I was reminded today that I have not posted in a year.  Hmm…it seems like my last post was only a few months ago.

I have had another kid in the intervening year, so that has kept me busy to be honest.  The newborn and 2 year old are too much fun, and so I haven’t spent much time writing at a computer (unless it was for work).

Other than things generally being awesome, time is my biggest challenge right now.   I don’t have enough time to meet all my obligations.

Children:  I want to spend time with them, so any free time (or even un-free time) I try to allocate to my kids.

Wife:  Luckily I can kill two birds with one stone here.  When I am with the kids, I am also with my wife.  Not a lot of date nights though.

Friends:  Tough to find time for this.  The only thing that makes me feel any better here is that they ALSO don’t have time.  It isn’t like they are all calling me and I’m having to make excuses why I can’t see them.  They are too busy to call/stop by as well.  It is a reciprocal “I’d love to see you but…”.

Housework:  Uh…we do the best we can.  My wife also works.

“Me” time:  I don’t really have this much anymore; however, I had a lifetime of it in my twenties and can honestly say I don’t like hanging out with myself that much, so I don’t miss it.

Work:   Arghh!!  I’m struggling here.  Unlike with friends, work doesn’t understand that I am busy.  I work in a billable hours industry, which rewards us for more….HOURS. Hours is something I don’t have.  I wonder if consulting (with the travel and long, irregular work hours) is an industry that is built for two income families?  I am unsure I can meet the expectations of the job.  I am unsure I can expect my wife to take care of two kids and work while I am away helping clients with problems that, while important in the context of work, are not nearly as important as my wife and children.  I’m struggling here.

Over the years I have heard many vacant cliches that aren’t all that helpful (e.g. live every day like it is your last, you only live once, speak your mind, follow your passion, etc.), but one that is extremely true and helpful is:  No one ever dies wishing they had spent a few more hours at the office.

Let’s see if I can update again before next year!

A little high level data/history here, and then we’ll jump into Myths related to taxes for the rich.  I will provide a logical plausible mechanism for why low taxes for the rich do not stimulate the economy.

1.  The GDP growth rates during times of high marginal tax rates on the rich have historically been better than when they were low. Understand?  Growth is BETTER when tax rates are high on the rich.

2.  If tax cuts for the rich were stimulative, we’d be in boom times right now, but we are not.  The Bush tax cuts were largely tax cuts for the rich.  They did not stimulate the economy when enacted, and now the argument is that if they are taken away the economy would be even worse?  Not true.

3.  There was one other time in our nation’s history where taxes on the rich were this low:  right before the Great Depression.

The funner, better question is why?  Why are high taxes on the rich better for the economy?

Myths about taxes and the rich:

More money for the rich creates jobs.

Really? How? Businesses create jobs, not rich people (unless you count their housekeepers).  Giving more money to the rich simply makes them richer.  More money for the rich does not make their businesses richer either (the money leaves the company when they pay themselves).

Payouts to the rich actually make businesses poorer, since that money is not available to fund new projects.  Low capital gains taxes can also produce this effect.  High taxes for the rich are stimulative because it encourages companies not to pay out that money, which the businesses can then use internally to make investments.

But, still, the rich have money, which they then spend, which creates jobs, right? No.  I do agree that demand for additional goods/services creates jobs.  But rich people do not create as much demand as others.  A rich person saves a good percentage of their money, which is a drain on the economy (since that money is not spent to create demand for additional goods/services).

To reiterate:  Extra money for the rich stimulates the economy less than extra money for the middle class because they save a good portion of their money.

But the rich use that savings to invest their money which is good for the economy, right?

Wrong.

The word “invest” is used too loosely.  I wish there were another word.

In economics, Investment is good for the economy.  It is defined as business expense (minus SG&A) and purchase of capital goods.  Businesses generally make investments.  They include purchase of machinery, expansion into a new line of business, improvements on a facility, even education of the workforce.

In finance, Investment is when you buy something and hope to sell it for more later.  This is just speculation.  That is what the rich are doing.  This does not help the economy (unless you work in finance).  Purchasing stock, bonds, mutual funds, etc. IS NOT INVESTMENT.  The underlying companies DO NOT GET ANY OF THAT MONEY (only at the initial sale does the company get money.  The entire stock market is a second hand market.)  The vast majority of business initiatives are funded through excess profit, not equity (or debt).  Even when the rich do spend money on IPOs where companies get the money, this is not a significant source of funding for new business ventures.

In short, the “investment” that the rich make with their excess savings does not help the economy. It encourages speculation or, more to the point, it IS speculation….which is incidentally exactly where we are right now with the financial crisis:  too much speculation.

Putting more money in people’s pockets through tax cuts is a good way to stimulate the economy.

No.  In most cases, taxes are neutral for the overall economy.

As covered earlier, tax cuts for the rich do not stimulate because they save more of their money.  Let’s say the rich spend 80% (which becomes someone else’s income) and save 20% (which goes largely into bank accounts or speculation and is not stimulative).

As an aside here, you may say “Well, then the 20% the rich have in bank accounts is then lent to allow businesses to pursue new initiatives.  It IS still sound economic investment in the end.”

Nope.  Banks don’t need deposits to lend; that money is good for nothing until spent.  Banks can always get the money they need to lend (meet their reserve requirement) through borrowing from the Federal Reserve, which has to lend to them by law (and creates money out of thin air so there is no natural limit).  Lending is limited only by the number of credit worthy people/projects, not by deposits.

If the government taxed away the rich’s extra money, the government would spend 100% of it, not 80% of it (since the government never saves).  So….the government taxing away the rich’s money is actually stimulative.

What about the rest of us (the non-rich)?  We spend almost all of our money.  If the government taxes away our money, it is a wash at an aggregate level….either they spend 100% of it or we spend 100% of it.

So, tax cuts in general don’t stimulate the economy.  What taxes do is allow the government to pick winners/losers.  The government simply takes the money from us and puts it elsewhere.  Sometimes we agree with where they put it (highways, education, etc.); sometimes we disagree (wars, etc.).

To reiterate, tax cuts do not generally stimulate the economy.  They are a neutral.

Although a bit more controversial, there is some data/history and a plausible mechanism to make the case that high taxes for the rich encourage growth, not low taxes.  With high taxes for the rich, the businesses are encouraged to keep the money and make investments to fund new initiatives and the rich  save more of their money (which does not help the economy).  With high taxes on corporate profit, business is also encouraged to spend the money on improvements/investments (which would be pre-tax) instead of taking the money as profit (which is taxed).  Excess profit does not create jobs or stimulate growth.  Demand for goods and services in excess of what the company can provide with current resources creates jobs and stimulates the economy.

To conclude, I do not understand the tax cut for the rich argument.  Data and history do not back it up and there is no logical plausible mechanism for it.

Zombies are really popular these days.  The story goes that some virus transmissible by the bite of an infected person could transform us into an ugly, bleeding, aggressive, cannibalistic, slow walking/limping, strong,  sleepless shell of a human who is somewhat resistant to gun shot wounds and generally hard to kill.

The background here is that I studied microbiology in college, and while I’m not a virologist, I do have some knowledge of the subject matter.

So let’s take the “symptoms” of zombification one at a time:

Ugly: Can a pathogen make you ugly?  Yes.  Leprosy, The Plague…any general Necrosis.  It is possible for a pathogen to transform appearance over time.  Even the flu makes us look rougher than usual.  I will draw a line though:  If you look as bad as zombies generally do on TV, you’re about dead and bedridden….not likely chasing people around trying to eat them.

Bleeding:  Yes.  Pathogens can leave us with open sores.  No objections here.  Though we will come back to this one…because bleeding along with some of the other symptoms are not likely to go together.

Aggressive:  Not likely, though possible.  When we get sick with a pathogen we are generally listless and tired, not aggressive.  If we are bleeding and parts of our body are dying, then we are not aggressive…we are bedridden.

Cannibalistic:  No.  I do not know of any infection that makes us want to eat other people.  Rabies (which is active on the brain/nervous system) is not transmitted person to person.  Also, rabies kills us.  It does not reanimate us into zombies.

Slow walking/limping:  Not likely.  Any pathogen that works on the nervous system, as the zombie pathogen would have to, could cause difficulty with motor skills.  Parkinson’s disease (though genetic and not caused by a pathogen) is an example.  However, I know of no pathogen that would cause a limp and then stop progressing without treatment.   The fake zombie pathogen would be smarter if it left motor skills fully intact; easier to hunt down people and eat them (like vampires).  Infections generally progress; if it progressed to a limp then presumably it would later progress to completely shutting down the nervous system.

Strong:  I think generally on TV zombies seem to possess some kind of extra strength, though I’m not sure.  If so, then this is not possible in real life.  Infections don’t make us stronger; they make us weaker.  Also, extra strength and a limp do not go together.  If our nervous system is impaired and we are generally bleeding…we are unlikely to have extra strength.  This one is simply not feasible.  Zombies, if they existed, would be weak as shit.

Sleepless:  Sure.  Pathogens cause sleeplessness.  Also, I’m not sure whether zombies sleep or not.  It is not clear from watching TV if they need sleep (or food).

Shell of a human:  Yes, sort of.  Alzheimer’s disease can basically erase a person, so this is possible…however, Alzheimer’s takes years, not minutes like the potential zombie pathogen.  Bear in mind Alzheimer’s patients are pretty weak as well, not bleeding, extra-strong cannibals as zombies are.

Somewhat resistant to gun shot wounds and generally hard to kill: Uh….no.  If we are sick we are not generally hard to kill.  The young and healthy are as close as we get to “generally hard to kill”.  The immunocompromised are not resistant to gun shot wounds.

Let me make a few other points:

Incubation period:  It seems the zombie pathogen comes on quick, which is possible.  However, the moment of transition is often shown as being within seconds.  The veins go blue; the eyes glass over…almost instantaneously.  That is not likely.

Undead:  This is flatly impossible.  I am assuming the zombie pathogen is infecting us while we are alive.  There is nothing that kills us and then brings us back from the dead.  That is not the way pathogens work.  If there were to be a zombie virus, it would have to work on us while alive.  Re-animation is not possible.

If there were a zombie virus, where would it come from? The aggression and super-human strength, which are not really attributes of pathogens, suggests if there were such a thing it would come from military research gone wrong, not nature.  (As an aside, some TV shows/movies have suggested the zombie virus comes from longevity research.  I don’t think so.  There is already a set of cells that are immortal: cancer cells.  I would think a runaway longevity virus would cause cancer, which would kill us, not turn us into zombies).

Are zombie’s biologically possible?  No.  The combination of symptoms is not possible.  The body is designed to work best when it is healthy; any deviation from that will make the body less effective.  It is the extra strength, ability to take bullets, aggression, tirelessness, etc. that I take issue with.  The zombie virus seems to me like it would simply kills us.  If you describe a bleeding, physically altered, limping shell of a human…I say that person is on their death bed.  They will not rise up and chase after us.

Food for thought folks!  Sleep safer knowing the zombies are not coming!

As a consultant, I am a paid expert.

What does it take to be an expert?

A few things.  There is subject matter specific lingo/vocabulary that experts use; if you know the lingo you somewhat self-identify as an expert.  Experts are sometimes published.  Experts know frameworks and the history of their subject matter.  They are knowledgeable, and can demonstrate that knowledge to others.

How do you demonstrate knowledge?

You can answer questions about your subject…lots of them; pretty much any question a layman can think of.  You know of stats and research.   You can be helpful to people regarding your subject matter/industry.  You can talk about your subject in such detail that a layman could scarcely follow the conversation.  If you can talk about something in so much detail that others can’t understand you, people assume you know a lot.

One thing I have not mentioned: You don’t necessarily have to be right about your subject, just informed.

Most important questions in life do not have right answers, just trade offs.  Experts always provide their “expertise” from a certain point of view.  The assumptions that underlie their advice are not stated, and sometimes the experts themselves do not realize their underlying assumptions.

Experts are sure of themselves.  We believe people who are confident.

This is one of the main issues with experts:  As long as a certain person knows more about a topic than you do, they can sound like an expert….even if they know little or are completely wrong.

When I was a few months into learning Spanish, a new student was listening to my conversation with someone else, and said, “Wow, you are so fluent.  How long did that take you?”.  She didn’t realize my vocabulary was limited, my verbs were conjugated wrong, and the person I was talking to probably thought I sounded like a child….as long as my Spanish was better than hers, she identified it as correct.

It is like that with experts.  Only a real expert can identify another expert.  The rest of us will identify an expert as anyone who knows more than we do about a given subject.

A real expert is very unsure.  They know they are informed; however, the “right” answer is very elusive and they know it.

The only experts I hear that admit to this are academics, since their jobs are secure and they aren’t really leading people who need to believe in them. Anyone who is sure of their knowledge is either putting on a show for some other reason or they are foolish.

The issue is that very few people want to put forward an expert who is so unsure of their ability to give the right answer (after all, aren’t experts supposed to be right?)….so by definition we are advancing experts who are not expert.  They might be knowledgeable; however, they are misleading us as to the extent of their knowledge and how transferable  it is to other areas they might be opining on.

The deeper your knowledge in one specific area, the less breadth you generally have across areas…you’re a technician of a sort.  We want general experts we can ask questions that apply to real life, not someone lost in the minutiae of a single subject.

The worlds foremost expert on human cell membranes or mammal fat metabolism, cannot tell us why people are getting fat.  If they might opine on why people are getting fat (with some unuseful answer about too many calories) , I don’t think they would be able to answer what to do about it.

The fact is that we are unable to identify the right person to ask why we are getting fat…if there even is a person.

Why do we need experts?

The world is increasingly complex, and the store of human knowledge is increasing. It is hard to know everything, so we must increasing rely on others.  If we don’t believe anyone, then we are overly cynical and unlikely to help move anything forward (naysayers usually aren’t much help).

Additionally, I believe our concept of “right” has increased in specificity as science has advanced.  If someone 100 years ago were asked the “right” diet, I think they would answer something vague about enough to eat, or good balance of fruits/vegetables, etc.  With the concept of calories and FDA percentage of vitamins and minerals the “right” diet now might be some very specific combination of foods (calories, vitamins, minerals, fat, cholesterol, carb content etc.) designed to optimize total health (measured by homone levels or BMI or something).  In short, it is getting more difficult to find the “right” answer.

How do I identify experts?

The short answer is that to identify expertise you must have some yourself….or put faith in someone who selects expertise for you.

It isn’t a hard answer for me:  I attempt to educate myself (which is time consuming); or I ask someone I trust (friend of family member).

The concept of 5 Whys is generally applied in process improvement to get to the root cause of a failure; though the practice of asking why is generally useful if you want to get to the root of an issue.

I saw in the news recently more talk of cold fusion, thorium reactors and other means of cheap, clean energy.  Cheap, clean energy would transform our world forever.

Before we take a look at what cheap energy would do, let’s think about what expensive energy does.  The most common example is an increase in the price of oil, which affects all energy prices (and all prices in general as energy is always an input).  The price (of oil) often goes up when supply (of oil) goes down; demand is pretty constant in the short term….then what happens?  We wait in line at the gas station, all prices go up, economic activity goes down (since more money is being spent on energy and less leftover for other items), and anxiety goes up.  We get a recession/depression.

So what about the opposite?  What if energy suddenly became very cheap, and to boot it was non-polluting? That would be great right?

Well, the economy would boom everywhere (except oil dependent nations).  We would usher in a new era of prosperity.  Everything would become cheaper to make.  Prospects for nearly everything would look great; capacity would expand, companies would hire and grow.  Negative energy shocks very predictably create recessions (economists can at least agree on that); the opposite would create a boom.

Is there a drawback?  Yes.  Even if the energy was non-polluting it would be bad for the environment.  Why?  People all over the world would suddenly be able to buy things they couldn’t before because all things would be more affordable as the price of the energy inputs used to make them decreased.  In the US, we already have most of the material goods we need, but for the majority of the planet an increase in buying power means they want STUFF.  They want a house; they want clothes; they want a TV, a car, etc.

All of these things require environmental resources to make.  If a billion people could suddenly buy TVs and cars; we’d need to the extract the raw materials to make that stuff.  What if it weren’t 1 billion; what if it were 2? 3 billion? How many TVs and cars could we make without running out of stuff?  Is there enough asphalt to make the roads for those cars to drive on?

I guess the question is:  What is the current bottleneck to making all that stuff?

Is the price of energy a bottleneck?  Is raw materials already a bottleneck? Are skilled people the bottleneck? Is land the bottleneck? Are capital goods (machinery) the bottleneck?  Finally is demand the bottleneck?

Let’s take them one by one:

Is the price of energy a bottleneck? I would say somewhat yes, since cheaper energy will surely cause more production.  Energy might be the primary bottleneck.  Put another way, price of inputs is one of the bottlenecks.

Is raw materials already a bottleneck? I would say no.  I have never heard of a company not making something because the raw materials aren’t there.  I’ve heard of the raw materials being too expensive (which cheaper energy would help), but I’ve never heard of them not existing.

Are skilled people the bottleneck? Perhaps this one has some merit.  If the world were filled with more productive individuals that had excellent skills in their area, production would become easier.  This is a tough one, since governments must be stable, infrastructure must exist, etc. for people to be able to use their skills.  That might be a bottleneck to more production.  This is an issue nations often deal with.  People don’t produce because the nation is corrupt, there is no infrastructure; it isn’t worth it to produce.

Is land the bottleneck? Not land period, but perhaps land rights, which is somewhat a question of stable governments and private property.  I do think this is a peripheral bottleneck, but not the main, systemic one as it is localized.

Are capital goods (machinery) the bottleneck? This is related to the infrastructure question.  I think in many countries this is an issue.  The capital goods don’t exist to facilitate production.  It is quite the loop huh?  Which comes first, the chicken or the egg? In general I would say no, this is not the bottleneck, since making more stuff would create the demand to make the capital goods.  Capital goods are an effect, not a cause.

Finally is demand the bottleneck? So this is an interesting question, one that economists grapple with: Would we produce more if more were demanded or are we at maximum capacity already? If we are at maximum capacity, what would increase capacity? If you think demand is the bottleneck what you must really be saying is that money is the bottleneck, since if you asked someone if they wanted a car, surely they would say yes (except perhaps if you lived in a desert)?  The theoretical demand is there; it just can’t be back up with buying power.

Scratch all that.  Here is what I think is the bottleneck:  Technology…more specifically ease of production.  Hear me out.

When we invented the printing press, we saw a boom in books, because they became easy to produce.  Anything that becomes easy to produce, becomes relatively cheap and widely available.  Cars are not widely available because they are hard to produce.  If cars were as easy to make as pencils, more people would have them.  Same with computers; if computers were super cheap and easy to make….we would all have them (even people in deserts).  If we could invent a 3D printing technology that could make anything for which a blueprint was available with a few raw materials…most things would get really cheap.

Anyone see an issue with this logic?

How we think it works:

We deposit our money at the bank and the bank then lends out that money to others, right?

How it really works:

People do make deposits, yes.  Banks also make loans, yes.

What I’m having trouble with is conceptualizing how they are connected.  Banks don’t need the deposits to make the loans. Loans are NEW money that didn’t exist before.

Banks are not taking your money (from your deposit) and then giving it to the loanee.  The bank simply says “Ok, we are giving you a loan,” and then they make a digital keystroke in the loanee’s account, and, presto, there is new money! Magic!

All those millions of bank customers (i.e. all of us) are a hassle. We aren’t very profitable.  We require banks to put branches everywhere and have tellers.  Mostly just so they can “warehouse” our money, as most of us don’t use fancy services.  We just write a few checks and add and subtract money from our account.  Those are pretty modest needs.  Why not simply stop providing depositor services and still give out loans (which is far more profitable)?

An aside here is for people to remind me that our fractional reserve banking system requires banks to keep about 10% of assets on deposit for every dollar they lend out.

This is simply a legislative requirement though (we invented it); so we could easily change it.  Also, it reminds us that banks are created legislatively by government; they wouldn’t exist otherwise…so for banks to ask government to stay out of their affairs is disingenuous.  The two are inseparable by definition.

However, even with the 10% requirement, why would the 10% need to come from us in the form of our deposits?  Why not borrow the 10% from the government or from other banks.   In essence, when we deposit, the bank is borrowing from us and paying a small interest to our account.

Why not just borrow from elsewhere and pay a small interest to them?  Then the banks wouldn’t have to deal with all the small consumer accounts, which is admittedly a lot of work for little reward from a bank profitability perspective.  In the end all money (even the money which we eventually deposit) originates from the government.  Why not just borrow directly from the government (since that is what is happening indirectly anyway)?

Indeed, why not?

I guess I’ll restate here in summary:

I’m saying consumer banking (where normal people deposit paychecks and maybe write some checks and use an ATM) is not causally related to lending. The two are associated, but you don’t need one to do the other.

Deposits wouldn’t go away entirely if lending and consumer banking were separated.  If banks provide loans, they will likely provide the ability to deposit for loanees, since banks generally deposit the amount of the loan you just asked for in an account they just created to be the repository of the loan (alternatively they could give you a suitcase of cash).  But the model of normal people depositing a paycheck and such….that just isn’t related to lending that I see.

Am I missing something?

I can think of a few reasons to keep the consumer depositor services: a) for marketing reasons (maintain the relationships for people who might need loans), and b) for public relations reasons (maintain the illusion that banks do something useful for us and so tie up the risk of our money with the risk of their investment arms which cause us to need to bail them out).

In short though, banks must have some other reason for maintaining consumer depository services; isn’t for reasons of profitability.

Tahrir Square ended in revolution in Egypt.  “Occupy Wall Street” probably won’t.  Why not?

What is similar?

They are both demonstrations protesting general disaffection with the current state, with the economy, etc.

They are both using social media.

They are/were both disorganized somewhat at first, but growing in clarity and numbers.

In short, they are about the same things thematically; why did it end in revolution in Egypt, but not here?  What is different?

Numbers:

Tahrir started with about 50,000 people and ended with about 300,000.

“Occupy Wall Street” has about 5,000 now; 700 were arrested over the weekend.  The numbers are growing.

So…Tahrir had more people (especially when you consider Egypt’s population of 82M people). “Occupy Wall Street” would need about 1.1M people to converge on Manhattan to achieve similar numbers per capita.

Income inequality:

The US’s income inequality is actually worse than Egypt’s by a fair bit. We are near the Ivory Coast and Uganda.  Egypt is more in par with the U.K.

Unemployment:

Unemployment in the US is about 9%.

Unemployment in Egypt was about 20% at the time of the revolution, concentrated among the young and educated.

So…I don’t consider this a ton different.  Our unemployment numbers are usually understated, and this is relatively small difference, not an order of magnitude different.

Hmm….I don’t see the general conditions as all that different; certainly somewhat different, but not an order of magnitude different.

Let’s make a few hypothesis as to why so many people showed up at Tahrir square, and so few show up at “Occupy Wall Street”.

1) The US is geographically distributed.

Even if we would like to show up (and it is largely young unemployed males that do something like this); we are pretty far from NYC.  All of Egypt is just a train ride away.  Most people live just a few hours from Cairo.

2) In the US, we can get married, even if we are poor.

As long as people can have a family and put food on the table, they will let the rich play their games and the government do what they want.  The Middle East in general could take a lesson here.

Stable societies are ones where men and women can have families.  If you have polygamy, some men will get zero women.  If you have restrictive socializing between men and women, men feel like they can’t get women.  If you have dowries, some men can’t get women.

And if you have a bunch of unemployed men who can’t get any women, they have nothing to lose…and so are apt to fight for revolution….so they can have a family in peace.

3)  In the US, we can still mostly put food on the table.

Income inequality is worse in the US, so relatively we are worse off than Egypt.  However, in an absolute sense, the poor still have more money in the US.  In Egypt food inflation had made it so that some people couldn’t eat.  That is a recipe (no pun intended) for revolution.

4) In the US, we have a democracy?

I actually don’t think this makes a ton of difference; it is a perceptual difference perhaps and gives us an outlet to say “I’ll just vote someone else in next time instead of staging a revolution”; however, in the end it is not democracy that keeps us from revolting; it is the ability to live our lives in relative peace.  Democracy or not, if that condition isn’t met, the government is in trouble.

So, there you have it.

If you want to keep people from a revolution, follow this recipe:

Make sure there are not a bunch of single, unemployed men around who cannot afford food.

If boys have too much time on their hands, they usually chase women.  If they can’t chase women, they eat.  If you take both those options away, they get really mad.

The supply side argument goes that if companies (and the rich) have more money (through incentives, lower tax rates, etc.), they will use that extra money to invest and create jobs.

This argument is silly.  Republicans have been making this argument since Regan, and perhaps they really believe it…but it just doesn’t make sense. (And to boot, the empirical evidence says it is wrong as well.  In an environment of overcapacity, supply side policies just make the rich richer.)

Why?

Imagine a gold rush.  People come and dig up gold.  Merchants spring up around the mines and rivers to sell to the people.  The merchants get rich.  Then the gold starts to dry up.  The local government gives tax breaks to the merchants to stay in the town and continue to sell, to employ some of the people that were previously miners.

Do the merchants take the extra money and invest in the town, employ some extra people…or do they take the money from the tax breaks (and all the rest of the money they’ve saved over the previous boom) and move to another boom town?

Easy:  They take their money and leave.

Why?

No one in the city has any money to buy their products.

How does this apply to us?

1) Tax breaks for companies and the rich do not create jobs if there is no one to sell to.

If the companies and the rich take an ever larger share of GDP growth (which they are), people will not have any money to buy their goods…and that will eventually be bad for all parties.

It may make sense for any one company, or any one rich person to try to amass as much as possible; however, the model falls apart if it happens in aggregate.  History is pretty clear on what happens when the rich get too much and the rest have too little.

Henry Ford famously paid people twice the going wage so that people could afford to buy his cars.  Conversely, if we all work at McDonalds (or are unemployed), have houses with negative equity (and mountains of student debt), and are one health issue away from bankruptcy….no amount of tax breaks in the world will incent companies to try to sell to us.  We won’t be able to buy anything.

The rich do not create a lot of demand for real goods; if you give them more money they simply have more money.  A tax/incentive structure that favors wealth distribution to the middle and lower classes creates demand.

To illustrate, if a rich man has enough money to buy 4 houses, he will not buy 4 houses.  He might buy 2.  If you divide the money among 4 middle class people, they will buy 4 houses.

2) Companies are not in business to hire people.  It isn’t their purpose.  They are in business to make money.  They would hire ZERO people if they could get away with it.

If, before the recession, emerging markets were the best place for companies to invest, then after the recession if you give them more money, they will invest even faster in emerging markets.  It does not make them want to hire more people in the US, especially when those people don’t have any money.

Let me repeat it again more plainly: If a business’s purpose is to make money, and you give them money (through tax breaks), then why hire people?  They’ve already achieved their purpose.  Businesses hire based on demand, not profit.

Also, all this mess about companies are not hiring “because they can’t get credit” or “because they are ‘uncertain’ about future regulations” is complete crap.

Let’s take these one at a time:

1) Companies are not hiring because they can’t get credit.

Credit is the easiest thing in the world to get; it is created out of thin air.  If there is no credit available, the most likely reason is that the people (or businesses) asking for credit are not credit-worthy.  Banks are  not lending as much as before the crisis; there is a ton of bad debt out there and no one knows what is going to happen with it.  That creates uncertainty…no doubt; however, please be reminded that the Banks themselves created the uncertainty that is now causing them to be uncertain about lending.

2) Companies are “uncertain” about future regulations.

This is complete crap.  I don’t doubt that there is some uncertainty about future regulations that might affect business.  No argument.  However, I know for a fact that companies do not sit around wondering about regulations that might have some affect on them in some number of years.  Companies are not nearly so forward-looking.  I work in HR consulting and we haven’t had not one company come to us asking what to do about the new healthcare regulation.  And I work in HR!!  If HR isn’t asking, the business itself is certainly not asking.

Business decisions to hire or not are much more immediate; they are not forward looking.  Companies do not hire until the very last second when the demand needed to keep that person busy has already existed for months and current employees are starting to complain or leave because of the workload.  If they cannot leave (and with high unemployment they often can’t), they don’t need to hire anyone else at all.

Again, it is about demand for the business’s goods/services, only then might a company hire.  They might also just buy additional equipment to automate, or hire someone in another country.  To repeat:  Giving a company more money does not incent them to hire people.

So do I have a policy recommendation?

Sure, when there is overcapacity (excess labor, or plant capacity) it is DEMAND that matters.  More supply won’t make a lick of difference as there is already over-supply (we have excess plant capacity and plenty of labor on the sidelines already).

So we must create demand. How do we do that?

1) The government can temporarily produce demand by deficit spending. However, it must be deficit spending.  It cannot be funded stimulus.  If it were funded then the government is taxing money away from us to re-spend the money on us.  The net result is zero.  If they hadn’t taxed the money in the first place, we would’ve spent it anyway.  That isn’t stimulus (unless we think the government can spend it better than us, which might be the case if all the money is going to the rich).

Unfunded (deficit) spending is new demand that would not have existed otherwise.  The jobs program is a fine idea for a policy recommendation.

I’ll tell you what isn’t a good idea:  Austerity.  The balanced budget camp needs a wake up call.  You can make all the arguments you want about the long term needs for a small government with continually balanced budgets; that is a big and worthy question….however, the short term effect of less spending is less demand….which is bad.  Let me repeat:  Austerity is bad for us in the short term.

2) Hmm…..the longer term issue of how to create demand is more complicated.

How do you level out income inequality so that people actually have money to spend?

How do you compete with economies like India and China that have absolute, not comparative, advantage?

How do you keep the financial sector from ruining the economy again?

How do we keep down run-away healthcare costs?

How do we improve education while keeping its costs (which are rising faster than healthcare’s) down?

Is the day finally arriving where technology is eliminating jobs faster than we are creating them?

Can we maintain our standard of living in a service-based economy?

Can we sustain our out-sized military spending?

What level of societal welfare benefits do we consider appropriate?

When does it become a supply and not a demand issue? Stated another way:  How much GDP growth (demand) would eventually wreck the environment (supply)?

So, that’s it.  Simple.  In the short term, with excess capacity, we must create demand.

We will all look back in 100 years and wonder why people ever invested in the stock market.  It will seem like such an obviously misguided and colossally bad idea; how did we ever think that could work out?

I admit that I do not understand the stock market.  It isn’t that I don’t understand how to pick stocks (I don’t but that is beside the point); it is that I don’t understand the CONCEPT of the stock market: Why pay money for stocks?  Why use a second hand swap meet of useless company baseball cards as a vehicle to save for retirement?  It is silly.

Point 1:  As in poker, you need to know which table to play at.  Put another way, inside information is the only way to consistently beat the market.

Regular folks investing in stocks is like you trying to win at the World Series of Poker.  We are like a toy boat on the ocean;  it would just be luck if we ended up where we wanted.

Along this same line, I disagree with making it illegal to trade on inside information.

Publicly the industry needs to say it is illegal to trade on inside information.  Why?  Because no idiot (meaning us) would invest in the stock market if they knew the game was rigged to benefit those with special information.  That is the democratic draw of the stock market; average people can participate and win…after all, the information is all out there, right?  WRONG.

Funds or people that beat the market consistently and trade frequently are likely cheating with inside information…period.  Mathematically it wouldn’t be hard to target any group/fund/person with consistent market beating returns that are outside a normal range….and assume they are cheating.  Start investigating them.

The reason I am for making insider trading legal instead of investigating everyone is that if you made it legal, people would hopefully stop thinking of the stock market as a vehicle for savings and start thinking about it for what it is:  A cutthroat gambling casino for the ultra-rich where the buy in is OUR money.

I don’t have a problem with the ultra-rich betting against themselves all day with their own money; if they wreck that stock market it only wrecks them.  The problem is that we give them OUR money and then they wreck that stock market and get bailed out.  In that scenario, they win if they win, and they win if we lose.  Seems like a pretty good deal for the finance folks, huh?

Point 2: How can stocks go up faster than inflation + growth?

No asset class can consistently outpace inflation + real growth over time.  People say Social Security doesn’t appreciate like stocks do; your rate of return would be better with stocks.  WRONG.  It might be better over time...but just wait until the first generation of people try to retire who have seen negative stock returns over their period of savings.  That will be the end of stocks as a retirement savings vehicle, and those people will eat potatoes and live by the wood fireplace in the winter.

It will also make us, as a nation, forever chained to the fortunes of the stock market (a very bad idea).  The government will always have to intervene if the stock market tanks because so much is tied up in it. This is a moral hazard for traders, since they know they will always be bailed out.  Additionally, their speculation is at the expense of our retirement.

This scenario of negative stock returns for retirees over the period of their career simply hasn’t happened yet. 100 years ago there was no retirement.  It is a modern concept.  Then there were pension plans (and Social Security), which were ponzi-like schemes where you always needed a larger portion of workers paying in than old people taking out to maintain them.  401K plans didn’t exist until the 1978, so basically no generation has yet retired depending on stocks.  Using stocks as a vehicle for normal people to save is a new and unproven concept.

If stocks cannot consistently outpace inflation + growth, then putting your money in the stock market is little more than gambling…and gambling against people who know a lot more about it than you.

Point 3: The miracle of compound interest only works if everyone doesn’t employ it. If stocks worked their magic for us and multiplied our money through investing, and then everyone was able to do that, would we all be rich? NO. Compounding interest can create money on paper no doubt; but it will only ever be able to buy what is available in the real world.  It would simply create inflation. I repeat:  No asset class can consistently compound faster than inflation + growth for everyone.

Point 4: Stocks don’t produce anything.  We can’t all be rent seekers.

If we were all, every single one of us, able to use stocks as a retirement vehicle to compound our money while doing nothing, then what would we be able to buy?  Other people’s stocks perhaps, but there would be nothing else to spend our money on.  In short, wealth is produced by improving stuff, by working…not by shuffling paper in a second hand market.  You can’t eat a stock certificate.

Point 5:  Traders and computers (HFT) will ruin the stock market.

The primary players (traders and computers) are not looking to invest; they are looking for arbitrage.  They don’t care about investments, or the health of the underlying economy; they are simply looking for the next trade, whether it is in pork bellies or Swiss Francs.  The larger the market gets, the more tempting it is to try to rent seek from it.  They are extracting profits from doing nothing.

~70% of trades are computers trading against other computers.  Why would we agree to participate in this?  The stock market has devolved into a computer game, and we are the losers.

As we look back in 100 years (probably less), we will realize that it was a rigged game, whose main benefit was to extract money from the dupes (us) and funnel it to the rule makers (traders).  We supplied the fuel; they extracted the profits.  In the end very little was ever financed; very little was returned, and all the financiers got rich.

I took a religion class in college and always thought it was odd that nearly all major religions single out usury/banking as evil.  Why single out one profession above others?  What is so insidious about banking that it gets a special mention above other professions?  Well, it is because they have a tendency to end up with all the money, when they don’t really do anything; it is simply fancy theft.

The stock market is the crowning achievement of fancy theft.  We will look back in 100 years and wonder how we could’ve ever thought buying stocks was a good idea…just like no one could’ve thought smoking was good idea, right?

Let me explain the real problem with social security, and I’ll give you a hint:  Paying for it is the easy part.

1) Social Security is currently a profit center (not that that is an issue, as I will explain later).  It takes in more than it pays out.  The rest the government spends on other things.  So to say it is “bankrupt” is just crap.

2) “We’ve got 78 million baby boomers who are poised to collect, in about 15 to 20 years, about $40,000 per person. Multiply 78 million by $40,000 — you’re talking about more than $3 trillion a year just to give to a portion of the population,” he says. “That’s an enormous bill that’s overhanging our heads, and Congress isn’t focused on it.“  I don’t know if this guy’s number is accurate, but I have heard a million variations on this theme, and I assume the idea is true directionally.

The premise of Social Security, and of most welfare states in general, is that the working population must be sufficiently larger than the beneficiary population (retirees, welfare recipients, etc.) to make enough stuff to supply to everyone.  If there are too many retirees and not enough workers, the system doesn’t work.

Note the $40K per retiree number above. That is a good bit.

3) What if our day of reckoning arrives?  What if all the baby boomers retire?  What if Social Security no longer takes in more than it pays out?

As I mentioned previously, paying for Social Security is easy.  The government simply writes the checks and sends the money.  The government doesn’t need to “get” the money from anywhere any more than a football stadium has to “get” the points it puts on the scoreboard.  Sending the checks will make the money.

4) The problem is not paying the retirees; the problem is producing enough as a nation to satisfy everyone.  Having enough real stuff (food, cars, houses, air conditioners, etc.) is the issue.

Let’s go back to the $40,000 per retiree number.  Each retiree will “earn” $40,000 a year and there will be nearly 80 million of them?

Here is the problem with that.  The median household income in the US is about $45,000 a year.  That means the average retiree will make as much (and thus can buy as much) as someone who is working.

In aggregate, as a nation we only have as much real stuff as the working people in the nation can produce.

In an extreme example let’s imagine everyone in the country is retired except one person.  We could still easily still pay Social Security to the retired people (after all it is just checks from the government), and the retired people would have a lot of money.

But what could they buy?  Only what the one person could produce.

That is the problem.  No one on Social Security is producing anything yet they are competing with the producers for goods/services, and making $40,000 a year they have as much money as the producers as well.  If there are a lot of people on Social Security, and a lot of unemployed people (who are also not producing anything), that puts a tremendous amount of pressure on those that are producing to make enough for everyone.

So can we pay for Social Security?  Yes.

Can we make enough to satisfy everyone?  Not sure, but I imagine in the short to medium term the answer is still yes as the Scandinavian countries have larger welfare states and more retirees than we have (% wise) with similar economic growth rates to boot.  The one thing those countries don’t have:  our enormously out sized military spending.  It is all about priorities I guess.