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3 was a lucky number

Amity Shlaes wrote a fascinating article in the WSJ on FDR and the notion of confidence, part of which is excerpted below:

Over the summer of 1933 ... Roosevelt launched a novel gold purchase program. The plan was to drive up the general price level by buying gold. Each morning, FDR set the gold price target, personally ... theoretically, Roosevelt's idea of reflating can be defended... 

But the exposure to investors that Morgenthau was getting through the gold purchase project of 1933 was already teaching him something. Investors didn't like the arbitrariness. It took away their confidence. One day Morgenthau asked FDR why the president had chosen to drive up the price of gold by 21 cents. The president cavalierly said he'd done that because 21 was seven times three, and three was a lucky number.

Sound familiar?  Arbitrary decisions make for uncertainty which now permeates the entire  process of our nation's allocation of capital and paralyzes the wealth creation process. Consider arbitrary nature of 

  • Cash for Clunkers, why cars? Why not computers? Or your children's education? Lawn mowers? Dishwashers or drilling equiptment? Hogs? Who knows? Why should you subsidize your neighbor's new car when your elderly parents need financial support? And why the $4,500 rebate? Why not $4,600 or $4,450?
  • The first drilling moratorium, opposed by the presidential commission but misrepresented by the administration, was reversed by the courts leading to a second moratorium, no doubt to be litigated but wait now its "OK, guys go ahead!" But wait, you need extensive recertification. Do you think owners of scarce rigs will hang around and wait for the drama or hit the bid to go abroad?  
  • Or consider the pure whimsy of estate tax, an inverse case of 'now you see it, soon you won't', 0% today, 55% Jan. 1, 2011, or maybe not.  
  • Or consider the unfathomable complexity of the entire code which according to CCH the US Tax Code now approximates 67,505 pages.
  • Or consider the whimsy of administration: as of this writing no one knows the tax rates to be effective for personal rates next year.
  • What happened to the rule of law governing status of the senior secured creditors of Chrysler debt? Extra legal persuasion? Danny Ortega style?
  • The full 100% payout of counterparties of AIG's credit default swaps courtesy of the US taxpayer.
  • The mysterious & all powerful Fed and the current structure of manipulated interest rates that penalize risk averse savers, among them particularly the elderly and those who can not prudently tolerate higher risk assets?
  • Rationing and arbitrary benefit decisions under the new national health care plan.
  • The arbitrary reallocation of some 34% of US corn production to ethanol corn which had the unintended consequence increasing commodity prices (~doubling corn farm prices) & inducing starvation in emerging countries that relied on non-ethanol corn.
  • The unfathomable complexity of Dodd-Frank: 2,319 pages requiring multiple new federal entities yet to be created and 248 regulations yet to be written (nearly 100 at the SEC alone) and 67 studies to be conducted. Plan around that, my small business friend.
  • The destruction of the value of the US$ and the incessant mau-mau'ing of impending trade wars.
  • Congress exempting itself from compliance of law & regulations imposed on the citizenry.
  • The wanton and willful destruction of the most important element of our economy, small business and farms, by operation of  the inheritance tax. No business survives the loss of half of its capital every generation.

Our problems arose from the cumulation of distortions and mis-allocations of capital mostly induced by the corruption of law, regulation, and leadership. We concede some base level of manifest error, but in our view it is corruption operating in absence of appropriate checks and balances. When countries mis-allocate capital badly over time, the standard of living declines. Productivity counts. The primary problem is that our tax code and budget process have become instruments by which Congress monetizes its ability to dispense economic favor. You don't need 67,505 pages and the K Street lobbying industry to treat people equally. And everybody knows it.

Consider the sheer magnitude of the unproductive burden of tax compliance on citizens and business alike. We now have whole industries and legions of tax lawyers and accountants dedicated to intermediating an unfathomable, incomprehensible extraction of wealth by the government where by compliance is impossible by virtue of complexity, so enforcement becomes discretionary. And out of this process comes not one wit of real production, not one loaf of bread, not one bucket of bolts, not a single chip or Ipad. Nothing but sludge and friction and now sobering, if not heartbreaking, macro costs. Keep it simple, so everyone can understand the deal without engaging a Wall Street law firm.  Eliminate  Congress' ability and inclination to corrupt itself and the process so essential to the well being of our country.

Until then three is still a lucky number.

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