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 Reagan, 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. If you are part of this population section, you should visit Skrumble and use their tools to invest in cryptocurrencies.

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.

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.

Tags: economics, social security

I think Facebook is going to make it.  They will not be a flash-in-the-pan like Friendster or MySpace.  They are in it for the long haul.  And I don’t think it is because of any purposeful brilliance of their business plan.

Let’s walk through the logic:

When I was growing up I thought the government had a file on everyone.  I thought they knew everything about us.   I did not know about transaction costs at that time.  After working in corporate America for a while I realized it would take almost as many people as there are in the US to do the work to keep a file on everyone in the US.  In short, it would be an administrative nightmare….and that is just keeping the files updated, not parsing all/any of that data.  That is also assuming people wouldn’t have a privacy/civil liberties fit that the government knew pretty much everything about them.

No doubt the government would like to know everything about you and no doubt such information is exceedingly difficult/sensitive to maintain:  Enter Facebook.

We are doing it for them, complete with correspondence, our friends and their contact information, attached pictures, our location (if using Facebook on a mobile device), what we are doing in real-time, etc.  This is the greatest intelligence database the world has ever known. It would take an army of CIA agents working around the clock to know this much about me…just one person.  We are voluntarily handing over information the government would never be able to collect on its own.

Granted I bet terrorists don’t use Facebook (probably no @terrorism feed update “About to bomb something! LOL! TTYL!”), but their friends/family might.  Or at least the government would like them too. And there is lots of other information the government might want that would be on Facebook:  like people reporting zero income but going to Vegas every weekend; people on SS Disability mowing their lawn, etc.

And that is why the government will promote the use of and support the business of Facebook.  And Facebook will cooperate (government has direct access to everyone on Facebook, whether or not you have friended the government), because there is no better business plan than being a government necessity (ask Amtrack, automakers and the airline industry).

I can’t believe I haven’t written about this before, but here goes:

Free Market: When we think of the free market, it conjures up the classic example of an open air market where there are a near infinite number of sellers all right next to each other with similar items.  If you don’t like the price, simply buy it from the next vendor.

The problem is that almost no market on the planet works like this.

Let’s give a real world example:  The Grand Bazaar in Istanbul should be a carpet shoppers paradise.  There are an infinite number of carpet sellers all right next to each other with near infinite choice of carpets.

Its a free market right?  There is lots of competition.  The prices should be great right?  WRONG.  Almost everyone is getter ripped off.  The mark-ups are unreal.  Why?  Most of the shoppers are not savvy.  Buyers know little about carpets, and so if told a price, they think it is fair.

Unequal access to information causes unfair prices.  The seller knows they bought the carpet for 10 dollars and tries to sell it to the unsuspecting tourist for the maximum price they can get, which can be 1000+ dollars.  That is the profit motive and we expect that….but unless the buyer has adequate information about the product, the market may be “free”, but it is certainly not fair. In this case “free market” almost certainly means “free to make a bunch of profit”.

Information inequality is a huge source of profit in all kinds of industries.  When you buy a house, you know how much that house costs, and you know the fee that the real estate agent gets.  It is all disclosed at the closing.

What if you didn’t know? What if the real estate agent could negotiate any price they wanted for the house (perhaps they got it at foreclosure), and sell it to you for any price they could get you to agree to (and pocket the difference)?  My guess is there would be a lot more real estate agents as it would be EXTREMELY profitable.  They could get a foreclosure, and sell it once at full price and not work for the rest of the year.

Why can’t they do that?  Because home purchase prices are disclosed as public information.  Why?  BECAUSE IT WAS LEGISLATED THAT WAY.  Without government intervention there would be no price transparency, and so we would not be able to get fair home prices.

Back to our example of the Carpet Shops:

Ok, I’m sure you’ll grant that there isn’t any price transparency at the first shop you go to…but why not go to a different shop? If you shop at a few of them surely you will be able to determine the fair price, right?

No.  What happens is that all the hundreds of sellers know that there is no gain to any of them if the buyer knows the fair price…so they ALL quote inflated prices.  It is silent collusion.  The sellers, whether explicitly or implicitly, are all in the carpet game together and they need to preserve the market.

Collusion is illegal in the US.  There can be no fair market if the sellers all collude to keep the prices high. If the government didn’t make collusion illegal, then businesses would certainly do it even more openly than they do now. From our example we see that hundreds of sellers can collude silently without too much trouble.

Think of most industries in the US (insurance, banking, healthcare, telecom, etc).  There are only a few major players.  It is so easy for them to collude, even if it is not through secret meetings.  Industries with a few major players are never “free markets” in the sense we think of. They behave more like unregulated monopolies, which means the consumer does not benefit.  This means that the majority of the markets in which normal people deal daily behave more like monopolies than the “Free Market”.

Here is the kicker of the free market:  No business wants a free market. Not one.

Why not?  In the theoretical “Free Market” (one in which there are multiple players, information transparency, educated buyers, private property protection, a lack of collusion, etc.) consumers gain at the expense of the businesses.  For business it is a blanket loss.  In business school they taught us that those are unattractive markets, and that you shouldn’t enter them.  Let me repeat:  Markets where businesses to not able to extract abnormal profits are not good markets.

But some companies want a free market, right?  Maybe…if it is not in their core area of business.  For instance, Google might want Net Neutrality (unfettered access to anything put on the Internet) because the more people are on the Internet, the more money they can make.  Their potential market expands through net neutrality.  Let me state it more plainly:  For Google to make money off of you, you have to have internet access (otherwise you can’t use their services).  Not only does Google want Net Neutrality, I’m sure they would like everyone to have free internet.

What about the companies selling internet access?  I assure you they do not want everyone to have free internet.  So one company’s “free market” (Google’s) comes at the expense of another company’s profitable market (Internet Service Providers).

“Free Market”.  It seems that term means that businesses are free to do what they want, even at the expense of the customer.  The Free Market is largely fictional in practice and relative to the company saying the market is free.

When a company advocates the free market, they mean they want the market open for them….which means it isn’t open for others.

To summarize:  A “free market” requires all kinds of prerequisites to make it work in the way that benefits the consumer (i.e. us).

____________________________________________________________

The question is: Where do these prerequisites come from?

There is only one answer to that question:  The government.

The “market” is not self-regulating, nor does it protect the consumer.  The Market is simply the field on which businesses play.  They want that field as uneven as possible so they can make a profit.  (As a reminder profit always comes from somewhere.  It comes from us.)

The government counterbalance is to rig the playing field so that businesses have to compete against each other, which benefits us.

It is not in business’s best interest to compete. Their whole market loses and the customer gains.  To go back to the carpet sellers in Istanbul: If the government mandated that all carpet sellers must include the original purchase price on the carpet before selling it so we could determine a fair price (like homes, where purchase prices are public), then in the end there would still be carpets for us to buy (we would lose nothing), but the profit margin for each seller would be dramatically less (they would lose a lot).

The carpet sellers would never agree to lower prices on their own.  The government has to force them to do it.  If some seller came in and priced fairly, the other sellers would collude to make sure he loses the lease on his storefront or in a completely unregulated situation would simply threaten force against him.

Why do we need the government though? Why can’t WE, the consumers, demand that companies self-regulate? Why can’t we vote with our dollars and just not buy?

I think the primary one is that businesses are organized.  Consumers are not. Businesses can collude in the best interests of their market.  They are limited in number and focused on the parameters of their market.  People are living their lives.  We are not focused or organized.

Besides we have already have a mechanism for consumer advocacy…its called government.  They are the group that is focused and organized and designed to speak on our behalf.  In fact, “on our behalf” is supposed to be the only job they have.

To ask a Machiavellian question: If the counterbalance to corporate power is government power, then what should the corporations do to maximize their power?  They should buy the government.  Voilà.  That is what they are doing.

So.  What is the”Free Market”?  It is the term companies use to sound like they are acting in our best interest when they are trying to bend the rules of the market in their favor.

Ouch.  That’s cynical.

Tags: economics, free market, government

I have discovered that I am a worrier.

Everyone worries I suppose….about paying rent each month, about their job, their kids, about lots of things.  That is normal.

I don’t worry so much about the day-to-day, but as if to point out that the brain (or at least my brain) is hard-wired to worry…..I invent worry about things I cannot control and most people would never even give a thought to.  These items consume much of my brain cycles and I write about them often (Democracy, Money, Work (in the abstract), Morals, Intelligence, etc.).  If only I could focus my brain on something more constructive instead of thinking about things I will never even influence, much less control.

I would like to introduce a concept and then develop a thought.

The Law of Conservation of Complexity (<– I made up the name):

The Law of Conservation of Complexity proposes:  When outcomes remain constant, Complexity is neither created nor destroyed; responsibility for it simply shifts.

Here is an example:

Computers have gotten easier to use over the years.  Remember command line, text interfaces?

Instead of making us remember tons of arcane text commands for doing simple things like copying, pasting, and/or renaming files, the software companies created a Graphical User Interface to allow us to do the same thing in simpler way.  The outcome is the same, copying/pasting, etc….but the complexity has moved behind the GUI interface.

Complexity actually increased.  Software engineers created a complicated graphics layer to allow us to interact more easily.  This layer didn’t exist before and creates lots of extra work for software folks.

In general, if something becomes less complex for you, it becomes more complex for someone else.  That is the law of conservation of complexity.

What this means is that complexity is always ramping UP….not down.  When something is “simplified”, generally it hasn’t been….the complicated work has simply shifted away from the people who are calling it “simplified” and toward another group that must maintain the “simplicity” with a bunch of complex processes and skilled labor.

If no one maintains the shifted complexity, you just get broken stuff as the people who think it has been simplified don’t realize that it was only simplified for them and don’t allocate sufficient resources to maintaining the newly shifted complexity.

The idea I’d like to develop is:

Civilization is limited by our ability to manage complexity….and complexity tends to crash, not unwind.

I’d wager people believe Civilization is a fairly stable thing.  The logic might run something like “There is just too much involved for it all to fail.  If some country falls apart or technology is lost,  it is replaced and relearned by others.  Civilization is robust.”

This is the global network theory, and is somewhat true on a limited scale.  Civilization is definitely built upon the remains of other civilizations and if one country fails, another replaces it.

HOWEVER, the analogy is less like a city or pyramid and more like a house of cards.

Civilization is a house of cards.

If you’ve ever built a very large house of cards (using multiple decks), you can occasionally have little sections collapse and rebuild fine; you can have it spread if you keep it near the floor….but as you build higher and the complexity of the structures rise, it becomes more difficult to rebuild collapsed sections.  Additionally it gets heavier,  more prone to larger issues, and it will eventually begin to collapse under its own weight no matter what you do.

If you get to this point, it is not possible to rewind your house of cards, to make it less complex.  The harder you try the more you will knock it down.

Things are really complex already; more than any one person can manage. Let’s take a concrete example:

The iPhone.  (I’m picking technology examples because technology is among the most complex things humans produce.)

No ONE person can make an iPhone.  No two people can.  In fact, no hundred people can.  You need cell networks to exist; you need miniature cameras; you need an army of expert software programmers, you need mp3s to exist; you need scratch proof touchscreen glass to exist; you need people with computers and iTunes and enough money to buy such devices; you need phones to exist; you need compression algorithms and IP protocols to send/receive data; you need sophisticated battery technology to power the device; you need cheap, available electricity to charge it; you need GPS satellites in space……..you need a shitload of stuff to exist to make an iPhone.

There are limits to the complexity humans can manage.

Now imagine a device 100 times as complex as the iPhone. How would it get made?  There are coordination costs of any large endeavor; eventually nothing gets done if the addition of extra complexity is eaten up by the lack of ability to manage it.

So when you reach this point, where each additional “unit” of complexity no longer adds to the end product, but subtracts from it….then what happens? Can you rewind?

Like a juggler, you can add extra balls and keep them all going and things are moving faster and they are more complicated…but then when you add that last ball, it doesn’t slow down….you drop all the balls and you have to start over.

How robust is Civilization?

I think not so much.  Though we have currently had a good row of 3000 years or so, that is paltry compared to the sum of mankind’s existence (modern humans have been around in fits and starts for about 100,000 years).  Events do happen that cause things to unravel, and unlike our linear conception of ramp up, then ramp down….in nature it is often an exponential rise, then a very steep drop off.  Complexity tends to crash, not fizzle.

Where does that leave us?  In the same spot we were before.  I know it exists and we (though probably not me) will bump up against the complexity limit someday…but we will not be able to do much about it.  I simply tend to think about things that I have no control over.

Tags: complexity

I write a lot about economics, and honestly I’ve come to understand a pretty good bit about how power is exerted at the macro level (remember economics is about levers and incentives, not money).

At work (and in life) I have no real macro power, but I have seen people who do.  Though I do not like politics from the perspective of Democrats vs. Republicans (since they are largely the same); I do like politics from the perspective of how to influence and how to barter power.

I read Nietzsche’s “Will to Power”; I read Machiavelli’s “The Prince”.  I even read the best-seller 48 Laws of Power.  Sadly I never read Sun-Tzu’s Art of War.

Here is some truth about Power:

– I will never have any….at least not enough to truly influence events on a macro level.  Influence at a local level is nice; however, it will not likely change the general circumstances of my life.

– Money is Power.  Information is Power.  Guns are Power.  I will pretty much never have those in any significant amount (and I don’t want them).

– We aren’t even in the game.  We are pawns.  The top 1% control 42% of wealth in the US.  The flip side is that 40% of the population vies for 1% of the wealth.

– We will never make enough money to escape the hedonic treadmill.  As our salary goes up, so will our lifestyle.  Some people make enough to get our of this trap…most don’t.  Working hard is not the answer.

– We will not be smart enough to “game the system”.  There are a few people at the bottom who draw social security disability that shouldn’t or get too many food stamps, but they are still certainly not the winners.  For us to begin to “game the system” at a higher level we will need more power/information than we’ll likely ever have.

So what is my advice?

CUT EXPENSES…and save.

That’s it.  You thought it was going to be some great revelation, but it isn’t.  We don’t have access to that kind of power.   We play by the rules; we don’t make the rules.

That’s the best most of us can do.  We cannot avoid taxes since we have no deductions.  There is no get rich quick scheme and we’re always faced with potentially crippling medical/education/unemployment/whatever costs.

We will not get ahead by making more money; our lifestyles will go up in lockstep with our salary, but we will be no better off (after about 40K there is no well-being bump from increased earnings).

We cannot pick stocks.  We will not win the lottery.  We will not become rappers and sports stars.  Most of us will never even become managers or VPs.

There are only two sides to the equation:  Expenses and Income.  We cannot affect our income in a way that will allow us to get ahead (where did your 2% raise last year go?), so that leaves Expenses…the only thing we control.

To get more concrete, it is FIXED expenses that kill us.

– A house.  Don’t buy a big, expensive house. A house is not an investment; it never was.  It is a place to live.  Living in a smaller house with a smaller monthly payment is key.  A smaller house will also help your energy bills.

– A car.  Don’t buy a nice car. A car is a waste of money.  Drive the worst car that your lifestyle will allow you to drive…then pick one a little crappier and older.  When you’re out of work and you have 15K extra because you didn’t buy the brand new Infiniti…you’ll be happy.  On a related note, pay cash for your car.  Do not take out a loan.  The car you can afford is the car you can pay for.

– Cable.  I fucking hate cable and as soon as I find a way to watch sports online, I will be ditching cable. I can already watch all the shows I want online.  I can get movies (which I can never find the time to watch anyway) through Netflix.   I still find it frightening that I drop nearly 100 bucks a month to watch a few sporting events.

– No debt: Don’t get trapped servicing debt, credit card or otherwise.

– Student Loans: Don’t go to a good school. They are expensive and will, at the best, get you a good paying job…which will not be all that beneficial for you.  It will be much more beneficial to have no debt and be a hard worker, which will make up for the fact your didn’t go to a good school.  However, do go to a GREAT school if you can get in (Harvard, Yale, MIT, etc.).  This is where the people that make the rules go to school.  If you become tight with them it is definitely worth the money.

What can you spend money on?

– Flat screen TVs, expensive beers, going out to eat, etc:  I’m not saying go crazy, but one time purchases can always be stopped.  Next month simply don’t buy a flat screen TV.  Easy enough. The expense is gone.  This crap about the American consumer being in trouble because they spend too much of frivolous junk is a load of shit.  Those kind of expenses, unless you have some sort of psychological shopping disorder, will not get you in trouble.  It is the recurring expenses, FIXED expenses, that will cause you to go bankrupt.

– Health Insurance:  Unless you’re 20 years old and invincible…buy some, at least a high deductible indemnity plan.  Just wait till you get unlucky and drop 100K on open heart surgery…then try for the rest of your life to recovery economically (and medically) from that.

So that’s it.  That’s being rich:  spending less than you make and having a piece of mind about it.

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It occurs to me that I’m giving the above advice to myself and others in my income level, which would be pretty much everyone in maybe the 50 – 90th percentile of earnings.

If you are below that (and most people will be below the 50th percentile by definition)….its still good advice in general; however, there is very little you can do.  Sorry.

Your expenses are likely already cut (except on crap like cigarettes and lottery tickets, which you should definitely cut out), and your income will likely never rise high enough to give you significant options.  The US has poor income mobility, especially at the bottom end.

Not that any one person can’t rise above their station in life.  We can.  It just isn’t likely to happen on average.

There is advice I can give; however, it isn’t likely to have any affect for a good number (if advice could help people we’d all be millionaires as there is plenty of it out there).

It is not that I write off the bottom half.  I have been in it (and may be again), and there are plenty of good, nice hard-working people there.

The fact that so many have so few options is what is troubling…not for me, but the future of the country and our children.

Tags: advice, economics, power

Rent Seeking:

Not to be confused with simply paying rent….rent seeking is an economic term to describe extracting an economic “rent” (i.e. some sort of value) on a transaction where the party adds no actual value.  Another definition (from investopedia.com) is when a company, organization or individual uses their resources to obtain an economic gain from others without reciprocating any benefits back to society through wealth creation.

This is easily applied to the current financial industry.  It is a simplification; however, if the high-finance industry simply ceased to exist, no harm would be done.  They don’t actually produce anything…they simply extract rent as a piece of other, hopefully productive, activities.

Finance claims to do risk assessment. That is almost laughable.  They failed to properly evaluate the risk they themselves created with their fancy debt instruments……and we ended up bailing them out.  If I were them….and they were smart….I would fire themselves.  They are obviously incompetent and a self-contradiction:  If their purpose is to mitigate financial risk and they themselves are the largest risk to global finance…the only logical conclusion is to close their doors and go home.

Rent seekers are bad. They produce nothing and extract a “rent’ (i.e. are a burden) on people who do.  If the rent seekers get bad enough….the producers simply stop producing.

Wealth creation:

Who then are the non-rent seekers?  What actually is a productive pursuit?  This is the more interesting question by far.

I argue that productive pursuits improve lives.

Productive:  Growing food is productive.  Building houses is productive.  Air conditioning, plumbing, refrigerators.

If you have these things….your life will be better.  No doubt.  Black and White.  It gets more difficult though.  Some things are necessary to make things that make life better.

Compliments to wealth creation:  Roads, electricity, computers, telephones, etc.

These are necessary to make the things that make life better.  It gets even harder.

Ambiguous:  What about lawyers?  Are they navigating the law for the wealth creators so they can do their job or are they using their special knowledge of our byzantine legal system to bend the rules in their favor….to rent seek?

What about the health insurance industry?  Are they helping people get health care or are they using their legally created special status to rent seek on people trying to get health care?  If the whole industry simply disappeared, would it really matter?

What about service industry jobs? Are barber shops and nail salons creating wealth? No.  They are not.  They are compliments.  Theses industries (and many others) do not create wealth; they exist solely because of the excess wealth of the industries which create things that make our lives better.

Only when the first dude created enough excess wealth from his labor would their ever be demand for a service job like laundry or cleaning.

After all…..imagine a society where everyone is cleaning for everyone else and cutting their hair….where do these people live?  What would they have to clean if nothing were being produced?  The service industry exists as a compliment.

So……I’ve probably lumped over half (forgive the imprecision) of US economy into non-wealth creating pursuits.  Most people work in service or rent seeking industries.

If this is the case, what about the US economy with its dwindling manufacturing base and increasing service sector?

Can a purely service economy exist?

No.  I don’t think so.  Not for any extended period of time and be prosperous.

There are a precious few things that truly make life better….and the vast, vast majority are all actual THINGS.  They are things enabled by advances in technology.

That’s what true wealth creation is:  Technology enabled stuff we produce that makes our lives better.

Everything else exists on the coattails of those very few items, because without those very few items all the other stuff wouldn’t NEED to exist.

Example:  It might be true that the greatness of the Seinfeld TV show made lives better.  I could agree with that; however, without food, a roof, warmth, indoor plumbing, electricity, etc….no one would care about TV.

What does all this mean?

1) Technology is the basis of everything that makes our life better.  Invest in it.  Waste money on it if needed (don’t waste money on foreign wars).

2) Make stuff that improves lives.  Everything else is either service for those that make things…..or rent seekers.  If you don’t make things, you’ll soon be lining up to be friends with those who do.

Tags: economics

Rand Paul has come under serious fire lately for his staunch libertarian stance on the Civil Rights Act.  The basic gist is:  Government doesn’t need to interfere in a business’s right to be racist if it wants.  The market can decide; if people don’t like racism, they won’t shop at or buy from racist businesses.

One site likened his somewhat naive comments to something college students might discuss in a coffee shop…not something politicians would discuss with any seriousness.

So…I’m a kid in a coffee shop…what would I say?

Let’s play the thought experiment:  pretend we let the market decide…and it decides that it wants to be racist.  This is probably the reality anyway, since why would you need to sign an anti-discrimination law if there weren’t any to begin with?

So is it ok for the market to be racist?

If I don’t like the businesses where I live that are discriminatory; I can just move somewhere else, participate in a different market, right?

Hmm…but you forced me to move. Someone else’s discrimination is affecting where I live, where I shop. And that is just me…what about the people that are being discriminated against?

The Libertarian argument that businesses (or anything else they are referring to) should be “free” to do what they like is bunk.  Your freedom is not always yours alone.  It affects other people; it doesn’t exist in a vacuum.

The extreme example is smoking.  You should not be free to smoke….because your smoke affects other people too.  If you want to smoke at your house or something…ok.  But a ban on smoking in planes, or in buildings, or restaurants is completely appropriate.  If your freedom to smoke means I get cancer, then you should not be free to do it.

Many things are like this.  A more subtle example is the time honored American “freedom” to be rich…really rich.  In America it is ok to be rich (not all countries are so positive about the rich).

But being rich comes at least somewhat at the expense of those who worked to make you rich.  The rest have to watch the rich move to the front of every line, drive nicer cars, live in better, safer houses.  People worry about their plight in life compared to the rich.  The rich simply existing is a source of anxiety which causes ill health.

I’m not saying it is bad to be rich…only that it isn’t in a vacuum.  The rich existing does affect the poor.  The larger the income disparity between the rich and poor, the more the effect.  Most countries have progressive tax schemes at least somewhat due to this.  It is a tax on the rich simply because they are rich (which affects everyone else).

So no.  Racism is not ok.

I wrote last time about the concept that Goldman is employing:  “all that is not illegal is permissible”.

When they say they did nothing wrong, they mean they did nothing illegal.

If some judge finds that what they did IS illegal, they will find another judge.  If all judges find what they did was illegal, they will make new laws.  If that doesn’t work, they will simply re-organize under some other legal structure and continue to do what they wanted in the first place.

So……how do you win a game?

I assure you it is not by being the best at something.  Hard work is a VERY difficult way to win.  It is a high effort strategy that, in real life, doesn’t often work.

Why can’t you win by being the best and working hard?

Because the rules change (and there is always some fool out there willing to work harder).

In sports, the rules stay mostly the same; the game is defined.  We enjoy the fairness; we scream when the rules (which are limited since the game is well-defined) are broken.

In life, the rules can change; the game can change.  There is no “score”, no tidy buzzer at the end that tells you when its done.  Those who win are those who make the rules.

Goldman can use its influence, its special knowledge, and its money….to make the rules or change them if needed.  They don’t break the law because they make the law.

When I was in business school I was taught attractive industries are those with high barriers to entry.

Here is how you make your industry attractive:   bend the rules in your favor.

Capitalism in the United States is not about competition and free markets.  It is about manipulating the rules of the game in your favor.  That is the easiest way to win any game.  It doesn’t require nearly as much hard work and is a much better guarantee of success.

Think about it:  How can you win long term if there is a level playing field?  The best strategy is to un-level the playing field….not to work harder.  If your long term strategy is working harder, you won’t be on top long…there is always some idiot out there willing to work harder.  If your long term strategy is hard work, you will kill yourself doing it.

I think Goldman’s strategy is simply how capitalism in the US works:  its a plutocracy.  The rich are bending the rules to make sure they stay rich.  The rich are largely smart, and we are busy working hard, so we don’t realize the bait and switch.

I remember the story of Mickey Mouse from business school.  Whenever the early Mickey Mouse movies get close to lapsing their copyright and entering the public domain, Disney simply gets the law changed to extend the copyright.

The pharmaceutical industry peddles treatments that work better than placebos….the treatments don’t have to work better than sunshine, getting friends, eating healthy, taking vitamins, exercising, etc….and often they don’t, but they can’t sell or patent exercise.

They even invent new diseases to match “cures” they have found (had you heard of erectile dysfunction before Viagra?).   You rig the game.  If you can “cure” erectile dysfunction, then you need to make it a disease.  Shyness is a disease now too (social anxiety disorder).

In short, the patent system CREATES the current pharma industry.  The industry manipulates those rules to protect their profits; they don’t want free markets.  Its much more profitable to define diseases or massage the drug approval process regulations.

Also, no business wants free markets……they want free markets when it suits them…and then closed markets when it doesn’t. The patent system creates a closed market; that’s good for copyright holders.

Multi-national corporations (who are also quite well-connected and resourced) want free trade…because it allows them to move goods and labor unfettered.  The only group you can bet for sure will benefit from that arrangement…is the multi-nationals themselves.

Who do you think writes these laws?  The industry almost HAS to write them; because they are the only ones with enough expertise to do so.  Would you want some blowhard politician writing laws about an industry they have never even worked in?  The industry groups draft the laws and try to get the politicians to sponsor them.

Banking is the ultimate special privilege industry:  It gets to create money…and he who creates the money, makes the rules.

If you’re looking for a lesson in my rambling here it is this:   The winners make rules.  Everyone else whines about working hard.

If you beat me 100 to 2 in basketball and I re-define winning as having the lowest score….then I win.  It doesn’t matter how good you are.

Tags: economics

Goldman contends they have done nothing but sell what other sophisticated investors wanted to buy.  Did they do anything “wrong”?

Hmm…….

I want to draw a distinction between ethics and morals:

Ethics is a set of rules, often set by a group, that defines right and wrong.  Morals are our own personal definition of right and wrong.  The two will hopefully be similar, but not always the same.

Goldman’s claim is that they have broken no rules:

They sold things others wanted to buy.

They made the best profit they could.

They did not break the law.

If you add a bit of personal responsibility (morality) to those claims though, the statements change:

They sold things others wanted to buy – – – EVEN though it was complete crap.

They made the best profit they could – – – EVEN when it came at the taxpayers expense or through special connections.

They did not break the law – – – EVEN though they perverted the intention of the law.

Goldman is basically claiming that if they didn’t break any rules, then they didn’t do anything wrong.

When we all know that is complete crap; its a lawyer’s excuse…finding some way of weaseling out of responsibility when it is plain to everyone they’re a bunch of crooks.

Not that I’m necessarily singling out Goldman.  The “profit motive” is a ruthless amoral code; it is the economic phrasing for “the end justifies the means”.

For Goldman, and many other companies, all that is not illegal is permissible.  The law is something to avoid and manipulate.  The spirit of the law is irrelevant.

So, to wrap up…Yes, Goldman has done something wrong….not breaking rules is not the same thing as doing what is right.

Tags: ethics, morality