Posts Tagged “economics”

Many believe some version of the following regarding income inequality:

The current income distribution is the free market outcome; we can’t regulate ourselves out of income inequality…it is a natural outcome of our global economy.

The statement is untrue.  It is better worded as follows,

“The current income distribution is a consequence of our government labor policies.   Based on current policy, it is the outcome we have created (perhaps inadvertently, but we still did it).  If we’d like to change it, we can.”

How can we better frame the issue of income distribution?

Income can go to two main places:  a) Capital (rich people/businesses)  or c) Labor (us).  We control which of those parties has the upper hand to “negotiate” for their share of national income.

A) Capital:  These are people who earn their income through owning things, such as land (to rent), or stock (to appreciate), or banks (in effect they rent money), or factory equipment (to make things), etc.  Capital does not work; it enables others to work/produce and so capital earns its income by “renting” its capital to others.

Capital has the upper hand right now.  The rich and business owners are raking in all the gains in national income.  If we change their bargaining power, they will capture less.

b) Labor:  This is people who earn a salary by working.  This is us.  We are fairing poorly currently in bargaining for any share of the productivity gains that we are producing.  The gains are all getting captured by capital.  Labor increases productivity; capital is capturing the gains.

There are some who would point out that without capital/business there would be no labor gains for us to think about capturing (this is the whole “the rich are the job creators” argument).  This is not true.  Without consumers/labor (with money) to buy/demand products, capital would be useless.  Job creation is an ecosystem, it takes both capital and labor to succeed.

Here are some factors that have created our current income distribution, which we can reverse if we so choose.

1. Decline in Labor Unions:

We are all in labor unions, whether we know it or not.

When a union bargains a benefit, we all get it as companies will offer it to everyone so that the non-union workers are not tempted to join the union.

Unions create collective bargaining power for labor in which even non-union members benefit.  Without unions, labor is weakened as a whole.

2. Enforcement of the FLSA:

In the US, we generally work many more hours per year than the rest of the world.  The FLSA created the 40 hour work week.  By being lax on enforcing the definition of an “exempt” worker, the 40 hour work week has been effectively abolished for all but a few employee groups.

The law already exists, simply reclassify workers as non-exempt (based on an alternate legal interpretation of the classification) and labor gets a bargaining chip (overtime hours).  As exempt workers, we do not have a basis on which to start the conversation (except complaints about work/life balance).

3. Enforcement of anti-trust law:

Many industries in the US (cable, wireless, media, etc.) are oligopolies…in which a few large firms (e.g. AT&T, Verizon) dominate the industry.

As such, they are near monopoly buyers of labor, and so they do not have to pay out as much to employees in salary.

Here is an example.  If you work in cellular, you work for AT&T or Verizon mainly.  There are only two buyers of your services; you can’t really continue to leave one company for another if your current salary doesn’t suit you.  There are only two places to go, and  you can’t move across the country if needed, because the same two companies exist wherever you go.  In the past, this wasn’t true.  It was easier for labor to say “I’ll just go work for someone else”.  We COULD go work for someone else; now we can’t as easily.

Anti-trust law already exists.  The legal interpretation of it changed such that companies were allowed to get larger and capture larger market shares.  If we go back to the old interpretation, then labor gains bargaining power as very large companies lose their “monopoly buyer of labor” market position.

4. Retirement investment in stocks:

When we put our savings in stocks (generally for the purpose of retirement savings); we drive up the price of stocks (which are owned by capital).  The reason is that we input additional dollars which chase a finite supply of stock shares.  We drive up the price of stocks….which gives money to capital (not labor).

Returns to capital would be lessened if we invested less in stocks and preferred (voted) instead to take a government pension.

5.  Privatization:

Government workers have lots of rights (largely due to government unions).  When anything is privatized, those rights go away and capital captures the gains.

As an example, you privatize a utility company in a particular city, those people lose their government benefits and jobs.  The company will be reformed as private (generally with a government granted monopoly) with lower wages, benefits, and job guarantees to employees and higher prices to the public.  The excess profit from the company will leave the city as it is distributed to company leadership and shareholders (capital).  Labor loses.

Those who say “that isn’t what happens…the free market is always more efficient than government run services”; that simply isn’t true in all cases (though it is true in some).

6.  Unemployment:

High unemployment means labor has little bargaining power as employees cannot leave for other companies.  In this case Capital gains the upper hand as it can capture labor’s increased productivity for itself instead of paying some of it out in higher wages.

Unemployment itself is a choice of the government (i.e. our choice as voters) as the government could always act as an employer of last resort to keep the labor markets fully functioning (just as the Fed acts as a lender of last resort to keep the finance industry functioning).

We could have a Fed for the labor market if we so chose.  This would give labor a lot more bargaining power (the government role as employer of last resort would provide a wage floor that private industry would have to meet or beat to attract workers).

7.  Minimum wage:

Increases in the minimum wage push up the wage floor which indirectly pushes up wages for all workers.

The wage floor is our choice.  In the absence of a floor, companies will pay whatever they want…which they are currently doing:   Wal-Mart has food drives to help feed its own employees.

8. Tax law:

Warren Buffet has pointed out that he pays a lower tax rate than this secretary, because of capital gains tax rates and loopholes/deductions for the rich.  Increase the capital  gains tax rate (to more than the marginal income tax rate); close the loopholes.  They favor the rich and the rich (capital) don’t need any help right now.  They are doing fine.

9.  Free trade:

Free trade agreements put our labor in competition against labor of other countries.  NAFTA gutted the domestic textile industry (which I watched happen living in S. Carolina).

T-shirts and other textiles are now dirt cheap (for which I am appreciative, since I don’t work in the textile industry); however, I am under no illusion that these agreements are only of benefit.

There are plenty of good arguments to be made about free trade (I can make them; they are of benefit sometimes); however, at this time labor is losing and we need to shift the balance of power back to regular people…not pit us against third world workers.  This is one avenue if we choose to exercise it.

10.  Corporate law and personhood:

Corporate personhood gives corporations rights they should not have.  Corporations are not people.

Corporate law could be changed to pay out a mandated percentage of profits to workers (if a company benefits, shouldn’t the employees?), or make CEO salary related to avg employee salary (so that executives can’t be paid in excess while workers are laid off).  Even something as simple as mandating employee representation on the board of directors would be helpful to labor’s bargaining position.

11. Campaign finance:

Limit the rich’s ability to influence election through campaign finance.  Last I checked, there are lots of lobbyists for the rich…not so many protecting labor’s interests.  Get big money out of politics and it will give labor a leg up.  We need it!

12. Finance industry oversight:

If, after the mortgage meltdown, we had put all the titans of the finance industry in jail, that would limit the hubris of Capital…and thus limit their ability to capture the gains of the economy (which is happening now).

Why didn’t anyone go to jail?  Poor enforcement of current law.  We don’t even need new laws.  We just need to enforce the laws we already have.  During the S&L crisis and Enron people went to jail.  Now the laws are not being enforced because of undue influence by Capital.

13. Copyright law:

Copyrights are government granted monopolies over a certain time frame.  They are a form of Capital, which funnels profits/income to the holder of the copyright.

Without the copyright protection, more producers would be able to enter the market, which would benefit Labor (both from a cost of goods standpoint and from the standpoint of more employers in the market).

We could weaken the time frames over which copyrights are granted (less time is better for Labor) and/or we could lessen the circumstances under which we grant copyrights (Apple tried to copyright rounded corners on phones and swiping to unlock.  Really?  I guess they are at liberty to try; however, the circumstances of copyright should allow for broader market participation and less special status).

14.  Social Safety Net:

Every time the safety net (unemployment insurance, medicare, medicaid, EIC, SNAP, Social Security, FMLA, etc.) is diminished, it makes it harder for the poor to move up the economic ladder, and thus depresses the income potential of the low income earners (which indirectly affects all of us).  Strengthen the safety net and labor has more of a leg to stand on….otherwise more gain goes to Capital.

You can see that there is a literal war on the bargaining power of labor, and labor is losing (largely without realizing it is happening).

It takes both capital and labor to succeed and right now the power is out of balance.  We need the pendulum to swing back in the direction of labor.  Perhaps in 50 years we can argue why capital needs more bargaining power (hopefully).

One can see that all these laws are creating the conditions of our current inequality.  We can change them; we created them in the first place.  It is silly to say “this is the free market outcome”.  The current income inequality is a choice.  We did it; we can un-do it.

It is fair to ask the question “If we decrease income inequality, what will that mean for me?”.  Most would see an improvement; some would not.  Income inequality creates lots of relatively cheap goods/services for the rich.  The cost of the items on the low end would likely increase if we paid many of the employees that produce those items more.  Lots of poor would benefit; a few rich would not be as well off.  That is OUR choice to make (or at least should be).

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Pope Francis is doing three things I’ve never seen in religion before (in my lifetime):   1) Being extremely relevant to our daily lives, 2) Potentially offending powerful people , and 3) Leading.  I’m going to focus on his comments on Capitalism because that is my area of interest.

1) Being extremely relevant to our daily lives..

The Pope isn’t just generally commenting on how “love of mammon” is bad.  He is getting specific…arguing against “trickle-down” economics as an “opinion, which has never been confirmed by the facts, and expresses a crude and naïve trust in the goodness of those wielding economic power.”  He has said, “We can no longer trust in the unseen forces and the invisible hand of the market.”  BOOM.

Also, note his reference to “confirmed by facts”.  This is also new for modern religion…the appeal to reason as opposed to faith.

In my life, religion/church is often a limited set of fairly sterile stories that you have to stretch to apply to day-to-day life.  Jesus may turn water into wine, but I don’t.  Judas may have been a betrayer; I am generally too boring to do anything like that.  I’m not saying there is no connection between Bible stories and our lives; I am saying though that you have to draw the connections.  They are not spelled out, and so are indirectly relevant most of the time.

The Pope is starting to spell some things out…lest the rich start to think Jesus would approve of their CDOs and bank bailouts.

2) Potentially offending powerful people..

The Church relies on powerful people to give it money.  The general messages of love, compassion, and morality are compatible with that.

But you start condemning the lifestyles of your patrons?  That is dicey game. No one likes to be reminded they are a hypocrite.

Also, one of our political parties is much more highly aligned with religion and usually favors the rich.  The rich don’t like to be told they are not completely awesome.

I think though the Bible is quite plain here: “And again I say unto you, It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.”  Matthew 19:24.

Uh…I don’t know how literal this is supposed to be or the definition of “rich” (since even the poor in the US are rich by global standards, and anyone reading this on the Internet would be rich by most any standards…that means me and you)….however, these are Jesus’s words…not some obscure verse from the Old Testament.

The treatment of the poor is very, very central to the Bible and Jesus’s teaching.  If the Pope starts calling out the rich, saying that their lifestyle is immoral, that it is sinful to make that much more than others, etc….that can change the world.

3) Leading..

Catholicism is huge; over a billion people align themselves with the Catholic Church.  The Pope is one of the single largest voices in the world.  When people say the U.S. President is the  most powerful man in the world, I have to agree in practice.  However, if the Pope chooses to lead, I would argue he has more influence.  The Pope usually isn’t considered in that light because the church rarely leads; it sticks to well worn, non-polemic topics.  Maybe we are seeing a change?

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I’ve talked about this before, and it is also discussed very well here.

The line of thought goes like this:  “Producers competing against each other benefits us all.  Free of government intervention, supply and demand sets the optimal market price.  Through open and free competition, the invisible hand of the market leads to the most efficient economic outcomes.”

The offshoot of this logic is “The free market outcome is the best and natural outcome, free from interference”.

I don’t think this is true in a practical sense.

Firstly, the government creates the market.  Always.  Look at our economy and I’ll challenge you to find one significant instance of a market that is not HEAVILY underpinned by government.  Here are some (but not even close to all) examples of the underpinnings.

Corporations:   Our modern economy is run by corporations, which are government created entities.  They are a legal invention.  There is nothing natural or free about them.

Money:  Without the government creating commonly accepted currency, I’m not sure how we’d pay for anything in our fictional free market.  Companies could issue their own currency (so could I for that matter), though I’m not sure who would accept it.

Contracts and Law:  The court system and contract law allows companies to interact and provides a baseline enforcement of trust.  I’m not sure what kind of entrepreneurship business you’d get if there were no common contract law…because you’ll never find an instance of it.  Government creates the opportunity for the market in the first place by underpinning it with the rule of law.

Copyright:  The modern, technology enabled market is created in large part by intellectual property protection.  This is a legal creation of the government.  Name a few large companies (e.g. Apple), and you’ll find many of them are insulated from the free market by copyright protection.  There is nothing natural or free about copyrights.

Employee Education:  Every employer and market benefits from government/publicly educated employees.  Companies don’t like to train their employees; its expensive.  What if entry level employees couldn’t even read?

Roads:  There is no market if people can’t get to it.  I’m sure companies could build their own roads; not sure how many there would be though, or what kind of expensive pass you’d need to get on each company’s  special road type that only led to their store.

Secondly, it is really hard to argue in practice against a free market that only exists in theory.

You can’t “disprove” the free market, because you’ll never find a real instance of it to argue against.  Some markets are surely less regulated/governed than others, but because the government creates the conditions of the market…they are never separate and so defending the free market is like arguing over the hair color of Bigfoot:   We can come up with lots of good reasons for white or brown (depending on habitat or season)…..but since there are no actual Bigfoots, we will never arrive at a conclusion.

Thirdly, thinking that the absence of interference in the market is good, is like saying that what is natural is what is good.

That isn’t true, period.  Hume solved this for us long ago.  Dying of cold in the winter would be quite natural if we didn’t put on a jacket (something that isn’t natural).  In fact, we can owe the relative comfort of our existence, to the struggle against what is natural.  We seek to be cooler in the summer, and warmer in the winter.  We want abundant food when scarcity is natural.  We seek to be dry when it is wet, and want water when it is dry.  We want youth as we naturally age, and want to be well when we naturally fall ill.  We seek order always, when disorder is naturally all around us.

Saying that we should leave the market to itself, and that by some “invisible hand” it will produce the best outcome for us goes against all evidence.  Its like saying “I’m going to sit outside in the winter and expect an “invisible hand” to make me warm and comfortable.”  We intervene in what is natural all the time to our benefit…why would the free market be the exception to that?

Thinking that the free market, natural outcome is the best outcome leads to some odd lines of thought (quote from Robert Reich):

“By this view, if some people aren’t paid enough to live on, the market has determined they aren’t worth enough. If others rake in billions, they must be worth it.  If millions of Americans remain unemployed or their paychecks are shrinking or they work two or three part-time jobs with no idea what they’ll earn next month or next week, that’s too bad; it’s just the outcome of the market.”

To me, that sounds like we’re shirking our responsibility to ourselves.  It is as if we’ve given “the market” omniscient, god-like properties.  It “knows” what prices should be.  It “knows” how best to allocate between capital and labor.   It “knows” how many hours a week we should work.  How?  I look at a market and I see people.

The market is a metaphorical construct that can’t “know” anything at all in the traditional sense.  People know and decide.  Leaving it up to “the market” is much like leaving it up to chance…a practice which, if employed outside in the winter, will leave you frozen to death.

The bottom line is that, through government, we create the conditions of the market.  We are free to change them if we don’t like the current market outcome, because we created the current market outcome in the first place.

In light of the above, I maintain that the “free market” is, in practice, a rhetorical device used by those interested in deregulating a certain sector of their market for their own benefit.  If it were not for “their own benefit”, they would be arguing for continued or increased regulation  (For instance car dealerships are arguing Tesla’s direct sales model is illegal.).

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A friend of mine, whose opinion I respect, commented on my last post about why I like pensions:

“I think your post opens you up to some pretty serious critique, though. I mean, essentially what you are saying is, “Why should I have to be responsible for my own future when someone else can be held responsible for me?” Who wouldn’t agree with that arrangement when given the option. What’s more, printing currency is an extremely dangerous way to meet the demands of retirees. The ensuing inflation complications punish everyone else. I think defined benefits are great if a company offers them as an incentive for working for their company rather than the other guy, but that’s about it. I think you also omit the key factor that a company may simply declare bankruptcy if the funds run dry. As an educator and one who pushes for equity in the system, I have to say that I can agree with your observation that most people aren’t equipped to handle risk and retirement planning as a rational choice because they are operating with imperfect information. To me the solution isn’t “Let’s recuse everyone from responsibility and put the burden on the market or the government.” Nor is it the hard-line conservative approach of, “My bootstraps worked just fine, so you’re just SOL.” Instead I say the real path of action lies in increasing educational quality for all. We’ve done so little still in closing the larger social gaps in our society. Now, is that completely realistic? Maybe not. But I think it’s a more positive approach than the other two.”

Here is my response:

“I think your post opens you up to some pretty serious critique, though. I mean, essentially what you are saying is, “Why should I have to be responsible for my own future when someone else can be held responsible for me?” Who wouldn’t agree with that arrangement when given the option.”

This dichotomy is setup far too often. The question is not “Government social services vs. our freedom” or “Government services vs personal responsibility”.  This is not a healthy way to look at social issues; there are no good answers when the issue is framed this way (which might be the whole aim of this framing).

How did any of us get fooled into thinking that it is better to have the freedom to die at home from lack of health care than it is to have the freedom to recover and continue to live a productive life?  Why is  the freedom for the elderly to die in the winter from lack of money to pay for heat more valued than the freedom to live out their years in relative peace?

As for personal responsibility, when we are young, we are cared for by others.  When we are old we are cared for by others.  When we are sick we are cared for by others.  No one accuses you of abdicating personal responsibility for your health to the doctor when you are ill.

Our entire lives are a web of responsibility; often with others depending on us, and often with us depending on others.

In short, a government pension has nothing to do with personal responsibility, and that’s why is important to have an savings plan and is when options like the Physical Gold & Silver IRA can be a good choice for this.

Failing to receive an adequate return on a 401k is not a celebration of personal responsibility.  It is an abdication of the responsibility we have to care for those who cared for us when they were able. Let me repeat:  Private retirement accounts that are at the whim of private financiers is a failure of our responsibility to ourselves.  The only winners in a such a scheme will be the financiers.

And to the point of “Who wouldn’t agree with that arrangement when given the option?” Indeed, who wouldn’t?  If that is the case, I am at a loss to understand why government social services, and government pensions, are such an issue.  Is this really controversial?

“What’s more, printing currency is an extremely dangerous way to meet the demands of retirees. The ensuing inflation complications punish everyone else.”

All money the government spends is printed money.  This is not an issue.

“I think defined benefits are great if a company offers them as an incentive for working for their company rather than the other guy, but that’s about it. I think you also omit the key factor that a company may simply declare bankruptcy if the funds run dry.”

A company going bankrupt is not an issue.  Pensions are federally guaranteed through the Pension Benefit Guaranty Corporation (PBGC), just like bank accounts are guaranteed through the FDIC.

It would be simpler though (instead of needing the PBGC)  if the government just issued the pension directly. Companies make products and services.  Why should Apple be great at making iPhones while at the same time being great at providing retirement or healthcare?  It is easy to see that isn’t and can’t be their core competence.

“To me the solution isn’t “Let’s recuse everyone from responsibility and put the burden on the market or the government.” Nor is it the hard-line conservative approach of, “My bootstraps worked just fine, so you’re just SOL.” Instead I say the real path of action lies in increasing educational quality for all. We’ve done so little still in closing the larger social gaps in our society.”

This is an interesting line of thought coming from someone that works in education (which is true of the writer of this quote).    Can you be educated at everything? Even if you are educated, does that mean you will make the right decision?

Can you be educated at everything?

Life is very complicated these days.  There  are so many things to learn that being an expert in everything is not realistic.  I am very good at HR consulting and helping with the people issues of large companies.  I have no illusions that I am also expert at a fixing a car, or operating on cats, or putting out fires, or making cell phones, or saving for retirement.   However, I am smart enough to know that I shouldn’t have to be.  That is a fundamental insight.  We are so interdependent it is silly to think we need to know everything.  We MUST depend on others.  The personal responsibility trope is a distraction.

Even if you are educated, does that mean you will make the right decision?

No amount of education will allow you to predict returns in the stock market (even average returns over extended time periods).  Education cannot be the answer.

So there we go…that is why I still think pensions are a good idea.

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Retirement is a modern concept; people historically worked until they couldn’t work anymore, at least in some capacity. Regardless, like most people, I would like to retire.  The question is:  How do you get the money?

A Pension is a defined benefit; it pays a fixed amount per year until you die no matter what.  You receive/accrue your pension based on years worked (private sector pensions); you can also accrue based on amount paid in (like Social Security), or simply buy a financial instrument (annuity).

The alternative to a pension (defined benefit plan) for retirement is usually a defined contribution plan (401K), in which you don’t accrue a fixed payment, you contribute and draw against the balance in retirement.

The advantage of a pension is its simplicity:

A fixed stream of payments until you die is very predictable.  It is the best, simplest solution for the retiree.

The retiree knows how much they are accruing each year of service along the way; that is something you can plan around.  They will not run out of money if they happen to live a long time.  This is the kind of security and simplicity everyone would like in retirement.  Life is complicated; retirement shouldn’t be, no?

This is why I like pensions.

If pensions are so great, then why are they so unpopular?

The biggest reason is that companies (and even governments to a certain extent, though they can print money, which is helpful) cannot manage the risk appropriately.

Pensions (like social security) can be unfunded.  There is no social security fund.  The people that pay in (working age) are really giving money directly to retirees.  I could accomplish the same effect by simply mailing my money directly to them.  The government is facilitating a direct transfer payment.  Some risk issues here could be the value of the US Dollar, the life expectancy of retirees, and/or the total population paying into the system. These risks are hard to manage and predict over short and long term time spans. The advantage the government has is that its pension is always solvent so long as the government can issue its own currency.

Pensions that are funded (like CalPERs and other large corporate plans) receive payments from employees (or simply lower their salary paystub, which is an indirect payment) and then manage the pool of money from which to payout the annuity revenue stream promised to retirees.

These plans have to manage even more variables than the government with a smaller population size (leading to more volatility); and they can’t print money.  They must predict how much people should contribute now, then predict a rate of return in the stock market, then make sure they don’t run a negative…and their business/industry must be healthy enough to continue to continue to exist when these people retire (avg life expectancy of a public company is less than 10 years). That is hard to do. The main issue for corporate pensions is that they have assumed a rate of return (historically 7%) for the stock market that hasn’t materialized.

So here is the crux, and why I still like pensions (preferably a government pension which can’t go bankrupt):

All the risk factors mentioned above that large companies and governments find difficult to correctly assess…..also apply to us.

We don’t know how long we will live.  We don’t know what payout amount is adequate.  We can’t predict the stock market.  We don’t know whether we will stay healthy enough to continue working.  We don’t know what the value of the dollar will be.  We are woefully unqualified to bear and assess these risks.

By switching from pensions to 401ks companies are shifting these risks from them to us.  If they have been unable to assess these risks correctly, how would we be able to?

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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?


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.

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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.

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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?


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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.

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It is sometimes said that the cure is worse than the disease; however, sometimes the cure IS the disease.

I was working in a benefits office of a large university and there was a lady who got a customer service award.  The story was told that employees would call the benefits office frantic that the doctor told them they didn’t have coverage.  She would scramble about and get them a confirmation of coverage, contact the carriers…fix everything.  That is great customer service.  The VP of Benefits turned to me and said, “The problem is that she was the one that forgot to enroll them in the first place because she is three weeks behind.  If she’d do her job, there would be no need for her great customer service responsiveness.”

Protection and Security:

The government is spending trillions on our security.  They are fighting ongoing wars in Iraq and Afghanistan; they are wiretapping us domestically; they are tracking us on our cell phones, monitoring us on Facebook; groping us as we go through airport security; censoring/blocking website they deem inappropriate, etc., etc.

Let me simply point out who it is we need protection from (hint:  it is not terrorists):

If we look at human history, the story is rarely of the government protecting its people from some external threat.  History teaches us that the threat of tyranny comes most often from the government itself. The framers of the Constitution had this concept specifically in mind when they created our government:  Limited government (see the 10th amendment) to protect us from the government.  We have the right to bear arms so the government cannot disarm us in case we would like to overthrow the government (yes, that is what the founding fathers had in mind).

I previously mentioned that if the financial sector’s main purpose is to assess and hedge risk and they themselves are the largest risk, then the only sensible solution is to pack up and go home.  Similarly, if the government’s aim is to protect us then they would be best served by doing almost nothing….since history shows over and over that the government itself is the largest threat to our freedom.

Saving the economy, Inflation, and the Fed:

We are told the Fed needs autonomy and power to intervene in the economy to save the economy.  As President Bush said, “I’ve abandoned free-market principles to save the free market system.”

That is a great story (and a bizarre quote).

I will ask why the economy needs saving in the first place? The Fed created easy money that fueled an asset (housing) bubble.  The government spends unfunded trillions on war that creates a budget crisis.

The government creates the economic conditions from which we need to be saved.  Indeed, they are the largest player in the economy and thus the one most able to create imbalances which cause crisis.  Very few other players have the market power to create a deep business cycle.  Very few other players could ever be considered rule makers or market movers.

Consider inflation.  Inflation is not caused by a rise in prices; it is not caused by increasing wages.  Those are symptoms, not causes.  It is caused originally by some expansion of the money supply (indeed there could be no inflation without an increase in the money supply).  The government/Fed controls the money supply.

When the government tells us it is fighting inflation, it is mainly fighting itself, since they are the party that must take the initial steps.  The government gets to create and spend money now when it is worth more and when it leaks out into the general economy as inflation we spend the money later when it is worth less.  Inflation is a tax on savings.  The tax goes to the government to spend now when the money is still worth more.

Similar to the situation with protecting us, the government is the primary cause of economic crisis and inflation, from which it then proposes to save us.


I actually think politicians are generally well intentioned (though not always); they have their beliefs and they fight for them on a political stage (which means lots of messy compromises).  Problem is, even if you have your beliefs, you are often wrong.  Strength of belief does not equal likelihood of correctness. See the Dunning-Kruger effect.

There is simply a powerful incentive to DO SOMETHING when there is a crisis, even if you are attempting to save yourself from yourself.

My question is:  Do the politicians realize any of this? I hope they are simply poor students of history, or willfully ignorant and are just trying to help.  If they realize it (even some of them), then my view of mankind is dimmed.

What do you think?

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