Incentives and Solyndra

The most important part of the study of Economics is the effect of incentives.

Case 1:

Solyndra - a solar company that recently went bankrupt.  Obama reiterated in Tuesday's State of the Union that "green energy" would continue to receive support from the Federal Government (also known as the American people).  In 2009 Obama allowed more than $500,000,000 to be sent to Solyndra as a "loan".  What incentive does this create?

The truth is, massive loans create an incentive to fail.  How?  Well after Solyndra received the loan, they had 2 options.

1. Work efficiently and pay lower than average wages in order to pay down their debt and hopefully pay the loan back within 30-40 years (if solar panels miraculously became ridiculously popular).

or

2. Supply 1,100 people with a couple years of wages (off the backs of the tax-payer), be inefficient by paying high wages to administrators, build luxurious facilities, and calmly go bankrupt 2 years later - and never have to pay back the loan!

Why would they want to work to pay back the massive loan when they could instead just use it as a handout?

If you doubt that Solyndra wasn't completely reckless with the money they received from us, see here how they treated the hundreds of brand new parts that they had stocked in their facility when they found out that they were going bankrupt.

A better way to tax

Greg Mankiw is a Harvard economist who served with George Bush and wrote my Introduction to Economics text book.  He also contributes a column to Sunday's NYTimes every once and a while.  Yesterday's column was great - it was about simplifying and maximizing the efficiency of the tax code.

Here are some highlights:

"TAX CONSUMPTION RATHER THAN INCOME Almost four centuries ago, the philosopher Thomas Hobbes suggested that taxes should be based on consumption, not income. Income measures a person’s contribution of labor and capital to society’s production of goods and services. Consumption measures the quantity of those goods and services he gets to enjoy. Hobbes reasoned that because consumption better reflects the benefits a person receives as a member of society, it is the proper basis of taxation."


"TAX BADS RATHER THAN GOODS A good rule of thumb is that when you tax something, you get less of it. That means that taxes on hard work, saving and entrepreneurial risk-taking impede these fundamental drivers of economic growth. The alternative is to tax those things we would like to get less of."


I personally like the idea of a federal sales tax because it discourages spending, incentivizes savings and encourages the sale of used goods (which might not be good for the "economy" but I think it is generally more healthy for a person).


One Bush tax cut that should be permanently implemented (but currently is set to expire at the end of the year) is the 55% tax on inheritance.  This tax is simply immoral.  Your parents pay taxes their entire life.  If they responsibly save money to pass on to their kids, the government should not take more than half of those savings (which have already been taxed at least once) when they die.

Was Bain Capital Bad?

Bain Capital is a "venture capital" firm.  What is a venture capital firm?  A venture capital firm accumulates money from investors and invests that money into small, usually start-up companies.  A struggling company (of its own free will and choice) would hire Bain Capital to help them thrive.  As you can imagine, sometimes Bain can help them grow and sometimes they can't.  Either way, Bain Capital doesn't do this work for free.  Romney and Bain are being criticized for being paid for laying people off (of course, they never laid people off - the employer would always make the decision to close its doors or lay people off - not Bain).

Venture capital firms are GOOD.  Without them, many huge companies today would not exist (including the ones that Romney saved like the often used example of Staples and Dominos).  They finance risky companies through the money of investors who believe in the company and hope to help them thrive.  

A new documentary from Newt Gingrich's "Winning Our Future" campaign uses misleading and flat-out false accusations to smear Mitt Romney.  It also uses music, a deep narrator voice, and the tears of children and people who lost their jobs to make Romney and Bain look bad.  It is despicable.

Here is the 28-minute documentary:

http://www.webcasts.com/kingofbain/

Here are a few of the lies debunked by CNNMoney:

http://finance.fortune.cnn.com/2012/01/12/the-bain-bomb-fizzles/

And here's some commentary by my two favorite radio personalities:
http://www.glennbeck.com/2012/01/11/newts-legendary-flip-flop-on-romney/

Newt Gingrich obviously does not like Capitalism (the system which allows venture capital firms to exist) and for this reason I will not vote for Newt.

Lesson #1: Economics Defined

Wikipedia defines Economics as: The social science that analyzes the production, distribution, and consumption of goods and services.

There are basically 2 ways for an economy to run.

1. An economy can be a free exchange of those goods and services, or
2. An economy can be coordinated and enforced by "smart" people (social planners)

The United States of America was founded using structure #1.  #1 is most often referred to as a "free market" economy and has two specific advantages.  First, a free market gives the citizens the most liberty.  For those of you who think liberty is important, and people should be able to trade their goods or services at their own will to receive the goods and services that they want or need, a free market is for you.  The second advantage of a free market is that it is most efficient.  People will make perfectly fair trades all day long.  See The Wealth of Nations by Adam Smith (1776)

The Soviet Union under Joseph Stalin utilized structure #2.  The advantage of a social planning structure is that goods are allocated fairly or at least a fair allocation is attempted.  Social planners believe it is morally wrong for productive people to receive food for their labors while unproductive people starve.  So they decide which goods are produced, how much, and who gets them.  See The Communist Manifesto by Karl Marx and Friedrich Engels (1848) and Wikipedia - Soviet Union

If you discovered an island and wanted to start your own country, which system would you choose? Would you take away people's liberty to ensure everyone is fed?  If so, think of the incentives that might create for people to become lazy.  Why would people produce if they are guaranteed the same goods as a producer without doing anything?  Or would you choose a free market, where everyone is free to produce and consume at will, but the unproductive or lazy citizens are either fed by charity, or they die?