Playwright Tony Kushner at a commencement speech to graduating college seniors had this to say:
"The people and not the oil plutocrats, the multivarious multicultural people and not the pale, pale, cranky, grim greedy people, the hard working people and not the people whose only real exertion ever in their parasite lives has been the effort it takes to get politicians to slash a trillion dollars in tax revenue and then stuff it in their already overfull pockets."
Then there is Bill Moyers who stated:
"We must guard against true believers in the god of the market who would leave us to the ruthless forces of unfettered monopolistic capital where even the laws of the jungle break down....And these idolators wrap themselves in the flag and rely on your patriotism to distract you from their plunder. While your standing at attention with your hand over your heart pledging allegiance to the flag, they're picking your pocket."
This attack on the free market system, while just a faint echo in the past, has been growing in volume in recent years. But in spite of the protestations, free markets have resulted in mankind stepping out of abject poverty to a steady improvement in standards of living. Before the Industrial Revolution which took hold around 1800, life was poor, brutish, and short for the masses. It brought about a new concept...economic growth, which spawned a growing middle class, and ultimately many in the middle class becoming truly wealthy. Alan Greenspan said, "It is precisely the 'greed' of the profit-seeker which is the unexcelled protection of the consumer." Then John Maynard Keynes stated, "Avarice and usury must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight."
Author Ayn Rand had this insight: "America's abundance was not created by public sacrifices to 'the common good', but by the productive genius of free men who pursued their own personal interests and the making of their own private fortunes. They did not starve the people to pay for America's industrialization. They gave the people better jobs, higher wages, and cheaper goods."
Then there is Henry Hazlitt who writes, "Contrary to the age-old prejudices, the wealth of the rich is not the cause of the poverty of the poor. Almost anything that the rich can legally do tends to help the poor. The spending of the rich gives employment to the poor. But the savings of the rich, and their investment of these savings in the means of production , gives just as much employment, and in addition, makes that employment constantly more productive and more highly paid."
All of the above documents the wide gulf between two opinions. Which opinion represents the truth? The important thing is to question everything rather than blindly accept what is being handed to you. If we objectively seek truth, eventually it will come gently to us.
Thursday, December 19, 2013
Monday, December 9, 2013
Policy Errors Of The Great Depression
Imagine a policy maker whose policies don't work. He resembles Euclidean Geometers in a non-Euclidean world who discovers that straight lines, apparently parallel often meet. He then rebukes the lines for not keeping straight only to soon witness more collisions. This is precisely what the government policy makers do when their solutions fail. Faced with failure, government then tends to blame the market rather than itself, and intervenes more! Feeling that they just haven't intervened enough, they try more...followed by more failure. If this process is not interrupted, the price and profit system will break down and government control ensues.
This is clearly demonstrated in the serious policy mistakes by government in attempting to bring an end to the Great Depression. Here is a list:
1. Wagner Act -- This basically kept wages from falling for union labor. In fact it went up 24% during the depression. But non-union workers were basically cast to the wolves. Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices. Since the primary function of markets is to bring prices into balance, it makes no sense that markets cannot correct unemployment.
2. High Taxes On The Rich -- The rich are primarily the investors. They risk their capital in new ventures. If the risk pays off, it means jobs. If you heavily tax the risk takers, they will not change their consumption, but they will reduce their investing. We should be encouraging saving and investing, not discouraging it.
3. Excise Taxes on Everyone -- This took money out of workers pockets.
4. Social Security Tax -- This was implemented in 1935....right in the middle of the Great Depression! Withholding funds from the workers during a crisis was a clear policy error.
5. Corporate taxes raised -- To take money away from the very ones who could potentially hire workers was another policy blunder.
6. Deficit spending went on too long. John Maynard Keynes advocated deficit spending. His view was that in periods of high unemployment, it would not be inflationary, and it would stimulate overall demand in the economy. To some extent he was correct. But he never implied that it should go on indefinitely. He was a deflation hawk, and by 1937 deflation had been quelled, and he told policy makers to return to the classical economic model of budget balancing. He was, of course, ignored, and the depression continued.
7. Trade Protectionism -- The Smoot - Hawley Tariff changed a recession into a depression. Today, even left leaning economist Paul Krugman stated, "Opponents of global trade, whatever their intentions, are doing their best to make the poor even poorer." -- NY Times; April 22, 2001
This is clearly demonstrated in the serious policy mistakes by government in attempting to bring an end to the Great Depression. Here is a list:
1. Wagner Act -- This basically kept wages from falling for union labor. In fact it went up 24% during the depression. But non-union workers were basically cast to the wolves. Since wages are just one of many prices, this meant that unemployment is caused by an imbalance of prices. Since the primary function of markets is to bring prices into balance, it makes no sense that markets cannot correct unemployment.
2. High Taxes On The Rich -- The rich are primarily the investors. They risk their capital in new ventures. If the risk pays off, it means jobs. If you heavily tax the risk takers, they will not change their consumption, but they will reduce their investing. We should be encouraging saving and investing, not discouraging it.
3. Excise Taxes on Everyone -- This took money out of workers pockets.
4. Social Security Tax -- This was implemented in 1935....right in the middle of the Great Depression! Withholding funds from the workers during a crisis was a clear policy error.
5. Corporate taxes raised -- To take money away from the very ones who could potentially hire workers was another policy blunder.
6. Deficit spending went on too long. John Maynard Keynes advocated deficit spending. His view was that in periods of high unemployment, it would not be inflationary, and it would stimulate overall demand in the economy. To some extent he was correct. But he never implied that it should go on indefinitely. He was a deflation hawk, and by 1937 deflation had been quelled, and he told policy makers to return to the classical economic model of budget balancing. He was, of course, ignored, and the depression continued.
7. Trade Protectionism -- The Smoot - Hawley Tariff changed a recession into a depression. Today, even left leaning economist Paul Krugman stated, "Opponents of global trade, whatever their intentions, are doing their best to make the poor even poorer." -- NY Times; April 22, 2001
Monday, October 21, 2013
Should We Go Back To The Gold Standard?
Richard Nixon ended the gold standard in 1971. At the time gold was pegged at $35 per ounce. Countries who sold goods to the United States would continually run trade surpluses. They would end up holding large supplies of dollars as a result. Eventually it became obvious that the US could not redeem all the dollars with gold, so country after country started converting their dollars into gold, thus drawing down the US gold stock. It was then that Nixon shut the gold window. The US would no longer exchange its dollars for gold. The world entered a period of generally floating exchange rates.
There are some that would love to return to some kind of gold standard. Very few professional economists would go along with this. The reason is because economists subscribe to the Quantity Theory of Money. This gets down in the weeds a bit, but let me explain this concept with the following formula:
MV = PY
where M = money supply
V = velocity of money
P = price level
Y = real GDP
Real GDP is growing globally. As a historical norm, V is relatively constant. If M is gold, we have a variable which is hardly growing at all. The fact that it has a high value is because of its scarcity. Now looking at the formula, if Y is globally increasing, P (prices) must be forced down. This would result in deflation which is an economy killer.
At the time of this writing, the spot gold price is $1314 oz.
There are some that would love to return to some kind of gold standard. Very few professional economists would go along with this. The reason is because economists subscribe to the Quantity Theory of Money. This gets down in the weeds a bit, but let me explain this concept with the following formula:
MV = PY
where M = money supply
V = velocity of money
P = price level
Y = real GDP
Real GDP is growing globally. As a historical norm, V is relatively constant. If M is gold, we have a variable which is hardly growing at all. The fact that it has a high value is because of its scarcity. Now looking at the formula, if Y is globally increasing, P (prices) must be forced down. This would result in deflation which is an economy killer.
At the time of this writing, the spot gold price is $1314 oz.
Wednesday, September 18, 2013
The New Global Economy -- Facts and Fallacies
In 2006, Israel fought a war with Hezbollah. Israeli Jets bombed encampments in Lebanon, while Hezbollah rained rockets on northern Israel. Yet, in spite of an all out war with much destruction, the Israel economy grew 5% and its currency soared. Why so little harm to the country's economy amidst so much destructive violence? As Greg Ip pointed out (The Little Book Of Economics) it was because of globalization. Israel's economy is led by advanced tech companies whose markets are the rest of the world. But in 2009, Israel went into recession with the rest of the globe. Israel didn't have a banking crisis, but because its major trading partners did, it was hit with the collateral damage.
Many smaller countries like Israel rely heavily on trade....up to 80% of their GDP can be dedicated to it. In the US, only 14% is, but that is still up significantly from 1960 when it was just 5% of GDP. The reason why rich countries buy toys and clothing from poor countries is because the latter have a comparative advantage in producing simple labor intensive products. That frees the US workers to earn more by building aircraft, conduct heart bypass operations, produce microprocessor chips, or make movies. Of course a number of countries produce the same products, but when the Japanese import a superior car, it compels the domestic producer to improve its product or die. The consumer is the winner with superior products at a lower price.
Of course politics often conflicts with economic reality. When Harvard economist Greg Mankiw said that outsourcing was beneficial when looking at the big picture, it created a political firestorm. But politicians rarely look at the big picture. How was Mankiw right? If a company outsources some of the basic programming to India, US consumers of that software are better off. And this cheaper end product can now find a wider market causing other kinds of jobs to expand in that company (e.g. sales, support, etc).
Apple employs about 43,000 people in the US, but more than 10 times that many through contractors in other countries. But in spite of this, only 2% of all wages earned in the sale of an iPod are earned overseas while 70% are earned in the US. And because of the lower price, sales boom creating more demand and more US jobs. So the winners are Apple shareholders, employees, and, of course, consumers.
Of course there will always be losers. Some domestic employment in high wage labor intensive manufacturing will take a hit. It is thus imperative that our education system stay on top of the ever changing labor market to insure that people have the skills that are in demand.
Many smaller countries like Israel rely heavily on trade....up to 80% of their GDP can be dedicated to it. In the US, only 14% is, but that is still up significantly from 1960 when it was just 5% of GDP. The reason why rich countries buy toys and clothing from poor countries is because the latter have a comparative advantage in producing simple labor intensive products. That frees the US workers to earn more by building aircraft, conduct heart bypass operations, produce microprocessor chips, or make movies. Of course a number of countries produce the same products, but when the Japanese import a superior car, it compels the domestic producer to improve its product or die. The consumer is the winner with superior products at a lower price.
Of course politics often conflicts with economic reality. When Harvard economist Greg Mankiw said that outsourcing was beneficial when looking at the big picture, it created a political firestorm. But politicians rarely look at the big picture. How was Mankiw right? If a company outsources some of the basic programming to India, US consumers of that software are better off. And this cheaper end product can now find a wider market causing other kinds of jobs to expand in that company (e.g. sales, support, etc).
Apple employs about 43,000 people in the US, but more than 10 times that many through contractors in other countries. But in spite of this, only 2% of all wages earned in the sale of an iPod are earned overseas while 70% are earned in the US. And because of the lower price, sales boom creating more demand and more US jobs. So the winners are Apple shareholders, employees, and, of course, consumers.
Of course there will always be losers. Some domestic employment in high wage labor intensive manufacturing will take a hit. It is thus imperative that our education system stay on top of the ever changing labor market to insure that people have the skills that are in demand.
Saturday, August 10, 2013
FALLACIES
According to economist Thomas Sowell, there are four basic economic fallacies. The Zero Sum Fallacy, the Fallacy of Composition, the Chess-Piece Fallacy, and the Open-Ended Fallacy.
The Zero Sum Fallacy
This states that what is gained by X, is lost by Y. This is often used by politicians to pit one group against the other, the latest being the 1% (the very rich) against the 99% (the rest of us). It is indeed a fallacy since the 1% are the investor class, and we need investment and risk taking to make the economy grow. When it does, we all benefit. As John F. Kennedy pointed out, "A rising tide floats all boats". (emphasis mine)
The Fallacy Of Composition
This states that what is true of a part is true of the whole. We often see politicians passing legislation which benefits a special interest, and selling it to the public with arguments like, "it will create jobs". At times like this, we need to keep in mind Star Trek's Spock who stated, "The needs of the many outweigh the needs of the few". Special interest legislation is just the opposite. Case in point would be the trade barriers protecting the domestic sugar crop. As a result, the consumer pays substantially more for this product, and the products that use sugar.
The Chess-Piece Fallacy
This fallacy states that large scale grand plans can benefit individuals. China's Mao had a massive program called The Great Leap Forward in which central planners tried to manage a billion people. It was a disaster resulting in the mass starvation of millions of people. Unlike chess pieces, human beings have their own individual preferences, values, and plans, all of which conflict with the goals of any specific social plan. The problem is that usually the social planner's response to a failing program is "if at first you don't succeed, try, try again". This is a formula for disaster.
The Open-Ended Fallacy
Who could be against health, safety, or open space? But each of these things is open-ended, while resources are limited. No matter how much is done to promote health, more could be done. No matter how safe things are, they could always be safer. And no matter how much open space there is, there could still be more. Obvious as this may seem, there are advocates, movements, laws, and policies promoting an open-ended commitment to more of each of these things, without any indication of limits. Open-ended demands are a mandate for ever-expanding government bureaucracies with ever-expanding budgets and powers.
The Zero Sum Fallacy
This states that what is gained by X, is lost by Y. This is often used by politicians to pit one group against the other, the latest being the 1% (the very rich) against the 99% (the rest of us). It is indeed a fallacy since the 1% are the investor class, and we need investment and risk taking to make the economy grow. When it does, we all benefit. As John F. Kennedy pointed out, "A rising tide floats all boats". (emphasis mine)
The Fallacy Of Composition
This states that what is true of a part is true of the whole. We often see politicians passing legislation which benefits a special interest, and selling it to the public with arguments like, "it will create jobs". At times like this, we need to keep in mind Star Trek's Spock who stated, "The needs of the many outweigh the needs of the few". Special interest legislation is just the opposite. Case in point would be the trade barriers protecting the domestic sugar crop. As a result, the consumer pays substantially more for this product, and the products that use sugar.
The Chess-Piece Fallacy
This fallacy states that large scale grand plans can benefit individuals. China's Mao had a massive program called The Great Leap Forward in which central planners tried to manage a billion people. It was a disaster resulting in the mass starvation of millions of people. Unlike chess pieces, human beings have their own individual preferences, values, and plans, all of which conflict with the goals of any specific social plan. The problem is that usually the social planner's response to a failing program is "if at first you don't succeed, try, try again". This is a formula for disaster.
The Open-Ended Fallacy
Who could be against health, safety, or open space? But each of these things is open-ended, while resources are limited. No matter how much is done to promote health, more could be done. No matter how safe things are, they could always be safer. And no matter how much open space there is, there could still be more. Obvious as this may seem, there are advocates, movements, laws, and policies promoting an open-ended commitment to more of each of these things, without any indication of limits. Open-ended demands are a mandate for ever-expanding government bureaucracies with ever-expanding budgets and powers.
Wednesday, July 31, 2013
The Greatest Anti-poverty Program In The History Of Man
"Man born of woman is short-lived, and glutted with agitation." -- Job 14: 1
During the heated federal budget battles of 2011, one liberal Christian group took out a full page ad in a national newspaper with the provocative question, "What Would Jesus Cut?" The ad asked readers to sign a petition asking Congress to oppose any policies that involve cutting domestic programs that help the poor.
The first anti-poverty program in the US extends as far back as the 1930's with Roosevelt's New Deal. This has been followed by many other "programs"....The Fair Deal, The Great Society, The New Frontier, etc, etc. Has the poverty rate dropped? Sadly it hasn't. There always seems to be a hard core that will never disappear...hovering above 10% of our population.
But for most of us, the free enterprise system has lifted more people out of poverty than all the government anti-poverty programs combined. In 1800, the average person had a standard of living no better than people living in the Stone Age. Even in advanced cities like London, only one quarter of the population could expect to live beyond five years of age. For the lucky few who survived childhood in the eighteenth century, the life that awaited them was difficult and short. So for all of history until about 200 years ago, the world was desperately poor.
Then, with the industrial revolution something changed. We had economic growth fueled by the free market system, incentivized by the profit motive. Jump now to the 21st century. The average American in 2007 enjoyed 35% more real income than 30 years ago, and every income bracket has benefited. In 1850 the average life expectancy was 38 years. Today it is 78. The first public school opened in Boston in 1817. Today we have 13 years of mandatory taxpayer funded education in all 50 states. All of this is funded by the greatest antipoverty program ever known.....the free enterprise system. As professor of economics (NYU) William Easterly stated, "profit-motivated capitalism is still the best case for the poor."
Of course, we will always need the safety net for the hard core poor mentioned above. But in looking at poverty here and around the world, social welfare programs are the band-aid. Free enterprise is the cure.
During the heated federal budget battles of 2011, one liberal Christian group took out a full page ad in a national newspaper with the provocative question, "What Would Jesus Cut?" The ad asked readers to sign a petition asking Congress to oppose any policies that involve cutting domestic programs that help the poor.
The first anti-poverty program in the US extends as far back as the 1930's with Roosevelt's New Deal. This has been followed by many other "programs"....The Fair Deal, The Great Society, The New Frontier, etc, etc. Has the poverty rate dropped? Sadly it hasn't. There always seems to be a hard core that will never disappear...hovering above 10% of our population.
But for most of us, the free enterprise system has lifted more people out of poverty than all the government anti-poverty programs combined. In 1800, the average person had a standard of living no better than people living in the Stone Age. Even in advanced cities like London, only one quarter of the population could expect to live beyond five years of age. For the lucky few who survived childhood in the eighteenth century, the life that awaited them was difficult and short. So for all of history until about 200 years ago, the world was desperately poor.
Then, with the industrial revolution something changed. We had economic growth fueled by the free market system, incentivized by the profit motive. Jump now to the 21st century. The average American in 2007 enjoyed 35% more real income than 30 years ago, and every income bracket has benefited. In 1850 the average life expectancy was 38 years. Today it is 78. The first public school opened in Boston in 1817. Today we have 13 years of mandatory taxpayer funded education in all 50 states. All of this is funded by the greatest antipoverty program ever known.....the free enterprise system. As professor of economics (NYU) William Easterly stated, "profit-motivated capitalism is still the best case for the poor."
Of course, we will always need the safety net for the hard core poor mentioned above. But in looking at poverty here and around the world, social welfare programs are the band-aid. Free enterprise is the cure.
Wednesday, July 3, 2013
The "Evils" Of Outsourcing
Outsourcing is the contracting out of an internal business process to a 3rd party. In short, it often manifests itself in a company hiring cheap overseas labor which replaces domestic jobs. On the surface, this seems disturbing. But there is more than initially meets the eye. First, we are talking about a global economy, and if a domestic company is producing a labor-intensive product, they had best produce that product in a low cost labor market, or they could be out of business. Their international competition most certainly will have low unit labor costs, and their final prices will reflect that. A politician may wring his/her hands about it, but short of throwing up tariffs, there is nothing that can be done. And you won't find a legit economist on the planet that would agree to the old days of high tariffs.
By the same token, those that complain the loudest about outsourcing never even mention "insourcing". That is, international companies like BMW and Michelin locating plants in South Carolina, and Honda, Nissan, Mercedes, and Hyundai having manufacturing in Alabama. It is Europe, with its liberal labor practices, high tax rates, and restrictive tariffs that has been outsourcing millions of jobs.
The upshot is that globalization has resulted in a loss of some jobs.....unionized factory jobs in autos, steel, and textiles. But manufacturing insourcing has more than offset this in right-to-work states. By the same token, there have been significant increases in the services industries, technology, and knowledge based industries. Nonetheless, some would balk at the service industry...they would argue that it doesn't pay well. But many service based jobs (trade, finance, insurance, banking, retail, travel, delivery, education, healthcare, entertainment, government, etc) have very competitive wages. And here is the salient point: A booming service economy is a symptom of economic sophistication.
By the same token, those that complain the loudest about outsourcing never even mention "insourcing". That is, international companies like BMW and Michelin locating plants in South Carolina, and Honda, Nissan, Mercedes, and Hyundai having manufacturing in Alabama. It is Europe, with its liberal labor practices, high tax rates, and restrictive tariffs that has been outsourcing millions of jobs.
The upshot is that globalization has resulted in a loss of some jobs.....unionized factory jobs in autos, steel, and textiles. But manufacturing insourcing has more than offset this in right-to-work states. By the same token, there have been significant increases in the services industries, technology, and knowledge based industries. Nonetheless, some would balk at the service industry...they would argue that it doesn't pay well. But many service based jobs (trade, finance, insurance, banking, retail, travel, delivery, education, healthcare, entertainment, government, etc) have very competitive wages. And here is the salient point: A booming service economy is a symptom of economic sophistication.
Sunday, June 16, 2013
The Law Of Unintended Consequences
Often, well intentioned policymakers pass laws they believe will make the harsh world a bit more warm and fuzzy. But often the blowback creates more problems than it solves. This is the Law Of Unintended Consequences. Consider the Americans with Disabilities Act (ADA) which was intended to safeguard disabled workers from discrimination. A noble cause, but the data shows that after the ADA was passed, the employment of the disabled dropped. Why? Employers where so worried they couldn't discipline or fire bad workers who had a disability that they avoided hiring such workers in the first place. Then there is the Endangered Species Act. When landowners feared that their property may be becoming the habitat of a species on the endangered list, they would begin by cutting back on any vegetation that would serve as nesting sites for these species. The net result was that the species in question would have an even more difficult climb to survival.
But the flagship example is the marriage between The Community Reinvestment Act (CRA) and government sponsored enterprises (GSEs). It basically led to the housing bubble which broke late 2007 and the Great Recession that followed. The intent of the CRA was noble. It empowered federal regulators to pressure banks to make loans to low-income people. We then had GSEs like Fanny Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) buying mortgages from banks. Without these GSEs buying the mortgages, the banks would be limited on how many loans they could make. The banks have a reserve requirement of 10%, and when they hit that limit, they stop loaning money. But if a GSE buys the mortgage, then the bank has more money to lend. By the end of 2007, government sponsored mortgages accounted for 81% of all mortgage loans in the US (Grant's Interest Rate Observer; May 30, 2008; 3) The seeds of destruction where now in place. We had more and more money available to be given to sub-prime buyers who if it were not for the CRA would never have been considered for a loan because of the risk of default. Was there also "predatory lending"? You bet. If a 3rd party (GSEs) is going to buy your mortgage, you have off-loaded the risk. As the demand for housing continued to climb, so did the price. It was just a matter of time before the bubble popped.
There are many more examples. Just about every attempt to social engineer has a blowback. Can we learn from the past to be more cautious and look a bit more before we leap? We can only hope.
But the flagship example is the marriage between The Community Reinvestment Act (CRA) and government sponsored enterprises (GSEs). It basically led to the housing bubble which broke late 2007 and the Great Recession that followed. The intent of the CRA was noble. It empowered federal regulators to pressure banks to make loans to low-income people. We then had GSEs like Fanny Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corp) buying mortgages from banks. Without these GSEs buying the mortgages, the banks would be limited on how many loans they could make. The banks have a reserve requirement of 10%, and when they hit that limit, they stop loaning money. But if a GSE buys the mortgage, then the bank has more money to lend. By the end of 2007, government sponsored mortgages accounted for 81% of all mortgage loans in the US (Grant's Interest Rate Observer; May 30, 2008; 3) The seeds of destruction where now in place. We had more and more money available to be given to sub-prime buyers who if it were not for the CRA would never have been considered for a loan because of the risk of default. Was there also "predatory lending"? You bet. If a 3rd party (GSEs) is going to buy your mortgage, you have off-loaded the risk. As the demand for housing continued to climb, so did the price. It was just a matter of time before the bubble popped.
There are many more examples. Just about every attempt to social engineer has a blowback. Can we learn from the past to be more cautious and look a bit more before we leap? We can only hope.
Saturday, June 8, 2013
Why Is The Crime Rate Dropping?
Who can forget the profound statement made by the former mayor of Washington, DC, Marion Barry, when he said, "Outside of the killings, Washington has one of the lowest crime rates in the country." Criminologists do tend to divide lawbreaking into crimes against property and crimes against people. It is interesting to note that since the early 1990s, both have been steadily dropping. Finally, a happy statistic. But it is a head scratcher. What are the reasons for the drop?
Is it stronger gun control laws? Is it larger police departments? Is it improved policing with techniques like DNA testing? Is it a better economy? Is it a dampening of the crack-cocaine market? Perhaps an aging population? To some extent, all of these MAY have some influence. But economist Steven Levitt has the most intriguing theory -- Roe v. Wade....the legalization of abortion. It began with 20 year old Norma McCorvey. All she wanted was to end her pregnancy. But in Texas, as in most states at the time, abortion was illegal. Various groups with a cause made McCorvey the lead defendant to legalize abortion. The defendant was Henry Wade, the Dallas County district attorney. McCorvey's name had been disguised as Jane Roe, and on January 22, 1973, the court ruled in favor of Ms. Roe, allowing legalized abortion throughout the country. By that time it was far too late for McCorvey/Roe to have her abortion. She ultimately gave birth and put her child up for adoption. Ironically, years later she would renounce her allegiance to legalized abortion and became a pro-life activist.
I'm sure you see where this is leading. Levitt's thesis is that a child born in an adverse family environment is far more likely than other children to become a criminal. Exactly 20 years after Roe v. Wade, when the pool of potential criminals had dramatically shrunk, the soaring crime rate took a sudden dip downward, and has continued to this day. Can we definitively say that Levitt was right? Perhaps, but the only way we could really confirm his thesis is if we banned abortion, then 20 years hence monitored to see if the crime rate started to spike again. But waiting 2 decades for an answer requires a lot of patience. Ergo, it is best to keep an open mind to all possibilities. On a personal note, I am against the aborting of a human life. But that is no reason to ignore all possibilities in explaining the world around us.
Is it stronger gun control laws? Is it larger police departments? Is it improved policing with techniques like DNA testing? Is it a better economy? Is it a dampening of the crack-cocaine market? Perhaps an aging population? To some extent, all of these MAY have some influence. But economist Steven Levitt has the most intriguing theory -- Roe v. Wade....the legalization of abortion. It began with 20 year old Norma McCorvey. All she wanted was to end her pregnancy. But in Texas, as in most states at the time, abortion was illegal. Various groups with a cause made McCorvey the lead defendant to legalize abortion. The defendant was Henry Wade, the Dallas County district attorney. McCorvey's name had been disguised as Jane Roe, and on January 22, 1973, the court ruled in favor of Ms. Roe, allowing legalized abortion throughout the country. By that time it was far too late for McCorvey/Roe to have her abortion. She ultimately gave birth and put her child up for adoption. Ironically, years later she would renounce her allegiance to legalized abortion and became a pro-life activist.
I'm sure you see where this is leading. Levitt's thesis is that a child born in an adverse family environment is far more likely than other children to become a criminal. Exactly 20 years after Roe v. Wade, when the pool of potential criminals had dramatically shrunk, the soaring crime rate took a sudden dip downward, and has continued to this day. Can we definitively say that Levitt was right? Perhaps, but the only way we could really confirm his thesis is if we banned abortion, then 20 years hence monitored to see if the crime rate started to spike again. But waiting 2 decades for an answer requires a lot of patience. Ergo, it is best to keep an open mind to all possibilities. On a personal note, I am against the aborting of a human life. But that is no reason to ignore all possibilities in explaining the world around us.
Saturday, June 1, 2013
100 Million Missing Women
Nobel laureate economist Amartya Sen has calculated that based on birth rates of men and women, and the number of men and women alive today, that roughly 100 million women are missing....perhaps victims of early death. In known demographics, more men than women are born every year, but women tend to be healthier than men. The upshot is that women outnumber men in the populations of high-income countries by about 105 women for every 100 men. But in less developed countries this is reversed. Lower health standards for girls seems to be a major contributor to the rates of missing women. By the same token, sex-selective abortion is having a major impact. Higher rates of maternal mortality in 3rd world countries is also having an impact. In China, the one-child policy has manifested itself in a skewed birth rate of 111:100. This is one reason that this attempt to social engineer has about run its course in China. Girls are so undervalued in India that there are roughly 35 million fewer fewer females than males. And if an Indian girl does reach adulthood, she faces a difficult life. 51% of Indian men said that wife-beating is justified. Amazingly, 54% of Indian women agree. More than 100,000 young Indian women die every year in "bride-burnings" or other instances of domestic abuse.
Literacy rates and education levels are also a factor. In North America, Europe, and Latin America, literacy between men and women are about the same. But in Arab states, South and West Asia, and across sub-Saharan Africa, literacy rates of women are about 20% below those of men. The direct effect of less education is that women have a lower chance of getting jobs, and lower wages in the jobs they do get.
Globally women are dramatically underrepresented in legislative bodies or as political leaders. In those countries that have a higher share of female representation in establishing government priorities, there is a greater share of funding going toward health and education. In the long run this has a positive impact on economic growth. It expands the life choices available to the world's population and gives people of both genders a better chance to choose the lives they want to lead. In the decades ahead, the successful countries will be the ones that move more toward market based economies, and improve the status of women.
Literacy rates and education levels are also a factor. In North America, Europe, and Latin America, literacy between men and women are about the same. But in Arab states, South and West Asia, and across sub-Saharan Africa, literacy rates of women are about 20% below those of men. The direct effect of less education is that women have a lower chance of getting jobs, and lower wages in the jobs they do get.
Globally women are dramatically underrepresented in legislative bodies or as political leaders. In those countries that have a higher share of female representation in establishing government priorities, there is a greater share of funding going toward health and education. In the long run this has a positive impact on economic growth. It expands the life choices available to the world's population and gives people of both genders a better chance to choose the lives they want to lead. In the decades ahead, the successful countries will be the ones that move more toward market based economies, and improve the status of women.
Sunday, April 14, 2013
It's April 15th -- The U.S. Tax Code
"A lot of our astute moves have been basically keeping up with tax laws, where to go, where not to put it. Whether to sit on it or not. We left England because we'd be paying 98 cents on the dollar. We left and they lost out." -- Keith Richards - Rolling Stones
Most of us need help in filing our taxes each year. Even with very simple returns, most people want someone knowledgeable to file it for us. That is why H & R Block is doing so well. The U.S. Tax code is currently 16,845 pages long. But Congress is always fiddling with it, and that number will continually grow. Parts of it are so complicated that even the experts sometime scratch their heads. In the mid-90's, Money Magazine produced a tax return for a fictitious couple who had a mortgage, with the husband working full time, and the wife running a part-time business from the home. On a scale of complexity, this would fall somewhere in the middle. They then gave the task of preparing the tax return to 40 different tax preparers, ranging from H & R Block types to individual CPAs. The results were 40 different taxes owed in a range of 1000's of dollars.
What have we done? Why have we created this monstrosity? In spite of the size of the tax code, and an aggressive enforcer (The IRS), there is still a huge leak in the system. The underground economy which deals in cash, never pays a dime in taxes. And it never will since there is no paper trail. Then there are the tax loopholes. For example, did you know there is a special provision for favorable treatment of racehorses? And not just any racehorse....just two year olds and younger. Section 68(e)(3)(i)(I) creates a special depreciation schedule for these fine creatures.....talk about a loophole for the rich.
The answer to all this silliness is a simple flat tax which doesn't allow special interest loopholes. Twenty-four nations have adopted the flat tax. Russia gets more revenue with its 13% flat tax than it did under the old system when tax rates were over 50%. And to address the underground economy and to broaden the tax base, implement a modest value added tax (VAT), which basically is a sales tax on consumption. Thus everyone pays something, not just those who have a paper trail.
Taxes are the price we pay for civilization. But there certainly must be a more civilized way to collect them.
************
Postscript -- IRS Mission Statement
"Provide America's Taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."
-- Publication 1, Catalog Number 64731W
Most of us need help in filing our taxes each year. Even with very simple returns, most people want someone knowledgeable to file it for us. That is why H & R Block is doing so well. The U.S. Tax code is currently 16,845 pages long. But Congress is always fiddling with it, and that number will continually grow. Parts of it are so complicated that even the experts sometime scratch their heads. In the mid-90's, Money Magazine produced a tax return for a fictitious couple who had a mortgage, with the husband working full time, and the wife running a part-time business from the home. On a scale of complexity, this would fall somewhere in the middle. They then gave the task of preparing the tax return to 40 different tax preparers, ranging from H & R Block types to individual CPAs. The results were 40 different taxes owed in a range of 1000's of dollars.
What have we done? Why have we created this monstrosity? In spite of the size of the tax code, and an aggressive enforcer (The IRS), there is still a huge leak in the system. The underground economy which deals in cash, never pays a dime in taxes. And it never will since there is no paper trail. Then there are the tax loopholes. For example, did you know there is a special provision for favorable treatment of racehorses? And not just any racehorse....just two year olds and younger. Section 68(e)(3)(i)(I) creates a special depreciation schedule for these fine creatures.....talk about a loophole for the rich.
The answer to all this silliness is a simple flat tax which doesn't allow special interest loopholes. Twenty-four nations have adopted the flat tax. Russia gets more revenue with its 13% flat tax than it did under the old system when tax rates were over 50%. And to address the underground economy and to broaden the tax base, implement a modest value added tax (VAT), which basically is a sales tax on consumption. Thus everyone pays something, not just those who have a paper trail.
Taxes are the price we pay for civilization. But there certainly must be a more civilized way to collect them.
************
Postscript -- IRS Mission Statement
"Provide America's Taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."
-- Publication 1, Catalog Number 64731W
Monday, March 25, 2013
Why Business Is Not Hiring
Many medium and large corporations are flush with cash. In spite of this, the hiring process is very sluggish. The upshot is that unemployment remains high. Hiring for federal government jobs is robust. But very little is happening in the private sector. Why?
Over the years, the cost of hiring an employee has slowly but steadily risen. It is more than just a salary. There is Social Security (FICA), Medicare (MICA), Unemployment Insurance, Workman's Comp, and now Obamacare. There are minimum wage rules, required sick days, overtime laws, union requirements, paid maternity leave, etc. By the same token, there are a legion of anti-discrimination laws that a hiring company must tip-toe around. God help the employer who happens to ask the wrong question to a potential employee. The result of all this is that in 2013 an employer must think long and hard about hiring even one more person. In Europe, it is even worse. The dark side is that for decades the unemployment rate in the Euro Zone has been about twice that of the US......but we are catching up.
The government answer to high unemployment has been to stimulate the economy by increasing their spending. Has this been effective? Yes and no. If we were in a deflationary period, there is empirical data that deficit spending does help prices to come back. This is important since deflation can be an economy killer. But if prices are stable or rising, the data reveals just the opposite. For example, Swedish economists Andreas Bergh and Magnus Henrekson measured the negative relationship between government spending and economic growth. They found that a 10% increase in government spending corresponds to a decrease in economic growth of between 0.5 and 1 percentage point (Journal Of Economic Surveys -- June 2011). By the same token, economists Timothy Conley and Bill Dupor in a detailed study of the American Recovery and Reinvestment Act found that indeed the stimulus did create or save 450,000 government jobs. However, up to 1 million private sector jobs where forestalled or destroyed. (http://web.econ.ohio-state.edu/dupor/arra10_may11.pdf) This is because of the detrimental tax and public debt effects on investment and confidence. These empirical findings go counter to Keynesian economic theory that says an increase in government spending will reduce unemployment. Since virtually every government on the planet practices Keynesian economics, these studies should get a lot of people's attention. But it probably won't since the pesky task of working with budgets has never been the favorite task of lawmakers.
Somehow, policymakers need to see the light, and make it less costly for employers to hire a full time employee, and also control excessive government spending.
Over the years, the cost of hiring an employee has slowly but steadily risen. It is more than just a salary. There is Social Security (FICA), Medicare (MICA), Unemployment Insurance, Workman's Comp, and now Obamacare. There are minimum wage rules, required sick days, overtime laws, union requirements, paid maternity leave, etc. By the same token, there are a legion of anti-discrimination laws that a hiring company must tip-toe around. God help the employer who happens to ask the wrong question to a potential employee. The result of all this is that in 2013 an employer must think long and hard about hiring even one more person. In Europe, it is even worse. The dark side is that for decades the unemployment rate in the Euro Zone has been about twice that of the US......but we are catching up.
The government answer to high unemployment has been to stimulate the economy by increasing their spending. Has this been effective? Yes and no. If we were in a deflationary period, there is empirical data that deficit spending does help prices to come back. This is important since deflation can be an economy killer. But if prices are stable or rising, the data reveals just the opposite. For example, Swedish economists Andreas Bergh and Magnus Henrekson measured the negative relationship between government spending and economic growth. They found that a 10% increase in government spending corresponds to a decrease in economic growth of between 0.5 and 1 percentage point (Journal Of Economic Surveys -- June 2011). By the same token, economists Timothy Conley and Bill Dupor in a detailed study of the American Recovery and Reinvestment Act found that indeed the stimulus did create or save 450,000 government jobs. However, up to 1 million private sector jobs where forestalled or destroyed. (http://web.econ.ohio-state.edu/dupor/arra10_may11.pdf) This is because of the detrimental tax and public debt effects on investment and confidence. These empirical findings go counter to Keynesian economic theory that says an increase in government spending will reduce unemployment. Since virtually every government on the planet practices Keynesian economics, these studies should get a lot of people's attention. But it probably won't since the pesky task of working with budgets has never been the favorite task of lawmakers.
Somehow, policymakers need to see the light, and make it less costly for employers to hire a full time employee, and also control excessive government spending.
Sunday, January 13, 2013
TAXES
No one likes taxes, but they are necessary. It is the price we pay for civilization. We have town taxes, county taxes, state taxes, and federal taxes. All very necessary.....but it does add up. Every state in the Union, with the exception of New Hampshire, has either an income tax or a sales tax (often both). So should we all move to New Hampshire? Probably not since they have the highest property tax in the nation. Tax Freedom Day (the day when if our income went to pay all federal, state, and local taxes, we would have completed the payments) in 2012 was April 17th. So for the first 107 days of the year we are working for the government. On April 18th we could start paying our personal bills and maybe indulge ourselves with a night on the town.
We do have this constant battle between public and private. The public sector (governments) needs the private sector to pay its bills. But the private sector generally doesn't mind since they get needed services in return...fire protection, police protection, schools, national defense, etc. But there must be a balance between the two. It is a fine dance as to where that balance should be, and when we are reaching a tipping point. To keep it simple, let's focus on federal taxes.
All federal policies (which always affect taxes) should be based in the dictum "Primum Non Nocere" (First, do no harm). If we spend a massive amount of money on national defense, or eliminating poverty, what could be the harm? The answer is pretty straightforward. The study of economics is all about the spreading of limited resources among unlimited wants. History shows that very quickly we do bump up against limits. How can you go beyond these limits? Quite simply, by going into debt. Will it do harm to keep increasing that debt? If we are to answer this strictly from an economic viewpoint and not a political one, the answer is "yes!".
One way to reduce the debt is to increase taxes, to pay for a new jet fighter or to pay the poor man. But who ever heard of a poor person spending themselves to prosperity. And raising taxes will always result in a drop in the taxed activity. In short, a clear violation of the Primum Non Nocere dictum. What is really needed is a growth in the economy. That will happen if we expand production and expand employment. To do that you must lower taxes on production and employment, not raise it. Tax policies that punish work, saving, and investing, create less work, saving, and investing.
If you want more taxes from the rich, you've got to make the rich richer. To make the rich richer you lower taxes. The dream of America has always been to make the poor man rich, not make the rich man poor.
A final thought....We can walk away forever from a bad boss, merchant, or customer, but we cannot walk away from the government. Therein lies the paradox. We have concentrated power in public guardians in order to protect us from private violence, theft, and fraud. But, having done so, who will guard us from the guardians?
We do have this constant battle between public and private. The public sector (governments) needs the private sector to pay its bills. But the private sector generally doesn't mind since they get needed services in return...fire protection, police protection, schools, national defense, etc. But there must be a balance between the two. It is a fine dance as to where that balance should be, and when we are reaching a tipping point. To keep it simple, let's focus on federal taxes.
All federal policies (which always affect taxes) should be based in the dictum "Primum Non Nocere" (First, do no harm). If we spend a massive amount of money on national defense, or eliminating poverty, what could be the harm? The answer is pretty straightforward. The study of economics is all about the spreading of limited resources among unlimited wants. History shows that very quickly we do bump up against limits. How can you go beyond these limits? Quite simply, by going into debt. Will it do harm to keep increasing that debt? If we are to answer this strictly from an economic viewpoint and not a political one, the answer is "yes!".
One way to reduce the debt is to increase taxes, to pay for a new jet fighter or to pay the poor man. But who ever heard of a poor person spending themselves to prosperity. And raising taxes will always result in a drop in the taxed activity. In short, a clear violation of the Primum Non Nocere dictum. What is really needed is a growth in the economy. That will happen if we expand production and expand employment. To do that you must lower taxes on production and employment, not raise it. Tax policies that punish work, saving, and investing, create less work, saving, and investing.
If you want more taxes from the rich, you've got to make the rich richer. To make the rich richer you lower taxes. The dream of America has always been to make the poor man rich, not make the rich man poor.
A final thought....We can walk away forever from a bad boss, merchant, or customer, but we cannot walk away from the government. Therein lies the paradox. We have concentrated power in public guardians in order to protect us from private violence, theft, and fraud. But, having done so, who will guard us from the guardians?
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