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.

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. 

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.

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.

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.

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.

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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

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.