairTax logic is correct on this issue. Find the smartest and most honest mathematical mind you know and give them the task of fairly comparing a federal tax on income to a federal tax on consumption and they will confirm this for you.

Example: With income tax, if someone has $100 of their income taxed at 23% they give $23 to the government and have $77 remaining to buy something. Similarly, with the FairTax, if someone has none of their income taxed and then pays $100 for the same $77 something mentioned above and the government gets $23 then these two scenarios amount to the exact same amount of taxation. If income tax in this example can be referred to as 23% then so should the FairTax.

Don't criticize the FairTax by saying it will never pass. The merits of the FairTax do not depend on whether or not politicians pass it. Instead of thinking about whether or not it will pass, I believe it is better to think about why some politicians might not want to pass it. Why might politicians cling to all 60,000 pages of our current tax code? It probably has a lot to do getting votes, contributions, and appeasing lobbyists.

Logical Reasons Against The FairTax

OK, so what then is a logical and intelligent argument against the FairTax?

I do have one pretty major problem with the FairTax proposal. I believe people who currently have a lot of money will be hurt by the implementation of the FairTax plan. These people paid income taxes when they earned all that money and then under the FairTax plan they would also have to pay consumption taxes when they spend that same money. I have read arguments by FairTax proponents as they try to tap dance around this issue, but I would prefer if they would just admit that existing wealth will take a slight hit with the FairTax plan. It will probably help their cause to admit this especially since nobody seems to care if the rich are financially hurt. I don't feel sorry for rich people, but it is worth acknowledging that what rich people can consume with their wealth will be taxed more heavily with the FairTax plan.

I also have another problem with the FairTax plan and it has to do with exports. One key component in the FairTax plan is to make businesses pay no federal taxes so that exports are free from embedded taxes that otherwise would hinder the competitiveness of American exports. The FairTax cheerleading theory is that the FairTax plan will make American exports competitive which would create jobs and encourage both foreign and domestic investments in America production. I don't mind jobs and increased investment in productivity, but I have a problem with how zero taxation on exports isn't representative of the costs that went into producing the products being exported. For example, the products being exported benefit from various federal expenditures such as roads, electric grids, education, security, regulation, etc. Selling these exports to foreign countries without factoring in any of our nation's federal expenses seems to me like America taxpayers giving to the world through exports. However, since America has had a massive trade deficit for decades, my concerns about zero federal export taxation is a mute point because it looks like will benefit more from collecting taxes on imports.

Conclusion

This blog entry is motivated out of a genuine belief that I don't want people to cling to nonsensical arguments especially with regard to a proposed system with the potential of the FairTax plan. This blog entry does not specifically focus on the positives of the FairTax plan, but you can read many positives about the plan at FairTax.org. In my opinion, that site does cheerlead a bit much, but it is forgivable because many of cheers in favor the FairTax plan are justifiable.

Just How Bad is Our Government's Spending Problem

At the time of writing this our national debt is $11.2 trillion (and counting). Another way of looking at this is to realize that the share of debt for each man, woman, and child in our country is over $36,500 each. For a typical family of four this amounts to $146,000 of debt. A sizable portion of your tax dollars go to paying interest on this debt.

Roughly half of our national debt was accumulated under the Bush Administration. Some notable expenses were the war on terror and the wars in Iraq and Afghanistan. Bush inherited a budget surplus and left office with the largest federal deficit ever.

One key number I am fascinated by is the federal deficit as a percentage of the GDP. I think it is a good number to compare deficit spending for different years. To get this percentage I take the federal deficit divided by the GDP using this data from usgovernmentspending.com.

Over the course of the Bush presidency the worst year for this number was in 2004 when the federal deficit was 3.5% the GDP. In 2008 the federal deficit was 3.2% the GDP which is not as bad but close to it. How does Obama compare?

Under the Obama administration the 2009 federal deficit is planned to be a whopping 12.3% of the GDP. This insane deficit spending of 12.3% GDP is more than double the worst value from any year from 1947 through 2008. The closest comparable year for excessive spending was 1983 where the federal deficit was 5.9% of the GDP. Another way of putting this is to say deficit spending is twice as bad now as it was in the worst year over the past six decades.

At the rate of spending planned by the Obama Administration our national debt is becoming a good bet to double during Obama's watch. Perhaps even more alarming, our national debt is on pace to exceed our GDP in a few years. The last time America's national debt exceeded its GDP was during World War II. Fortunately back then we were able to overcome this debt burden because our economy was in a position to significantly outgrow our debt. Our debt still grew back then but our economy grew faster, a lot faster.

Unfortunately for us now, however, our economy is not well positioned to outgrow our debt. We have an aging population with baby boomers already starting to collect social security. Our GDP growth rate in 2009 is looking to be lower than any year over the past six decades. Our economy is addicted to foreign oil which will likely hinder our economic growth because oil prices will surely rise and create a downward pressure as the economy starts to shows signs of any significant growth. Unfortunately, spending money at levels not seen since WWII does not guarantee we will get the economic growth we saw after WWII.

Instead of comparing our current situation to ourselves back in the 1940s, I believe it would be more appropriate to compare ourselves with another highly developed economy that has many similarities to us. The recent economic history of Japan offers us a crystal clear window into what our future might look like if we continue to try and spend our way out of the current economic situation.

Japan's Nikkei average peaked in 1989 and the peak was followed by a major correction. Similarly, the Dow peaked in 2007 and that peak was also followed by a major correction. Japan tried to spend their way out of their economic crisis just as we are trying to do now. How did all this spending work for Japan? Well, in 2009, two decades after the Nikkei peaked, Japan's Nikkei hit a new 26 year low. Also, in 2010 Japan's debt as a percentage of GDP is estimated to be 200%, a massive burden on their economic future.

Japan is a crystal ball that shows where excessive government spending will lead us. Our economic situation now is similar to Japan's situation back in the early 1990s. Unfortunately, our government response to spend, spend, and spend is hauntingly similar as well.