Some Thoughts on the Economy

I got some interesting questions via email and I thought I would share them, along with my answers.

  1. Does he feel that the economic crisis make him more or less confident in Rand’s objectivist philosophy?  Why?
it hasnt changed. Im not a believer that her writings are guidelines for how governments should operate. I think her writings are motivating to the individual, regardless of how governments operate.
2.  What does he think about the growing income disparity in the U.S.?  Does he dispute the notion of a disappearing middle class?
    I dont think disparity in income is the problem. Nor do i think the middle class is disappearing. Just because Usain Bolt sets a world record every time he runs doesn’t make the other runners slow. It makes them slower than the best. The middle class can continue to move forward when those who earn the most out perform.

    If you want to know where I think we have a problem, Im happy to share. Our government doesn’t know the difference between an investor and a speculator or trader.  If we did, we would understand that we should tax the trader/speculator more heavily than the investor.

    The investor allows entrepreneurs access to capital and allows them to work with it and build businesses, which in turn build employment and do great things for the economy. The trader/speculator pushes companies to make more money now rather than invest in doing the right thing for the company. The trader/speculator dominates the stock market today, which in turn puts pressure on public company CEOs to cut jobs and play games with their financials in order to give the appearance of stability in a far from stable market. The investor understands the bigger picture and is ok if profits fall for several quarters or even several years as long as the company will maximize its return over the long run.

    The government should raises taxes significantly on profits from short term capital gains on the sale of public stocks, indexes, commodities, futures held for 24 hours or less and extend the length of time required to qualify for Long Term capital gains and reduce the tax rate on Long Term gains.  This will discourage flash trading, ETFs that move markets purely on cash inflows rather than fundamentals and also reduce the amount of speculation on commodities. It will also reward companies that act in the financial interests of long term holders and their employers. I think the impact on the economy would be far fewer layoffs as CEOs find themselves with more shareholders who think long term rather than short term. Believe it or not, there are shareholders who are fine with companies not beating their numbers if the company is making progress towards a clearly defined goal. I don’t care if the P/E of the stocks I own is 14 or 20. I want the companies investing in being a great company rather than  trying to make traders of their stock happy. Most CEOs give great lipservice to this approach, but they are so focused on marking to market their own personal stock portfolios, they emphasize stock performance over doing the right thing for the company. Taxation can change the focus on public companies and stock trading. That would be a great thing for the economy.

    1. Does he think that massive pay packages are warranted at financial institutions accepting government bailout money?

    2 types of pay. Salary and performance bonuses based on outside criteria (stock performance), and commission. if a guy is busting his ass and is great at his job. More power to him if he makes 100mm dollars. If he made his bank 300mm, he helped solve the problem, he didnt contribute to it. If an executive gives him/herself a ridiculous compensation package , thats a different story. Given is far different than earned. I dont have a problem with earned. I do have a problem with given.

    27 thoughts on “Some Thoughts on the Economy

    1. vcigan makes a point I hear often: the middle class is stuck in the mud while the wealthy are speeding ahead. The following analysis seems to show that every income level is better off since 1980, and not by just a little bit. Real income has been on the rise across the board. Keep in mind that all these statistics don’t include the fact that the vast majority of products today are far superior to those of the past, which severely understates how much better off we all are.

      Comment by uclalien -

    2. To jimgable

      I have a feeling that Mark would agree with you to some extent and want to get a bit more info so that the point you make is not just some bs you come up with but actually based on fact.
      Obviously your comment that top 1% today pays over half of all income taxes is totally irrelevant since we are talking about aftertax income. Also your point feels like a disgusting trick designed to confuse the big picture by excluding payroll and other taxes paid by vast majority of people.
      Note that I don’t give a rat’s ass about how much money top 1% makes – the more the better. What I am concerned about is the growing distance between the elite and the vast majority of the population, because that leads to destabilization of society and eventual break into banana republic or communist morass.

      I cannot discuss your point about changed tax laws since you didn’t provide any relevant facts or links.

      Comment by vcigan -

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    4. I really dont see why we should use the tax system to discriminate against speculators- whether or not your personal belief happens to be that certain markets need liquidity or not. If I decide to buy a call for CIT Group who is at risk of going bankrupt and this helps restore confidence, why shouldnt that be rewarded (or punished accordingly)? Most companies are not around for 25 years. Capital has to be acquired/ maintained and speculators are a big part of the process.

      As far as the notion that people have too much of a short-term outlook, a notion that I agree with, that is a fall-out of the tax system and welfare state, as well as the moral hazard resulting from the Federal Reserve system trying to print our way into prosperity, dont blame the speculators.

      Comment by neatnick2004 -

    5. As an aside, this comment is overstated:

      — Last CBO data I found on household aftertax income in 2006 dollars

      — Middle top 1%
      — 1979 $42.900 $337.100
      — 2006 $52.100 $1.200.300

      The tax laws changes so completely in the 80s that the comparison is weak. Now the top 1% is at least half made up of small businesses passing their profits through their personal taxes. Additionally, in the 70s everyone with high income shielded it with real estate partnerships, race horse partnerships, personal corporations and on and on.

      And it ignores that the top 1% today pays over half of all income taxes. Which is a different kind of problem.

      Comment by jimgable -

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    7. Although the idea of taxing “traders” differently than “investors,” that’s got to be an awfully difficult distinction to write into law.

      Comment by Cubs Shirts -

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    10. Mark, I’m a late comer to your stimulus plan, having only recently heard about it on Bill Simmons’ podcst.

      Three slides on slideshare give you all you need to know, product, business plan etc.

      Hope you will look at one more.

      Comment by secker0425 -

    11. Marc makes a great point about compensation based on short-term vs. long-term results. I know more than a few mortgage/real estate brokers who got rich from ’03-’07 off fees from deals that bankrupted their clients. Financial professionals should not be banking big in the short-term off deals that don’t work in the long-run.

      And if your counter-argument is “well their clients made the deal so it’s their fault”, all I can say is brokers and deal facilitators/advisors are professionals who represent that they maintain some semblance of expertise. They don’t get immunity from the results of their deals.

      Comment by mbilinsky -

    12. your comments have been right on – leave the traders/speculators out – give money to people like you that actually create wealth.

      Invest the money where it will do the most good.

      mike chlanda

      Comment by mojomikey -

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    15. Wonderful suggestions. I think another idea for reform that fits with the underlying problems you identify is requiring public companies to report their cash-flows more often than once a quarter. More of the trading would be investing in that scenario.

      In fact, I think both types of reform are necessary to stabilize the market.

      Comment by Michael F. Martin -

    16. Everybody has good ideas. It’s just too bad that they hit a wall in DC, and in state capitals too. Health care needs to be fixed, the economy, everything – but don’t count on it until we really reform our government.

      Comment by pangofilms -

    17. “Usain Bolt sets a world record every time he runs doesn’t make the other runners slow”

      Last CBO data I found on household aftertax income in 2006 dollars

      Middle top 1%
      1979 $42.900 $337.100
      2006 $52.100 $1.200.300

      So for middle class it’s barely above 0.2 improvement while for top it’s almost 4.0
      While Usain Bolt is sprinting the others just standing still?

      “The middle class can continue to move forward when those who earn the most out perform”

      It looks to me a bit misleading to continue calling it “middle” class 🙂

      Comment by vcigan -

    18. MC: Thanks for the response, you’re comments make for a good argument, except for the comment that it’s not difficult to introduce market makers.

      Who would do it? Will the gov’t mandate a group to do it, or will they give special tax exemptions to the MM’s?

      Market Makers aren’t there for the public good– they exist to make a profit.

      From MC> There are companies that specialize in being market makers. Plus, the products that the speculators are trading rarely are the ones that need liquidity. By definition, if you are a short term trader, particularly a 24 hrs or less trader, you are only going to enter into devices that give you the liquidity to exit your position !

      Comment by steveplace -

    19. Business wisdom on display. Mark Cuban for President!

      Comment by hirecules -

    20. Great post. So how do we make it happen? You are in a unique position that a few Senators would probably answer your call, but most cannot. Beyond pontificating, how do we get Congress to implement this strategy?

      Comment by anvilmike -

    21. Since we’re on the out-of-the-box thinking mode, why not do away with the concept of “publicly-traded” for stocks? This will convert speculators to long-term investors and CEOs to long-term strategists.

      Comment by saleh1najar -

    22. Mark, I almost completely agree with post with one caveat.

      I’m cool w/ guy making $100m bonus if he earns it, but not cool with bonus/comp plans that encourage short term thinking, long-term risky behavior. If I make $100m bonus one year, and then lose billions for my company the next 4 years, I still have my 100 mil (minus taxes of course). This is also the problem with hedge funds. They are incented to make it big one year, and no equivalent penalty for them if they fuck it up on any other year.

      Comment by swooshdude -

    23. I completely disagree with you about Rand’s writings not being guidelines for government. Remember she came from the U.S.S.R. and was particularly motivated by how the government operated there and similarities she found in America. I do agree that her writings are meant as inspiration to the individual and you can choose to stop at applying it there, but she also makes the case that democratic government is truly just a collection of individuals. We can’t shirk our individual responsibilities to contribute to our own governence at every level, whether through voting or giving both positive and negative feedback to those representing us in government.

      Your suggestion about significantly raising taxes on short-term gains seems so obvious (I’m not completely against taxes), has there not been at least some proposed legislation that has broached it?

      Last answer is timely: How do you feel about the new AIG CEO coming in at an annual salary of $7M? I suppose one can say he earned it previously. Proof is in the pudding though, as they say.

      Comment by benrice23 -

    24. Hi, speculator here. Of course I’m going to be a little bias with respect to your tax structure, but let’s take a look.

      You propose a tax increase on short term traders, forgetting the fact that there’s generally two types of short term traders: speculators and hedgers.

      So sure you’ve got guys at the NYMEX flipping oil contracts, but they are providing liquidity to the big energy firms so the firms can hedge against any risk. The same can be said for industries who sell contracts in corn, soybeans, sugar, and hogs.

      Ok, so maybe you weren’t talking about commodities. What about short term speculation on options? Well, those speculators help provide a market to larger firms that hedge risk through not-so-complex derivative transactions. To remove them, it would be much harder to manage risk in bigger funds– yes that means your pensions, annuities, life insurance, and mutual funds.

      Ok, so maybe not options…well what about secondaries, you know, when a company comes onto the market and sells more shares to raise capital (pyramid scheme I know)– who’s going to have the incentive to underwrite if they can’t liquidate shares quickly and cheaply?

      Ok, so maybe not secondaries… how about just straight, vanilla equity. Well if you’re a trader on a less than 7 day holding period for any equities, you could care less about the fundamentals of the stock– you’re concerned about the fundamentals of the auction process. In return for speculating you bring liquidity to other timeframe buyers who are looking to establish more of a long term position.

      So in effect if you increase taxation on speculators, you pull liquidity out of the market as the incentive to play is no longer there. When you pull liquidity out, the bid/ask widens, volume tanks, and it becomes *much* harder to manage risk– and then you’ll end up with much more wild swings in price as there aren’t others to slow buying or selling– large funds who “invest” in a company will have a much harder time going to cash, and the system slows overall. In effect by removing the incentive to trade, you cripple the market.

      From MC> First you are assuming markets need liquidity. We survived with far lower volumes for decades with out problem. Plus its not difficult to introduce market makers to enforce levels of liquidity. The liquidity argument is lame. AFA hedges, Its a hedge and hedges rarely are done on a daily basis. Extending the hedge beyond a day is no big deal. So thats lame as well

      Comment by steveplace -

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    26. The best and the worst thing about America is out slow and ineffective our government is. It allows for lots of freedom and economic growth. It also allows for people to die and for economic busts.

      Case in point: Your argument about speculation vs. investing is spot-on and potentially a great idea. Except it has been tried before, and no one can come to an agreement on taxing/punishing investment of any kind — including speculation. The Dems tried it about 2 years ago and then backed down when the GOP accused them of hating America and business.

      Maybe it’s a good thing that we don’t get anything done. But it also means that nothing smart gets done.

      Comment by markcaseyonline -

    27. Mark, I think you’re right to defend the free market thinking, but there are more improvements to the system that need to be done to prevent the financial crisis from happening again. Government needs to setup the proper incentives and then get out of the way. Right now, moral hazard is everywhere on Wall Street. You’ve written about this in the past in your CEO’s going long and public vs private owned hedge funds posts.

      Michael Lewis’ book Liar’s Poker shows many examples of screwed up incentives. Most trading firms trade stocks and bonds along with advising and managing their clients to trade the same. But what happens with the firm makes a bad bet and needs to dump a stock but no one will take it? They get their employees to convince their customers to buy it off their hands. Do the customers leave the firm? No, they have short memories and usually stick with the firm that just screwed them.

      In this instance, did the employee who convinced the customer to buy the bad stock get a docked pay or a small bonus for screwing over a customer? No, he got a huge bonus because he made the firm a ton of cash. It’s this kind of screwed up incentives that the government needs to address to protect the consumer. Something as simple as separating the firms that advise and buy only for customers and firms that do their own trading would be all it would take to correct the system.

      Comment by dereksthered -

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