Posts Tagged “government”

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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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 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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This PRISM spying thing is interesting for me because so many factors are at play (listed below in no particular order):

1. What motivates a whistleblower? Edward Snowden is the new Bradley Manning (and we see how that ended).  The motivation behind leaking this kind of information and the trouble it causes for you is fascinating.  Would I leak if given a similar opportunity?  Probably not; I like my life too much.  Would you?

It seems to me to be a case of self-sacrifice, where the whistleblower is potentially making the world a better place for us, while at the same time ruining their own life.  Questionable move.

2. The government has to spy on us.  The current whistleblowing, while creating a useful dialogue about freedom vs security, will not change government eavesdropping now or in the future (the program will simply move further into the shadows if shut down).  Think about it from the government’s perspective:  1) We’re already creating all the data for them (emails, phone calls, facebook, cell phone GPS, etc.) and the technology exists to gather it.  It would almost be a missed opportunity, from the government’s perspective, if they didn’t take that final step of collecting it. 2) If the US government isn’t spying on us, then some other government (or organization) will be, and the US government will not accept that kind of information asymmetry.  Would we want our government at a disadvantage?

3. It is safe to assume we are being watched all the time by multiple parties.  I would not assume the US government is the only one with this kind of program.  If they are today, they won’t always be.  Information of all kinds is being created about us at an increasing rate, and so organizations will be increasingly tempted to use it.

4. How is government spying all that different than marketers or financiers? Marketers  know what I want to buy before I do.  Financier formulas give me a credit rating that is likely more accurate at predicting my ability to service debt than even I would know if you asked me.  In short, the world of commerce not only knows most things about me already; they often know MORE than I know about myself.  And, really, how much “spying” does the government need to do?  Many people simply publish their lives on Facebook voluntarily.

5. The government is collecting 99.9% junk, and the program is a waste of time. This will be the world’s largest database of people doing regular, boring stuff that ever existed. To separate signal (some terrorist) from noise (our comings and goings) is an intellectually stimulating but largely fruitless endeavor.  I would be highly suspicious of any claim that actionable intelligence is coming out of the surveillance (although I am sure that claim will be made).

We had mountains of data about the finance system and years of effort in creating sophisticated models, and no one could predict the financial crisis or housing bust.  Do we now think we’re going to drum up some model that can find, or even significantly contribute to finding, terrorists (if that is even the program’s real/primary use)?

6. Do terrorists really carry registered cell phones, and put “I’m a terrorist!” on Facebook? Perhaps a few really crappy terrorists.  In general, it is beyond me what the government hopes to learn of significance.  I do bet they could catch a bunch of drug dealers and petty criminals who aren’t sophisticated enough to prevent leaving a digital trail.  Certainly though the government doesn’t need any more help catching drug dealers/users?  The jails are already overflowing.

7. Convenience trumps Freedom. I think most of us are OK with having our every move logged. Like I said, we are voluntarily doing it mostly anyway.  We “log” into every site or service we use and they “log” our information.  We do that because it creates something convenient for us (it is nice that Amazon saves my info and predicts my likes).  We can simply not buy cell phones if we don’t want our location constantly monitored, but most of us value the convenience of driving directions more than the freedom we give up.

8. The Internet does not promote a free and open society.  This is exactly the opposite of what we’d like to think and have been told.  Our digital universe (including the Internet) creates the most effective surveillance state that could ever be conceived.

9. Cloud Computer is inherently insecure. If we create the data and upload it centrally somewhere for a service to manage…then we are volunteering our data to the government, and likely others as well.  I think, ultimately, people value convenience over security, and so “the cloud” has a big future…it is just a big future in which privacy is marginalized and our mistakes are recorded in perpetuity.

10. Spying is being automated.  Can former spies apply for unemployment?  No longer does a spy have to sit in a cafe in Damascus and eavesdrop on conversations; the conversations are being recorded.  I guess no industry is immune to automation.

11. Who Watches the Watchers? Even though I believe this kind of surveillance is a waste of time for finding terrorists, I am strongly against it.  Even though our lives are incredibly boring and full of non-events, with this much data about our comings and goings it would not be difficult to find “other” uses for it.  There is no need for any organization to have that kind of power.

If the government would submit themselves to be watched in the same way they are watching us…then I might see a moral justification for the program.  They can have their privacy but we can’t have ours?  That seems unfair in a nation where no one is supposed to be above the law.

For those who would invoke “national security” as the justification for the information asymmetry, I submit my last comment:

12) The response to 9/11 is enormously out of line with the event. Is no one brave enough to lead with, “Despite the tragedy, it simply is not worth all this.”?  Preserving our way of life is not disrespecting the dead.  It is what the dead would have wanted for us, and thus is the highest form of respect we can pay.

2,993 people died on September 11, 2001 as a result of a terrorist attack.

4,488 US soldiers  have died in Iraq since 9/11…. Certainly we have not saved 4,488 US lives in prevented terrorism since that day? We’ve killed more of our own soldiers in response to 9/11 than died on 9/11.

Over 1 million Iraqis have died due to US military activity since 9/11.  If there wasn’t a lot of dislike of US before, there is now.  As much as some Iraqis appreciate the liberation from Saddam, if the deal is “to save us you must kill us”, I’m not sure that is a great bargain.  We’re kicking the hornets nest in the Middle East.

Here are some other sobering statistics:

Over 5,000 people per year die in the US from texting while driving accidents…44,000 per year in car accidents in general.  47,000 per year die in the US from hospital/doctor errors.  24,000 per year die of lightning strikes (globally).  No one is declaring war on any of these things….despite causing more death per year (recurring) than 9/11 (a one time event).

6,800 people die per day in the US from all causes.  4292 days have passed since 9/11/2011, so 29,185,600 people have died overall in that time period.   The tragic deaths of 9/11 account for .02% of all deaths since that day. How are the other 99.98% of deaths any less tragic? Why no passionate response for non-terrorist deaths (some of which could likely be addressed without such a draconian response)?

What is the justification for the response to 9/11?

It certainly can’t be lives saved, since we are killing more than we are saving.

It can’t be freedom, since we are giving up (in civil liberties) more than we are preserving.

It can’t be safety, since there are far better, less invasive ways to make us safer.

What is the justification?

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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?

Wrong.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What is similar?

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

They are both using social media.

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

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

Numbers:

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

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

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

Income inequality:

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

Unemployment:

Unemployment in the US is about 9%.

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

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

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

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

1) The US is geographically distributed.

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

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

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

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

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

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

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

4) In the US, we have a democracy?

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

So, there you have it.

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

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

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

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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.

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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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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).

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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.

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I will keep Wikileaks separate from Julian Assange, since I’m more  interested in the concept of Wikileaks than the person representing it.  I will also keep the specific content of the cables largely out of the discussion, since that is not central to my question either (btw, I didn’t find anything that damaging in what was released.  Secretary of Defense Robert Gates mirrors my sentiments).

Is it OK to publish secret/private information, even if it is potentially damaging?

Yes.  In fact, isn’t that what freedom of the press is all about?  I know that is what the founding fathers had in mind when they drafted the 1st amendment (not the 2nd or 3rd, the 1st): To allow We the People to hold those in power accountable for their actions.

I understand that leaking the information may have been criminal (Bradley Manning is being indicted), but obviously publishing previously leaked information is not.  In fact, Joe Lieberman is trying to make up a law to make it illegal.

I suppose politicians want freedom, openness, and transparency….as long as they themselves don’t have to abide by the same principles.

Since 9/11 and the PATRIOT act, the ability for the government to eavesdrop on our comings and goings has been greatly broadened (not that it wasn’t sufficient before I am sure).  I hear the argument all the time from politicians that if you have done nothing wrong you have nothing to worry about.

Touché Wikileaks

If the government has done nothing wrong, then why are they worried about leaking their internal memos?

The government argues that a) “diplomacy” is messy and requires secrecy, and b) that leaks of this kind may cause harm to those named in the documents.

A) Ok.  Diplomacy is messy.  I agree.  I also agree that parties may desire secrecy.  But in a country with free press that does not mean that they will GET secrecy; it just means they want it.  I see it as an operational failure….you couldn’t keep your information secret. Don’t shoot the messenger who has not broken any laws.

B) Leaks of this kind may cause harm to those named in the documents.  Hmm….they might.  However, there is not one documented case of this ever happening due to a Wikileak.  Not one.  To shut something down and put people in jail because it MIGHT cause harm…that is as bull headed as the idea of pre-emptive war (another puzzling policy).  You can’t attack someone because they might one day have the capability to attack you….that is a recipe for eternal war. To censor information that might be harmful is a recipe for blanket censorship.

Additionally, suppose there were some unfortunate harm caused by the publication of the cables? That is a thorny issue; however, not one that, in a blanket, fashion says publishing the material was bad.  If we’d had a Wikileak that proved the intelligence used to justify the invasion of Iraq was faulty, then that would’ve caused harm to those concocting the scheme, but it would have saved harm to many others.  Remember, no one has accused Wikileaks of publishing FALSE information, just inconvenient information.  The truth may occasionally cause harm; however, history teaches us that the truth serves the average person far better than government power and secrecy. It is hard to argue with that.

Finally, except in scale, how is this much different than other instances of investigative journalism with potentially harmful impact….like say Watergate?

Didn’t the Washington Post publish harmful information about the politics of our nation?  A president got impeached and Bob Woodward got a Pulitzer Prize.  Fast forward 27 years: no one is impeached or harmed and they want to shut down Wikileaks and put Julian Assange in jail (can you get a Pulitzer Prize from jail?).  My how times have changed.

I think the media is at least a little bit mad that they aren’t doing journalism anymore and some no name computer hacker from Australia is doing it for them.

—- Again, if the government is not doing anything wrong, then why do they care if their internal correspondence is made public?  It would simply be boring drivel (which it largely is this time, though that might not always be the case).

—- If they are doing something wrong, then Wikileaks is performing a journalistic service.

Thoughts?

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I have some things to share with the 7 or so people who might read my website:

Why I am apolitical:

I’ve always stated that I am apolitical, neither democrat, nor republican, nor centrist, nor libertarian.  But I have strong ideas about politics and the role government can have in our lives…very strong ideas.

So as I watch the bailout of the financial system and the endless debate on healthcare reform everyone agrees in theory needs to happen…..I ask myself:  Why am I  not more political?  Here is why: because there is no substantive difference between the democrats and republicans.

We think of them at opposite ends of the ideological spectrum, but they are not.  They argue loudly about small difference they make seem big while rarely addressing anything substantive.

I’ll use the example of the financial system bailout:  Both the republicans and democrats wanted to bailout the financial sector; they just argued about the amount (both amounts being very large) and how to spend the money.  The Republicans started the bailout and then the Democrats inherited it, and continued the same basic policy.  Neither party addressed why it happened in the first place; no one (except maybe Ron Paul) wanted to discuss the structural issues of a monetary system based on debt and a fiat money controlled by unelected officials making decisions behind closed doors (the Fed).  Neither party has addressed the “too big to fail” issue (not only that, but the big financial companies have used the bailout money to buy up the smaller companies that failed during the crisis; they’ve actually become bigger).

Here is another example:  9/11.  Both parties wanted retribution.  No party was brave enough to say:  ” 2993 died today in a terrorist attack.  6,744 people die a day on average everyday, so to put that in perspective, America is not under attack.  This was high profile and a great tragedy, but to upend our way of life, to start long costly (very costly) wars on foreign soil with unclear means of success in which more men and women will certainly die…..to restrict and lose, in the name of increased security, the very freedoms and civil liberties we would claim to go to war to protect…..this is not acceptable.  If this is our response to terrorism, then certainly we have already lost.”

This brings me to my next point.

Why Republicans want healthcare reform to fail:

I do not think the Republican’s opposition to healthcare reform is 100% genuine and in the interest of their constituents (even if you include the healthcare companies as their constituents). Republicans want healthcare reform to fail because if the Democrats pass the reform the people want, the Republicans may not see the inside of the White House or a majority in Congress for a generation.

The point, is that neither party has a genuine interest in doing what is best for us….they have an interest in getting re-elected.  They pass laws based on that and little else.  Democracy works because the two can definitely overlap; if you pass laws people want, you get re-elected…..but their are other ways to go about it as well:  money can also get you re-elected (so pander to companies); being less-bad than the alternative can also get you re-elected (just bash the other party and say great things about yourself).  In short, there are alternative ways to get re-elected.

This brings me to my next point.

Why I want to go back to school:

I’ve been kicking around the idea of going back to school to get a PhD in Economics.  In the long term, its a good life to be a college professor, and in the short term it would allow me to follow these ideas to their natural conclusion.

Incentives.

People are neither good nor bad; they act, en masse, according to the situation in which they find themselves.  Modify the incentives and you modify behavior.

I would like to study some form of behavioral economics that would allow me to construct a system of incentives to help people avoid all these situations.

The economic system in which we operate works together with government/law to create the set of incentives that control our lives.  I would like to draw lines in the sand, to establish some facts and some subtlety:

The free-market can fail to reach optimal outcomes. We must accept that these textbook perfect market conditions don’t exist in the real world, and even if they did they would still produce monopolies, corruption, inequality, price fixing, etc.

Economy doesn’t exist w/o government….therefore government has a role to play…not as a spender of money, but as a regulator, a system-maker.  We need to accept that the invisible hand of capitalism produces anxiety, inequality and pits us all against ourselves.  This produces crime, mistrust and ill-health.  We don’t want to live in a country like that.

GDP is a horrible measure; lets replace it:  It promotes over-consumption, doesn’t differentiate between types of spending, and you can’t subtract from it.  Here is an example:  The US has the largest economy in the world with a GDP of 12 trillion (per year).  I can turn the tiny nation of Uruguay (or any country for that matter) into the largest economy in the world:  Let them borrow 13 trillion dollars from someone and spend it all on rat poison next year.  They will be horribly in debt and have a country full of rat poison…..but they will have a 13 trillion dollar GDP.  You might be thinking “that’s not how it works, surely!?!?!”…..but oddly enough, it is.

Monetary policy is the basis of our society, because money controls/influences most of our actions.  Fiat money created by debt is the structural issue that has caused our current crisis, and yet few seem to understand that (so no one addresses it).  Money systems fail (and empires fail with them).  To create a lasting society, you have to create a lasting money.  Our current system is unsustainable; it allows the government to confiscate our wealth through inflation.  Taxes are cheap in comparison.

I would like to clarify these ideas, to write my own Das Kapital; furthermore to elaborate it using agent-based computer modeling so that it isn’t all theory, you could potentially model changes to law/monetary policy to see the potential effect.  It would be akin to what weather forecasters use; imprecise, but better than nothing.

What do you think?  Quit my job and go back to school or continue as is?

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