The Wonder Springs Chronicle

No Skin In The Game VII

26 May 2011

Volume 13, Issue 21

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Before we get to the homework and the discussion I assigned for this week’s Chronicle episode, I shall digress a little, to discuss a real world situation, which really describes the reality that virtually all our technical problems, here on this earth, really are not all that technical, but really human personal problems, and how we deal with those problems in “human engineering” results in unintended consequences to our decisions, or simply the metaphor now being used to describe entitlements and all phases of government debt: kicking the can down the road, path, or off the cliff.

On Monday and Tuesday I was involved with about 200 community members and leaders from eastern Washington and northern Idaho in the “Spokane River Forum.” This was the third meeting of this process, where diverse groups of people attempt to bring some unity of action to their specific interests and areas of expertise, so that the City of Spokane’s marketing and a regional effort of “Near Nature — Near Perfect” may really have some semblance of reality.

For those unfamiliar with the area, the Spokane River Basin is home to the nation’s largest and one of the most complex Superfund sites, in what is known as the Silver Valley of northern Idaho. Beginning over a century ago, the lead, zinc and silver mines of the area began dumping a variety of mining wastes into the rivers that feed Lake Coeur d’ Alene. The outlet of the lake is the Spokane River that flows about a hundred miles to the west where it enters into the Columbia River and Lake Roosevelt, the name of the reservoir behind Grand Coulee Dam.

To make the unintended consequences of these mining cleanup endeavors more difficult is another river reservoir on the Spokane that has somewhat recently been renamed “Lake Spokane” rather than the historic title of “Long Lake,” because it was formed by the century old hydroelectric project that bears the Long Lake name.

Making these very expensive environmental problems, is, in the illustrious unintended consequences of its regulatory prowess, the Washington State Department of Ecology (DOE), that has no environmental designation for lake reservoirs. So from the regulatory point of view, the lake really is a river and as such it must meet water quality standards of a river, which is impossible in the warm summer months, except in the regulatory minds of the DOE enforced by the national EPA.

Therefore for the tune of a couple of billion dollars, the municipal and industrial point source wastewater dischargers along the Spokane will be forced to do a number of great and wonderful environmentally clean up procedures, which will reduce the phosphorus loading to Lake Spokane, so that it doesn’t turn bright green (or worse) and be choked with aquatic weeds during the summer months, and the water below the stratified reservoir will support cold water trout.

Most of that phosphorus exists in the sediments of Lake Spokane, that is really a reservoir, that wouldn’t exist, except for a dam, that does exist in reality; most of those sediments having come from agricultural runoff from Hangman Creek, that is also known as Latah Creek, depending who and where you are along that drainage basin; that has been subject to soil erosion of the northern portion of the very fertile Palouse Hills, one of the breadbaskets of the United States, except this winter wheat really isn’t used for bread.

The trout-salmon fishery hasn’t existed in the lake since the dam was put in a century ago, but I digress, except to note that these billion dollar unintended consequences will continue to get more complicated and expensive as time goes on; being paid for by tax payers; to reach a flowing river goal for a impounded reservoir.

In the greater Spokane River basin, everybody has skin in the game, now as river cleanup and the heavy metal pollution from the upper river drainage combined with agricultural sedimentation, makes the concept of Near Nature — Near Perfect, subject to the reality underneath the clear blue waters that flow over the rocks of the falls of the Spokane in the center of the city.

Having stated the problems associated with this river system, compared to the environmental quality of similar systems in the rest of the nation, the rest of the world; it is still true that Spokane is still, in context, Near Nature — Near Perfect, simply because they are attempting to deal with unintended consequences of previous very human decisions.

One of the members of one of the panels used the term “hubris,” which its context was not generally recognized within the assembled participants, nor was its soon following nemesis; all being the “low lying fruit” of unintended consequences of human actions.

Human unintended consequences result from wise or stupid decisions, all based upon a reality that we desire to have simple solutions to complex multidimensional problems; that flat-out don’t fit our talking points, except yours and mine of course, and I am just adding yours to the equation, so that you will continue reading.

Your homework from last week was to read the material under the Laffer Curve and the Kauffman Foundation links. If you haven’t read that material, do that now!

Before we begin this discussion a little background. When I left the established corporate structure, I assumed, like many-most of the people at the Spokane River Forum, that if we just came up with the right technology, black box, or widget, we could solve the specific problem (for good, bad, or indifference); but we could move onward, and hopefully upward.

After a cultural readjustment period, I began to realize that the stuff solution wasn’t really the problem, it was a wide range of human factors that surrounded the stuff; that really was the issue. Those factors may have been completely unrelated to the issue, they may have been directly related, most of the time neither I, nor the client really had a grasp of the totality of what was going on and perhaps if the truth be known, we really were unable to accomplish the mission or goal, within the parameters we had set up.

So before we begin this taxing Laffer and entrepreneurial problem, let me state that I would like to see the United States move toward a national flat tax, of say twenty percent on personal and corporate taxes, with a sliding scale to a very low level, bottom rate, say one percent for the very poor; no deductions, loopholes, developmental incentives, a true natural (free) market system for everyone. Therefore everyone has and makes a minor contribution to skin in the game.

I am not in favor of what is called a Fair Tax because it is based on Industrial Age consumption and eventually maintained by leverage, debt and an unreal dream-illusion-lie that economic growth could-can continue forever, outside the limits of natural universal laws.

As I was reading Art Laffer’s Curve article, what for some reason struck me, was the bimodal nature of what he was trying to establish. That simply was if taxes get too high, federal government revenues decrease, just as they do if you directly reduce rates too low. The point was to find that sort of sweet spot on the Laffer curve where you could get the most literal bucks, for the least bang.

The article really doesn’t set up where that point was, but it does use the assumption that for most of the history of the progressive income tax in the United States, the marginal tax rate has been too high for what he-we generally define as the producers of society. If we give these producers a tax break, they will not seek as many ways to shelter that income and just pay their taxes, thereby increasing government revenues.

Those producers, having kept more of their money, would then spend that money within the society and those results would then create a “supply side” economic system in that all of society would become more prosperous as the prosperity “trickled down” the economic river; which over the period from the Reagan Revolution, we have seen reduced to a leaky faucet.

As far as I can determine that was not some sinister plan to destroy the country, but rather just a two dimensional model, that was forced upon a three dimensional world. All the unintended consequences we now see happening around us, really are that third dimension. They surround Laffer’s thesis: Less taxes equals more revenue; with the reality that is much, much more complicated.

We live in a three dimensional world: where that third dimension can be simply defined as unintended consequences of our desire for two-dimensional solutions. The required phosphorus removal from the Spokane River point sources, being an example of really a non-point source problem; as is prosperity based upon durable goods consumption as a measure of wealth, rather than some better definition of wealth itself.

Specific comments on the Laffer article:

Table 3 (page 6): The 1920’s- 1930’s durable goods increase was not necessarily tax reduction cause and effect; as the fruits or entrepreneurship and totally private sector success; but rather government-private infrastructure development.

Tables 1 (page 5), 4 (page 7), 7 (page 9), and the rest of the article simply do not supply any statistics to merit that: “Incentives to work, produce, and invest” (how and why) contrasted with tax cuts, with eight total reported points, has any statistical significance, especially in a three dimensional multifaceted economy.

For example capital gains taxes are normally only paid on traditional investments, not on startup risk wealth and net job producing capital. The majority of capital gains revenue is generated essentially in S&P stocks and similar publicly traded investments, essentially forcing “the fruits to work, produce, and invest,” away from any risky entrepreneurial equity.

Finally if the Laffer Curve is so simply correct, why can’t budgetary forecasters get it (revenue estimates) at least on the proper side of the Laffer Curve? Perhaps it is really just smoke and mirrors—or is it our two-dimensional forecasting models really are incapable of properly measuring the unintended consequences of our multifaceted economy?

Specific comments on the Kaufman Startup article:

Existing firms, both small businesses and major corporations do not create jobs; they are net job losers. Figure 1 (page 2), 4 (page 5), both point out that reality. While startups have created somewhat consistent job creation over time, what really has the marked effect on the economy is the net job losses from those small businesses and corporations, (net job losers) yet these established firms have received the benefits of all the so called “incentives to work, produce, and invest,” that we say the nation (and the world) so desperately needs at this time.

So what does this really say about the 1960s beginning time frame of these Skin in the game articles?

Most of the major new technology companies (over well used examples: Apple, Microsoft) had their initial startup phase in the era of high marginal tax rates. One consumer example that didn’t was Amazon.com, however the major focus of the Amazon model exploited the simplistic two-dimensional model that continued growth of a consumer society could continue forever through easy monetary policy and debt leverage.

Creation of tax flight investment capital so that it will flow to startup businesses outwardly seems as a very inefficient way to produce that capital, but if you go back to Art Laffer’s example of the 1920s-1930s prosperity, it is not all that difficult to extrapolate that the high marginal tax rates that proceeded that roaring twenties prosperity, occurred through startups created during the high marginal taxes of the early days of the progressive era.

So where do we go from here?

Come back next week, when we will hopefully be back on a Wednesday publishing schedule.