Friday, February 29, 2008

Financial Politics

Many sites have begun to discuss the 2008 election. Many of the posts I've read on financial sites seem to have a flawed understanding of the two major issues that will directly impact households and consumers - tax cuts and bailouts.

McCain's position on the Bush tax cuts is pretty simple - make them permanent (they're set to expire in 2010.) The two Democrats are inclined to let the income tax cut on those making over $200,000 per year expire. Obama offers a tax credit for working families, for homeowners, and an increase in childcare credits. The merits of the respective positions can be debated, but to argue that the Democrats want to increase taxes on the majority of middle class Americans is false.

"Bailout" is a fairly loaded word. Opponents argue that the government should stay out of things like the subprime mortgage scandal because market forces will correct for the problem. An analogy might be the easiest way I have to explain the two major problems I have with this argument.

Take a company that makes "milk." Now, this substance isn't actually milk, it's a combination of toxins that will probably make you sick. But they label it as milk and sell it for half the cost of true milk. An awful lot of people are going to start buying this. Market forces can't account for this decision making, as the people buying the "milk" aren't making a true cost-benefit calculation, since they don't know the true cost. Market forces tell us that companies will live and die on the strength and cost of their product, but the model falls apart when deception is introduced. So now we have a whole bunch of really sick people who drank the "milk." As word starts to get out and people are able to see through the deception, the "milk" company goes under, because no one wants to buy a product that will make them sick. Market forces have corrected, the price of true milk goes back to normal, and harmony is restored. Except for those sick people. Those people go back to not having any milk and are now sick to boot. Market forces have prevented new people from getting sick from the "milk," but have nothing to offer those already affected.

This is certainly a trivial analogy, but it is at least illustrative. One can go further with how market forces might over correct (for instance, consumers stop buying milk en masse, resulting in collapse of legitimate industries and skyrocketing price of milk, meaning only the wealthiest can have milk, etc.) None of this is to suggest that government regulation and assistance doesn't sometimes go too far, or is inefficient, or without it's own problems. But I see posts like this one from NCN and it strikes me that while personal responsibility is certainly something to be emphasized, sometimes it isn't enough.

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