What Congress Knew

From the document. Public domain work of the US Congress, "THE SIZE AND FUNCTIONS OF GOVERNMENT AND
ECONOMIC GROWTH", 1998

With all this talk of Keynes, and stimulus, and this supposed "great debate," I wanted to take a moment to look at what Congress actually does know.

"The Size and Functions of Government and Economic Growth" was written by three economists, James Gwartney, Randall Holcombe, and Robert Lawson, all closely tied to Florida State, and presented before the Joint Economic Committee April 1998. Using a great survey of all OECD countries and their trends with regards to time in terms of the size of government and the rate of economic growth, they observed a major decline in the ability of economies to grow quickly as the size of government increased, and a major decline in private reinvestment in the economy.

At the time they also accredited government size with helping prevent major slowdowns and bring stability, though recent economic events put serious doubt on that hypothesis. More though, they also observed that America has not seen any truly great gains in prosperity since the early 60's, with the economy gradually edging down to a mediocre level of growth that can barely keep pace with population and really only improves the well-being of the top 10%. Poverty rates have remained unaltered since 1978.

As part of their introduction, they also propose several mechanisms by which economic growth slows in the face of government: "First, the higher taxes and/or additional borrowing required to finance government expenditures exert a negative effect on the economy. As government takes more and more of the earnings of workers, their incentive to invest, to take risks, and to undertake productivity-enhancing activities, decreases."If people, who aren't business owners, don't purchase cars, how can they go vast distances to work at better jobs that make better use of their time to produce for the economy (and in the end, as a result, are able and willing to pay them more.) If farmers don't purchase tractors, you end up with not enough food.

"Second, as government grows relative to the market sector, diminishing returns will be
confronted." Hoover Dam, good. Solar panels on your roof so you can genertate 3 lightbulbs worth of electricity, not so good.

"Finally, the political process is much less dynamic than the market process." Indeed. Our system was specifically designed by the Founding Fathers to NOT be dynamic. Why? Because something that's dynamic can tear away at your rights and freedoms, whereas something thats not dynamic can at best gnaw at them. A quickly changing society is a society where no one knows precisely where they stand, where people are imprisoned without good cause, and where nothing is sacred. That's why we've set up two houses of congress, a presidency that can block congress and a constitution that limits congress.

But first, they point out that their assessment of the actual size of government expenditures is likely over generous: "If government expenditures were measured in constant purchasing power units or on a per capita basis, the increases in the size of government would be substantially greater than those presented in Exhibit 1." In other words, relative to what the money actually buys, its much higher.

Jim Saxton, chair of the Joint Economics Committee and the one who called for the report, is a blue state Republican from New Jersey. The Northeastern United States have not been characterized by their extreme Republicans, and Jim Saxton was elected from a district of suburban Philadelphia, New Jerseys 3rd, including Cherry Hill, a major "edge city," and Willingboro, one of the original Levittown-style suburbs.

Dr. James Gwartney, Professor of Economics and Policy Studies at Florida State University, "holds the Gus A. Stavros Eminent Scholar Chair at Florida State University, where he directs the Stavros Center for the Advancement of Free Enterprise and Economic Education. He is the coauthor of Economics: Private and Public Choice, (South-Western Press, 2008), a widely used principles of economics text that is now in its 12th edition. He is also the co-author of Common Sense Economics: What Everyone Should Know About Wealth and Prosperity (St. Martin's Press, 2005), a primer on economics and personal finance designed for the interested lay person."Glancing briefly at Amazon.com reviews for both books, I noticed that even his most ardent detractors seemed to admit he had a good grasp of the economics. It is also worth noting that getting 13 editions of a textbook published (and professors do shop around for textbooks even if students do not) is not easy in a world where textbooks are often the main moneymaker for professors.

Dr. Randall Holcombe has written extremely prolifickingly, with twelve books and 100 articles to his name. "His primary areas of research are public finance and the economic analysis of public policy issues."He still teaches at Florida State University, where he is the "DeVoe Moore Professor of Economics."

Dr. Robert Lawson, at Capital University Columbus, Ohio, was also a student of Florida State before coming to teach at Capital. A quick glance at his Curriculum Vitae reveals a man driven by data and studies of what actually happens in real states and nations, and also an open-minded creative thinker who will more then readily drag comic strips in to the classroom.

All three of these professors work together on a regular basis, and you can often find their names on the authorship of the same texts. Although tied together well, their success has been borne out in publications, empirical evidence, and the simple fact that a moderate Republican from New Jersey would be interested in hearing them. In addition, the sheer wealth of information the draw on to reach their conclusions is a credit to them, as any scientific man must admit.

Bring in the Creditors!

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One of the greatest problems with government worker unions is the lack of a check on power. In private business, unions can never extort too much out of customers, shareholders, and owners because the company must at least break even to continue paying them, but in government, as just happened with the 66% increase in income tax in Illinois, the ability to tax and extort the people allows union power to grow unchecked. That's why Hailing from Georgia is giving the following proposal of Jeb Bush and Newt Gingrich two thumbs up:

First, as with municipal bankruptcy, it would have to be completely voluntary. This means that neither the federal government nor state creditors could push an unwilling state into bankruptcy, no matter how catastrophic the state's finances may be, as this would violate the U.S. Constitution's protection for a state's sovereign immunity.

Second, as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc. The new law could also allow states an opportunity to reform their bloated, broken and underfunded pension systems for current and future workers. The lucrative pay and benefits packages that government employee unions have received from obliging politicians over the years are perhaps the most significant hurdles for many states trying to restore fiscal health.

Third, the new law should allow for the restructuring of a state's debt and other contractual obligations. In a voluntary bankruptcy scenario, states, like municipalities, will have every incentive to file a reorganization plan that protects state bondholder claims and their ultimate recovery. States will evaluate their future access to bond markets and their prospective borrowing rates as they formulate the optimal restructuring plan. (LA Times)

Now states, like private industry, will have a genuine check on union power - the ability to eradicate their arrangements if negotiations bring them to the point of bankruptcy! And just like in private bankruptcy, it can be challenged in court if states are abusing the system. Not state courts though...

This is probably not going to work for the Federal Government, which has no singular higher authority to turn to for such dispute resolution, and so we recommend that this motion be accompanied by a BAN on federal unionization.

This conclusion is from the facts. The facts show two things: 1) unions in government work every bit as bad in practice as they do in economic theory, as the recent affairs of California and Greece attest to, and 2) municipal bankruptcy, which has been an option for cities, counties, and towns since the 1930's, has helped many a municipality, from NYC in 1975* to Orange County in 1994, to fix their affairs. In fact, in Orange county, the restructuring was so successful that they were able to repay 100% of the principal without raising taxes a dime, while instituting useful reforms to prevent a rehash of the events (ERisk):

The new Orange County investment policy statement establishes safety of principal, and liquidity, as the primary objectives of the fund, with yield as a secondary objective. More specifically it prohibits borrowing for investment purposes (ie, leverage), reverse repurchase agreements, most kinds of structured notes (such as inverse floaters) and derivatives such as options. The same document bans the treasury oversight committee and other designated employees from receiving gifts, and obliges them to disclose economic interests and conflicts of interest. The county treasurer now has to submit monthly reports to the investors and other key county officers that contain sufficient information to permit an informed outside reader to evaluate the performance of the investment programme.

Now it is true that for munie investors, who will now see their risk in investment substantially increased, this isn't 100% a good deal. However, this too in the end is probably a good thing, as it makes selling government debt much more difficult, requiring higher interest, and will thus discourage state governments from running their bills so high to begin with in the future. Sorry munies, but we have bigger responsibilities then investors who, whether they knew it or not, volunteered to take a chance. It's time to bring in the creditors, and with them, bankruptcy court!

*Note: NYC did not actually declare bankruptcy. Rather, mayor Abraham Beame, used the threat of it to coaxe a overextended teachers union to invest 150 million of its pension funds in municipal bonds. He then acquire a large loan from the federal government. Not long after, Ed Koch and Rudy Giuliani began confronting NYC's debt problems, and largely solved them, and the days of over extension by NYC municipal unions were largely over for decades. (NY Times)

Taxes & Manufacturing

Launching Liberty Ship SS George Washington Carver. E.F. Joseph of US War Information, Public Domain

Due to the exams I have been studying for, I have not been posting here much. However, as I was studying for my Engineering Economy exam today (all the wonderful accounting rules that Industrial Engineers have to know), I stumbled upon something that was simply beyond the pale in what it means for manufacturers.

Very well known is the role labor costs play in driving manufacturers out of the United States. Less well known is the role government policy and bureaucratic red tape that in no way, shape or form benefits our quality of life overall effects manufacturing, and drives still more manufacturers away from our country. Previously, we have discussed the effect of railbanking regulation, excessive accounting standards and nuclear energy moratoriums (see number 4), but today, I want to talk about the way that our tax system favors an America of pizza delivery boys.

Land, with time, generally increases in value, but the property used in manufacturing and transportation deteoriates. We've all experienced this when we sell a car. When your property deteoriates, but you still sell it for more then the government expected, you are taxed at the rate of corporate or personal income (depending upon how your company files.) But when your property increases in value beyond what you purchased it for, as happens with land, you are taxed at a lower rate, called Capital Gains. Literally, when manufacturers do a good job maintaining their factories, they get taxed more then a pizza shop does when they maintain their land. The only exception is when a manufacturer is finally shutting down, then the land is worth more (manufacturing jobs attract people) and they finally get a capital gains tax.

So we see that the government favors manufacturers only when they've finally decided to close shop. In life, they get taxed more then others for their property, period.

This is not the only example. Property taxes allow manufacturers to die when the community they cultivated becomes too good, as their two or three acres of communally important land becomes too expensive for the amount of revenue they generate a year, and the potential of land fluctuations to drive manufacturers out of business massively increases the risk of them and other businesses that rely on borrowed money. Just like the homeowners in Detroit, their loans breathe down their neck, and the potential of things they have no control over to drive them out of town makes it breathe harder.

Think about that, millions of dollars of borrowed money in jeopardy because you might do too well for the community you are in. Beyond the economics, contemplate the morality of that.

Policies like this hurt upstart and cutting edge manufacturers the most, as they must take the biggest, highest interest, and longest-term borrowed capital in order to even begin to produce, as they have no starting capital to begin with. Their entrepreneurs also face the worst consequences should they fail, as no one may well trust them again since they have no good yet on their record to balance it. In developed countries like America, it will be manufacturers like these that create the fastest and most reliable growth, as they need the support services, development capital, and personal connections that a developed, industrialized country like America has to offer.

Further, the establishment too depends on serving the mavericks in order to have reason to remain here, as otherwise, their costs may well be cheaper in Asia, but they too benefit from industrial buccaneering for the innovation, quality workforce, markets, and new activity it creates. It may not show up every year, but it does show up from time to time, and business people have always been gambling men. Friends, let us compete in what we are good at, and take home our first-world wages while we're at it.

Open Clip Art Library. Public Domain

Hold Your Nose and Vote for the Stabenow Bill

Cartoon by Peter Welleman. Public Domain.

Though in general I am adamantly opposed to any senator who supports the Fairness Doctrine, or any other attempt by the government to control the media, or believes in the Green Jobs Myth (I will reserve a response to that for another time,) this time, she does seem to have a bill that would fill a dangerous void in existing unemployment policy.

The Americans Want to Work Act has been introduced in congress and is being passed around the Committe on Finance right now. You can track its progress here. The full text of the bill, in its' present form, can be found at THOMAS.

So what exactly does this bill do? It extends unemployment benefits by up to 20 weeks. In addition, it allows for a "fourth-tier" benefit to kick in when bureaucratic delays relating to the application of this bill are reached. Considering the length of our current recession, this is an absolutely necessary act. One can debate for hours the practicality of unemployment insurance to begin with, but it is not sensible to go changing the world on families already hurting from a bust economy. Such debate is better reserved for the summer of economic growth, when private charity and families can take care of their own during the changeover period, rather then this horrid blizzard, where we would be ripping the coat off of their backs to face the bitter gales.

It also does something much less desirable. It extends the rather poorly thought out temporary subsidy for hiring. This will encourage businesses to act irrationally and hire workers they don't need, creating production that will likely go away when the subsidy does, assuming if it is ever created at all, and wasting tremendous resources that could be instead invested in the economy of our nations future. Even worst, it increases the size of the subsidizing for workers thus hired retained, increasing the effectiveness of this economic laser guided bomb. So why should the senate vote for this bill?

Because right now, the families of those 99ers are on the economic edge of oblivion. Private charity has dried up, the budget (and with it government jobs) are drying up, unemployment is at the point where they may not have relatives or a community that can support them, competition for jobs is fierce, and the government is, for better or worse, the last place they have to turn. It costs relatively little money, and it keeps these people going for 20 more weeks. Like it or not, we signed up to cover them. Sound economic policy, in this one rare case, will just have to wait, as we have to consider the culture of our country and how actual human beings will interact with the system, in this case, by not saving money as a result of the unemployment insurance that our democratically elected (by you and me) government created.

"Whoever causes one of these little ones who believe in Me to sin, it would be better for him if a millstone were hung around his neck, and he were drowned in the depth of the sea." (Matthew 18: 6, New King James Version)

Further, it's a very well-written bill. It covers the technicalities and exceptions even ones (example: Railroad Retirement Taxes) that most people have never heard of. It's clearly written by someone who understands bureaucracy. And yet, it's relatively short. I read it in under 30 minutes. And it doesn't create a lot of unnecessary bureaucracy. Good job Stabenow. It's the exact kind of bill we should encourage, on principle, to keep the elected leaders accountable to people like you and me. In conclusion, good tidings, but of the slightly smelly variety.

A brief, relatively undefended argument

I don't have a world of time today, but just wanted to briefly, as a skeptical economic conservative, pose a question to my readers, along with a couple arguments (informal, without full defense of sources, statistics et cetera) to go with it: what is the effect of unemployment insurance on the economy.

The first argument is actually not mine, but comes from the Wall Street Journal. In The Folly of Subsidizing Unemployment, Richard Barro presents and defends logically the case that "subsidizing" unemployment for longer leads to insufficient job search and job acceptance. He also argues that such an action, even in a recession, continues Obamas onward march towards a socialist welfare state.

My response is a "yes, but." I'm certainly an economic conservative, but I'm also a realist, and I know that the acceptance of ANY degree of welfare distorts the perspectives and behavior of the entire population. While I do believe an argument against unemployment insurance to any degree (and it would have to be a "remove all" to evoke the necessary change in behavior) would have made sense in 1911, the year is 2010, we're in a recession, and the large bank accounts, investments, community and family support, and austere spending behavior that accompany a libertarian society are not in place and will not be in place for quite some time to come. Such changes would be better implemented in good times economically, so that private charity and the community can handle the burden of the transition well, caring for their poor (in a reasonable, authoritative manner of course) at a time when they can. So what is my argument?

My argument is that you don't want an excessive amount of job acceptance, or job search. I'll explain my case with an example: you have a pHD level Mathematician who has been trained for years in the development of algorithms and their implementation in computers, both at the hardware and software level, and the instruction of students. He loses his job at the university, due to a cut in funding, a common effect of recessions and political disagreements about the allocation of research funds. Facing a deadline on his unemployment benefits, he takes a job as a waiter at a fancy restaurant, earning about 40 grand a year, using his academic manners and knowledge as the requisite refinement.

In result, America has lost a mathematician, something we always have too little of, along with all the research and its improvements to industry that would've come through the completion of his life, and the availability of a well-paid, family-wage job for a less educated member of society, most likely leading to that members children being raised in poverty and a toxic environment where they themselves are unable to grow to full economic potential. While Barro is most likely correct in decreasing the rate of unemployment, it is the damage to the economy inflicted by the unemployment, and not its actual amount, that must be considered. Unemployment might be only 7%, but the damage to the human capital of society, both in terms of lost educated labor and advancement potential of the poorer classes, and the resulting devaluation of assets, efficiency and industrial production, could equal more then that under normal conditions.

Exactly how much more? I don't know, but it is a question that would need to be answered before the nation proceeds with such logic. We must act in foresight.

Furthermore, in a severe recession where current indicators (including government debt) seem to be indicating only a further downward spiral, the situation outlined above with the pHD level mathematician is actually very realisitic under any number of weeks less than what Obama has extended unemployment to. Still, it needs to be understood, and possibly bankrolled against with government bonds to hold congress to contract, that this is a wholly temporary condition and, in good times, unemployment benefits will be completely nixed to begin a positive transformation in behavior at a time when it can happen.

Unemployment benefits cannot be seen as a long-term solution, as Barro also states correctly that the tax burden of increasing unemployment payout WILL magnify a recession, leading to more ending up unemployed. We need to go back to savings and community, but we can't do it now any more then a man being dragged under by water moccasins can fight them off his back. We will have to wait, and pray, and curse FDR's name, but action, it will and must wait.

The Road of a Million Forks - the unsung benefits of cancer research

In a time when people are increasingly questioning the good of spending money on healthcare, I think it is useful to remind ourselves that cures and safety are not the only gain. Science, like any discipline worth pursuing, creates new avenues for exploration with every discovery made. Today I'd like to tell you about the potential benefits of cancer research that you probably would not have thought of immediately.

Follow this for a while, for you will not see its relevance at first, but it is there I assure you. All organisms have a death clock, a preprogramming for death that ticks on every second of your life, and of the life of every other thing currently alive, waiting for the time when life shall terminate. This clock is in your DNA, a huge molecule. See, all of your chromosomes have a long tale of unnecesary DNA called the telosome that every time one of your cells divides, loses just a few pieces of that DNA off the end. For most of your life, what it loses is not neccesary, is not used in the encoding of any of the stuff that makes you up, but eventually, it runs out of excess rope, and then it starts cutting what you need. This starts with the cells with the highest rates of replication, the blood, the skin and the hair. As the materials that make up your body and the chemicals required for your bodies processes are miscoded, and made improperly, your bodies reactions spin out of control, resources are wasted, cells die quickly, and finally, the whole organism (you) dies.

Recent studies however, and I will get citations soon from my professor, have shown that cancerous cells actually relengthen their telosomes, reversing this clock. It has long been known that aging partially exists as a defense against Cancer - the wasteful and excessive multiplication of cells eventually starving the body of resources - but now we have far better knowledge as to where structurally in the body, the connection lies. Through cancer research, we may find a way to cure aging as well as cancer.

Cancer by its nature is actually very regenerative, organs like the brain that do not normally produce new cells will mass produce them in a tumor, and not only do such ability hold promise for aging, but when properly tamed, cancer may also help to alleviate the suffering of stroke victims, paralysis victims, liver disease, sever ulcers and ulceration, flesh eating bacteria and many other ailments where the body either never produces new cells after birth, or cannot produce them quickly enough. The very thing that makes cancer so dangerous also makes it potentially a valuable tool for ALL healthcare needs, if the ways to handle it properly could be understood and mastered by science. We could even regenerate limbs and eyes, if only the cells could find again their function and cease multiplication when appropriate. This is exactly what we're trying to do with Stem Cells, and with a modified and controlled cancer, this could be done using a patients existing cells as they already are in the body. I know that's a big "if," but it is a good example.

But beyond the healthcare business itself is the nanotech industry, the industry of building things at the molecular level, of creating out of a chain of carbons the strongest material on earth or an engine that can power a tiny robot. Such machines exist in cells, and have forever, and are among the very things a sequence of DNA encodes for. Your body produces such things automatically, without a hand being laid to it, chemically, wasting hardly any chemicals at all, producing its own energy from the sun or from sugars produce by those that use the sun, and multiplying in great number to create a being, out of these tiny machines, weighing between 90 and 250 pounds and standing 4" 10' to 7" 8' with infinite comlexity and abilities. Cancer creates the highest rate of replication, and thus for industrial purpose, producing vast chains of carbon, superfuels, tiny engines and robots, the optimal process for this manner of manufacturing.

Cancer research may also involve radioactive materials, chemicals of every kind, viruses, machinery, imaging, and all manner of things useful outside of cancer and outside of medicine entirely. Through the research, we understand not only the cancer better, but also the machine, as in the case of CAT Scans and medical x-rays adapted for scanning bags at the airport, and also can learn better production methods for existing technologies with the investment put in for treating a deadly disease and improving the lives of millions.

For the ecology and ecosystem, humankind has much to learn about recycling its own resources and conserving for its own needs from the greatest recycler of all, the mother Earth. From mother nature, through medical research, we can find the ways to live on less, and master much more fully on resources, producing strange new materials out of familiar ingredients, not needing mines or finite quantities of fossil fuels, themselves the product of nature now past, and even, in some limited circumstances, reducing or reversing entropy.

"You have much to learn from your friends, and even more to learn from your enemies." (Chinese folk saying) In our fight with cancer, we may win battles we did not realize were part of the same war.

I wanted to get this article out quickly, but revisions will be made over the next few days. If you find it unclear now, come back in a week and if this message is gone you know its better.

Gas Tax

Shell Gas Station in Hiroshima, Japan. Public domain by Frank Gualtieri, God rest his soul

Thank you Lord, for helping me clean house of hypocrisy! I've realized a hole in my thinking (willful or otherwise) regarding taxation, and am seeking to partially address it here:

One of the fundamental dilemmas of government is that you need to pay for government services. Not everybody wants these services, and not everybody believes in them. In a way, to enact laws and taxes is to steal from those who would never spend their money that way. But stuff does still need to get built.

But I do see one way out of this moral quandary: what if you provide for certain less crucial (but still highly beneficial) government services such as freeway construction with usage taxes? Now there are two traditional ways to tax a freeway: a toll and a gas tax.

A toll involves setting up certain payment stations where in order to use that section of the road, you must pay the fee. Then you may drive a certain distance on it. The trouble with tolls is unless they are equitably applied across the whole landscape (something that will never happen - politicians love to make deals with each other) they will create distortions in traffic patterns as people seek to avoid (as always) paying the tax.

A gas tax involves adding a little bit to the cost of fuel to pay for the roadway that's been built and is being maintained. You pay it to the exact degree that you use it, and the only avoidance method is purchasing more fuel-efficient vehicles, which we currently give tax deductions for anyways and is a fundamentally beneficial behavior. And before you ask, a gas tax high enough could pay for the entire road system, though it should ONLY be used to pay for the road system or any expenses related to gas consumption and cars, such as maintenance of any publcily-owned oil pipelines (do they exist?) and proper enforcement of various regulations and laws (such as State Patrol speeding cops) related to the two.

These roads have to be paid for one way or another, and paying for it with a gas tax puts the cost ONLY on those who use the roads and only to the degree to which they use them. This seems to be very fair and equitable, and avoids stealing from anyone. It also puts the cost of maintaining a freeway grid squarely on those who use it, with those who benefit the most paying the most.

Now on the flip side, there's a less traditional method as well: Car GPS tags, but the enforcment cost would be huge and it might not be difficult to mess with them. It would give a more accurate measure then gas consumption for sure, but the cost of building the national surveillance system required for such a thing is tremendous and enforcing such a thing on a population that would surely try to avoid it with transceivers that are themselves very technologically complicated and thus, breakable, is tremendous. Still, it is something to think about, and I guess electrocution hazard could keep some people from messing around.

The Copenhagen Post

Looking at many articles pertaining to Climate Change (and many of the stories revolve around Denmark), I have found a rare gem.

This quality Danish newspaper is concise, informative, intelligent, and has a wonderful English language edition. Very few of their newstories are over half a page, and yet they give you five pages worth of information. I especially loved this gem on public opinnion related to Nuclear power: "'Nej Tak' to nuclear after all".

They started by mentioning the two polls and their collosally different results. They then briefly mentioned the question that one of the polls asked versus the other. Then they gave a simple and clear reason - "did not ask respondents about the actual placement of nuclear power plants in Denmark" (4th paragraph, last sentence) - for the discrepency. It followed this up with a one-sentence explanation (without making it clear that it was an explanation) for why they looked in to this to begin with, and finished with the status (in the last paragraph) of Danish political parties on the issue.

I also found a wonderful article there about an accounting scandals involving carbon credits and a VAT carousel. It involves a classic conflict-of-interest scenario, where registering the VAT you paid to buy your goods for resale, you drop the VAT Receivable of the “cooperating” businesses without collection, and run off to a foreign country before you have to pay the VAT yourself. The "chum" businesses who "sold" you the goods also disappear, leaving no complete recursion for the collection of the tax.

Look at it yourself any time:

http://www.cphpost.dk/index.php

Accounting & the Economy

Discarded Image from University of New Hampshire student sever.

And now we come to the boring subject of academic accounting. Mostly, it affects Bankers who are in too much of a hurry to inspect a company's books and Investors with more money then sense - or too little of both. Unfortunately, these people affect the economy too. Thus, accounting standards that unfairly favor one industry over another can have a genuine effect on the economy.

In addition, taxable income (as reported in income statement) has an uncanny ability to affect taxes paid. And what the accounting rules say, you do - penalties range from being shamed in front of investors, to jail time for Chief Executives.

As we continue our magical mystery tour of the world of accounting, one general rule of cause and effect for readers: When taxable income is made higher, those that need investment capital benefit as both banks and stock investors see a higher income. But when taxable income is lower, less taxes need be paid on income. The greater investment generally helps smaller businesses, while the lower taxes helps those already established to want to invest and expand to begin with.

Software Development

A good first example of the way accounting affects us all is research and development. R&D, though really an investment, cannot be "capitalized," or apply to the asset price, of a product as the products very existence is uncertain. Instead, it must be applied to Expenses, lowering a companys' quarterly profit. But there's exception.

You see, software developers are allowed to apply R&D costs to asset price after "technological feasibility" (loosely defined term that can be set arbitrarily so long as you don't spook investors with how arbitrary you set it) has been reached. This means that software developers show larger profits then anybody else who does R&D, tricking investors not "in the know" in to thinking they are more profitable then they are. If we applied the same logic to the auto industry, they could start recording development cost to asset price as soon as they'd decided to make the vehicle concept a production car. Lower profits mean less investment among less educated or industrious creditors and investors, giving the software industry an artificial advantage over all other firms that must create their own intellectual, and especially engineering or science, property.

Lower Exports

The US Constitution says "congress shall not enact an export tariff," but in effect America has an export tariff in the form of inventory standards. See, American companies can apply LIFO standards, or Last-In, First-Out, standards to there inventory, allowing them to understate how much profit they gained from the products they sold (inflation), and thus pay lower taxes, but when such a company sells goods to foreign countries, they must use either First-In, First-Out or Average-cost standards, which decrease the original value of the inventory (via inflation), and thus raise the taxable income of these companies. This discrepency exists because in America you must use the GAAP standards, which allow LIFO inventorying to understate taxable income, while in most other countries (over 100 total) you must use IFRS standards, which do not. This leads to an effective export tariff in the form of higher income taxes, discouraging American businesses from engaging in export trade.

Now, for some companies that doesn't actually affect them, and it doesn't affect them because they need so much investment capital to develop their products and expand production that they will use First In, First Out standards to increase income so that investors see them as more profitable. As there is less export of the other, older industries that would rather have the lower taxes, the cost of exporting to other countries (shipping, currency exchange, et cetera) declines, giving these companies an artificial boost.

Huge Conglomerates

Sometimes people complain about corporations being too large. Here's a secret. Our accounting standards make them too large. See, when a company buys another for more then Assets - Debts, they get an intangible asset, an intangible asset that the original company didn't have, called "Goodwill." "Goodwill" can only be gained by buying a company out for more then Assets - Debts. We increase the value of companies, to investors and creditors, especially lazy and ignorant ones, when they get sold to other companies. Over-sized conglomerates get an advantage in acquiring capital over the original businesses that made them up, and not one that comes from any intrinsic value of the conglomerate.

Sarbanes-Oxley

The Sarbanes-Oxley act of 2002 was enacted to prevent the kind of corporate abuses and widespread bad behavior that defined the ENRON and WorldCom scandals. Most of the reforms of Sarbanes-Oxley were pretty common-sensical, you know, don't let the person who handles the money record it, assess your risks always, monitor your internal controls, and let the board of directors hire the auditors, stuff like that, but there are two particular aspects of internal controls that can cause distortions:

"Control Environment" is described as a general subjective vibe, without any objective standards. As such it may well mean, as it is accountants judging this general vibe, excessive rules making, "ethical behavior" such as not swearing or drinking whiskey, and lots of "team" values. This helps industries that benefit from such attitudes, but my guess is your average steel or logging mill with heavy drinking joe six-pack and whiskey-drunk axe-throwing contests, those within the business aren't clean shaven enough, and they end up hiring outside of the industry for management so the accountant will sign off on their internal controls.

In addtion, "Information and Communication" requires constant reporting of everything, new sales and the works, which for companies that sell small numbers of high-valued goods (like diamonds) adds a lot of additional labor, all so investors will trust them.

Discouraging the selling of stock

These new standards only apply to publicly-traded companies, which gives private-companies (single owner, family, and partnership) an artificial edge. See, companies that must abide by Sarbanes-Oxley take a lot more work to prepare their financial statements, leading to the need to hire more accountants and more billable hours. This gives a further edge to private companies with their simpler, more objective financial statements.

Conclusion and Post-Summary

These are just a few elementary examples about how small flaws in the consistency of accounting can lead to distortion and misappropriation of resources in the economy. The most important job of an accountant is to represent all relevant information in an objective manner, but the very standards that Accountants must use are inherently flawed. When the standards are flawed, the information is biased, and the biased information distorts taxable income (and thus taxes paid on income) and stock prices (and thus investment available.) This gives some companies a leg up and some a shove down. It also distorts trade (due to the 2 separate standards for out of country and in country) and, through the subjectivity and labor costs of Sarbanes-Oxley, discourages companies from being publicly traded. Software companies can develop intellectual property themselves, and record it as investment, while all other companies must count it as loss. In short, the economy is bullied by accountants.

Sources (1, Print)
Financial Accounting, Spiceland, Thomas, Herrmann, First Edition, McGraw-Hill

If you viewed this prior to October 12th at 5:43 PM, no sources had yet been added. My apologies to all who did for leaving out such vital information.