Follow-up to Wealth Distribution

I read an article today by Martin Feldstein, brilliant Harvard Economist, who wrote regarding the Governments plans to remove the tax deductions for charitable donations given by the wealthy. I think the government is thinking that they are just closing up a tax loophole for the wealthy, but in fact they are going to hurt charitable giving. He explains why it is yet another not very thought out government idea.

I can't help but point out that I wrote my post before Mr. Feldstein did, but he most certainly wrote his more intelligently and with greater data to back up the argument.

Click here for the article.

Wealth Distribution

I know that many out there are thinking, why shouldn't the wealthy be forced to pay higher taxes so that the government can give the poor money?

The reason why that doesn't work is because for every dollar pulled in by the government through taxes, very, very little goes to middle to lower class families (When is the government going to realize that it just isn't at all efficient? And when are we going to stop putting up with that?). However, when the wealthy are given the chance and encouragement to share their wealth then for every dollar spent a dollar goes to the middle and lower class families. The interesting thing is that the wealthy like giving money and are willing to give on their own terms, but they will go to great lengths and hire attorneys and accountants to keep as much money as possible from the government.

Here is a great story that would be good for everyone to read. The company it talks about is now opening up in the U.S. to give loans and they already have people in other countries who are excited to now make these loans to people in the U.S. (How cool is that?). Also, just in case the article isn't clear enough, the company is struggling finding people to loan to because it is getting too much money to loan:

SAN FRANCISCO (Fortune) -- When the economic downturn took hold last autumn, the management team at non-profit Kiva.org made a calculated bet to curb investment, anticipating that donors would slow the volume of small loans they make to entrepreneurs in the developing world. That slowdown never came. Now, the non-profit site is racing to keep up with user demand even while planning to bring its unique form of charity to the U.S.

Nearly 500,000 users have lent almost $65 million, interest-free, to developing-world entrepreneurs through Kiva.org. The nearly four-year-old site received a major boost during its early days from a wave of media publicity (including FORTUNE's The only non profit that matters) and the very public endorsement by former President Bill Clinton.

Media attention has waned in the last year or so, but growth has only accelerated due both to friend referrals and loyal users who repeatedly re-loan money rather than withdrawing it. The site distributed $3.5 million last month. "The good news is that we're doing more loans than ever," says Premal Shah, president of the San Francisco-based organization. "The flip side is that we under-estimated demand. [Our growth] rate exceeds the rate at which we can scale."

Kiva takes no cut of the loans allocated for entrepreneurs. Instead, it solicits an optional 10% fee of every loan to help pay salaries and keep the lights on. The organization uses microfinance institution partners to vet entrepreneurs before allowing them to solicit funding. By asking a series of questions to assess roots in the community and the legitimacy of a business, Kiva is able to establish a risk profile for each entrepreneur. Before offering money to, say, the proprietor of a Dominican fruit stand, any lender can read the entrepreneur¹s profile, history of defaults, and a bit about the business.

Default rates are low --­ 2% total ­-- and users can lend a minimum of $25 to any single person. Spreading loans across a series of entrepreneurs further lessens a lender's exposure to risk, and gives more people an opportunity to put money into the system. Lately, however, lenders are putting up more money than Kiva can distribute. Several times in the last month, the site has displayed a message saying there were no entrepreneurs to lend money to.

"This is pretty much a fault of management," says Shah. "We assumed things were really going to fall off. We didn¹t sign up enough microfinance institutions. That turned out to not be the right assumption. There are plenty of poor people out there."

Great Economist's View of Current Issues

1992 Nobel winner Gary Becker recently sat down for an interview with the Wall Street Journal. As one of the few economists who uses the words "I don't know" when in fact he doesn't, and who also doesn't seem to be overly terrified of saying "I was wrong", I think he has some very refreshing views. He also happens to be one of the smartest economists out there.

Please click here to see the full interview.

Here is my favorite part of it:

Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."

There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."

As the interview winds down, I'm thinking more about how people can make pretty crazy decisions with the right incentives from government. Does this explain what seems to be a decreasing amount of personal responsibility in our culture? "When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."

That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."

Hidden Spending

It's really only hidden if you keep your "Everything Obama does is Magic" glasses on. If you have those on this article is useless, if you take them off for a minute then this article will get you a little upset at our "transparent" government.

Click here for the article.

The Bank Plan

Click Here for a fantastic explanation of the current bank plan that I totally agree with. To sum up: It has a good chance at working but at horrible costs.

For anyone looking for a good moderate conservative economist, Brian Wesbury is a great one.