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Tuesday, February 20, 2018

Alternative Currencies in Wyoming

Thanks to HB0019 and SF0111, there is a discussion under way about the use of alternative currencies, primarily digital, here in our state. 

I am happy to see this discussion, especially since it means opening up Wyoming to a possibly new industry of technological innovation. It would be a great accomplishment if we can attract businesses without throwing hundreds of millions of taxpayer dollars after them. 

As for the hopes that many people have of establishing a digital currency as legal tender in Wyoming, in other words an alternative to the dollar, there are a few obstacles in the way. I am not opposed to that idea per se - some alternative currency systems have proven successful, such as the British LETS system - but it is important to know the potentials as well as the limitations, of such a system.

The potentials first. Obviously, trade taking place in an alternative currency is not liberated from the laws of the United States or of Wyoming. However, it can help people get around some of the institutional hurdles associated with the U.S. dollar. For example, you can create a credit system that is independent of the recording practices used in the traditional banking system. In theory, this is possible with dollars as well, but for institutional reasons the alternative currencies tend to be door openers for this type of institutional innovation. 

Institutional innovation is an essential part of a free-market economy. It keeps the economic system and its agents on the alert. If we have a financial system that is getting stale because of old age and lack of competition, trade in an alternative currency can be the starting point of an invigorating challenge to an institutional status quo.

Another potential benefit of wider use of digital currencies is that they are not as easily forfeited. To the best of my knowledge, so far there have not been any fraud cases in bitcoin. There is a limit to what fraud protection a digital currency can offer, but there is a credible argument being made for these alternative means of payment based on their higher fraud deterrent threshold. 

There are also some drawbacks or risks that we should not look away from. The most important problem is currency inflation. To illustrate this point, let us look at a schematic of the market for bitcoin, under the assumption that bitcoin became frequently used in regular economic transactions. Figure 1 shows the supply curve of bitcoin as per the algorithm that defines the "mining" of new bitcoins. By design, the slope of the supply curve is supposed to flatten out completely by an already known date.

Figure 1 also has a demand curve. Suppose that, so far, there has been a reasonable long-term balance between bitcoin demand and supply. Then, as bitcoin hypothetically takes of as a currency of transaction, demand soars; because of the deterministic flattening of the supply curve, we rapidly end up with excess demand for bitcoin:

Figure 1

Excess demand for a currency drives up its price - and since a price is always relative in nature, this is the price in U.S. dollars. 

By definition, we now have an exchange rate between the dollar and the bitcoin. All other things equal, the exchange rate is going to rise, appreciating the value of the bitcoin, as demand grows. Here, we run into the same type of problem as we have with existing currencies when there is a big shift in the exchange rate. Bitcoin holders will be wealthier in dollars, but it will also become cheaper for everyone to buy products denominated in dollars. 

For example, suppose a computer made by Hakkapeliitta in Finland is sold for 8,000 Finnish markka, and the markka-to-dollar exchange rate is 8:1. Suppose a computer built by Dell in Texas costs $1,000. The two computers are now priced equally on the Finnish market (again, all other things equal). Suppose, now, that a surge in demand for dollars drives up the exchange rate to 9:1. If Dell wants its $1,000 for its computer, it is going to have to charge 9,000 markka; the option is to keep the price constant and only take home $889. 

By the same token, suppose Plumber Pete charges his customers in bitcoin and Plumber Paul charges in dollars. The exchange rate is 8:1 when Pete offers to put in new pipes in your house for 1,000 bitcoins and Paul offers to do it for $8,000. Since you have $8,000 to spend, the means of payment is of less importance; what matters is entirely the quality of the work. If Pete gets the job, you buy 1,000 bitcoins for your $8,000 at no transaction fee.

Suppose, now, that the exchange rate rises to 9:1. All of a sudden, your $8,000 can only buy 889 bitcoins. Pete has to cut his price, or lose out to Paul.

Over time these exchange-rate and transaction costs issues are taken care of by a functioning market. It would take a carefully crafted regulation-free market to make that happen, where government gives no preferential treatment to either currency. 

Which brings us to another problem with a new currency: its status with government. If Pete the Plumber is successful in selling his services at bitcoin prices, as things are today he still faces the problem of paying his taxes and fees in U.S. dollars. So long as government gives preferential treatment to the dollar, accepting no other currency for tax payments, it is unrealistic to see bitcoin reach quite the same status as the dollar. 

That said, if we can create a functioning market for bitcoin with the same liquidity as we have in the dollar market, it is probably only a matter of time before bitcoins (or whatever alternative currency we are talking about) will become acceptable as means of tax payments. 

There is more to be said about this, but let us make do with these basics for now. More later. 

Monday, February 19, 2018

Bills to Be Keep an Eye On

Now that the legislature has closed the introduction window, it is time for a first review of the bills to be aware of.

Before we do that, though, let me once again point out that the defeat of Taxmageddon was only a battle victory. The political war against tax hikes continues.

With that in mind, here is a quick rundown of important or interesting bills to keep our eyes on:

HB 1 - The Budget. Finally on file... Now we can take a closer look at it. Which we will.

HB 32 & 33 - School funding. These bills are referred to the Appropriations committee. These bills propose changes to the formulas for maintenance and capital construction funding.

HB 153 - Expand Hathaway. The idea is to extend lower tuitions to out-of-state students. While I sympathize with the idea of bringing more students to the University of Wyoming, the better way to attract more students is to bring in more private funds, strengthen the competitiveness of faculty research, broaden the intellectual capacity into innovative areas, and to reduce the university's inordinate reliance on taxpayers.

HB 185 & 186 - Distribution of investment income. These two bills may seem to be inconspicuous in themselves, but they would raise the bar for future tax reforms. It is better to hold off on any new distribution formula rewrites and instead concentrate on a fundamental change to our state's tax system (which, of course, would have to be preceded by fundamental spending reform).

HJ 7 - TABOR. I have already discussed this bill, and my conclusion stands: it is a worthwhile initiative that, with some modifications, could help strengthen taxpayers vs. spendoholic legislators.

SF 98 - Exemptions from severance taxes. I understand the goal behind this bill, and while we are waiting for some real spending-and-tax reform, this type of rebate or exemption is worth the while. However, a future tax reform should come with a ban on tax exemptions, just to make sure that future governors and legislatures do not abuse the power that tax exemptions provide them with.

SJ 4 - Changing the authority over school funding. This one seems to be good. It remains to be seen if it provides enough wiggle room to be used as a door opener toward real school-choice reform. 

The efforts to establish crypto-currencies in Wyoming is worth a separate comment. See you back here tomorrow!


Saturday, February 17, 2018

Liberty Takes Courage

Disclaimer: As always, all articles on this blog are my own. Nobody else is responsible for them.

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As I mentioned yesterday, our fiscally conservative friends in the legislature here in Wyoming, as well as conservatives running for governor, have yet to show some backbone when it comes to spending reform. The situation is even worse in Congress, where Republicans are almost tripping over their Democrat friends in an effort to perpetuate growth of the welfare state. 

Therefore, it is time for us who believe in the values on which this country was founded; the values that have guided the birth, growth and success of the entire Western Civilization; to once again take a stand, draw the line and reclaim the rights to freedom and the pursuit of happiness and prosperity that God has given us. 

Time is running out. We may stop tax hikes, but unless we can roll back, structurally and permanently, the spending programs that constitute the backbone of government spending, our resistance to higher taxes and larger government will prove to be little more than a speed limit on the growth of the egalitarian welfare state.

It is time for us to do what we do best: use the means of government that our Constitution provides, to re-establish the four pillars of the American Republic:

Limited government 
a government that exists only to protect life, liberty and property; 

Free-market capitalism 
despite its imperfections, the most successful economic system mankind has ever invented; 

Private charity 
the only sustainable way to build and maintain strong communities; 

Personal responsibility 
a free society is free only as long as its citizens share in its protection and growth.

However, these words mean nothing unless we are willing to turn them into actionable reform. In addition to the plan I have developed for reforming Wyoming, here are two ideas on how to turn the tide on big government at the federal level - an issue of similar importance to reforming our state:

Protecting the Defense Budget; a model that would guarantee the funding of our national defense regardless of the budgetary bickering over the rest of the federal government's finances;

Family Savings Accounts; instead of tax-paid family leave, a model that gives families of all walks of life, all incomes and all constellations control over their own income security. 

The family-savings account model can also be implemented at the state level. 

Again, these solutions, state and federal, are perfectly realistic and actionable. This can be done through legislative bills, campaign platforms and commitment from us, the voters and taxpayers.

Do we have the courage it takes to get this done?

Friday, February 16, 2018

Beware of a Special Session

As of this morning, the apparent tax threat to the Wyoming economy is not as urgent as it was before the session. There are still two bills to keep an eye on, HB0051 about gross receipts collections and HB0176 creating a "tax reform 2020 committee". It would be great if they both failed, as that would raise the bar further for the statists in the legislature. While I am all in favor of a state tax reform, I would not want it to happen until the legislature has appointed a "2020 spending reduction committee".

That said, it would be naive, bordering on irresponsible, to believe that the tax-and-spenders in our legislature will give up this easily. We had cause for celebration when the Revenue Committee chickened out and refused to get behind any of their own major tax-hike bills. However, a statist just does not give up this easily; do not think for a moment that the people who crafted bills that would raise our taxes by half-a-billion dollars or more, suddenly threw their hands up in the air and said "OK, you know what, I was wrong - raising taxes is a bad idea". 

Politics does not work that way. The statists we are up against; the lawmakers who spent all of 2017 trying to find a way to raise sales and property taxes; to expand the sales tax; to raise excise taxes; and create an entirely new tax; those lawmakers are dyed-in-the-wool statists and will not give up. They have realized that they cannot use the usual pathway through the interim committee process, but instead of giving up they are working on finding another way forward. 

There are three reasons you should all be on the alert for a special session, any time from a week from now to at least the end of March. 

First, as mentioned, a statist does not wake up one day as a born-again conservative. For sure, there are statists, even socialists, who come around and change their fundamental views. I am a good example: raised a socialist in a home with two hard-core socialist parents, in a country run by socialists for decades, I did not begin to question my beliefs until I started traveling Europe. I saw the British economy flourish under Lady Thatcher, asking myself "if our Swedish socialist welfare state is so awesome, how come the Brits have better cars, newer homes, can spend more on restaurants and wear better shoes than we do?" 

Another formative experience was the summer I spent traveling through the Soviet satellite states in eastern Europe. I will never forget walking along the Berlin Wall on the east side. 

It took me years to give up my belief that government was the path to prosperity and happiness. A statist in Wyoming does not come from nearly as extreme a viewpoint, but it still takes time, a long time, for them to change their beliefs. When they do, on the other hand, you will not hear the end of it. 

Have you heard any of the legislators who originally backed the Taxmageddon package come out and repent? No. All they have done is to quietly stash those bills away somewhere. All my political intuition tells me that they are waiting for the right moment to bring them up again, with a much better chance to get them passed. 

A special session would be the logical venue.

My second reason for expecting it, is the somewhat better outlook on the Wyoming economy. As I have repeatedly explained on this blog, our "new normal" state of economic activity is something we will have to live with for the foreseeable future - unless, of course, we get a governor and a legislative majority that are willing to commit to structural spending cuts and substantial deregulation. In that case, Wyoming would become a prosperity powerhouse. 

However, until that happens, our "new normal" is exactly that: a new, normal state of economic activity that can easily be disrupted by higher taxes. 

Some people, however, misread this new state of normality. They see it as a sign that the economy is now on its way back to the heydays of yore, when tax revenue was as abundant as gravy on Thanksgiving. This, of course, is a big misinterpretation of economic reality, but a statist mind will often try to warp, bend and reshape reality to fit his own image of what it should look like. 

A special session would be the logical consequence of the statist macroeconomic pipe dream. 

The third reason to expect this unusual event is the unfortunate lack of support for structural spending reductions among fiscal conservatives. This applies to fiscal conservatives in both the legislature and among our gubernatorial candidates. In the legislative branch, there is not a single proposal for fundamental school-choice reform. Done right, this reform would reduce the cost of our K-12 system by $250-$300 million per year, while creating a new private industry contributing $450-$500 million and thousands of new jobs to our economy.

Nor have I seen proposals for Medicaid reform, which also could cut costs - permanently - for our state's taxpayers and open for making the program a completely in-state operated program. This, again, would allow for substantial cuts in costs; on the non-elderly side, a very first reform would shave off more than $100 million in permanent cost cuts. And this is without adding the benefits of a future Obamacare repeal. 

These are just two examples of reforms that the fiscal conservatives could have brought up as bills in this session. If they had, they would have strongly contributed to building a successful alternative to future tax hikes. 

Sadly, things do not look better on the executive side. Not one of our gubernatorial candidates have shown any interest in permanently reducing the size of our state government. So far, Harriet Hageman's only substantial mention of the Wyoming economy was in her announcement speech when she made clear that she wanted a "regulatory renovation" plan for our state. That is a great idea, but it is not sufficient. As for fiscal policy, all she said was that she does not think it is a good idea to use discretionary revenue for permanent spending. 

Hageman needs to do more - a lot more - if she wants to convince fiscally conservative voters that she is their candidate. 

Taylor Haynes remains an unknown quantity on this matter. I hope I misread him when I suggest that his desire to grab federal lands and associated severance tax revenue, is combined with a belief that Wyoming will continue to get federal funds from Washington. If this is what he believes, then I fear he might just be out to put more money into state coffers. 

If our fiscal conservatives would come out stronger and actively contribute with proposals for permanent reductions in state spending, we would show the statists that there is a stronger alternative to their Taxmageddon vision. It would not sway the hard-core tax-and-spenders, but it would win over enough fence sitters to permanently reduce the big-government crowd of lawmakers to an amusing minority. 

As things are now, there is nothing fun whatsoever about the direction in which our state is moving. We fiscal conservatives have given the tax hikers a real run for their (our) money, but we have a long, long way to go before we have secured a prosperous future for our state. 

A little bit more help from our elected fiscal conservatives would help. Especially if the governor calls a special session for the purposes of raising taxes. 

Thursday, February 15, 2018

Wednesday, February 14, 2018

Do We Need a TABOR in Wyoming? Part 1

Representative Gray has brought up a very important issue in his HJ0007. Called a Taxpayer's Bill of Rights, this bill brings a constitutional feature to Wyoming that we have seen at work in Colorado since the 1990s. 

Tuesday, February 13, 2018

Governor Mead's Political Selfie

Yesterday, in his last State of the State address as governor, Matt Mead choked up when he wanted to thank his wife for standing by him during his gubernatorial tenure. He showed a great deal of love for both her and their children. 

I want to recognize this, and express my respect for the governor for being a genuine family guy. In politics and public policy, the tone is often hard, almost unforgiving, to a point where we forget the person behind the politician.

Sometimes, the person also comes across as a bright contrast to the politician. That is more often the fault of our political culture than the individual, but it is nevertheless a feature of political life that discourages many from running for office. Personally, I left that side of politics almost a quarter century ago, for precisely this reason.