Archives for If I Ruled the World category
12
Oct
Posted in If I Ruled the World by Roger |
There is nothing wrong with your computer; do not attempt to adjust the screen. I am now in control. I control the vertical, and the horizontal… Ah, the Outer Limits. A fitting beginning to this week’s post, as you once again find yourself exploring a world where I, Roger, The Amateur Financier, am in charge. Luckily for you, I’m a benign dictator. Mostly.
This week, we take on one of the most daunting tasks facing anyone trying to remake the entire financial sector: education. Education is very important, particularly when it comes to money; one of the first things almost any financial adviser will suggest is to get educated about your situation, your goals, and the various financial tools available to you. The problem is that there are few areas, save perhaps religion and politics, where there is more disagreement on what should be taught (if anything) and how it should be handled. Between religious differences on what investments are acceptable and unacceptable, personal feeling from the students (and their parents) on what should or shouldn’t be taught, and possible involvement from investment related companies, attempting to get their products before a captive audience, trying to strike a balance that pleases everyone will be nigh impossible.
School's in Session! Now, Quiet Down!
My solution: don’t try to strike a balance. Instead, present the basics of money management, saving, spending, and investing as well as possible, avoid the truly big pitfalls (i.e., don’t claim that all debt is inherently evil OR that you can leverage your way to riches in just a few short years), and above all, try to give the students the information and skills they need to do the research and make the choices that are right for them. That was the goal I attempted to reach with my Financial Lesson posts, and it’s a good approach to take with students of all kinds. So, let’s take a little peak into the curriculum at Roger’s school of personal finance, shall we?
My (Lesson) Plans
Home Economics – No, not the type where you learn to cook a meal from scratch or to sew your own clothing (although both of those are skills that more people could definitely use). Instead, here the students would learn about creating a budget, setting up savings and checking accounts, balancing their checkbooks, and generally using their money in a smart manner during their daily lives. It’s a shame that so many people even now cannot balance their checkbooks that it’s practically a cliche, so why not try to tackle it at the source?
Financial Literacy – Given the sheer overwhelming amount of financial products and potential investments out there, the best thing to teach students is how to read up and find out information about them. Explaining the information presented in stock listings and mutual fund prospectuses, as well as how to compare and evaluate them, would go a long way towards making the students more skillful and thoughtful investors when they graduate.
Budgeting - This would probably fall under the category of Home Economics, but well, it’s a very important subject. Teaching the students how to use credit cards properly (if they opt to use them at all) and that you must avoid building up more debt than you can afford to comfortably finance will go a long way to prevent any future credit crises. Letting students know that there is a trade-off involved in all financial decisions, from whether to spend or to save to choosing between all their various wants, will help them to keep their eyes on the important goals they have in life.
Investing – It’d have to be handled fairly delicately; there’s a lot of area here where some parents will try to have your head if your contradict their beliefs/wishes. Sticking with the broad principles, such as how to compare investments and the trouble with beating the broader market, will go a long way to helping the students plan for their future. Noting the average returns and potential risks of various types of investments like stocks and bonds will give the students a standard for comparison for the promises of other, more unusual vehicles. Which brings me to the last, but perhaps most important point:
Bulls*** Radar – Probably the most important financial tool for a student to develop, and also one of the hardest. There’s no surefire method to teach someone to catch all the tricks that potential con artists will use, but knowing what sort of return is realistic for a given level of risk, knowing to thoroughly investigate any investment, and knowing to run when someone offers high yields with no risk are all good starts. Add in an understanding that every investment has its pros and cons, and that there is a balance between risk and potential return, and you will have students prepared for the investing world.
That in a nutshell is how to improve the educational system when it comes to personal finance; change the curriculum to reflect these policies, and watch the students’ understanding of economics soar!
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5
Oct
Posted in If I Ruled the World by Roger |
Alright, it’s time to confront the elephant in the room (and the donkey, as well): there’s no way I can hope to reform the budget and tax processes without dealing with social welfare programs. They make up a large portion of the nation’s spending, and as the American population grows older (and we increasingly expect our government to become ever more generous with the handouts), the point will come where they simply outpace our ability to pay for them. If we hope to get the budget under control, welfare must be reformed dramatically.
There’s where I come in. Using all my powers as the (sadly, fictional) ruler of the land, it is time to lay down a few decrees and change the welfare system for the better. Luckily, I don’t have to create a brand new system from whole cloth; there are more than a few examples that already exist. I’ve found one in particular that seems to meet all my needs, and then some.
My Solution
-Scrap The Current System: Rather than trying to patch over the problems with welfare and other government aid programs, a process that has been going on since at least the time I was born, I’m going to burn everything to the ground and start from scratch. With few exceptions (Social Security, military and civil service pensions), all checks currently going out from the government will cease. Before you get up in arms too much, they will be immediately replaced with the new system…
-Institute a Negative Income Tax (NIT): Essentially, if you make a small amount of money (or none at all), rather than the government taking away money at tax time, you’ll end up being paid by the government. You won’t receive a huge amount from this negative income tax; the amount will be somewhere in the neighborhood of the poverty line, or something like $8,000 for each adult and $4000 for each child in the household. Either way, the amount will be indexed to inflation to allow for future growth.
Not the Kind of Welfare We Want
-Have the NIT Decrease Less Than Other Income Increases: You might justifiably ask at this point, ‘why would anyone both to work a low wage job if (a) they are getting a fairly decent amount of money from the government and (b) that money will disappear if they have another source of income?’ Well, that’s a bit of a trick question; the NIT amount will not drop to zero if someone in the household gets a minimum wage job. Instead, for every dollar that the welfare recipient brings in, the amount he or she receives will decrease by 25 to 50 cents. In this way, there will be smooth income growth as earned income begins to replace the NIT income. The incentive to work rather than relying solely on the NIT will be present, for anyone hoping to increase their income.
Administer the NIT Through Specialized Debit Cards: An attempt to ensure that the money distributed through the NIT goes to helping the recipients to acquire things like food, water, and shelter, without worries that it will find its way to less reputable parts of the city. Not to imply that all welfare recipients are criminals or drug dealers, however, some of them undoubtedly will be, by the rules of probability if nothing else, and minimizing the ease with which government welfare can travel into the black market is one step in the right direction to decreasing such problems. To simplify things a bit, though, it would be possible to arrange for a direct deposit of your rent/mortgage payment each month, as well as paying off any utilities, so you don’t have to worry that your landlord won’t have a debit machine in his apartment..
The Solution, In Action
How would something like this work in real life? Let’s consider a quick little scenario: you are the sole breadwinner for a family of three. Unfortunately, you lose your job (as so many have done lately), and suddenly need to go on welfare. You file to enter the welfare system, and receive benefits somewhere in the range of $20,000 each year. Not much to write home about, but enough to keep your head above water and provide for the necessities in life. Assuming you had an adequate emergency fund, these payments (a bit more than $1500 each month) should provide a decent, if not fun-filled and action-packed, existence until you can get back on your feet.
Of course, in times when jobs are hard to come by, sometimes you have to make compromises. In this case, you take a part-time job earning minimum wage, pulling in only about $10,000 a year. If that would cut your NIT benefits down to nothing, the clear choice would be to NOT work at all, at least not until you can find something that pays better. But since this job will only offset $5000 of your benefits, you can take the part-time job and still do right by your family. (Since the $15,000 in remaining benefits plus the $10,000 from the job total more than the $20,000 of benefits by itself.)
From there, you could add on another part time job, decreasing your benefits (but increasing your overall pay) or get a full-time job if possible; either way will increase your overall income, with the NIT covering the shortfall of your paycheck(s) until you hit $40,000 in total work income. As your income from other sources ramps up, the payments from the negative income tax will decrease; if things go south, the payments will start to resume.
Not bad for a welfare system, right? That’s my plan to reform welfare in a nutshell; hopefully, it sounds rational and reasonable (to say nothing of logical) to all of you out in reader land.
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28
Sep
Posted in If I Ruled the World by Roger |
Welcome again to another session where I take on the role of Benevolent Dictator (although, not the one you learned about in Economics 101) and attempt to solve all the problems of the country in the course of a few blog entries. This week, we’re going to look at one of the most hated, cursed, and generally despised aspects of life, as well as the only one that ranks up with death in terms of inevitability. That’s right, this week I take on taxes!
Just about everyone believes that some level of taxation is needed, to fund the vital roles that various levels of government play in our lives; the problems arise when it comes down to who should pay those taxes, and how much. If you do enough reading, you’ll see that everyone has their own view on how the tax system should be structured; income taxes to sales taxes, capital gains taxes to the Fair Tax, flat and progressive taxes are all thrown out by one group or another in an attempt to fill our coffers. Going through every single proposed tax plan, discussing its pros and cons could fill weeks worth of posts, or even an entire blog. Instead, for this exercise, I shall use my powers to cut through all that and get down to the basics of what would be in MY tax system. The guiding principles I’m going to follow are that an ideal tax system should be:
1) Simple – The perfect tax system should be so simple that you can fill out a return on a single sheet of paper, with all the instructions included.
2) Progressive - Those who make more money should pay an equal or higher percent in taxes when compared with those who make less.
3) Controlling Disincentives – Unfortunately, taxes distort economic incentives. Income taxes make earning an income less appealing, sales taxes make buying things less appealing, and capital gains taxes makes selling economic products less appealing. The goal of a tax system should be to keep these disincentives to a minimum, or direct them towards decreasing the incentive for negative behavior.
With these principles in mind, what would be my ideal tax system?
My Solutions
A Graduated, Gradually Progressive Income Tax – The basic structure of the new tax system will be essentially an almost-flat income tax. Almost because, to ensure that our tax system remains progressive, those earning a higher wage should a higher percentage in taxes on the last dollar of income than someone earning less. A five to ten percent differential between each tax bracket (and a limit of only three or four brackets) will ensure that moving from one bracket to another won’t dramatically increase the taxes you pay on that last dollar of income. There will be arguments that this creates a disincentive from earning more money, but if all the ways of making an income are taxed according to the same rates (in my mind, ranging from 10% to 40%), the discouragement will be minimal. And speaking of which…
Tax ALL Income According To the Same Scale – One of the major sources of confusion and bad financial decisions when it comes to taxes is due to the numerous different types of income. Short term capital gains are taxed at a different rate than long term capital gain, money you inherit is taxed differently than money you earn by working, and of course, if you make a high enough amount of money working, you might have the Alternate Minimum Tax to handle, as well. The simplest way to deal with all those different systems is not to deal with them at all; treat all income as well, income, and tax accordingly. The system will be simplified, tax incentives to act irrationally will disappear (such as holding a declining security to get the long term capital gains tax rate, even if it declines to zero), and no more finagling of HOW you get paid to lower your tax rate will be possible.
Eliminate (Almost) All Deductions – Another problem with the current tax system is that it has, over the years, become so chock full of deductions for dozens of different reasons. Whether it’s trying to encourage homeownership, increase investments, or help people who have kids to have a little extra spending money, there are a huge number of tax deductions and credits in the current system, as you can see from this About.com list. The easiest way to cut through all the bull honky is to eliminate all of the deductions and just add back in the few that are the most common (and popular): retirement accounts, children and mortgage interest payments will be among these selected few. Such eliminations of ‘loopholes’ will enable taxes to be lowered all around.
Make the Tax Rates Public, Flexible, and Tied to Government Spending – If you remember last week, I railed about how I would change government budgets. Here’s another step in that plan: when government spending rises, taxes rise. If the Federal Government wants to spend more money, rather than adding to the national debt (which, as you may recall, we will now be regularly paying down), taxes will automatically rise to a level consistent with the new budgetary needs. Unless otherwise specified in the bill, the increase will be across the board, covering everyone from the lowly minimum wage earner to the multi-millionaire living off dividends. If having everyone in the country watch their tax rates rise to cover new spending doesn’t make politicians think twice about adding more programs without first ensuring that they won’t add on more debt doesn’t slow them down, nothing will.
There you have it: my four step plan to a simpler, saner tax policy in the United States. Feel free to nominate me for the Noble prize in economics, if you so desire.
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21
Sep
Posted in If I Ruled the World by Roger |
(This is the first in a series of posts where I will rant and rave about the state of the world and how things would be different if Roger, The Amateur Financier, was in charge. Consider them conversation starters; I’d like to hear the solutions my readers have for some of these pressing problems facing the country and world today.)
I don’t know how much of a story this was in other states, but the big news in Pennsylvania is that we finally have a state budget. The governor and the state congress have been at odds with each other for over eighty days (that’s 8-0, nearly three months) trying to work things out; they finally reached an agreement at the end of last week, although it could be another week before it goes through (and even then, our governor had threatened to veto it, although I don’t know if that threat is still outstanding). This impasse has had some serious consequences; government workers haven’t been getting paid, some have even been laid off, and any program or person who receives state money has been at the end of their financial rope for nearly three months. It’s been a horrible, horrible situation.
Still More Organized than the Pennsylvania Budget
This whole ordeal has had me thinking. I’ve been trying to come up with some ways to improve the budgetary process in the government, to avoid situations like this in the future. (It’s either that, or start screaming in frustration at the sky.) Clearly, there’s plenty of changes that could be made to the budgetary process. So, I’ve taken on the task of fixing the budgeting process in my role as benevolent (well…mostly benevolent) fictional dictator and created a few solutions to make budgeting more effective.
My Solutions
No Budget, No Pay - One of the most galling parts of the whole budget debacle is that the legislators and governor continued to draw their salaries (and benefits) while people who depended on state government money, from employees to beneficiaries of state programs, had to suffer and muddle through without any help. So, my first change is rather simple: if a governing body can’t come up with a budget, the members don’t get paid. Period; no ifs, ands, buts, or per diems. Perhaps losing some of their income will inspire our legislators to be more friendly and less confrontational. (Or we go onto the next stage: locking them in the capitol building until they come up with a workable, balanced budget.)
Balance the Budget – More directed at the federal government than the states, since all the states (except Vermont, apparently) are already required to have balanced budgets. Nothing good will come if the federal government is allowed to lower taxes, raise spending, and push off the bill to the future taxpayers (and those of us young enough to still be paying taxes decades from now when the bills start coming due). Eventually, something has to give; taxes will have to go up, the budget will be slashed, or inflation will climb (and in the worst case, we will have to deal with all three at once). It’s much better to reign in the spending now, before things start to get even worse. And on that subject…
Pay Down the National Debt – I’m not saying we need to completely pay off the national debt; there are solid arguments for some level of national debt, and many people like to invest in federal government bonds. But reversing the trend, from growing fairly rapidly to staying steady, or better yet, declining, would definitely be a positive trend. Gradually decreasing the amount of government bonds issued each year (the amount of new debt we take on) will slowly decrease the debt, as well as any negative effects associated with a large and ever increasing debt.
Sell (More Specific) Bonds – Perhaps my favorite idea on the subject, inspired by the war bonds sold to help finance World War II. The concept is simple: start selling bonds that cover specific expenditures, rather than having all the proceeds from government bonds going into the same pot of money. The same values, types of bonds and return on investment; the only difference is where the money goes. So, now we’ll have Afghanistan War Bonds, WIC Bonds and National Endowment for the Arts Bonds, each providing money to different programs.
Think of it as an indirect form of voting; by buying bonds in programs we support and avoiding those we don’t, we’ll be able to help direct where the government places its priorities. If the Michigan Trout Fishing Fund can’t get enough investors, well, perhaps we can do without it. Similarly, if there is overwhelming financial support for the National Endowment for the Arts program, well, all the more reason to keep it going and expand it. (Admittedly, this gets complicated when dealing with foreign governments buying Treasuries; keeping bonds for foreign consumption broad would be one way to avoid having foreign investors dictate US policy.)
For smaller programs, this could be the only funding that is needed. Programs with expenses under $100 million (small by federal government standards) that get enough investor interest get funded; those that don’t, get canceled (unless they get funded by a specifc government bill). As a result, we can trim some of the little expenses from federal spending bills without much time or effort involved. No need for legislators to comb through the minutiae of the budget to hunt down small programs to cut; just let the market handle it.
That, in a nutshell, is my plan to fix the governmental budget system. It might not be perfect, but compared to our current system, it’ll be a definite improvement.
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