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Friday, November 5, 2010

The Game of Monopoly on a National Scale

"Excessive taxation will carry reason and reflection to every man's door, and particularly in the hour of election." — Thomas Jefferson

 The Monopoly Board Game originated during the Great Depression. At first its inventor, Charles Darrow, could not interest manufacturers. He launched it in 1933 and it quickly made him rich. Parker Brothers turned the game down, citing “52 design errors.” In 1935 Parker Brothers finally bought the rights from Darrow and started manufacturing a slightly updated version. In the same year Waddingtons bought the UK rights to the game and made a version based on the streets of London. By 1935, the New York Times was reporting that “leading all other board games is the season’s craze, ‘Monopoly,’ the game of real estate.”

Most of us are familiar with the object of Monopoly: the accumulation of property on which one places houses and hotels, and from which one receives revenue. Many of us have a favorite token. Perennially popular is the top hat, which symbolizes the sort of wealth to which Americans who work hard can aspire. The top hat is a token that has remained in the game, even while others have changed over the decades.

One’s willingness to play Monopoly depends on a few conditions—for instance, a predictable number of “Pay Income Tax” cards. These cards are manageable when you know in advance the amount of money printed on them and how many of them are in the deck. It helps, too, that there are a limited and predictable number of “Go to Jail” cards. This is what is called a knowable risk, as opposed to an uncertainty. Likewise, there must be a limited and predictable number of “Chance” cards. In other words, there has to be some certainty that property rights are secure and that the risks to property are few in number and can be managed. You can read more of this analogy in Hillsdale College publication, Imprimis by clicking here.

The bank must be dependable, too. There is a fixed supply of Monopoly money and the bank is supposed to follow the rules of the game, exercising little or no independent discretion. If players sit down at the Monopoly board only to discover a bank that overreaches or is too unpredictable or discretionary, we all know what happens. They will walk away from the board. There is no game. In other words there are no surprises and the rules of the game remain fixed — no housing bubbles, no borrowing from China and no QE2 by the Federal Reserve Bank.

QE2  the electronic equivalent of starting up the Fed’s printing presses to create money for buying financial assets in the market – in this case long-term U.S. Treasury bonds. Buying bonds pushes down their yields, and the interest rates across the debt markets that are closely tied to U.S. Treasury rates.

According to Credit Suisse inflation is a threat in China, and it is at least partially driven by speculative capital entering China due to expectations of a Yuan appreciation, higher interest rates in China vs. the developed world, and strong relative Chinese GDP growth. Yet should China hike its interest rates to control inflation, it will only widen the gap with U.S. interest rates, which could attract even more capital. If China does nothing, then inflation could get worse.

Problem now is, Bernanke's QE2 just gives capital yet another reason to choose China over the U.S., threatening further inflation. It thus compounds the problem above. But China has to do something, and they'll likely be forced to mix interest rate hikes with domestic price controls in a haphazard struggle to keep the nation on track.

All of this economic gobbledygook boils down to two simple facts. As our government borrows more from China to cover our increasing deficit spending our money will become devalued and prices will rise for all commodities and services. This will include grain, meat, vegetables, oil, coal, timber and manufactured goods. As an example I went to my local office supply store the other day to buy a ream of paper for my inkjet printer. The cost had risen almost two dollars since I purchased my last ream. The reason for this is twofold. One is the cost to produce the paper, i.e. timber, processing, packaging and shipping. These costs have increased due to the cost of the materials, government EPA regulations, such as “carbon footprints” and higher taxes on the companies selling the raw materials and making the products. The second reason is the lower value of the dollar — you get less for more.

The United States is an asset rich nation. We have vast amounts of timber, coal and oil that lays fallow due to pressures from the progressive environmental groups. We also have another, less spoken of asset, land. As an example in the state of Utah the federal government owns 58% of the land, with the latest federal land grab being the 1.9 million acre Grand Staircase-Escalante National Monument created under a 1996 executive order from Bill Clinton as a political move to placate the environmental groups and win Arizona’s electoral votes in the 1996 election.

The Federal Government owns nearly 650 million acres of land - almost 30 percent of the land area of the United States. Federally-owned and managed public lands include National Parks, National Forests, and National Wildlife Refuges. These are lands that are held for all Americans. The Federal agencies responsible for managing America's natural resources must meet both the public desire to protect them and the public expectation of economic growth based on them. Within the Federal Government, a number of agencies contribute to the management of natural resources associated with public lands. All of these Federal agencies are partners in the production of

In the late 1990’s Psomas, the civil engineering firm I was part owner of, hosted monthly breakfasts for our clients and the press. We would always manage to have a guest speaker of some notoriety speaking on a topic of current interest to the engineering community. At one such meeting we had Senator Strom Thurmond (R-SC — 1902-2003), speaking on the recently passed Intermodal Surface Transportation Efficiency Act (ISTEA).

While we were eating breakfast prior to Senator Thurmond’s remarks my colleague and one the best out-of-the box thinkers I ever knew, Jim Duffy, commented to the senator that a good way to reduce the national debt would be to sell some of the federal lands. Jim suggested a high value coastal property such as a portion of the Marine Corps Base at Camp Pendleton. Jim felt that a costal property would go for a very high price on he international market. Senator Thurmond gulped his bacon and eggs and responded with affirmation to Jim’s suggestion.

In the game of monopoly when you run out of money and don’t have enough cash to pay your taxes you are forced to mortgage or sell some of your properties. You begin with your hotels and house and finally the property they sit on. The object of the game is not to over invest leaving yourself short of cash when the taxes come due or you land on another player’s high rent property. Haven’t we done the same with the nation’s economy?  Haven’t we over invested in housing and now we are faced with deficits, and high taxes that are killing job creation?

In my post on the debt I mentioned so ways we could lower government spending and borrowing so we could create more private sector jobs. A few days ago talk show host Larry Elder posted a column on expanding on my recommendations. In light of the recent elections I think Larry has hit the nail on the head. Here are Larry Elder’s recommendations.

I. Sell or lease land. The federal government owns about 700 million acres, more than one-fourth of all land in the U.S. For fiscal year 2007, the government valued its land holdings only at about $1 trillion -- but that includes a zero-dollar valuation for much of the acreage because it was never "purchased." The national debt is approximately $14 trillion. The proceeds from sales/mortgages/leases will fund our current and near-term liabilities and, with other changes, will completely eliminate our debt.

II. Social Security. Workers below the age of 55 shall have the option of placing their retirement contributions in private savings accounts.

III. Medicare. Health care needs of those below the age of 55 shall be addressed with individual, tax-free health savings accounts. From these accounts, people can purchase policies with high deductibles, as we do with auto insurance. Non-emergency matters will be paid for out-of-pocket from the accounts.

IV. Medicaid. Those currently on Medicaid must be grandfathered in, but by a date certain, all federal welfare payments will stop. The needs of the needy will be handled by the states and/or by the unparalleled generosity of the American people.

V. Eliminate, privatize, outsource or sell/lease many federal activities. These include, but are not limited to, Amtrak; the Tennessee Valley Authority; government-operated dams and nuclear power plants; the federal student aid grants and loans; public housing; the Food and Drug Administration; the Occupational Safety and Health Administration; the departments of Energy, Education, and Housing and Urban Development; the Environmental Protection Agency; Freddie Mac; Fannie Mae; the National Institutes of Health; and the Federal Housing Administration.

VI. Repeal laws that violate the principle of federalism, such as wage and hour laws; federal minimum wage; the Clean Air Act; the Americans with Disabilities Act; equal pay laws; the Davis-Bacon Act (mandating prevailing union wages for those working under federal contracts); and all federal anti-discrimination laws that apply to the private sector.

VII. Taxes. Eliminate income, corporate, capital gains, dividend and estate taxes. Given the reduced size of government, the limited duties of the federal government as described in Article I, Section 8 of the Constitution will be funded, as the Founding Fathers envisioned, with duties and tariffs.

In the game of Monopoly if you get into financial trouble and do not have enough case to cover your debts you cannot borrow from the bank or another player (like China).You have to take stock and mortgage or sell some of your assets if you want to continue playing the game. With some intelligent moves and a bit of luck it is possible to recoup some of your assets and eventually win the game. If you do not you will be in bankruptcy and you are out of the game.

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