Something doesn't add up...

Here's a head-scratcher from the New York Times:

An Associated Press report this week on census data found that “a record number of Americans — nearly 1 in 2 — have fallen into poverty or are scraping by on earnings that classify them as low income.” The report said that the data “depict a middle class that’s shrinking.”

An October report from the Congressional Budget Office found that, from 1979 to 2007, the average real after-tax household income for the 1 percent of the population with the highest incomes rose 275 percent. For the rest of the top 20 percent of earners, it rose 65 percent. But it rose just 18 percent for the bottom 20 percent.

Here's a dumb question, how can the middle class shrink when their earnings have increased?  It can't.  That's right folks, if everyone's household income goes up in real terms, then everyone is better off, including the shrinking middle class.

Color me skeptical, but I don't see 150 million or so Americans barely getting by.  We are the richest nation that has ever existed, and apparently we are doing better than 1979.  Yet this author would have you believe that half the country is basically begging for food.  Ridiculous.

Oh, and why do you suppose the statistic starts in 1979 and ends in 2007?  I'm curious to know how 3 years of liberalism have helped the bottom 20 percent.

Keynes makes a little sense

I was thinking about it the other day and the rationale for Keynesian stimulus spending hit me.  I don't necessarily agree, but I understand the problem he was trying to solve.

The problem goes like this: say you have 3 people, 2 who are working, 1 who isn't.  Real wealth is what the total economy produces.  In our imaginary economy the actual wealth is the output of the 2 people, the third contributes nothing to the economy.  He is under utilized.  Say we could put this guy to work, whatever he produces is a net gain for the economy.  It doesn't matter what he produces because he wasn't producing anything before.

That's it.  Keynes saw a situation where the capacity of the economy wasn't being utilized and he attempted to create remedies for that situation.  Now I don't know enough to criticize all the remedies, but there is one obvious caveat.  This logic is only valid when one person is involuntarily out of work.  If he is not, then diverting his work to some other task, is a net loss for the economy.

Another thing to consider is that in our imaginary economy all we see is the symptom.  A person is out of work who could be producing something of value.  What we don't know is why.

That's a lot of money

3,000,000,000,000 - 12 zeroes in a trillion, a million million, a lot of freaking money. Three trillion is about 10,000 dollars for every man, woman and child in this country. I don't know about anyone else, but the idea that we have a revenue problem is a joke.  We need to control our spending. Right now we spend a trillion more than we take in. If we just held spending constant, revenues would eventually equal spending. And when revenues continue to rise, so can spending. One day we would have 4 trillion, then 5, then 6, then...does it really matter once you have that much money?

Politics is increasingly less and less about money, and more and more about psychology. Why does income inequality matter? Because it makes people unhappy to have less than the guy next to them, even when they have quite a bit themselves. Happiness is a psychological state, not a material one. Liberal politicians understand this; they point out happiness problems and offer "solutions" to those problems. 

The reality is that we need to placate people whose only problem is their own greed and envy.  Like it or not, but a problem in someones head is a problem we need to solve.

No Brainer

Who should the Republicans run against Obama? Herman Cain, that's who. First, the guy is rock solid on economic policy and if anyone hasn't noticed, the country could use someone like that. Second, he's passionate, articulate, and smart. He's all the things Obama claims to be. Finally, he's black. He'd garner a huge proportion of the minority vote and give white liberals a way to ease their conscience for voting against Obama. The guy would win by a landslide and he would put this country back on sound footing until the next crazy liberal was elected. I like Cain, and so should you.

Can't give it away

Of all the ways to raise "revenues", i.e. increase taxes, none is more insidious than limiting charitable deductions. Private charity exemplifies the humanity we feel toward our fellow man. No one forces anyone to give their hard earned money and time to complete strangers. Nothing is expected in return, only the hope that the needy are lifted from need, and that one day they can be givers as well.

Charitable deductions are a way for government to encourage giving, to encourage humanity. When government takes away those deductions, it by definition discourages giving and humanity. For liberals, government is the ultimate benefactor of mankind. It's telling and sad, that liberals want to take from charity so they can give to the needy.

Mad Men

My soon to be wife and I are watching "Mad Men". It's a very entertaining, if not erratic show. Set in the 60's, it's at the forefront of social change in America; civil rights, social norms, you name it. I think what most people notice first about the show is the treatment of women in the workplace. Women are nothing more than spectacle for the men and treated as such. One of the main characters, Peggy Olson, is a women who is making it in a man's world, and we are led to believe that this is social progress. A woman being promoted to copy writer; a man's job being done by a woman.

It's an interesting social commentary on the progress of women in the work force, how they broke through the glass ceiling. But I find the insight to be only skin deep. Yes, women were treated badly, and yes it's remarkable for Peggy to achieve success as a copy writer. But what's more remarkable is that men are copy writers. Copy writing, advertising, is not a man's job. 50 years before, no man was a copy writer, the job didn't exist. Before men could keep women out of the copy writing business, there had to be a copy writing business.

Women's success in the work force is part of the same revolution that brought us male copy writers. Women didn't break through the glass ceiling, the glass ceiling rendered itself obsolete.

Cuts, Cap, And Tax

Some things make me wonder, like the latest plan to forestall financial disaster. I read that the proposal is to institute 75% in spending cuts along with 25% in tax increases. Sounds good for the good guys, right? Maybe, but why make it so complicated? Let's do the math:

Reduce spending by 3 dollars, raise taxes by 1 dollar = 2 dollars net in reduced government spending.

Call me simplistic (read: skeptical), but couldn't we just have easily had a deal which reduced federal spending by 2 dollars and achieved the same result? Well...yes! So why don't we? It's really simple, the only reason to tie tax raises to spending cuts instead of simply agreeing on reduced spending is because you want to raise taxes and not cut spending. Keep it simple, stupid, and don't get snookered.

Whose money is it?

Recently my girlfriend and I were listening to liberal talk radio and unfortunately, she was hoodwinked. Not to worry, I set her straight, but it is an interesting lesson in economic fallacies and the liberal mind.

The topic du jour was executive pay, and its exorbitance, especially relative to the lowest paid worker. In the 1970's a CEO got paid roughly 30 times that of the janitor, but today, that ratio has skyrocketed to roughly 10 times what it was. Even I have to admit, that's a lot of money.

But here's the interesting point. The radio host effectively convicted CEO's because they made so much more than the rest of the employees. The CEO sits on his behind all day and steals from the janitor who works his behind off all day. It's just unfair.

To whom? Unfair to the janitor? Unfair to the other employees?

Who pays the janitor, the engineer, and the CEO? The owners, that's who. The owners decide to pay the CEO a lot of money, and they decide to pay the janitors and everyone else a lot less. And if anyone is getting ripped off, it's the owners. They are the ones whose profit goes down as CEO pay goes up.

Curiously, the radio host never cries for the owners. He will never cry for them, because in his mind, the profits don't belong to them either. His only goal is to incite envy and hatred in order to justify rage which he can channel. Yes, CEO's get paid a lot. But they didn't take it from you or me, and they certainly didn't steal it from the janitor.

Atlas Shrugged

Went with my girlfriend to see the movie this weekend and I didn't think it would be very good, but like Star Wars, I had to see it. Anyway, it wasn't as bad as the critics said, but it wasn't very good either. The book the movie is based on is nothing more than a thin veil of Ayn Rand's philosophy, and unfortunately it doesn't come across as a very entertaining, nor comprehensible movie.

What the movie needed was a major rewrite. For G-ds sake, make the characters act and speak like human beings! Also, it might be blasphemy, but temper the philosophy to its essential and universally appreciated points. Maybe it wouldn't be "Atlas Shrugged" to the faithful, but so what? If people want the undiluted version of the book, read the book!

Most people, including myself, find the appeal of Ayn Rand in her unrelenting celebration of the individual. That Man doesn't exist for other men, but for himself. She believed that the philosophy of altruism/collectivism, where man is viewed as a sacrificial animal to others/society, is abhorrent.

I don't ascribe to Objectivism, and I am certain that the adherents of Objectivism would castigate those like me. But the reality is that there are tons of us out there who implicitly understand and celebrate, the message that individual achievement is moral and admirable for its own sake. Capitalism is moral, not because it's "Dog eat dog", but because it is the manifestation that what you produce is your achievement, and that others placing a claim on your life is immoral.

That's what inspires me about Atlas Shrugged, and I think that's what inspires others too. It isn't some philosophically consistent diatribe, but universal themes of individual achievement, freedom, and morality. One day, that will make a great movie.

Medi-choice

"If you like your medical care, you can keep it."

As Neo correctly deciphered, the issue is choice. Obama-care passed because despite its obvious awfulness, it offered the false choice that nothing had to change. Why don't conservatives learn this lesson?

It's amazing listening to the Left and their attacks against completely reasonable proposals regarding health care. The proposal: instead of receiving government insurance, give people money to buy their own insurance. Sounds radical, right? No, but what's radical is the insinuation that conservatives want to destroy Medicare, rob old people, and give their money to millionaires and billionaires (who ironically happen to be quite old).

The logic behind the proposal is that by giving people money, they become conscientious consumers. You would be employing millions of people to act as fiscal watch dogs over health insurance companies. Right now, no one has any incentive to restrain their health care consumption because they don't pay for it. Like it or not, the logic is compelling and just makes common sense.

Of course there are people who disagree, so how can we sell this "experiment" and see if it actually works? Liberals, for all their open mindedness, will not allow the experiment to be run. So we have to get people on board by letting them keep what they have, and allowing them to try our proposal. If you like Medicare, you can keep it. But ours might be a better deal and the choice is yours.

Choice is always a political winner, which is why Obama so disingenuously employed it. We don't have to lie; we offer choice and that's how we should sell our ideas to the American people.

Align incentives

The best way to restrain government is to impose the cost of government on as many people as possible. Why? Because regardless of the cost, everybody's vote counts equally and who wouldn't vote for something they don't have to pay for?

Now the reality is that we could always ask the rich to pay more. After all, it's only fair because they have all the money. The issue however isn't fairness, but efficiency, and taking money from the rich makes us all poorer. Even if you are a huge proponent of redistribution, it doesn't make sense to kill the goose that lays the golden eggs.

Here's my proposal: redistribute first, and then tax every single tax payer at the same flat rate. The rich will pay more because they have much more money, but the poor will also pay because you gave them money to pay taxes with. This means that they are more likely to resist future tax increases because they have skin in the game, and this will in turn limit the size and scope of government.

Rich Pay More, DUH!

While not a fan of the "rich don't pay their fair share" camp, I find it slightly disingenuous for my side to argue that the rich pay too much. One statistic bandied about is how the top 1% of income earners contribute nearly 40% of federal income taxes and how the top 50% pay almost all federal income taxes. Well, color me stupid, but so what.

Let's say Rich Guy III makes $1,000,000 and Poor Joe makes $10,000 and they both pay 10% of their income in taxes. Well, even though the individual percentage is the same, Rich Guy III will pay $100,000 vs. $1,000, or 100 times the amount in taxes. As a fraction of the tax pie, Rich Guy III pays about 99%.

The Right seems to think that because these percentages are so skewed in favor of the rich that it will elicit sympathy. Wrong, it simply points out that these people are rich and furthers resentment from those who don't make lots of money.

The issue with taxes is not how high they are, but how they incentivize behavior. Rich and poor alike work and invest to make money, not to pay taxes. At some point, high tax rates act as a disincentive to produce. That's a bad thing. Taxes are a means to generate revenue, and revenue consists not only of what you get today, but what you get tomorrow as well.

The winning argument for conservatives is that taxes are too high because they generate lower total revenue. Not that the "rich" pay too much. The reality is that most Americans are envious and resentful of the "rich". To win, we must acknowledge that and adapt.

What do they want from us?

Lately, politics has gotten me despondent, and I am coming to the conclusion that the Left is insane. I am trying to come up with an argument on how to limit taxes on the "rich" and I haven't a clue.

Every day I hear from a Left winger that the "rich" don't pay enough. FINE. Then what would be enough? What would it take for you to leave them alone? Name a freakin number already!

Years ago I had the same thought with regard to education. How much is enough? The problem, we are told over and over again, is money. That's a solvable problem. Hire more teachers, pay them more, do whatever it takes and get it done. Yet spending has gone up significantly, while results have not. Where is the humility? Where is the admission that your hypothesis was invalid?

Saying the "rich" don't pay enough implies that you have a figure in mind. It means that there is a ransom for which you'll release your captive. Yet, I have a sinking feeling that no ransom will ever be enough. The life of the "rich" will always hang in the balance, at the whim of so called social (un)justice.

Taken to the logical conclusion we can either be hopeful or fearful. If there is a definite number, then one day we will reach it. But, if that number doesn't exist, then one has to wonder what the Left actually wants? If it's not money, it's...

Why can't I pay more?

A few days ago I had the pleasure of visiting the DMV. It wasn't the worst experience I have ever had, but unpleasant nonetheless. What is amazing to me, is that there is ALWAYS a line. I mean, by sheer chance, one would think that there are times of the day where business is slow and you could get right in. Not a chance.

My purpose at the DMV was to get a new Washington State drivers license. It cost me not only 2 hours in line, but $64 to boot. It's really not about the money, but about my time. Truth is, I have better things to do than sit at the DMV. I could watch TV, enjoy a nice relaxing walk, or even work a little bit. I value my free time a lot, and I would be willing to fork over a few more dollars to have more of it.

But I can't pay more at the DMV for another person behind the counter. The reality is that the number of people behind the counter is very loosely correlated to the number of people in line. So, when lines build up, you wait. You wait as long as it takes, or until the next election.

In another system known as the free market, when demand goes up, prices go up, which encourages more supply and less demand. In laymans terms, you wait less.

It's all been said before

I can't tell you the number of times I hear people tell me that all you have to do is explain things to people and it will change their minds. It won't, and for proof I offer the simple fact that nothing I say is original. Truth of the matter is that everything I say, pretty much everything I will say, has already been better said.

I'll give myself a little credit and say that my thoughts are not exactly the same as others, but the point is that everything you read here about economics and politics can be found throughout history. Hell, that's where I get a lot of inspiration from.

My point is not to diminish my uniqueness, but to say that if you believe lack of knowledge is what drives people, and that someone like me providing that knowledge will change people, you are dead wrong. Most political blogs preach to the choir, and the choir loves to sing. It's not about debate, or rationality, but adherence and propagation of dogma. We all love to hear that someone agrees with us, and we seek out that approval. It's a good feeling.

For me however, that's not interesting. I actually want to change things and I am not interested in dogma. I don't care if liberals or conservatives are hypocrites. I don't care if something is "unconstitutional" or not. What I care about is how can we make things better. Better, not perfect, but within reason and reality, better.

I firmly believe in the supremacy of free markets. Sound economics dictates that that is the best way to allocate resources. But I also believe that human nature doesn't give two shits about sound economics. They care about fairness, and dignity and life in general. Perception is reality. Not something I like to admit, but it's the truth. I write with that in mind, I write, act, to make things better. That's my only goal and it's what interests me most.

Borrowing from the future, today

Generally, I try to understand the other side. Especially when it comes to economics because that's a topic which ought to be non-partisan. The goal is to generate wealth. What we do with that wealth is another question. Yet, despite everyone sharing the same goal, there is a ton of disagreement over how to get there.

Over and over again liberals (and some conservatives) extol the virtues of deficit spending. They say there is slack in the economy due to lack of demand and that government must pick up the slack. Below is what Alan Blinder of Princeton University had to say in the Wall Street Journal:

...But even if you dislike some particular piece of government spending, how exactly does it kill jobs? (The taxes raised to pay the bills may kill jobs, but we are talking about deficit spending here.) If the government either hires people itself or purchases things from private companies, doesn't that create jobs?

...My point is simply that, when there is so much unused capacity and so many unemployed people hungry for work, "job-killing government spending" is oxymoronic. Virtually any type of spending, public or private, will create jobs.

Princetonians deserve better. First, there is no such thing as spending. Only trading between people. Let's think about it.

When I spend money, what I am really doing is trading either something I made, or a service I provide to another person for something they made or a service they provide. Money represents what you have made or done for someone else. It's a store of value to be used in the future. Money is not simply a piece of paper.

Second, there is no such a thing as deficit spending. If we calling spending what it is, trading, it would be obvious that deficit trading is nonsensical; you can only trade what you have. The fiction being perpetuated is that by government printing money you can have deficit spending. Well, no. What happens when the government prints money is that the value of all money goes down. In essence, all current holders of money have been taxed by the government and according to Mr. Blinder, that does kill jobs. Regardless of your political persuasion, government spending is always a tax on the economy.

The reality is that government spending doesn't create anything, by definition it cannot. It can only direct the spending of it's citizens. It can trade what people have already created, We can debate when and how government should do this. But make no mistake, government never creates anything. The worst part about this scheme, is that in a stealth attempt to redistribute wealth, it hurts those most with the least wealth. Ask yourself this, who out there have the most resources to guard against government devaluing the currency? You guessed it, the rich.

Ask and you shall receive

I was contacted a while ago by someone trying to plug their blog. I admire that, so here it is:www.newpolity.com

Household Economics

Let's conduct a thought experiment. Say your house has monthly expenses of $100 and a monthly income of $200. Every month you save $100. Years go by and that savings grows and grows and eventually you have quite a sum, say $1000. You decide that since your monthly income exceeds your monthly expenses that you can spend that money and replenish your savings later. In essence, you are borrowing from yourself. So you take that money saved and write a little note, "will pay back later" and then proceed to spend the money.

Here's the tough question: after spending the saved money, how much money do you have? If you answered $0, go to the head of the class. It's not complicated. If I spend all the money I have saved, I don't have any money. What about those pieces of paper that say "will pay back later". Well, those are pieces of paper, not money. And until you actually pay them back, you've got nothing.

Here's another way to think about it. Imagine we have the same household income of $200 and instead of spending only $100 and saving $100, we spend the whole $200 every month and write ourselves little notes, "will save $100 later". Every month we have no money saved, only little notes we wrote to ourselves. Eventually we have quite a lot of notes. But if you're really astute, you'll realize that we still have no money.

Folks, Social Security is broke today. We are currently taking in less income than we are paying out in benefits. And there is no "trust fund". All that's in there are little notes.

I am always amazed at the duplicity of politicians. How anyone can say with a straight face that there is a trust fund, and that social security is not broke is beyond reproach. The reality is that if your household, our government, spends every cent it takes in as income, it doesn't have any savings. That's common sense.

Vocabulary

I suck at interviewing. It's about the most frustrating thing in the world to be bad at something so instrumental in getting a job. I'd say that being good at interviewing is at least twice as important as being good at your job. After all, getting a job is a prerequisite for doing a good job. Anyway, I am sure there are a multitude of reasons for my poor interviewing skills, but my concern is how to get better.

All my life, I have been very good at math, and like any genuine math person, I scoffed at English skills. Every standardized test, math lifted me over the top, while my English scores brought me back to earth.

As a kid, I didn't read a lot unless I was forced to. TV was my thing and the boob tube had me transfixed. I was too lazy and impatient to exercise my imagination with a book.

When I got older, I started to read more. Opinion pieces on economics and politics were a drug. As I read, I started to notice something strange happening. Through no fault of my own, I would catch myself using words that I had never used before. Out of the blue, I would say something that I couldn't believe came out of my mouth. That used to happen before, but this time, it wasn't my foot that was the problem. Gradually, my vocabulary improved. And the more I read, the more it improved. It improved so much that on the last standardized test I took, my math skills were the weak link.

I don't think change is made in one fell swoop. Eloquent people do not wake up one day and decide to be eloquent. They evolve into eloquence. All changes are a consequence of small steps repeated over and over until they become second nature. We are wired for routine, change the routine and you change the wiring.

Risk

My girlfriend was offered a pretty good job in New York City. One of the factors weighing in on the decision of whether to go was her condo. Could she sell it? Rent it out? Walk away? It's no trivial decision and even less so because the value of the condo has plummeted since she purchased it. Even with a very large initial equity position, she's currently underwater on her mortgage.

Then I read a Wall Street Journal article chronicling some other people in similar (actually far worse) situations. One had "strategically" defaulted, basically making the economic calculation that his loss was irrecoverable. From a business standpoint it makes perfect sense, but what about from a moral standpoint?

At first blush I am one to always rail that it's wrong, just plain wrong, to welch on your debts. But, after some thought, I don't believe that's the case. We don't have debtor's prisons and that means that the calculus for giving out loans needs to adjust.

No one gives a loan out of the kindness of their heart. Banks give people money for one simple reason, to make money. And in their decision to lend is a calculation of potential risks; one of those being that they might not get paid back. That risk, along with all others, is embedded in the price of the loan (the interest rate). Banks which severely misjudge risk ought to pay the consequences.

Think about it this way, if you as an investor lend money (buy a bond) to a corporation, you are essentially a bank. When you purchase that bond, you assume certain risks reflected in the price. The bank loaning money to individuals is no different.

Our free market system consists of profits and losses which incentivize certain behavior. Losses punish uneconomical behavior by removing resources from those that can't manage them. An immoral borrower is far less of a concern to society, than the irresponsible lender who enables them.