Posted 24 November 2012 - 11:56 AM
I studied economics at the Vanderbilt University Graduate School of Economics back in the early 1980's. Finished the course work and was about to take the Ph.D. qualifying exam when I went to look at the old exams kept in the library. Vanderbilt kept all the old qualifying exams in every field. When I looked at the economics exams, they were all there but there were no answers (other fields gave answers except for essay questions). I went back and asked the chairman of the department why there were no answers. He told me, “the answers aren't important; it's how well you can argue your position!” I said to him, “you do realize that is the definition of bull s**t don't you?” Needless to say I wasn't offered a fellowship the following year.
The whole problem with economics is that no one thinks the issues out. Adam Smith, the founder of modern economics (see his "Wealth of Nations") defined "money" to be the most liquid capital asset. The problem with modern economics today is that they regard "promises" as a capital asset. This so distorts the view that economic decisions today are actually grossly erroneous and have been for years. In my opinion, we never recovered from the great depression in the 30's. What actually happened was that the scientific breakthroughs in the 1940's enhanced productivity to such an extent that low real incomes could be hidden. Check how much human effort goes into creation of a house today as compared to 1925.
When I was a child, I remember the first time I ever saw a "Federal Reserve Note". In the upper left corner of the bill, was a small note in black ink which said,"This note is legal tender for all debts public and private and is exchangeable for lawful currency at any Federal Reserve Bank". I asked my dad what "lawful currency" was. His answer was, "it's a buck, go spend it". I believe they removed that part either in the late fifties or early sixties. They now say, "This note is legal tender for all debts public and private" period. Most people in the U.S. don't know the Federal Reserve Banks are privately owned. They are the only banks in the U.S. allowed to print “demand notes” (which essentially constitute interest free borrowing from the public by the bank). The Federal Reserve Board was created to, keep the books of the Federal Reserve Banks under constant examination to assure that “no Federal Reserve Bank ever prints more demand notes than it can reasonably expect to redeem.” Boy they sure have held to that requirement haven't they?
I didn't find out what "lawful currency" was until I was in college and, now in my seventies, I have never met anyone who knew what lawful currency was. It is "fine silver"! A dollar has been defined by the U.S. Government three times. The first time it was "one ounce of fine silver", the second time it was "one ounce of silver with less than (I think something like 9%) impurities" and the third time the actual allowed impurities were specifically named. Essentially it has always been "one ounce of silver".
Well, silver is now about $32 an ounce which makes a Federal reserve dollar worth about three cents in "lawful currency". By the way does anyone out there comprehend what stands behind U.S. currency? It's taxes... The government requires one pay their taxes in dollars but they will take "legal tender". Who the hell would consider paying in real dollars? Well we aren't alone in this. The British pound note is supposed to be for one pound of sterling silver and that means a British pound should be about 16 real U.S. Dollars or about 512 Federal Reserve dollar-notes. And what is it really? Something less than three??
Back in the 1970's, when I had my own business, I thought U.S. taxes were unfair to both the poor and the high earners. The “rich” weren't taxed at all, if you started the year rich, you could just invest your money in tax exempt stuff and get around the issue but if you started the year off broke and earned a substantial amount, the government took most of it. It was very difficult to “get rich”. I thought the issue out and decided the following tax rate would be the fairest thing possible. I call it “tax on discretionary income”.
First, the taxes need to pay the government expenses. So one starts with the actual government budget as the amount to be raised. Then give everyone exactly the same amount to be relieved from taxes. That number should be the average cost of living: i.e., the average cost of food, clothing, transportation, housing and medical expenses. Since all that is required is a decent estimate of that number, take last years averages (or maybe the year before that if the numbers are hard to get). Let everyone just subtract that from their gross income and then set the tax rate high enough to pay the government's expenses. It has everybody paying exactly the same percentage of their discretionary income. You want to live here you should be willing to pay your share of the expenses but it shouldn't come from non-discretionary income unless it is absolutely essential. If you are poor, you can live at below average levels and save the excess and, if you are rich, you can live high on the hog if you want, but do it with taxed money.
So I obtained those numbers and tracked the required percentage for several years. At the time the required tax would have been about sixty percent. However, sometime around 1980, it went over 100%. After a couple of years at that level, it was clear that my idea had no legs. But it did point out some interesting things: people could not continue to live at the “average level of consumption of food, clothing, transportation, housing, and medical expenses! As I remember those years, it was housing and medical expenses which were reduced the most. The government handled it by borrowing more money which led directly to what was called the “Carter Inflation”. Had the income tax been structured they way I did it, the consequences of their spending would have been obvious. But those are things people would rather not see.
So the result was, as I call it, capitalization of promises. Governments have done that over the centuries. In the long haul, governments never live up to their promises. The dictatorship of Sulla in Rome flowed essentially from exactly the same phenomena as did the rise of Hitler in Germany.
And it will all happen again!
Have fun -- Dick