Who Pays More Income Taxes: The Top 1% or the Bottom 95%?

I've blogged about this before, but here is some updated data from the IRS, via the Tax Foundation, on the topic: Tax Burden of Top 1% Now Exceeds That of Bottom 95%. Not only is that now true about income taxes, but it has been trending this way for some time: from 1987 to 2007, the bottom 95% share's of total income taxes has fallen from 58% to 39.4%, while the share of total income taxes paid by the top 1% has risen from 24.8% to 40.4%. What this means is that the top 1.4 million taxpayers pay a larger share of the income tax burden than all of the bottom 134 million taxpayers combined.

Bert Ely on Incentives vs. Regulation

I always find financial consultant Bert Ely, who I met many times years ago at conferences, worthwhile to listen to. He either makes very good points or asks very insightful questions, or both. Here is a good video interview of him from The Economist magazine, on some aspects of the current financial mess, the recession, and so on, and an important highlight is his stress on the difference between incentives vs. regulation.

On Common Myths About the Great Depression

I recently finished reading Meltdown, by Thomas Woods 2009). This is a book that I highly recommend if you are interested in understanding the current financial mess and how we got here. Not only is it clearly written, but it is a joy to read because of the author's sense of humor and the book's length of well under 200 pages. The subtitle describes nicely what it covers: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.

One topic that helps Mr. Woods in telling the full story, but that isn't captured explicitly in that subtitle, is his chapter 5, "Great Myths About the Great Depression". In this chapter Woods begins by giving some history that led up to the Great Depression, and he notes the following as myths:

• Herbert Hoover was a pro-capitalist, laissez-faire guy. This is what is commonly taught to us in school, but it couldn't be more wrong. The difference between Hoover and FDR is not at all the night-and-day that it is commonly protray as.
• FDR's New Deal was a bold new direction. Not really, it was more a series of extrapolations from what Hoover had already been doing, e.g., he expanded Hoover's public works initiatives, raised taxes furhter, and took Hoover's efforts to prop up wages and prices and institutionalized them, for instance by destroying crops and imposing acreage reduction requirements on farmers.
• If only FDR had done even more government spending, we'd have gotten out of the depression sooner. As Woods writes, the claim is that "if still more resources could have been seized from the private economy and spent on arbitrary projects, prosperity would have been restored." Along the way Woods debunks specific claims about the 1937-38 "depression within the depression".
• "What saved the economy, and the New Deal, was the enormous public works project known as World War II." (That is a direct quote from Paul Krugman.) Woods demolishes this myth, see pages 103-106.

I'll also note a good article from the WSJ on Nov. 4, 2008, titled "Five Myths About the Great Depression", by Andrew Wilson. The one's Wilson talks about are:

• Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting.
• The stock market crash in October 1929 precipitated the Great Depression.
• Where the market had failed, the government stepped in to protect ordinary people.
• Greed caused the stock market to overshoot and then crash.
• Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight.

Read this article for the details on each point. But more importantly, get Meltdown and learn what the biggest culprits were for the current financial mess, why what the Bush and Obama administrations (and their Congresses) are doing will not help, and what should be done instead to really help and keep major recessions like this from ever happening again.

On Paul Krugman and the Austrian School

Many people hold NY Times columnist Paul Krugman in high regard. I assume this is especially true since he recently won the Nobel in economics. Of course, he won that award for work he did quite a while ago and not in areas he most typically opines and prescribes policy in his columns and TV interviews. And of course there are numerous other nobel-winning economists who disagree with many of Krugman's views and policy prescriptions.

Based on what I've read from him, I don't hold Krugman in high regard at all. In fact, quite the opposite: while I haven't read all of his columns, I can't recall one where I didn't find at least one important claim in that I didn't disagree with strongly, let alone find myself screaming "no, no... NO!"

I recommend you (especially if you are a Krugman fan or disciple) read the following short item titled Paul Krugman's inconvenient track record. It presents an interesting twist to the claim that Mr. Krugman foresaw the housing bubble. It seems he didn't so much foresee it, as he did in a sense recommend it.

The professional economists who most accurately -- and for the right causal reasons -- predicted not only the housing bubble buts its necessary collapse and various other related isseus that have arisen in the past year, are the contemporary exponents of the so-called Austrian School of economics. This is the school founded by the likes of Carl Menger and Eugene von Bohm-Bawerk, but then made a bit more well-known by the likes of Ludwig von Mises and especially Friedrich Hayek (himself a economics Nobel winner, by the way).

Along with various libertarian and Objectivists writers, it is Austrian School proponents like Peter Schiff and others who understood the primary causal factors (the Fed policy of easy money, the existence and actions of Fannie May and Freddie Mac, and so on) that led up to the housing bubble and the many consequences since its collapse. It was they who correctly predicted it ahead of time (with dire warnings), and it is they who are accurately providing the best economic ex-post-facto analysis today. Alas, they continue to be marginalized for a variety of ideological and other reasons.

How many more boom-bust cycles will we have to go through, how much more (sometimes) well-intentioned but wrong-headed government interferences in the economy will we have to witness, and how much more damage to our rights and freedoms will we have to endure... before more people will start to listen?

Blame Beyond GM's Management

Alex Epstein has written two good blog posts critical of the notion that the primary blame for GM's problems should be attributed to GM's poor management over the years. See his posts:

• The elephant -- and the Donkey -- in the room (part 1)
• The elephant -- and the Donkey -- in the room (part 2)

In this second posting he recommends the writings (on this subject) of Holman Jenkins of the WSJ. He excerpts the following gems from a recent Jenkins article:

Why don’t the auto makers limit themselves to paying competitive wages and benefits in line with what workers could earn elsewhere? Because, in the 1930s, Congress passed the Wagner Act with the nearly explicit purpose of imposing a labor monopoly on Detroit to keep wages at higher-than-competitive levels.

Why doesn’t Detroit rationalize its musty brand lineups and dealer networks? Because, in the 1950s, legislatures across the country imposed franchising laws, including the federal “dealer day-in-court clause,” to make such rationalization prohibitively expensive.

Why don’t the auto giants do as Whirlpool and other manufacturers have done, and move their production to cheaper offshore locales? Because, in the 1970s, Congress enacted fuel economy rules to penalize homegrown auto makers if they don’t build the lion’s share of their cars in high-wage, UAW-staffed domestic factories.

On Privatizing Roads

John Stossel had a segment on this topic on one of his 20/20 shows several weeks back. Now part of that is available in this column: Sell the Roads. A good article, that includes many success stories.

On New York's Taxes

I'm a little late commenting ont his, but there was a really good opinion piece in the April 11 issue of the WSJ: The Tax Capital of the World. The focus is on New York and the proposed increases in taxes. First we learn of the plans to further tax the "rich", who in New York are dwindling at a faster rate than elsewhere in the country given the slam that Wall Street in NYC took late last year. The article also notes that the richest 1% of New Yorkers already pay almost 40% of the income tax, and the top 0.5% pay 30%.

Speaking of State Assembly Speaker Sheldon Silver, the article later ends with these four paragraphs:

Mr. Silver says of the coming tax hikes: "We've done it before. There hasn't been a catastrophe." Oh, really? According to Census Bureau data, over the past decade 1.97 million New Yorkers left the state for greener pastures -- the biggest exodus of any state. New York City has lost more than 75,000 jobs since last August, and many industrial areas upstate are as rundown as Detroit. The American Legislative Exchange Council recently said New York had the worst economic outlook of all 50 states, including Michigan. And that analysis was done before these $4 billion in new taxes. How does Mr. Silver define "catastrophe"?

Oh, and it isn't just high earners who get smacked. The new budget raises another $2 billion or so on top of the $4 billion in income taxes with some 100 new taxes, fees, fines, surcharges and penalties to be paid by all New York residents. There are new charges for cell phone usage, fishing permits, health insurance (the "sick tax"), electric bills, and on bottled water, cigars, beer and wine. A New York Post analysis found that a typical family of four with an income below $100,000 would pay more than $800 a year in higher taxes and fees.

This is advertised as a plan of "shared sacrifice," but the group that is most responsible for New York's budget woes, the all-powerful public employee unions, somehow walk out of this with a 3% pay increase. The state is receiving an estimated $10 billion in federal stimulus money, and Democrats are spending every cent while raising the state budget by 9%. Then they insist with a straight face that taxes are the only way to close the budget deficit.

And so Albany is about to make a gigantic gamble on New York's economic future. The gamble is that the state with the highest cost of doing business can raise taxes on everyone who lives, works, breathes, eats or drinks in the state and not pay a heavy price for it. If they're wrong, New York will enhance its reputation as the Empire in Decline State.

I've lived almost my entire life in New York, and still very much like where I live. But how much further down the road of "spend and tax" can our state go before it becomes unlive-able?

Henry Waxman's Scary Plans For Us

I find it hard to choose what items to bother mentioning at my blog, because there are just so many worthy items coming out of Washington. There are so many attacks on our rights, proposed schemes that will ruin the economy, and so on... where does one begin? Why mention this horrific idea over any other? I'll continue to somewhat randomly mention the ones that happen to catch my eye... like this item from the April 10th WSJ: Henry Waxman Has a Plan. The list of things his plan would further regulate includes roofing, furnaces, laundry machines, dishwashers, showerheads, faucets, water closets, urinals, jacuzzis, lightbulbs, lamps... and likely a lot more that the article doesn't bother to mention. Another day, another "yikes!".

Obama and Big Numbers: The Difference Between 100 Million and Several Trillion

Yet another great visualization of the numbers that are being tossed around in Washington these days: Obama Budget Cuts Visualization.

On Big Numbers and the Obama Budget

My friend Will Wilkinson's brief article Obama budget adds up to a big problem nicely summarizes many of the points I've been making lately to anyone who will listen. He notes the feebleness of Obama asking each cabinet area to cut $100 million, how such numbers are dwarfed by the number $3.5 trillion, and the obvious long term problem being that we will all have to pay for this spending spree at some point down the road -- through higher taxes or through inflation (a tax on money you already have). Well done Will!

Thomas Sowell on One Major Cause of the Housing Crisis

Thomas Sowell recently wrote a good essay focusing on one of the biggest causes of the financial crisis -- the unnecessary and economically damaging government emphasis and programs to try to artificially increase home-ownership. A good read.

Scary Debt Numbers

As a follow-up to my recent posting "Scary Deficit Numbers", see the graph that accompanies the March 23 WSJ editorial. These are the CBO estimates for the federal debt held by the public as a share of GDP if President Obama's 2010 budget becomes law. Notice it skyrocket from just over 40% to close to 60% in 2009, and then gradually increase to over 80% by 2019. Just yet another visualization of the enormous spending being proposed here!

Scary Deficit Numbers

See this graph from the Washington Post. The White House numbers are scary enough, but the independent CBO numbers are even more frightening. See Paul Hsieh's post at NoodleFood for some further comments on this.

I'd love to re-watch the many quotes -- from Democrats in particular -- the countless times they criticized the now relatively-puny-deficits from the past 8 years (particularly before they took over congress). Those quotes should play on a loop on some cable station me thinks.

And just keep in mind folks -- these numbers are the annual deficit numbers, which means they are cumulative on top of the already existing huge debt.

We'll soon need new adjectives here folks!

Stossel on Bailouts and Bull

John Stossel gave a great 20/20 program on Friday, March 13. He covered a handful of topics, and these are available as separate videos on YouTube as follows:

• Part 1: Stimulus, Bailouts, and Crisis (7:46)
• Part 2: In favor of privatizing some of our roads (7:02)
• Part 3: Feds vs. States on Medical Marijuana (6:49)
• Part 4: On Universal Pre-K (6:17)
• Part 5: On the Border Fence (6:16)
• Part 6: America: The Land of Opportunity (6:45)

Good stuff!

WSJ Item on Rand's Relevance

I liked Yaron Brook's opinion piece that was published by the Wall Street Journal recently: Is Rand Relevant?

Glenn Garvin on Unions and Mortgage Bailout

Here is a good column about the "Orwellianly named Employee Free Choice Act", from Glenn Garvin of the Miami Herald: "No choice in Free Choice Act". This beginning speaks to a change of opinion by primary supporters of the act that I didn't know about:

If consistency is really the hobgoblin of little minds, then Hilda Solis and George Miller must be America's top ghostbusters. They think the secret ballot is the cornerstone of democracy, except for American workers deciding whether to join a labor union.

Miller is the U.S. House's chief sponsor of the Orwellianly named Employee Free Choice Act, a bill much-coveted by labor unions that would do away with secret-ballot voting when they're trying to organize a company workforce. And Solis, a former congresswoman from Southern California who is President Barack Obama's newly confirmed labor secretary, is EFCA's chief cheerleader.

Oddly enough, Miller and Solis used to think secret ballots were the very lifeblood of democracy. In 2001, introducing himself as someone ''deeply concerned with international labor standards,'' Miller wrote Mexican officials urging them to allow workers to vote on unionization with secret ballots.

''The secret ballot is absolutely necessary in order to ensure that workers are not intimidated into voting for a union they might not otherwise choose,'' Miller wrote, adding that the practice ''will help bring real democracy to the Mexican workplace.'' (The American workplace, I guess, is quite another matter.)

That is precious.

I poked around, and found this late February column he wrote on the mortgage bailout plan which was good too: Common sense missing in Obama bailout.

What Does $1 Trillion Look Like?

I've seen many images like this lately, and most don't do much for me. But this page's building up of images to show just how large $1 Trillion is... I find this series impressive.

Ayn Rand, Atlas Shrugged, and the Tea Party Protests

My friend Paul Hsieh wrote a great two-page (short) article titled "Ayn Rand the Tea-Party Protests". Like countless other articles in the past few months -- including articles in just about any major newspaper or business magazine -- he begins by noting the resurgence in interest in (and sales of) Ayn Rand's epic novel Atlas Shrugged. But then what sets Paul's writeup a part from most of the others is his accurate attention to Rand's ideas and philosophy. Many other recent articles either only cover the book sales increase aspect of the story, or mangle (intentionally or not) Rand's views in ways great or small. So if you don't read any other similar such articles, please do read Paul's two-parter here.

Explanation of the Financial Crisis

Wow... long, but great: John Allison, of BB&T, speaking frankly, explains cause & possible cures of the financial crisis. Video is over an hour long, but well worth watching: The Financial Crisis: Causes and Possible Cures. This guy clearly is smart and knows this subject like the back of his hand.

Atlas Shrugged Sales On the Rise

See this brief item in the latest issue of The Economist: Atlas felt a sense of déjà vu. All the more reason that a movie version of the book -- starring Angelina Jolie no less -- should hurry up and get produced!

Videos Opposing Detroit Bailout and Economic "Stimulus" Plan

Two good videos on YouTube:

• Opposing 'Stimulus' -- Hundreds of Economists Sign on to Cato Institute Ad -- From Cato
• Bailing Out the Big Three - Why reward Detroit (and punish taxpayers) for making unprofitable cars? -- From Reason, and includes at beginning/end some funny clips from SNL.

Government Again Pushing Banks to Make Bad Loans?

Bert Ely wrote a nice piece for the Feb. 2 Wall Street Journal titled "Don't Push Banks to Make Bad Loans". As always, Bert writes in a clear, concise fashion -- and makes a strong case that the federal government's recent actions are perpetuating their mistakes of the past.

Two Economists Against the Massive So-Called "Stimulus" Plan

My friend Will Wilkinson wrote an interesting piece, The Self-Defeating Stimulus, that provides the views of two nobel award winning Economists (Edward Prescott and Edmund Phelps) on the massive so-called "stimulus" plan from the Obama administration and the Democrats in congress. Good stuff!

Rick Santelli Is Angry About Government's Recent Actions

Rick Santelli of CNBC sparked a revolution of sorts on the floor of the Chicago Board of Trade. Watch the video to see! Pretty cool... also available on YouTube of course.

How big is 13 Trillion?

I got an email recently from CEI (Competitive Enterprise Institute), that asked the provocative question "How Big is $13 Trillion in Debt?". (I couldn't find the email as a press release or other article at their website, but I did find it reproduced here.) It begins with these interesting numbers:

Regardless of your political party or ideological leanings, the notion of the federal government spending $2 trillion, adding to the national debt of nearly $11 trillion already, should make you stop and consider the staggering size of our national tab.

If the irony of using debt-based spending to solve a problem caused by debt-based spending has escaped you (I doubt it has), perhaps these fun facts will put things into perspective:

• If you spent $1 every second, you'd have to keep spending for 412,000 years to get to $13 trillion. That means you'd have to start shortly after the time human beings first starting using stone tools and fire to get to $13 trillion today.
• $13 trillion in one dollar bills weighs 28 million pounds. That's as much as 87 blue whales or 462 Statues of Liberty.
• If you laid 13 trillion one-dollar bills end-to-end they'd reach from the earth to the sun and back...five times over. That's 946 million miles of greenbacks.

It then continues on to talk a bit about the $2 trillion bailouts figure, and also the big number that amounts to the amount of interest we are all paying on the debt.

Forbes on Bad Economics, Tax Cuts, and Bernanke

Steve Forbes must have had his protein drink when he wrote his opinion items for the Feb. 2 issue of Forbes magazine, because these three are all excellent and well worth reading: Big Bar to Robust Recovery: Bad Ideas, which is continued on page two along with "There Are Tax Cuts and Then There are Tax Cuts" and "Earth to Bernanke".

On Sound Money and Gold-like Standards

Two recent items that are worth reading on the need for sound money and a gold-like standard, instead of our current inflation-enabling fiat currency system:

• Capitalism Needs a Sound-Money Foundation, by Judy Shelton in the 2/11/2009 Wall Street Journal
• Hamilton Got it Right -- Why Can't We?, by Steve Forbes in the February 16th issue of Forbes

Gary Becker on the Stimulus Plan

In the Feb. 10 issue of the Wall Street Journal, Nobel economist Gary Becker (along with Kevin Murphy) analyzed the stimulus plan working its way through Congress: There's No Stimulus Free Lunch. They consider the plan's effects according to four basic factors -- a good read.

BB&T's Allison on how a truly free market could have prevented this

People who are blaming "capitalism" and "free markets" for all of the problems in our banking and financial systems are willfully evading the extent to which our system is not truly free at all. I mean we have how many pages of regulations already? And we have government institutions like Fannie and Freddie, not to mention the Federal Reserve itself?

While the US remains more capitalist and free-market than many other countries, we have been steadily becoming less free since just about day one. Or perhaps "steadily" isn't quite the right word, since our economic history if punctuated by specific government actions that have decreased the level of freedom in our markets... but the general trend has been consistently downard in this regard. The similiarities with some of the events of Ayn Rand's novel Atlas Shrugged are made clear almost every day.

Here is a good writeup (split into six short pages) at TheStreet.com about the views of John Allison, BB&T Chairman and free-market enthusiast: BB&T's Allison: A Free Market Could Have Prevented This. Embedded in the article are several audio clips of an interview with Allison, so don't miss those too.

Here are some good bits from the article:

"This is potentially the worst economic correction that I experienced in my career," he says. "What's unique in this correction was the panic created unfortunately by the Treasury, the Fed and [former President Bush] in October."

Allison takes issue with the government's ability to produce -- "out of the blue" -- $700 billion for the bailout package; the "incredible arbitrariness" of saving some banks and letting others fail; and the lack of consistency within the plan so far, he says.

"Markets hate that kind of stuff," Allison says.

...

"[Allison] established and nurtured a corporate culture of the highest integrity," BB&T lead corporate director James Maynard, who is also the co-founder and chairman of the Golden Corral restaurant chain, said in the August release announcing Allison's retirement. "His leadership is unique and unprecedented in the financial industry. Our company has seen profitable growth for more than 20 years."

Unlike larger, in-state rivals like BofA and Wachovia, which was acquired by Wells Fargo (WFC Quote - Cramer on WFC - Stock Picks) at the end of last year, BB&T has remained profitable, mostly due to its conservative lending standards and the discipline that Allison and his team followed.

...

Allison says the roots of this downturn were laid out by years of easy credit and misguided policies from the Fed and Republican and Democratic administrations.

For one, the aggressively low interest-rate management by former Fed Alan Greenspan created the "illusion of low risk" in the economy that caused consumers and investors to "save less" and "make more risky investments," he says. From the early 1990s through 2007, "we didn't have a meaningful correction," he says.

...

Allison says the creation of the Federal Deposit Insurance Corp. in the 1930s provided a "lack of discipline" at financial institutions seeking to grow their deposit bases. Most importantly, he took issue with the Clinton administration's affordable housing policy objectives, which ultimately led to the solidification of government-sponsored enterprises Fannie Mae and Freddie Mac as major players in the mortgage market.

"Homeownership is a good thing in a broad context, but encouraging people to buy homes they can't afford is not a good thing," he says. "If you want to look at the proximate cause for this mess you got to focus on Fannie Mae and Freddie Mac. They would have never existed in the free market. They drove the mortgage market."

Video On the So-Called Stimulus Bill

Here is a good video on YouTube about the so-called "Stimulus" plan going through Congress right now. Only 7 minutes long, and very easy to understand, it is well worth a viewing.

On Property Taxes in New York

The top story in my local Rochester newspaper today described the results of a recent report from the Tax Foundation. I new that New York had really high property tax rates, the worst in the country. But in terms of property tax burden as a percentage of home values -- a useful statistic I think -- New York amazingly has 19 of the top 20 counties in the entire US. My home county, Monroe is fifth highest in the country, with a 2.8% rating. The highest is Orleans county in New York, which is at 3.0%. (The only county to crack the top 20 that is not from New York, in case you are curious, is Fort Bend, Texas.)

This is pretty depressing, since politicans talk about this issue all the time, but little is ever done about it. They just note the rising costs of this or that service, the hefty mandates imposed by the State government, and on and on. No one ever talks about the proper role of government, and about truly cutting back what the state does in a radical way -- even radical cuts spread out of a period of a decade to ease the transition. Until the people demand this, the politicians likely won't put forth such a radical plan. We'll just keep slowly leaking talented people out of the state, people who are fed up with our outrageous property taxes.

On Time People Spend Looking For Work

I don't recall ever thinking about this question before: How much time does the average unemployed person spend, in minutes and on average, each day? Well, an article in the Jan. 3 issue of the Economist magazine, A Safety Net in Need of Repair, provides the stats for a few countries.

See the graph that goes with the article. It seems that in the US the average unemployed person spends a little over 40 minutes a day "looking for work". That struck me as quite low. There are of course many important things one could be doing while umemployed in addition to looking for work aggressively: going back to school or getting more work training to better enable you to find a job in the future is one obvious example. Or if you have young children, then their needs -- in light of your inability to afford childcare now -- would also take up a lot of your time.

But still, it strikes me that 40 minutes a day is quite low. But what is quite interesting is that the other countries in the graph are all significantly lower on this metric! France is under 30 minutes a day, Spain just over 20, Germany about 10, and Britain and Sweden under 10! Yikes. The article I think rightly notes that this is largely because those countries have stronger UI programs and hence individuals have less incentive to aggressively look for work.

The article itself was arguing in favor of overhauling the unemployed insurance system in the US, presumably to give more benefits in light of the recession. I won't go into my views on this here, I'll just note that I hope that the congress and new administration take this intuitive, and apparently empirically-validated fact into consideration.

On the Laffer Curve

Checkout these very clear and instructive videos that explain the Laffer Curve -- which explains why tax revenues can (in some cases) increase when income tax rates are lowered. These videos are fast-paced and even entertaining, well worth the twenty minutes of your time to get a better understanding of income taxes.

• The Laffer Curve, Part I: Understanding the Theory
• The Laffer Curve, Part II: Reviewing the Evidence
• The Laffer Curve, Part III: Dynamic Scoring

On the Flaws of Keynesian Economic Thinking

Here is a very easy-to-understand video that explains in seven and half minutes why Keynesian economic thinking will not be helpful to our current economic problems. Definitely worth watching!

On Paying Organ Donors

I was pleased to see an article in the October 8th issue of the Economist about the need to allow for payments to organ donors (in the case of a kidney) or their families in the case of donation of organ donation upon death.

Here are my previous blog postings on the need for a market for organ donations (esp. for kidneys):

• On Why We Need a Market for Human Organs (7/27/2008)
• The Need for an Organ Market (12/23/07)
• Repugnance Shouldn't Be a Standard (8/4/07)
• Market for Kidneys... Guess Where? (11/26/06)
• 10-person Domino Donation at Johns Hopkins (11/26/06)
• Sounds Good, But How About Really Helping? (10/29/06)
• Consequentialist Bioethicist is Proud of Efforts to Restrict Organ Donations (9/15/06)
• A Good Sign for Change to Organ Donation Policy (8/5/06)
• Equal Opportunity to Suffer and Die (6/18/06)
• Market for Organs (5/20/06)

On Ugly Fruits and Vegetables

I didn't even know that Europe had complicated rules that regulate the sale of 26 types of "ugly" fruits and vegetables. I'm not shocked, given how much other unnecessary, bureaucratic regulations Europe (and the US too!) impose on the aren't-really-even-close-to-free-markets. But this story from the NY Times is at least noting a "relaxing" of the rules. Parts of it read like a joke from The Onion, but sadly the existence of such government meddling is all too real. Gimme a break!

On Capitalism, Greenspan, and Recent Events

Recent statements by former Fed Chairman Alan Greenspan are quite disgusting. He blames capitalism and his "ideology" for much of the recent financial crisis, but he couldn't be more wrong. Along the way, journalists have taken no small measure of glee in dragging Ayn Rand's name through the mud, because Greenspan's association with her in the 1960s, and his supposed continued belief in her philosophy. But Greenspan is no Objectivist -- not even close.

A good editorial refuting this comes from Harry Binswanger, and is titled Alan Greenspan vs. Ayn Rand and Freedom.

A second great read on this subject is from Richard Salsman, and is titled The GOP Betrayal of Capitalism, Alan Greenspan's Lies and The Scapegoat Phase of the Bear Market. The entire essay is worth reading, but I particularly like these bits:

The Bush Republicans came to Washington as social conservatives, and not at all paradoxically, will be leaving it as conservative socialists.

...

These GOP traitors to capitalism have aped the Social Democrat playbook: if it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it; and if it dies, nationalize it.

...

This recurring pattern — the "scapegoat phase" of bearish markets — has been visible for decades in the U.S., because the main culprit in our economic-financial crises has been the government. First, government manipulates markets (via subsidies and regulations) until they become dysfunctional; next, the government blames market-makers for the losses and pain resulting from hamstrung markets; finally, instead of repealing the initial manipulations, government launches inquisitions, imposes fines, threatens litigation and enacts still more laws, subsidies and regulations, further roiling markets.

The Mortgage-Mess Fable

The Sept. 22 Wall Street Journal had a good opinion piece titled "A Mortgage Fable" that begins with a bit of humor, but then gives a nice overview of the key people and institutions at fault -- as they describe it, "Let us take the roll of political cause and financial effect". Included are: The Federal Reserve, Fannie Mae and Freddie Mac, A credit-rating oligopoly, Banking regulators, The Bear Stearns rescue, and The Community Reinvestment Act.

Some stats on North Korea and South Korea

Sometimes a few numbers helps to make already clear distinctions that much more so. The Sept. 27th issue of The Economist magazine had a series of articles on North and South Korea. A sidebar in one of the articles had some numbers that are quite striking:

• North Korea Population: 22.9 million
• South Korea Population: 48.5 million

So North Korea has 47.2% of the population that South Korea has.

• North Korea GDP: 25.6 billion ($)
• South Korea GDP: 957.1 billion ($)

So North Korea has only 2.7% of the GDP that South Korea has! Wow. This works out in GDP per capita to $1,118 for North Korea and $19,751 for South Korea.

Another interesting difference is Power Generation, measured in kWh, 100m:

• North Korea: 225
• South Korea: 3646

Again, that works out to North Korea producing only 6.2% of what South Korea does. No wonder night-time satelite images of North Korea always appear so completely dark!

And while there are no doubt a variety of factors involved in life-expectancy, I would assume that if Korea had been one country for the past 50+ years, the life-expectancy between people in the north and people in the south would be fairly similar. Instead, it seems safe to assume that the policies of the North Korean communist regime are greatly reducing the life expectancy of its people: North Korea's is 67.3 and South Korea's is 78.6.

I'm no expert on North Korea. I learned a lot from my friend Don Parrish's trip report, and from what I gather from news sources, the people in North Korea have systematically lied to for many decades and are very, very isolated. If/when the North Korean Communist regime falls, and the country opens up and attemptes to reintegrate with the rest of the world... what will it be like for the common individuals of that country? It is hard to imagine... and sad to think about... but I just hope we have some good reporters and/or social scientists on the ground when it happens to chronicle it all.

On Taxing the Rich

Another interesting Wall Street Journal opinion item that I've been wanting to blog about is from their July 21 edition and is called "Their Fair Share". See the great graph that goes with it. I would quote key passages or numbers, but the article is short, so I encourage you to just read the whole thing.

On Fannie Mae and Freddie Mac

A month ago Paul Gigot wrote a great opinion piece for the Wall Street Journal: "The Fannie Mae Gang". If your only somewhat familiar with the history of Fannie Mae and Freddie Mac, then I encourage you to read this article. I really liked the ending of the article, and I've bolded a key paragraph:

Fan and Fred also couldn't prosper for as long as they have without the support of the political left, both in Congress and the intellectual class. This includes Mr. Frank and Sen. Chuck Schumer (D., N.Y.) on Capitol Hill, as well as Mr. Krugman and the Washington Post's Steven Pearlstein in the press. Their claim is that the companies are essential for homeownership.

Yet as studies have shown, about half of the implicit taxpayer subsidy for Fan and Fred is pocketed by shareholders and management. According to the Federal Reserve, the half that goes to homeowners adds up to a mere seven basis points on mortgages. In return for this, Fannie was able to pay no fewer than 21 of its executives more than $1 million in 2002, and in 2003 Mr. Raines pocketed more than $20 million. Fannie's left-wing defenders are underwriters of crony capitalism, not affordable housing.

So here we are this week, with the House and Senate preparing to commit taxpayer money to save Fannie and Freddie. The implicit taxpayer guarantee that Messrs. Gray and Raines and so many others said didn't exist has become explicit. Taxpayers may end up having to inject capital into the companies, in addition to guaranteeing their debt.

The abiding lesson here is what happens when you combine private profit with government power. You create political monsters that are protected both by journalists on the left and pseudo-capitalists on Wall Street, by liberal Democrats and country-club Republicans. Even now, after all of their dishonesty and failure, Fannie and Freddie could emerge from this taxpayer rescue more powerful than ever. Campaigning to spare taxpayers from that result would represent genuine "change," not that either presidential candidate seems interested.

Ugh. Clearly these "institutions" need to end up being privatized somehow (if you need to first nationalize them, I'd be open to at least considering that, as long as the end goal was privatizing). Indeed, Fannie and Freddie should never have been created in the first place. The government should not be in the housing loan business, risky ones or otherwise. Why? The proper role of government is the protection of individual rights. There is no individual right to own a home, pure and simple. So the government shouldn't be involved, not directly and not through half-government proxies like Freddie and Fannie.

Krauthammer on Pelosi on Drilling

Charles Krauthammer's Washington Post column this past week was pretty good: "Pelosi: Save the Planet, Let Someone Else Drill". He does a great job stating the unintended consequences of Pelosi's resistance to allowing for off-shore drilling and drilling in a very, very small amount of the ANWR. Here is snippet, but I encourage you to read his entire column:

Does Pelosi imagine that with so much of America declared off-limits, the planet is less injured as drilling shifts to Kazakhstan and Venezuela and Equatorial Guinea? That Russia will be more environmentally scrupulous than we in drilling in its Arctic?

The net environmental effect of Pelosi's no-drilling willfulness is negative. Outsourcing U.S. oil production does nothing to lessen worldwide environmental despoliation. It simply exports it to more corrupt, less efficient, more unstable parts of the world -- thereby increasing net planetary damage.

Of Onions and Oil

The July 8 WSJ had an interesting opinion piece titled "The Onion Ringer". It notes the effects from a ban on futures trading in onions, and argues that the same negative effects could occur if congress continues to demonize, and eventually bans, oil speculators.

On Why We Need a Market for Human Organs

Its been a while since I've blogged about the desperate need for a market solution to the issue of kidney donation. So I wanted to note this good opinion piece in the May 16 issue of the WSJ, by Sally Satel: "Why We need a Market for Human Organs". She makes many great points, and even responds to some critics by noting how such a regulated system could be put in place so that the poor would not be taken advantage of. In addition to the more fundamental philosphical arguments that one could give (e.g., we have a fundamental individual right to sell one of our kidney's if we want to), Satel's arguments and reasons are strong ones and hopefully will one day help to change policy on this issue.

As I've blogged on this subject a lot in the past, I've decided to gather the links to those postings in one place. So here they are, with the oldest ones last:

• The Need for an Organ Market (12/23/07)
• Repugnance Shouldn't Be a Standard (8/4/07)
• Market for Kidneys... Guess Where? (11/26/06)
• 10-person Domino Donation at Johns Hopkins (11/26/06)
• Sounds Good, But How About Really Helping? (10/29/06)
• Consequentialist Bioethicist is Proud of Efforts to Restrict Organ Donations (9/15/06)
• A Good Sign for Change to Organ Donation Policy (8/5/06)
• Equal Opportunity to Suffer and Die (6/18/06)
• Market for Organs (5/20/06)

Bread and Butter? That will be 27 billion dollars, please

Each time I blog about Zimbabwe, I wonder how much it will get -- both the political crisis and the economic crisis. Check out the latest inflation numbers and prices in this article, Zimbabwe has shortage of food, abundance of zeros.

The price of a loaf of bread is $2 billion Zimbabwe dollars (or $15 billion on the black market) and 17.5 ounces of butter is $25 billion. A car battery, by the way, will run you 2.4 trillion dollars (which is about $240 US dollars). Other similar prices are listed in the article -- but amazing as these all sound, they all assume you can even find these goods available at all.

And yet... Brian Raftopolous, a South African-based economic researcher, notes "As bad as things are, it can get worse." I wonder what the next set of inflation and price numbers will look like?

Zimbabwe Has Some Inflation

Understatement of the year candidate? This AP news item included the following ridiculous tidbit:

On Thursday, Zimbabwe's central bank unveiled a new half-billion Zimbabwean dollar bank note.

The new bill and three others for 5 billion, 25 billion and 50 billion Zimbabwe dollars, called "special agro" checks intended for purchases and sales involved in farm production, were going into circulation next Tuesday, the central bank said.

Earlier this month, the bank floated the local currency exchange rate through commercial banks, where a single U.S. dollar sold Wednesday for around 240 million Zimbabwe dollars, slightly higher than the dominant black market rate for hard currency.

That change saw prices of goods soar, with unofficial estimates putting annual inflation at more than 700,000 percent.

Official inflation was given in February at 165,000 percent, and no further official figures have been released.

"Prices are now doubling every week instead of every month, and it is hard to see how we can survive to the end of June or how an election will be feasible at all if things continue to deteriorate at this pace," Harare economist John Robertson said.
The central bank said the "agro" checks, similar in appearance to the nation's existing range of bills, will be accepted by retailers and banks up to the end of the year.

The previous highest denomination bill was for 250 million Zimbabwe dollars, enough to buy about two loaves of bread.

As of press time, no word yet on whether there are any plans to start producing gazillion or kajillion dollar bills next. LOL

Should the US Follow Canada's Lead?

I've been meaning to blog about this for a couple of months now, so here goes. Mark Steyn gave lecture at Hillsdale college in September, and the January issue of Imprimis provides an abridged version: Is Canada's Economy a Model for America?

This is a great essay. While admitting that these are differences of degree, Steyn details five important differences between the US and Canadian economic systems, and argues that in each case we should not be eager to move in Canada's direction. To summarize, the Canadian economy is more unionized, protected, subsidized, centrally planned, and heavily taxed. In each of these area Steyn makes great points, and goes on to make some additional great points about the dependence, in many ways, of the Canadian economy on the US economy in many ways. Rather than quote many passages from him here, I'll just encourage you to read Steyn in his own words.

China as Savior of the Oppressed?

Kudos to Gregory Clark, chairman of the Economics department at University of California at Davis. He wrote an interesting book review in The Chronicle Review entitled "China as the Antidote to Oppression and Exploitation?" The book being criticized is Johns Hopkins University sociologist professor Giovanni Arrighi's Adam Smith in Beijing. I admit I've not read the book myself (and don't plan to). But I found many of the points Clark makes to be strong ones and contrary to so much rubbish still being spouted by academic leftists (that seem to dominate so many fields, including sociology). Such writings are often as Clark describes this book... "little more than an extended anti-market, anti-capitalism, anti-Western harangue."

Importing Cars in Mexico

The writers at the Onion couldn't invent a story this odd... well, maybe they could, since they are quite good at what they do. See the AP story "Mexico Abruptly Restricts Car Imports". Basically, Mexico is now only allowing car imports from a single year, 1998. All market interference by governments distort the market, but this is serious arbitrariness and micromanagement. If you live in a border state and have been sitting on a lot of 1998 model cars, you are in luck.

Scary New York Numbers

I regularly read or hear statistics about New York State that indicate it is below average or near the bottom among the 50 states in a wide range of categories. Most of the time, these stats are talking about high taxes or other economic figures.

Columnist Jay Gallagher has done us all a great favor by gathering together many such statistics into one column, New York's Numbers are Numbing. Not all of these numbers are bad for New York -- a few are actually pretty good (low crime), and many are middle-of-the-pack (so not that bad at least relative to other states). But ouch... so many of these numbers place New York at or near the bottom.

On Ethiopia

If you are like me then you have kept up with the news in recent years out of countries in East Africa such as Sudan and Somalia. Often involved in these stories has been Ethiopia, a country that it seems has been helping the US in various matters in the region. In the Nov. 3 issue of The Economist there was a good "briefing" article "A brittle Western ally in the Horn of Africa". It gives a good overview of recent history of that country, both improvements made in recent years and the many troubles still faced. The last half is mostly about the near-term strictly political issues, but what I found more interesting are the long-term and quite devastating economic (and political) issues. Here is that section:

The fact is that for all the aid money and Chinese loans coming in, Ethiopia's economy is neither growing fast enough nor producing enough jobs. The number of jobs created by flowers is insignificant beside an increase in population of about 2m a year, one of the fastest rates in Africa. Since every mother has about seven children, it is conceivable that Ethiopia, with 75m-plus people today, could overtake Nigeria (now 140m-strong) as Africa's most populous country by mid-century. Just to stand still, let alone make inroads into poverty, the country must produce hundreds of thousands of jobs a year.

It is hard to see where they will come from. The government claims that the economy has been growing at an impressive 10% a year since 2003-04, but the real figure is probably more like 5-6%, which is little more than the average for sub-Saharan Africa. And even that modestly improved rate, with a small building boom in Addis Ababa, for instance, has led to the overheating of the economy, with inflation moving up to 19% earlier this year before the government took remedial action.

The reasons for this economic crawl are not hard to find. Beyond the government-directed state, funded substantially by foreign aid, there is—almost uniquely in Africa—virtually no private-sector business at all. The IMF estimates that in 2005-06 the share of private investment in the country was just 11%, nearly unchanged since Mr Zenawi took over in the early 1990s. That is partly a reflection of the fact that, despite some privatisation since the centralised Marxist days of the Derg, large areas of the economy remain government monopolies, closed off to private business.

This is where Ethiopia misses out badly. Take telecoms. While the rest of Africa has been virtually transformed in just a few years by a revolution in mobile telephony, Ethiopia stumbles along with its inept and useless government-run services. Everywhere else, a plethora of South African, home-grown and European providers has leapt into the market to provide Africans with an extraordinary array of cheaper and more efficient services, now used even by the poorest of farmers, for instance, to check spot prices for agricultural goods in markets miles away. And the mobile-phone revolution has created thousands of new livelihoods; at times it seems as if every boy on a street corner is hawking a top-up card. Not in Ethiopia.

It is the same story in financial services, where, despite the growth of some smaller private banks, no foreign banks are allowed. Micro-finance schemes have expanded exponentially, but it remains almost impossible to find start-up loans for small or medium businesses.

There is no official unemployment rate, but youth unemployment, some experts reckon, may be as high as 70%. All those graduates coming out of state-run universities will find it very hard to get jobs. The mood of the young is often restless and despairing; many dream of moving abroad. It was this mood of resentment that the opposition tapped into in 2005, and the capital's maybe 300,000 unemployed young men proved a combustible force on the streets. The ruling party, the Ethiopian People's Revolutionary Democratic Front (EPRDF), underestimated the degree of disillusion with its policies, and thus overreacted when the opposition polled much better than expected.

Unless the private sector is allowed to create jobs, the country's problems will continue to mount and the gains of development may be squandered. Sooner rather than later, 2m more people a year will overwhelm a state that is trying to provide most of the jobs itself.

An Update on the Government Spending Numbers

Here is a nice column from Jacob Sullum, Entitlement Mentality, that covers all the earmarks in the recent spending bill, and also reminds us of the ridiculous economic crisis that the big three entitlement programs represent.

Government Should Not Promote Home Ownership

Government should not have policies that "promote home ownership". The very idea implies interference in the free market. Yaron Brook wrote a very good piece, Predatory Legislating, for Forbes in December, attacking the ridiculous "Mortgage Reform and Anti-Predatory Lending Act of 2007", legislation passed in the House in response to the "subprime mortgage crisis". The entire commentary is worth reading, but here are the two paragraphs on the fundamental point that is so often missed in the press when folks are talking about how the subprime mess arose:

The government does not need to crack down on lenders. It does need to take responsibility for its role in promoting irresponsible lending and borrowing practices through its myriad interventionist programs to "promote homeownership." The very concept of the government having such a goal means that it facilitates borrowing and lending that would not occur on the free market--i.e., a market in which people are held fully responsible for their decisions.

One example of this is the Community Reinvestment Act, which literally forces banks to lend to people with high credit risk. Another is the Federal Reserve's policy of creating artificially low interest rates, which encouraged financial institutions to lend out more money for mortgages than they otherwise would have--and which helped artificially bid up housing prices and fed the fervor that buying a home at any price is a can't-miss investment that all Americans should make. The government's promotion of home-buying was a recipe for irresponsibility--and that's exactly what it produced.

Daniel Boone and the Nanny State

The Orange County Register recently published an interesting satirical piece: Daniel Boone vs. the Nanny State. While I certainly want to live in Daniel Boone's time, this essay makes many great points.

Housing Bubble Explained

Economist George Reisman has written an excellent blog posting that explains in detail what led to the housing bubble, the subprime situation, the credit crunch, and so on. Long as far as blog postings go, but worth reading.

80% Unemployment and 100,000% Inflation

No surprise, but the news out of Zimbabwe just keeps getting worse. The August 11 issue of The Economist has an article about the increasing number of people fleeing Zimbabwe for South Africa. There the unemployment rate is "only" 25-40%, which sounds awfully high until you learn that the rate in Zimbabwe is 80%. It also notes that, according to the IMF, the inflation rate is "heading for 100,000%". No wonder there are "severe shortages of meat, sugar, and cooking oil". This situation almost sounds like someone is trying to set records in Guinness or something.

From Relative Bread Basket to Basket Case

Each time I read about the declining situation in Zimbabwe, I post a blog entry about it. And each time I think that it can't get much worse. And then I read how it has gotten worse a few weeks later. I need to stop being amazed at this.

The latest I've read is from the July 14th issue of The Economist, "How to stay alive when it all runs out" (which I only got around to reading tonight). There are some amazing items in this brief article. Oops, there I go again, being amazed by the economic numbers and dismal reports.

If anyone ever creates a Hall of Government Shame, Dictator Robert Mugabe could easily be a unanimous selection in the first round of inductees! The sad thing is, unless someone with near perfect economic policies becomes the next leader of Zimbabwe, it will take quite a long time to recover -- even after a radical shakeup in leadership occurs. And to think that at one time Zimbabwe was referred to as the "breadbasket of Africa". As I've said before, it is now the "basket case of Africa."

Sowell on Neglected Infrastructure

Thomas Sowell has written a good column, A Bridge Too Far Gone, on some of the neglected infrastructure in the US. This is of course written in the wake of the bridge collapse in Minnesota, and the inevitable questions about similar bridges and other infrastructure issues around the country.

Some people claim that the problem is how much money it would take to properly maintain bridges, highways, dams and other infrastructure. But money is found for other things, including things far less urgent and some things that are even counterproductive.

The real problem is that the political incentives are to spend the taxpayers' money on things that will enhance politicians' chances of getting re-elected.

There may be enough money available to maintain bridges and other infrastructure but that same money can have a bigger political pay-off if spent building something new instead of maintaining and repairing existing structures.

When money is spent building a new community center, a golf course, or anything that will be newsworthy, there will be ribbon-cutting ceremonies and the politicians who cut the ribbons can expect to see their pictures in the newspapers and on TV.

All that keeps their name before the public in a positive role and therefore enhances their prospects of being re-elected.

But there are no ribbon-cutting ceremonies when bridges are being repaired or pot-holes are being filled in. These latter activities may be more valuable than a community center or a golf course, but they are not nearly a photogenic.

He then goes on to note that this incentive problem has existed for centuries, and that the situation will not improve until incentives are changed. He then makes a brief case for doing exactly that -- by privatizing bridges and other aspects of our infrastructure.

A company that has to get the money to build and maintain bridges or other infrastructure through the voluntary actions of people in the financial markets, instead of being able to extract money from the taxpayers, is going to find financiers a lot more finicky about what is being done with their money.

People who are putting their own money on the line are going to want to have their own experts taking a look under the bridges they finance, to see where there are rust, cracks or crumbling supports.

When people know that the lawsuits that are sure to follow after a bridge collapses are going to drain millions of dollars of their own money — not the taxpayers' money — that keeps the mind focussed.

Government as a Cause of Subprime Follies

Thomas Sowell has written a column, Sub-Prime Politicians, that describes the mutliple ways that bad government policies are causes of the subprime mortgage mess. Government restrictions on building in certain times and places have been shown to be a major factor, as has the more obvious and direct government interference of pressuring lenders to give loans to people with risky credit to encourage more home ownership. He concludes his column as follows:

Yet with all the finger-pointing in the media and in government, seldom is a finger pointed at the politicians at local, state and national levels who have played a key role in setting up the conditions that led to financial disasters for individual home buyers and for those who lent to them.

While financial markets are painfully adjusting and both lenders and borrowers are becoming less likely to take on so much risky "creative" financing in the future, politicians show no sign of changing.

Why should they, when they have largely escaped blame for the disasters that their policies fostered?

Repugnance Shouldn't Be a Standard

Over the past several years I've read more and more from bioethicists and others who argue against some regulation, policy, or law based primarily on the grounds of "repugnance". I've read this on the issues of stem cell research, cloning, euthanasia, and others.

This is absurd. One's subjective emotional responses -- whether discomfort, repugnance, apprehension, joy, elation -- are not a proper grounding for moral evaluation of an action, or a prospective regulation, policy, or law.

And yet this charge of "repugnance" surfaces time and again, perhaps most commonly in connection with the dire situation with the lack of kidneys available for transplant. There are no where near enough donors relative to the number of those who need a kidney -- people are suffering for years for lack of a kidney, and many die waiting for one.

And yet this problem could be solved in a relatively short time if a market for kidneys were allowed to develop and flourish. In such a market, individuals could be given cash payments for one of their healthy kidneys, or their beneficiaries could be given cash payment in exchange for kidney donation after death. The former is what would really fix the shortage, but even the latter (which seems like a no-brainer) would help. But neither of these are allowed today in the US. Although regulation of a market, generally speaking, interferes with that market and creates a suboptimal result, even a regulated market is better than no legal market at all. So in this case, as with many other non-violent acts that are currently prohibited, I definitely support a move from prohibition to a regulated market for kidneys.

The BBC recently did a special on this subject. This summary, after mentioning the "repugnance" or "disgust" viewpoint (I won't even call it an argument), quotes a Bishop whose position is that cash payment for a kidney negates the act's moral worth. His position apparently is that simply donating a kidney to a stranger or loved one is a good thing, but not if you are paid for doing so. This is, in part, the common ethical bias against money, commercial exchange, and best put -- the trading of a value for a value. This is a basic -- and common -- ethical error the Bishop is making here.

Here is a great clip from this article:

Yet others argue that what really counts here is not the motive, but the results.

American writer Virginia Postrel has been campaigning for it to be legal in the US to pay cash for a kidney from a live donor.

She said: "People want to keep it as a heroic, uncompensated act because it makes them feel good.

"Never mind that tens of thousands of people are dying for your right to feel good about other people's heroic acts."

Postrel's criticism sounds cynical, but she isn't the cynic she appears to be. She donated a kidney to a sick friend, became interested in the idea of a market for kidneys because of her experience with donation.

"The reaction is completely disproportionate to the actual risks involved. People do act like you're completely nuts."

Italics mine... what a great line!

Generic Drugs More Expensive in Canada

The Frasier Institute in Canada has done study which shows that the prices for generic drugs in Canada have been skyrocketing, and that Canadians now pay significantly more for generic drugs than we do here in the States. It is of course well known that we pay more for brand name drugs than Canadians do. Both of these results are because of government interference in the market. Here is a brief news item on this study.

Gas Taxes vs. Gas Profits

On June 6 John Stossel provided another great item, "Why is Profit a Dirty Word?" (thanks to Shawn Klein for this link). He begins as follows:

At a recent press conference Sen. John Kerry was upset as he snarled, "Oil companies in America are reporting record profits. Record profits."

When did profit become a dirty word?

I wish the oil executives would face the media.

They could say something like:
"What are you complaining about? What do you think we do with our profits? Buy fancy cars and homes? Well, we do, actually, but nearly all the money goes to looking for more oil and following environmental rules that you want us to follow. You should want us to make more profit. Anyway, we make less profit per gallon than your beloved government takes in taxes."

This is something I have thought about often: the lack of proper argumentation from those in business when they are attacked by the press or by politicians. And the point Stossel makes here is so ripe for use in response to the likes of John Kerry! "Can you explain your record profits?"... countered by "Sure I can. But if I do will you explain why you feel it necessary to take more in oil and gas taxes than we do in profits?" LOL... the look on the politician's face at that moment would be priceless.

A Brief History of Economic Time

University of Rochester Economics professor Steven Landsburg wrote a nice opinion piece in the 6/9-10 Wall Street Journal, titled "A Brief History of Economic Time". He begins with the following rapid history review:

Modern humans first emerged about 100,000 years ago. For the next 99,800 years or so, nothing happened. Well, not quite nothing. There were wars, political intrigue, the invention of agriculture -- but none of that stuff had much effect on the quality of people's lives. Almost everyone lived on the modern equivalent of $400 to $600 a year, just above the subsistence level. True, there were always tiny aristocracies who lived far better, but numerically they were quite insignificant.

Then -- just a couple of hundred years ago, maybe 10 generations -- people started getting richer. And richer and richer still. Per capita income, at least in the West, began to grow at the unprecedented rate of about three quarters of a percent per year. A couple of decades later, the same thing was happening around the world.

Then it got even better. By the 20th century, per capita real incomes, that is, incomes adjusted for inflation, were growing at 1.5% per year, on average, and for the past half century they've been growing at about 2.3%. If you're earning a modest middle-class income of $50,000 a year, and if you expect your children, 25 years from now, to occupy that same modest rung on the economic ladder, then with a 2.3% growth rate, they'll be earning the inflation-adjusted equivalent of $89,000 a year. Their children, another 25 years down the line, will earn $158,000 a year.

Against a backdrop like that, the temporary ups and downs of the business cycle seem fantastically minor. In the 1930s, we had a Great Depression, when income levels fell back to where they had been 20 years earlier. For a few years, people had to live the way their parents had always lived, and they found it almost intolerable. The underlying expectation -- that the present is supposed to be better than the past -- is a new phenomenon in history. No 18th-century politician would have asked "Are you better off than you were four years ago?" because it never would have occurred to anyone that they ought to be better off than they were four years ago.

That is a good point, and one I hadn't thought of! Landsburg's history review then goes beyond income alone:

One hundred years ago the average American workweek was over 60 hours; today it's under 35. One hundred years ago 6% of manufacturing workers took vacations; today it's over 90%. One hundred years ago the average housekeeper spent 12 hours a day on laundry, cooking, cleaning and sewing; today it's about three hours.

As far as the quality of the goods we buy, try picking up an electronics catalogue from, oh, say, 2001 and ask yourself whether there's anything there you'd want to buy. That was the year my friend Ben spent $600 for a 1.3-megapixel digital camera that weighed a pound and a half. What about services, such as health care? Would you rather purchase today's health care at today's prices or the health care of, say, 1970 at 1970 prices? I don't know any informed person who would choose 1970, which means that despite all the hype about costs, health care now is a better bargain than it's ever been before.

The moral is that increases in measured income -- even the phenomenal increases of the past two centuries -- grossly understate the real improvements in our economic condition. The average middle-class American might have a smaller measured income than the European monarchs of the Middle Ages, but I suspect that Tudor King Henry VIII would have traded half his kingdom for modern plumbing, a lifetime supply of antibiotics and access to the Internet.

Some interesting numbers and thought experiments here. I've read the health care comparison he poses somewhere before, and it is an important point to make when considering the rising cost of health care in this country. He then goes on to praise what he sees as the source of this wealth: technological progress and ideas, not just technological ideas, but ideas of all kinds including new ideas in economics. He makes good points here, but I don't think that he has really hit the fundamental source. The examples of economic ideas that he cites are very particular, concrete ideas, like Julian Simon coming up with the idea of bribing airline passengers to give up their seats on overbooked flights and so on. But the fundamental source of the incredible progress of the past 100 years is a particular economic-political system that fosters and allows for such progress in technology and ideas, and that system is of course capitalism, the system that promotes liberty and protects individual rights.

It'll Function Fine Until the Next Storm

In the May 14 issue of BusinessWeek there was an article titled "Hurricane Ahead, But Lower Insurance", subtitled "Why the price of property coverage is going down in the face of dire predictions". The article notes that even after Katrina and other recent, costly storms:

In most of the country, property insurance rates for homeowners and businesses are actually lower than they were before Katrina. And amazingly, insurance rates have been falling recently in many parts of Florida and the Gulf Coast that stand to suffer severe losses from hurricanes, encouraging continued construction in low-lying areas.

There are some financial reasons given for this, but the other big one is government interference in the market:

Regulators and the insurance industry are only beginning to grapple with the problems of pricing coverage in an era of potentially big storms. By some calculations, actuarially correct premiums would be so high as to freeze economic development in places such as Miami and New Orleans.

But of course that isn't happening, because actual risk calculations are not determining the market. Government regulators are capping rate increases and in some cases "broadening the availability of state-subsidized insurance for highly exposed property owners who can't get coverage from the private market". Consider this:

Under Governor Charlie Crist, Florida has gone the furthest in challenging market forces. In January, the state legislature massively increased government involvement in the insurance business in hopes of rolling back homeowners' rates. It blocked rate hikes by the state-controlled Citizens Property Insurance Corp., which insures people who can't get coverage in the private market. That allowed Citizens to undercut private insurers. To keep private companies from bailing out of Florida, it intends to make available an additional $16 billion in highly subsidized reinsurance from a state fund.

Trouble is, if a series of big hurricanes empties out the Citizens reserve fund and the reinsurance fund, the state will have to raise the money to pay claims via a special assessment of thousands of dollars apiece on all policyholders in the state. "It'll function just fine until the next storm. Then we'll see," says Joshua D. Shanker, an equity analyst at Citigroup Investment Research.

Well, duh. That is a classic line: "It'll function just fine until the next storm. Then we'll see."

How many times have you seen people's homes or businesses destroyed, not by freak occurrences that are hard to predict like a tornado, but by regular occurrences that one should expect in certain areas, like damage from being too close to a river or an ocean? And how often do those people then say, on camera, "Well, it is a tough loss. But we'll rebuild." The many times I've seen and heard this I've always thought two things. First, I'm glad you are picking yourselves up and are eager to rebuild your lives and rebound from disaster. But second, why are you going to rebuild in the same location?!?! How could you afford to do that given the massive increase in insurance that will no doubt hit you... oh wait, it won't, because the government will subsidize you and encourage you to rebuild in that high-risk location. And this will be a cycle that will continue and continue, with billions of dollars wasted time and again.

The article continues:

The political fix temporarily alleviates the financial pain, but it worsens the underlying problem. Developers continue to erect condos in vulnerable parts of Florida in part because of the availability of state-subsidized insurance. Florida already has $2 trillion in coastal exposure and remains one of the fastest-growing states. That will raise the cost of the next Big One. "People have the expectation that insurance is a commodity and should be flatly priced," says Robert Muir-Wood, chief research officer of Risk Management Solutions Inc. But in an actuarially ideal world, he says, the rate for the South Florida beachfront should be perhaps 50 times higher than the rate for an elevated property in northern Florida. "The wealthiest people tend to benefit the most from this aberration," Muir-Wood says.

Meanwhile, the Florida state government's decision to fight the market and absorb more hurricane risk is benefiting other parts of the country. As private insurers and reinsurers are being driven out of Florida, they are writing more policies elsewhere, which is helping to lower rates in other places, like Mississippi.

The dip in rates is not likely to survive another year like 2005. Insurers are being more rigorous in setting rates and paying closer attention to their risk models than in the past, says Timothy R. Gardner, global head of the property specialty practice of Guy Carpenter and Co. The influx of capital could ebb. And if another Katrina-type hurricane hits, regulators and politicians will find it harder to defy nature and enforce unrealistically low rates for coastal property.

Harder, perhaps. But I don't think one more Katrina-level disaster will lead to change in this system. A change in thinking is what is needed, not just more financial disaster and hardship -- and I don't think just one more massive-damage event will get the relevant parties' thinking to change. Government needs to get out of the insurance-subsidizing business, and individuals and businesses need to stop building and re-building in such high-risk areas. If you are wealthy and can and want to take the risk -- either by not having insurance or by buying expensive insurance that is priced according to the actual risks involved -- then fine. But anything other than that is an evasion of reality. I mean, do people expect the government to subsidize the insurance for their new home or business that they want to build on the side of an active volcano? I'd like to think that the obvious answer there is "of course not", and the essence of the situation in Florida and other high-risk areas is relevantly similar. Live there without an insurance safety net, pay the price for your insurance safety net, or don't live there at all.

John Stossel on Double Thank-You Moments

John Stossel recently wrote a great column, The Double "Thank-You" Moment. In it he writes:

I suspect ignorance about economics leads many to believe that when two people exchange goods and money, one wins and the other loses. If rich capitalists profit, the poor and the weak suffer.

That's a myth.

How many times have you paid $1 for a cup of coffee and after the clerk said, "thank you," you responded, "thank you "? There's a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.

Economists have long understood that two people trade because each wants what the other has more than what he already has. In their respective eyes, the things traded are unequal in value. But this means each comes out ahead, having given up something he wants less for something he wants more. It's just not true that one gains and the other loses. If that were the case, the loser wouldn't have traded. It's win-win, or as economists would say, positive-sum.

We experience this every time we have that double thank-you moment in a store or restaurant.

It doesn't matter that you wish the price of coffee were lower. We want the price of everything to be lower (except the price of what we're selling, whether it's our products or labor). What matters is that you bought the coffee for a buck.

This is a great phrase that is new to me: "The Double Thank-You Moment". He then goes on to apply this same reasoning to the notion of "fair trade" vs. "free trade".

"Fair trade" is code for protectionism disguised as retaliation against other countries that may or may not practice protectionism, and it's a bad sign when even Republicans talk about "fair" rather than "free" trade.

We should practice free trade no matter what others do. Why? Because freedom is good in itself. If foreign governments want to hurt their citizens, it's no reason for ours to hurt us.

People who live in different countries are divided by a political boundary, but boundaries are accidents of history or the results of politicians' arbitrary decisions. Political boundaries are economically irrelevant. When left free, people trade across them as naturally as they do across state lines. Trade is trade. Buyer and seller both benefit. "Thank you." "Thank you ."

If you're worried about a trade deficit with, say, China, imagine that China became the 51st state. We'd immediately forget all about that so-called deficit. Who cares if New York runs a trade deficit with Pennsylvania? As Adam Smith wrote, "Nothing ... can be more absurd than this whole doctrine of the balance of trade."

That is a great point and something to keep in mind the next time you hear someone, of either political party, bemoaning the "trade deficit" with China or whoever. He concludes with:

Once we choose trade over self-sufficiency, we're just arguing about how big the free-trade zone should be. Since trade is always mutually beneficial, the answer is: The bigger the free-trade zone the better.

Worldwide is best of all.

Indeed.

Gas Prices "Too High"?

The Ayn Rand Institute's Alex Epstein recently wrote a good op-ed piece titled "What to Do About Rising Gas Prices". Here is an excerpt:

There is no moral or economic justification for any politician or consumer to declare market prices "too high," and to use the government to coerce lower prices. To do so violates both the rights of gasoline producers and their productive customers to set voluntary prices -- and, in doing so, causes destructive shortages. When shortages exist, how much gasoline one is able to get depends not on one's willingness to pay a mutually agreeable price, but on one's political pull to secure rations, or on whether one has time on one's hands to wait in endless lines (as in the 1970s).

There is only one sense in which we are entitled to tell the government to "do something" about gasoline prices: insofar as these prices are made artificially high by the government's many regulations on oil and gasoline production.

He then goes on to cite a few such regulations that cause the price of gasoline to be as high as it is, and the concludes: "What should the government do about gasoline prices? Get its hands out of the market--and keep them off."

Say on Pay?

Yaron Brook has written an Op-Ed attacking the Say On Pay bill that has passed in the US House of Representatives. The Op-Ed ran in modified form here at Investment News. The bill would force all corporations to allow shareholders a non-binding vote on CEO compensation, the idea being to shame directors in lowering CEO pay. While this bill itself might not do much -- since it forces only non-binding votes -- this bill would appear to be only a first step. As Brook notes, the Rep who proposed it, Barney Frank, has supported outright caps on CEO pay and "has threatened that if 'say on pay' does not sufficiently reduce CEO compensation relative to that of other employees, 'then we will do something more.'"

Brook's piece is a good read, and he notes several things that shareholders can do already if they are unhappy about the pay of a CEO, none of which require further regulation of business by government:

1. "Vote with his dollars" by selling his shares
2. Accumulate a controlling interest in the company (typically 51%) and impose a new board of directors
3. Persuade a majority of shareholders to replace the board with people sympathetic to their concerns.

When Trade is Outlawed, Only Outlaws Trade

The following letter to The Economist ended with a great line, that I've used as the title for this posting:

SIR -- Your article on tigers outlined the cost to their conservation of refusing to countenance markets ("Market failure", April 21st). I have argued that the only way to save the tiger is to sell it, but conservationists have maintained that commerce and conservation are antithetical. Their principal strategy has been to prohibit tiger hunting and the trading of tiger parts. Policing has thereby become the cornerstone of conservation polices and, predictably, it has failed to stave the decline of tigers in the wild.

Some of the poorest people in the world live in close proximity to valuable resources like tigers, yet they have no incentive to conserve and manage the resources sustainably, allowing criminals and smugglers to profit from poaching. This is bad for the people and very bad for tigers. In contrast, 2m crocodiles are harvested each year from facilities as far apart as Australia, South Africa and the United States. The international availability of farmed crocodiles has virtually eliminated crocodile poaching. Clearly, when trade is outlawed, only outlaws trade and the only market failure here is the failure to let markets operate.

Barun Mitra
Liberty Institute
Delhi

That great line -- "When trade is outlawed, only outlaws trade" -- surely that is not new? Well, I looked it up on Google, and found only two other references. And guess who those are from? The same person, Barun Mitra: see "Commerce for Conservation" from April 17, 2007 in the Hindustan Times, and also "Environmentalists Can't Save the Tiger" from 2005. Both are on the same topic as the letter above, but go into more detail, and give examples beyond crocodiles.

So thanks for this great line Barun!

Internet Radio on Life Support?

Is so-called "Internet Radio" on life-support? It seems that unless a new bi-partisan bill introduced in congress, the Internet Radio Equality Act from Jay Inslee (D) and Donald Manzullo (R), is passed by July 15th... well, a great many outstanding Internet music sites will quickly go bankrupt and be out of business. Most notably for me would be the harm this could cause Pandora, a service I have quickly grown to love, as my recent blog posting described.

See this article, and this one, and this one for info on the situation. More recently than any of these it was announced that the feared May 15th deadline was actually a July 15th deadline, so that gives the SaveNetRadio.org group and others time to fight to get the new bill passed. Doing so would essentially cancel the decision of the federal Copyright Royalty Board, which had determined to hike up fees for web streaming radio stations like Pandora and many others. The new fees are bizarre -- they are per song rather than based on profits (thereby treating streaming like downloading), and they are totally out of whack with (higher than) the fees charged statellite radio and traditional AM/FM radio.

A few comments... first, I wish that we didn't refer to sites like Pandora as "Internet Radio". I mean, "radio" is a particular technology. It isn't used by the Internet to stream music. Calling sites like Pandora "radio" is confusing and based on inessential similarities. Yes, it is similar in that the music (or other content) is streamed rather than downloaded permanently. So lets call such services Internet Streaming services or Music Streaming services or whatever. That is accurate -- calling them "radio" is confusing.

Second, how many people know much about the federal Copyright Royalty Board? That sounds like something out of a socialist or communist country! What are a bunch of government bureaucrats doing dictating to anyone what they must pay to other people for streaming copyrighted content? Can't the two parties involved contract with each other? I'm not in favor of theft of intellectual property -- but equally wrong is government intervention in the economy... and for the same reasons: both are violations of individual rights.

The third news item linked above has the following bit worth quoting here:

Anyone who spends more than an hour a day in a car -- and there a lot of you in Miami -- knows that commercial radio stations are horrid purveyors of mainstream schlock. Internet radio has made new artists, genres, and songs available to listeners all over the world. Artists have a new way to get their music out there, and small distributors have a way to wrangle in new customers.

Sites like Pandora, which uses the innovative Music Genome Project to create specialized radio stations for its six million users based on what they tell it about their musical tastes, are a blessing to music junkies everywhere.

"We can't continue, at the new rate we can’t sustain the service," said Pandora founder Tim Westergren from Washington D.C., where he is attending congressional hearings on the fee hike. "We are losing money now, even at the old rate, we were looking at another two years before we expected to be in the black."

If the new rates go into effect, and sites like Pandora and W305 shut down, it would be a huge loss for music lovers, and perhaps an even bigger blow to musicians struggling to get their music to the public. A lot of smaller, independent Internet stations may go underground and avoid paying licensing fees all together, Kalimi said.

Scarcity Amid Abundance

The April 14-20 issue of The Economist again has a good article about the situation in Venezuela, and the economic problems being caused by Chavez and his policies. I couldn't think of a better title for this than what they used: Scarcity Amid Abundance. As I've noted in earlier blog postings, such as in Let Them Eat Chicken Feet, the price controls imposed by the Chavez regime are leading to ridiculous shortages. This latest article also points out the very high inflation rates in Venezuela, which only makes the price-control-causing-shortages issue that much more pronounced and guaranteed to occur (since people will be much more careful with their goods and their money, knowing it will be worth far less in the coming months).

Maximize Absolute Rate of Growth, Not Relative Rate

The April 14-20 issue of The Economist had a good, brief editorial "Come in Number One, Your Time is Up" (subscription required, but also available here). It discusses the various ways that America is being pushed off its economic pedastal, whether by some European countries, China, or whoever. The last two paragraphs, subtitled "A Winnner in Second Place", are worth quoting:

There will be plenty of hand-wringing in the years ahead. But does being the biggest economy matter? It helps to ensure military superiority; it gives a country more say in fixing international rules; and as the issuer of the main reserve currency, America can borrow more cheaply. But being number one cannot be an end in itself. The goal of policy should be to maximise a country's absolute rate of growth, not its relative rate.

Losing top place in the economic league is different from being beaten in sport, where for every winner there is a loser. Economic competition is not a zero-sum game. China's economy will overtake America's not because the United States is in terminal decline, but because China is catching up. And faster growth in China and other emerging economies will benefit America's economy, not harm it. If an obsession with remaining number one foolishly caused America to adopt protectionist policies, that would reduce America's growth as much as China's. It is better to be number two in a fast-growing world than number one in a stagnant one.

Some Consumers Unable to Buy Caviar

Lately I've been reading numerous articles about the collapse of the "sub-prime" mortgage/loans/housing market, and the impact of this on the "alternative" loans market and even the broader market. Some articles or news items on TV covering this have been better than others, naturally. The ones that annoy me are the ones that lament the situation without asking the important questions of how we got into this situation in the first place. This seems to be yet another example of journalists becoming more and more lazy -- because I refuse to believe that news consumers (you and me) are not asking for this kind of information in news reports on issues like this.

The subprime loan situation seems to be at least in part another instance of government intervention in the economy producing unintended, negative side-effects. This is another Hardy-moment, "This is another fine mess you've gotten me into!" -- a quote that I have thought of more and more in recent years when considering well-intended government programs that end up doing far more harm than good (above and beyond the inherent violation of individual rights that they involve in the first place).

The banking/loan/housing industry is of course far from a laissez-faire capitalist system. On top of that, the government in the US has been promoting more and more home ownership for many, many years now. Well guess what? Not everyone has the financial ability to own a home. To do so, unless you can pay in cash upfront, you need a loan. To get a loan you pay interest and rate of interest must rationally be based on what kind of risk you represent to the bank giving you the loan. This is all very simple economics folks! The more the government promotes, subsidizes, encourages, etc., more and more people to own their own homes, the more risky loans are going to be made. As base interest rates rise, and if people do not have fixed rates, then the inevitable will occur -- people won't be able to pay for their loans, banks will foreclose on homes, and dreams will be shattered. This is a simplification of the current situation, but it captures the essence I think.

And this is entirely predictable of course -- again, it is basic economics.

As an example of the kind of news article I'm talking about, consider the one in last Sunday's Rochester Democract and Chronicle, titled "Not 'Sub', Not Prime" which ran on the front page of the business section. It is a story about those with "Alternative Loans", which are kind-of between "sub-prime" loans and regular mortgage loans. In particular, Matt Drouin is profiled -- a 23-year old who lived with his parents for a while (a brief while it seems) after college to save up some money to buy a home. Because has virtually no credit history -- since he is only 23 years old! -- he doesn't qualify for a regular loan, and can only buy a home with an "alternative loan" that has higher interest rates of course. (How many single 23-year olds own their own homes vs. rent apartments I wonder?)

So what annoys me here is... why is this news? Why does this warrant an article in the paper? I mean, some people are not in a financial position to buy XYZ -- so we report on it? Since when? I don't recall seeing articles with titles like "Some Consumers Unable to Buy Caviar", or "Some Local Residents Priced Out of the BMW Market", or "The Poor Find they are not able to Attend Football Games Every Weekend". Isn't this all obvious? If you are poor, you can't buy things that cost a lot. If you are young, you have no credit history -- and unless you have a really high-paying, secure job, you are therefore a major credit risk for banks. Ergo, you will not get a good interest rate on a major loan (like a mortgage loan).

The sub-title for this article was "Some home buyers must settle for 'alternative' loans". You can almost here the "sigh" being voiced in that subtitle -- as if, the world is unfair, and maybe, just maybe, something should be done about it.

Only buried on page four do we have the all-important point being made:

But the availability of subprime and alternative loans has boosted the nation's number of home owners, with 69 percent of households owning their own homes. "For the past two decades, the emphasis by our government has been home ownership," Nothnagle [local Realty giant] said.

Wow... 69% own homes? I knew the number was artificially high these days -- that is, not what the market would bear without government interference in various ways -- but I had no idea it had reached nearly 70%. We can all agree that owning a home is a good thing, generally speaking -- rather than throwing money away in rent, you are investing in property that you will one day own outright. But just because something is good in this general way doesn't mean that everyone, or even 70% of people, can just magically obtain it. Because the markets represent reality, government interference with them amounts to attempts to interfere with reality -- and that can only have consequences at some point down the road. The chickens come home to roost.

Making this same point recently was a brief Letter to Editor by David Holcberg from the Ayn Rand Institute from 3/30, titled Lenders are Damned if they Lend, and Damned if they Don't:

With 2 million homeowners defaulting on their mortgage payments, we are increasingly hearing denunciations of lenders for having loaned money to people who had no means of paying it back. But these denunciations reveal a disturbing double standard. For years, politicians pressured lenders to not discriminate against those with poor credit history and shaky finances. Now we have the despicable spectacle of politicians accusing lenders of not having discriminated enough and of having made too many risky loans.

Lenders are damned if they lend--and damned if they don't. Whatever lenders do, politicians seem to always find their practices objectionable, and will take advantage of any excuse to call for more regulations and increased political power over lending. Politicians should leave lenders alone, and instead of damning them, they should acknowledge their crucial role in making home ownership possible for so many people.