I have been seeing a lot of US flags out lately and, while I’ve never been a flag waver, I’m planning to plant one in my yard. I’m sure there are a number of reasons people are displaying flags. Here is what it means to me.

For me, the flag of the United States does not stand for “law and order”. The Boston tea party was a violent, property destroying, act of civil disobedience. The entire American Revolution was viewed as traitorous sedition by the “loyalists”. If you were a “law and order” person back then you flew the British flag. China is now a great example of a “law and order” country.  Thomas Jefferson in his wonderful rumination on government said “I hold it that a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical”.

The flag of the United States also does not stand for any religion, indeed one of the founding principles of the country is the separation of church and state which is an essential requirement for freedom of, or from, religion. One third of the flags of the world have religious symbols on them. The US flag has none.

At the most literal level, the US flag represents the contentious union of the states. The original thirteen colonies are represented by the stripes and the field of stars represents all the states. The compromises required to ratify the Constitution explain why currently a citizen of Wyoming has almost 70 times the representation in the Senate as a Californian, and why we have a minority President. The compromises also included the continuance of slavery. Like every flag, the US flag has its stains.

For me, the US flag represents an idea. This makes it unique in the world. The idea is best summarized in the words of the Declaration of Independence: the inalienable rights of Life, Liberty, and the Pursuit of Happiness.  This simple phrase captures the spirit of the Enlightenment: the role of government as serving the people, the inalienable rights of the individual, the separation of church and state. These goals are aspirational, the US has always been a work in progress to fully realize the ideals of its founding as a land of, by, and for the people.

Not since the early 1800s has the US faced a credible outside threat. The threat to our ideals and union have come from inside and do so now. A President who willfully divides the country, who ignores precedent, who fires Inspector General and appoints a partisan Attorney General , who solicits the intervention of foreign governments in elections, who packs the courts with loyalists, who in short sets the stage for an imperial presidency beyond any control is a danger to our carefully balanced government with its division of powers. This threat would not be possible without a political party that willfully enables such actions, and that refuses to reign in even the most egregious abuses. 

The US flag, to me, is not a symbol of nationalism, above all not a symbol for fascists to roll themselves in. When I plant the flag in my yard next to my Biden sign, it is for me a symbol of the love I bear for the spirit of the Enlightenment as embodied in our country which has so long served as a beacon of hope in the world.

Economic Common Sense – Government Debt & Taxes

Perhaps you’ve heard the term “Keynesian Economics” but aren’t sure what it means. Well, the basic idea of Keynesian Economics was around way before Maynard Keynes and can be illustrated by a couple of well known stories, one of them from the Bible.

Simply put, the most basic idea is that one should save during fat times so one can spend during lean times. This is so common sense that it almost seems silly to restate it, but unfortunately US economic policy in recent years seems to have forgotten this basic lesson.

Back to those two stories. In one, the Ant and the Grasshopper, the grasshopper spends the summer hopping around eating all the leaves he can and mocking the ant for working so hard to gather and store food for the winter. Of course, come winter, the grasshopper is starving, and the ant kindly shares some food with him.

The other story is the Biblical tale of Joseph in ancient Egypt. Joseph interprets a dream for the Pharaoh: seven fat cows come out of the Nile, followed by seven skinny ones. The seven skinny ones turn on the seven fat ones and eat them. Joseph interprets this to mean that there will be seven years of plenty followed by seven years of famine and that Pharaoh should appoint a discerning and wise man to arrange that a portion of the crops will be gathered during the fat years so that food can be distributed during the lean years and famine avoided. Joseph is appointed, crops are taxed, the extra food stored, and famine during the lean years is avoided.

The story of Joseph is a particularly good illustration of the central idea of Keynesian economics. Keynes was concerned with the economic booms and busts that were a regular feature of the economy prior to, and including, the Great Depression, and he proposed that government could smooth these highly unpleasant business cycles by taxing during the good times and spending during the bad times. And indeed, Franklin Roosevelt implemented a drastic program of government spending during the Great Depression, and of course during World War II, which brought us out of the slump. After World War II the implementation of Keynesian policies in the US and Europe led to greatly smoothed business cycles. During economic downturns individuals like you and me tend to cut our spending because we’re worried about our income and jobs, and only the government can “pump up” spending to reinvigorate the economy. But this should be followed by taxing and saving during the fat years. Unless you believe in free lunches.

So, have we forgotten this simple common-sense lesson? Recent history suggests so. During the boom years buildup to the Great Recessing of 2008, Bush pursued a highly expensive war in Iraq and we put the entire bill on the tab. In short, we did not raise taxes to pay for the war, we just added that cost to the deficit during the good times.

When the Great Recession hit, the story of Jacob and Keynesian economics both say the Government should pump up spending to reduce the depth of the downturn and save important industries. And in the end we did, although there was much screaming from some quarters about the deficit and it took tremendous political will to get even a somewhat inadequate response. Since we hadn’t saved anything during the “fat years”, we had to add the cost of saving the economy to the tab.

Now the fat years are back, and we have a $20 trillion deficit. We should be saving up for the lean years to come, or at least paying back some of the enormous amounts we’ve borrowed. And what did we do?  We passed a major tax cut that will instead add at least an additional $1.5 trillion to the deficit.

Now I personally think a corporate tax cut was long overdue, it will help make our companies more competitive and encourage them to keep more money in the country. But we should have paid for that tax cut on corporations by making sure all of them pay it – get rid of all the loopholes and tax giveaways – and by raising taxes on individual income whether in the form of dividends, employment, or capital gains. Most, or all, of that additional tax should be paid by the wealthy since they have received most of the benefit from the tax cuts and are far better able to absorb the cost than the middle class. We’re not talking about anyone paying more on the first, say, million dollars of annual earnings, just a higher marginal rate after that. Like it was during Eisenhower’s Presidency when the economy boomed at several times today’s rate.

Some of you might say we should reduce costs, and indeed there are places where I see major cost savings possible. However, some might be for reducing the military budget and ethanol subsidies and others might be for doing away with Social Security and Medicare, but in the end the big-ticket items on the budget aren’t going away, in fact they’re increasing. The single biggest contributor to a rising budget is simply the cost of servicing the national debt itself. As a percentage of Gross Domestic Product, the Federal budget has been remarkably stable for the last 30 years at about 35% of GDP. That pays for Social Security and Medicare, the military, Veterans benefits, and Homeland Security. All the other activities of the government are a miniscule 5% of GDP and falling.

So, the problem really hasn’t been on the spending side, it’s been on the paying side. Taxes have been reduced, especially on the rich, and we’re putting increasingly more on the credit card. With the aging of the baby boomers, our kids will have to assume the burden of our retirement as well as medical care. And now we’ve saddled them with at least another $1.5 trillion in debt to pay for a tax cut. This at a time when the economic prospects for young people are worse than any time in recent history.

It is time for us to start paying for what we consume even while we continue to argue about spending priorities. Not only should we be paying for current consumption, but we should be taxing to reduce the deficit instead of passing the IOUs on to the next generation. It says so in the Bible as well as in Keynes’ “The Wealth of Nations”. Insist that your representatives, whatever their party, get this message or vote for someone else who does!


Thoughts on Bitcoin Investing

The other day I was speaking to a friend about Bitcoins and referred to them as Beanie Babies for Techies. As an investment, Bitcoin is right up there with those infamous stuffed toys, Pokémon cards, and Danish tulip bulbs in 1600 – all examples of enormous speculative bubbles.

The opinions on Bitcoin are generally framed in terms of economists versus the tech savvy, but the arguments against Bitcoin as a currency are strong on both sides. A recent series of articles on Bitcoin and cryptocurrencies in the Scientific American, while not focused on Bitcoin as an investment, provides an excellent overview of the technology, economics, and social implications of cryptocurrencies.

First, it is important to acknowledge the technical achievement of Bitcoin. Bitcoin showed that it is possible to develop a distributed ledger to record transactions that is essentially impervious to fraud (under certain assumptions) and that does not rely on a central authority or middleman to guarantee accuracy. In Bitcoin, two parties exchange the “coins” using only their cryptographic “keys”, the transaction is then added to the distributed ledger by the distributed network according to certain rules built into the code base (which is public) and the updated ledger is secured by a hash that would clearly show any attempt at modification. In short, the ledger records all prior transactions back to the inception of Bitcoin.

Bitcoin was by all accounts a brilliant implementation of a distributed ledger system, and this technology is here to stay and already being used for a number of public and private distributed ledgers. One can see how distributed ledger technology can be used to record and validate transactions of many types: real estate title transfers, stock transfers, contracts, or pretty much anything that can be represented or hashed in digital form.

So why is Bitcoin itself doomed as an investment? There is no denying the fact that “first to market” (aka “network effect”) is a powerful fact of life, but there is so much wrong with Bitcoin as a medium of exchange or store of value that it seems highly improbable that it will be the final word. And if something better comes along and gains traction, where does that leave Bitcoin?

So what is wrong with Bitcoin?  Let us count the ways 🙂

From an economic perspective, one of Bitcoin’s major flaws is that the number of Bitcoins being “mined” bears little relationship to demand. Basic economic theory provides a direct relationship between supply and demand: as demand increases either supply increases enough to keep prices steady, or price will go up, and this applies to currencies. In the last year, the cost of a Bitcoin has gone up 2,300% against the dollar (a fairly stable medium of exchange in purchasing power). If Bitcoin were the currency of the world, demand would increase billions of times over and so would the value of the Bitcoin in purchasing power since supply is essentially fixed (and in fact by design there will be no more than 21 million Bitcoins issued). Now, would you spend a dollar today if tomorrow it would buy ten times as much stuff? Of course not, and all economic activity would come to a standstill. This scenario is called deflation which is considered a worse threat than inflation. Never has deflation anywhere, ever, come remotely close to what would be required to adopt Bitcoin as a widespread medium of exchange, and the result would be disaster.

Another economic argument against Bitcoin really amounts to much the same thing: it isn’t tied to anything with “intrinsic” value so it can fluctuate wildly. But the US dollar and the Euro are not legally tied to anything with intrinsic value either. However, central banks such as the Federal Reserve go to great lengths to maintain a steady “purchasing power” for currencies which essential does tie the value of the dollar or euro to not just a single source of value such as gold, but instead to a market basket of goods. This stability is what makes the dollar and the euro reserve currencies of choice.

In addition to these killer economic reasons why Bitcoin, as currently constituted, will never be a major medium of exchange are technical ones.

Famously, the process of mining Bitcoins, which is integral to the process of adding blocks of transactions to the ledger, consumes huge amounts of electricity. Estimates indicate the Bitcoin mining consumes more electricity than Amazon, Google, and eBay combined. The protocol coded for mining Bitcoins is competitive and explicitly designed to adjust to increased processing power to limit the number of Bitcoins produced. It is an ecological disaster and distinctly uncool in more than one sense.

A second technical issue is the inability of Bitcoin to handle a significant number of transactions. This limit is estimated to be around seven transactions a second, which is a tiny fraction of economic activity. (The limit is related to the protocol for mining and issuing new blocks which is explicitly designed to adapt to improved technology, so having faster processors doesn’t help).

Perhaps most concerning is that the Bitcoin validation and mining protocol are so demanding that a relatively small number of groups are effectively controlling the process.

These economic and technical issues make it highly unlikely that Bitcoin, as currently constituted, will ever become a widespread medium of exchange or, in the longer term, store of value. The Bitcoin protocol and code base is public and there is a dedicated group of well-meaning and technically brilliant software engineers working to improve it, but it seems unlikely that all the above issues can be addressed. And if they could, the value of the Bitcoin would have to crash in any case.

Google wasn’t the first or even fifth search engine, nor eBay the first auction site, so being first is not a guarantee of success. And a cryptocurrency must, by definition, be exchangeable – if a “better” cryptocurrency gains a footing, Bitcoins could be exchanged for that currency.

The current value of Bitcoins is based on it’s being first, and rampant speculation. It does have utility for anyone wishing to send money across borders (for example, repatriated earnings). Also, the ability to purchase Bitcoins anonymously is a boon for anyone living in a country with a poorly managed currency and/or widespread institutional corruption. However, those advantages are easier to appreciate when the currency itself is appreciating. And a cryptocurrency which fixes, even in part, the issues with Bitcoin would be more desirable, and quickly replace it in these roles, once it gains traction.

In summary, I wouldn’t bet on Bitcoin. I wouldn’t bet against it either because there is no telling when precisely the bubble will burst. But burst it almost certainly will.

It might retain some value as a collector’s item like an original Rembrandt. Of course there are millions of Bitcoins, and they have little esthetic value. Personally, I’d save up for the Rembrandt.