Yearly Archives: 2011

Equalization?

Equal. This simple word conceptualizes our most basic and noble sentiments: all men are created equal…equal protection under the law, etc. But, it has a sinister sibling that it is often confused with: “equalization”. This concept is the dubious notion that we should forcefully create a state of “equality” among all citizens, at least on an economic level.

But why this notion that equalization is necessary? The usual answer is that it is “bad” when some make “too much” money. However, this response betrays a childish and simplistic view of the economy, one wherein it is likened to a board game (one player wins and all others lose). This view is based on the fallacy that money itself is wealth. But, it is production, not money, that is the basis for wealth. If money were wealth then the government could just print up a billion dollars for each of us and our troubles would be over!

To illustrate the true nature of wealth let us consider two hypothetical peach farmers, let’s call them Hayek and Keynes (google the names to get the joke here). They each start with one peach tree. Each year they produce a crop sufficient to sustain themselves. After a few years of this Farmer Hayek decides to not sell all his peaches, rather he plants a few to grow new trees. [Economics lesson: the act of not consuming is called “saving”, anything saved is called “profit” and accumulated profits are called “capital”. Capital is that which is produced not for consumption but for further production.] Farmer K sells all his peaches each year and lives it up relative to Farmer H (i.e. he consumes all that he produces and does not save anything). After a few years Farmer H’s new trees start to bear fruit. After several years Farmer H has a large orchard that out produces Farmer K’s single tree. Farmer H now has many options: he can purchase any number of goods that Farmer K could never afford, or perhaps he may hire someone to manage his farm thus allowing him to retire early. His deferment of present consumption (unsold peaches) is accumulated and thus becomes capital (new trees), which makes possible greater future production.

After several years Farmer H makes a hundred times what Farmer K does. Is that bad? Should we “equalize” them by taking the “excess” profit from Farmer H and giving it to Farmer K? Is Farmer K worse off than before? No. Farmer H did not take anything from Farmer K, he simply produced more by employing the simple concepts of capitalism.

The economy is not a zero sum game. Farmer K is not worse off because Farmer H produced more. If a CEO or Wallstreet mogul makes millions or billions it doesn’t negatively affect me (or anyone else) in the slightest. They did not forcefully take anything from me (only the government is allowed to do that!) All “equalization” does is punish those that efficiently produce what other people want. So let’s keep our tax policy focused on funding the government, not on correcting ill-conceived notions of equality.

Pet Peeve Regulations

It was recently reported  that the Morgan County BOC  is seeking to enact an ordinance that would regulate garage sales. This proposed ordinance is absurd. The reasons for it are so ludicrous I thought perhaps the article was a satire. It was reported that a mere 12 complaints (0.06% of the county population) a year about garage sale signs in part prompted this proposal. The next issue was that “unregulated outdoor sales annoy citizens.” So, I suppose regulated outdoor sales would not annoy them? The bar is awfully low if mere annoyance is sufficient to prompt regulation. Another cited issue is “traffic congestion.” The most “traffic congestion” I’ve ever seen is through downtown Madison around 5 pm… where it might take an extra 2-3 minutes to get through town. Even this “congestion” is not worthy of regulation.  The final reason is an embodiment of ambiguity:  “disrupt the local residential environment.” A statement so broad that it can apply to virtually any “annoyance” is the regulator’s best friend.

So, I suppose regulated outdoor sales would not annoy them?
In order to qualify for the “privilege-that-used-to-be-a-right” of having a garage sale one would seek permission of a bureaucrat who could arbitrarily deny a request based on the most nebulous of reasons – i.e. “would not be in the interest of the public health, safety and welfare.”  Since that phrase can be interpreted to apply to any denial then decisions are based merely on subjective whims. Furthermore the ordinance would micromanage the sale itself, as it would “deal with how items can be displayed and the sizes and number of signs”. So, is the cash strapped county now going to pay people to go out and inspect garage sales to ensure they are in compliance? We certainly wouldn’t want items displayed incorrectly!

 

What’s next? Will the county require sellers to warranty goods for a certain period of time? Would they regulate the maximum price of an item? If this ordinance is enacted then it will become that much easier to justify new regulations by using this regulation as a precedent. Perhaps birthday parties should be regulated as well? Perhaps any kind of gathering at one’s residence should be regulated? Nearly all the issues cited in support of this ordinance also apply to such gatherings, why not regulate them too? This is a classic slippery slope. The goal of regulations should be the protection, not violation, of natural rights. This regulation violates the property rights of the seller by limiting their ability to sell their own property. If a seller does happen to violate the rights of others in their sale then they should likewise be cited under EXISTING laws. There is no need for a new patchwork of “pet peeve” regulations.

Math 101

Let’s do some simple math.

2011 Federal Budget: $3.8 Trillion

2011 Federal Revenue (est): $2.6 Trillion

so

$3.8 – $2.6 = $1.2 Trillion Deficit

100% of all personal income above $200,000 per year = $1.2 Trillion.

So there you go, I guess the President is right after all. The solution to our deficit problem is so simple: take ALL of the income of the “wealthy” above $200,000 per year (in addition to the taxes they already pay on the amount below $200,000 which would effectively be an 83% total (not marginal) tax rate).  I guess “fair share” or “shared burden” is code for “no one should make more than $200,000 per year”.

And just to disabuse anyone of the notion that corporations are where the real money is: the combined income of everyone making more than $200,000 per year exceeds the combined income of EVERY corporation in the country ($2 Trillion vs $1.2 Trillion – and no I’m not double counting, these are C-Corporations only). Indeed, the combined AGI of every US Citizen is $7.5 Trillion vs only $1.2 Trillion for every corporation. Why is individual income so much more than corporate income? Payroll is the single biggest expense for corporations. Median profit is only 5% of revenue whereas Payroll is 18%. That’s right, companies pay more to their workers in salaries than the company itself retains as profits.

So what is my point? Obviously I’m not actually advocating 83% absolute tax rates on the “wealthy” (hopefully I haven’t given the Democrats any ideas!) My point is that spending is the problem, not revenue. Even returning to the much-touted “Clinton era” tax rates would not even begin to make a dent in the federal deficit. The rate of increase in the federal budget from 1980-2000 was a consistent $60 billion/year, but starting in 2001 the rate of increase jumped to $150 billion/year and in 2009 jumped even further to $240 billion/year. Clearly Bush got us off course spending wise and Obama has made it that much worse.

If we were to return Federal spending to the 20 year trajectory it was on when we got off course in 2001 the Federal Budget for 2011 would be a “mere” $2.4 Trillion. That’s right, we’d actually be in surplus EVEN with the Bush tax cuts. For a detailed outline of how this could be achieved please see this Reason article. The Cliff notes version is this: no sacred cows, EVERYTHING (defense, social security, Medicare, entitlements, etc) must be cut.

All values obtained at: www.irs.gov/taxstats/ and are for the latest years with available data.

Productivity kills Jobs?

Recently Congressman Jesse Jackson Jr. (D-IL) remarked that Apple’s iPad was “probably responsible for eliminating thousands of American jobs.” Further, he tried to link it to the recent bankruptcy of Borders Books as well, quipping that “Why do you need to go to Borders anymore? …just buy an iPad and download your book…”

Wow.

Such an expression of sheer ignorance of basic economics is astounding. And from a sitting U.S. Congressman no less makes it all that much more sad and appalling. But I guess I shouldn’t be too hard on Jesse. This fallacy has been with us for a long time. Every time some new tool that enhances productivity (and thus lowers costs) is introduced it is decried as terrible because it will put so many out of work. The benefits (lower prices) are ignored. But after awhile the controversy dies down and we’re all much happier to be paying less for our robot built cars, our sewing machine made clothes and our machine harvested food.

So why does this myth persist? Well quite simply because it is true – people do of course lose their jobs – in the short term. However it is disingenuous to evaluate productivity gains over a narrow time frame and summarily conclude the outcome as negative because a few will lose jobs.  That’s like planting seeds and a day later noting that nothing has yet sprouted therefore the seeds must be worthless. Productivity gains take time to take root and spread their fruit of lower prices throughout the economy. As people spend less money on the newly cheaper goods they now have more money to spend on other goods. The increase in demand for these “other goods” drives job creation. Of course it does take time for people to retrain or to move to where the new jobs are, it doesn’t happen overnight. That’s why we have Unemployment Insurance. In the “big picture” there are no job losses, in fact there will be net job gains if the productivity enhancements are sufficiently large.

But some inevitably want to prevent the process from ever starting because of short term fears, thus they use the power of government to act as a break to these productivity gains. Government will either subsidize the outmoded industry or attempt to penalize the new entrant through punitive taxes or burdensome regulations. This only happens of course if the “harmed” industry has a sufficiently well funded lobbyist group. This explains why sugar is more than twice as much in the US than in all other countries (due to the trifecta of tariffs, quotas and subsidies) whereas typewriters have practically gone the way of the Dodo. Government meddling in the market simply makes the process take even longer (we’ve been waiting since 1812 in the case of sugar!) by eliminating most if not all of the cost savings achieved and thus the net additional jobs that could have been created.

Carrots vs Sticks

In a previous article I distinguished “requirements” for life from “rights”. Requirements are things that we are to provide for ourselves which allow us to continue the biological process we call life (e.g. food, water, healthcare, shelter). Since we are to provide these for ourselves either directly (e.g. grow our own food, etc) or indirectly (via work which is exchanged for money which is then exchanged for these things), this then begs the question: What of those that are incapable of providing for themselves? Shouldn’t the government provide this social “safety net”? Well, actually no. Why? There are three principal reasons although I could simply point to the nightmare of a Ponzi scheme that is Social Security and Medicare as prime examples of how well government is able to manage such systems.

1)    Theft. Theft for a noble cause is still wrong. Merely renaming “theft” by a group (government) from the individual (taxpayer) as “taxation” does not suddenly change its moral character. If I rob my neighbor and then donate all that I have stolen to the local food bank, is that ok? Clearly not. In the same way if the government robs from my neighbor (taxation) and gives to someone else, it is still wrong.
2)    Inefficiency. Government is inherently incapable of utilizing resources (tax money) efficiently because it does not employ the profit/loss feedback system. Profit says “you’re providing something people want” whereas Loss says “you’re not providing something people want.” The funds doled out by governments are not theirs; thus there is no inherent motivation to efficiently allocate such funds. In fact government budgeting rationale is the opposite of that in a profit/loss system: using all money and NOT accomplishing your goal is justification to get even more money. Without a profit/loss test governments are doomed to be throwing darts at a budgetary efficiency target whilst blindfolded… every now and then they’ll get lucky, but most of the time they don’t even hit the board.
3)    Forced Charity. Every major world religion holds acts of charity in inestimably high regard. Such acts must come from within, not without. If we are forced by the government into giving (through taxation or the proposed “Universal National Service Act” continually reintroduced by Rep. Rangel (D)) then two thefts have occurred. First our money or time. But secondly we are robbed of the positive spiritual feedback we could have received when we willingly extend assistance to someone who truly needs it.  
Independent, free market and unregulated charitable organizations are the most efficient tool to help those that need assistance. They offer the exact counterbalance to the above three problems with government based charity. Theft is transformed into Giving. Money that was stolen is now given to those charities the citizen (not the government) deems worthy. Inefficiency is transformed into Efficiency. Charities are described as “non-profit” organizations however that is merely a tax descriptor. Charities do profit, but non-profit tax regulations prohibit distributing said profit to the owners of the charity. All money is reinvested. So the profit test exists – inefficient or bad charities go out of business and those that “profit” will grow bigger and more able to accomplish their mission. And finally, Forced Charity is transformed into Charity. When we give to someone willingly we get back much more in a spiritual sense. The positive feedback from giving compels the giver to continue giving. What could be better then a system that encourages giving through carrots rather than sticks?

What is a “Right”?

In a recent editorial I obliquely referred to the concept that healthcare is not a “right.” I would like to flesh out that concept more fully in order to substantiate the concept that healthcare is not a right any more so than food, housing, transportation, clothing, television, or any other consumer good.

Yes, I can hear the protests now, “Of course healthcare, food and housing are rights! We need these things to live, to survive!” Yes, that is true, we do need these things. But that does not make them rights. They are requirement to survival, but they are requirements we are to provide for ourselves.

So, what is a right? There are actually two types of rights: negative and positive. Negative rights are also known as Natural rights whereas positive rights are those conferred by decree (Fiat rights). Negative rights transcend time and place. For negative rights to be upheld requires NO action on the part of anyone else. We all have a right to our life, or stated conversely, we have the right to not be murdered. For us to not be murdered requires only the inaction of others. We have a right to our property (i.e. those things produced by us through work). Inaction of others ensures our property will never be taken. We have a right to free speech. This means that we can speak our mind publicly and not be silenced by force; it does not (and never has been interpreted to) mean we must be provided a means by which we can disseminate that speech. In the same way our right to life does not mean we must be provided with the tools necessary to maintain that life. If we are to be provided with such tools that implies someone must provide them.

Positive rights are those rights that by their nature require that someone else DO something to provide that right. If healthcare were actually made a right by decree, then this would mean that it MUST be provided to all. The problem with this concept is what do you do if no one or nearly no one wants to provide this service? If it is a “right” then it must be provided, and if it must be provided then the government must through force or coercion compel someone to provide this right. The coercion may be direct (i.e. the state dictates what your profession will be) or indirect (i.e. the state takes money from one group against their will to give to another group in order that they may obtain their “right”). Some may see this as “ok” because collectively, we, as society might be better off (e.g. the concept that “healthy Americans benefit the country”).

That is a dangerous road to travel. If we can justify any action based on the concept that society benefits then what is to stop us from establishing laws that require people be licensed before they can have children (so that the state can ensure they are “ideal” parents) or dictate how many children we can have… or perhaps sterilize those with undesirable genetic traits (they simply lead to higher health care costs, and anything that lowers health costs is good for society, right?). Well, I for one vehemently disagree. This is where all government intervention errs (beyond the core duty of protection of our natural rights) – the intentions are good but they are never thought out to their logical conclusion. That conclusion being that in fact the good of the many does not outweigh the needs of the few or the one (with apologies to Mr. Spock).

Nanny State Strikes Back

Recently the U.S. Justice Department announced it was blocking anyone in the U.S. from accessing online poker sites as well as accusing 11 people of bank fraud and illegally operating gambling websites. This story is disturbing on several levels. Firstly, upon what Constitutional basis does any government have the power to declare certain behaviors that harm no one to be “illegal”? It’s apparently not “illegal” when governments do it (lottery). This is not only an unconstitutional action but a hypocritical one as well.

Some might argue it is justified because gambling has a potential to harm the gambler. True enough, but, the gambler is aware of the risks; there is no deception or fraud. Some might then argue that gambling could harm the gamblers family. Yes, that’s possible. But there are lots of things people can spend too much money on thus potentially harming their family… should all those goods be made illegal? Or perhaps we should submit to government approval before we make a purchase to be sure it is appropriate for our level of income so that it won’t harm our family? The inherent danger of trying to regulate the behavior of others is that we may soon find our own behavior regulated. The Libertarian philosophy runs counter to the notion that government knows how to run our lives better than we do. One of the fundamental planks in the party platform states:

 “Individuals should be free to make choices for themselves and to accept responsibility for the consequences of the choices they make. No individual, group, or government may initiate force against any other individual, group, or government. Our support of an individual’s right to make choices in life does not mean that we necessarily approve or disapprove of those choices.”

Secondly, on what grounds does the government restrict the right of a U.S. citizen from accessing any website (that does not depict real physical violence)? Shall they start censoring our access to books they disapprove of? These events illustrate that Internet freedom is an illusion. Government can take these freedoms only because we permit it. Freedom of speech extends not only to the person making the speech but also to the person consuming it. To praise the ideals of free speech in one breath and then make consumption of it illegal in the next breath makes a mockery of free speech.

Lastly, the charges of “bank fraud” sound ominous but are misleading. The supposed fraud is a “letter of the law technically legal” interpretation of a 2006 federal law that forbids financial institutions from processing transactions related to online gambling. Apparently there was weak support for outlawing online gambling, so instead they outlawed activities associated with it (money transfers) rather than the activity itself. A deceptive and cowardly action intended to bypass the will of the people in favor of the will of the brick & mortar casinos.

This attack on free individuals (producers and consumers) causing no harm is a prime example of the “Nanny State” in action: intruding into the personal choices of its citizens, because after all, the nanny knows best, right?