Uncharted territory

October 16, 2012

I recently came across yet another excellent article by Steve Randy Waldman over at Interfluidity, which led me to several erudite posts from Ashwin Parameswaran at macroresilience.com. I’ve got a lot more reading to do but first wanted to share a simple thought.

One significant difference between the Great Depression and the Great Recession is, during the Great Depression, we essentially stood by and let the wave of bankruptcies wash over the entire financial system. It was a tragedy. Many otherwise healthy banks were washed away along with the hopelessly insolvent. Credit froze, unemployment soared. Millions of people suffered without work and income, lacking the means to care for themselves and their families.

However, once the flood receded, all the gross financial excess and disparity that led to disaster had been washed away. The economic terrain was now clear for more stable, balanced growth to resume. We had to endure a very painful decade to reach that point, but once we did, the economic skies were much bluer than they had been before. This “new beginning” of sorts led to the most stable and productive generation the world has ever seen. The standard of living of the average middle class worker improved more than during any other period in history.

Fast-forward to today. At the outset of the Great Recession, our immediate focus was to prevent the pain of the Great Depression from happening all over again. And we did, for the most part. We stepped in and saved the biggest of banks – the pillars of the global financial system – while letting thousands of smaller ones fail. These measures averted panic. Unemployment rose, but not as badly as during the 30s. After a few scary months, the financial system returned to business as usual. Since then, unemployment has slowly but steadily recovered.

Now we are entering uncharted territory. This is where the paths of the Great Depression and the Great Recession diverge. We prevented the wave from wiping out the big banks, and yes, this partially averted a global tragedy. But by doing so, we also prevented the wave from flushing away the financial excess and disparity – two significant contributors to the crisis. Not only did we preserve the system and the institutions that led us here, but we kept them essentially in tact, if not made them bigger. There’s been no change in leadership. Only minimal new regulation. The message we’ve sent is: “don’t worry, this wasn’t your fault.” We have allowed, if not encouraged, those institutions to resume what they were doing before, attitudes unchanged.

By preventing this tragedy from painfully washing over all of us, we’ve also prevented it from flushing away the source of our infection. I fear we’ve merely bandaged over our problems. They’re still there, festering under the surface, potentially fomenting a greater tragedy for our future. And I don’t mean after another 80 years of prosperity – I mean, within the next decade. Or maybe tomorrow.

Think about it. Nothing has changed, really. So why should we expect the macroeconomic outcome to be any different?

(I guess I’m feeling awfully Austrian today).

Romney and the 47%

September 18, 2012

In case you haven’t seen it:


Romney: “There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe the government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you-name-it. That that’s an entitlement. And the government should give it to them. And they will vote for this president no matter what.

“These are people who pay no income tax. Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn’t connect.”

So who are these 47% of no-income-tax-paying Americans that Mitt Romney has given up on? Well, from the Atlantic, the following map shows the percent of people, by state, who pay no income tax. The 10 highest states are in red, the 10 lowest in blue, the middle ones in white.

And from my previous post, the electorate map from the 2008 election. Red states republican, blue states democrat.

Of the 10 worst states, only two voted democratic in 2008. Eight, or 80%, voted republican.

So I ask again: who in fact are these 47% of no-good, irresponsible, hapless, govt-dependent, un-American, food-entitled freeloaders??

Mitt Romney’s base.

(O the irony…)

In the aftermath of the SCOTUS ruling that upheld Obamacare, Florida Governor Rick Scott is leading the revolt against the ruling and the law itself, by refusing to accept the $1.9 billion in federal medicaid subsidies allocated to his state by the Affordable Care Act.

It got me thinking about federal transfers to states, and about something Paul Krugman wrote (in his blog or his book, I forget where), about the reasons why the United States is not suffering the same type of regional economic malfunction as the EU, even though both the US and EU are large single currency zones comprised of mostly independent governments.

One reason, Krugman notes, is that labor mobility is more constrained in the EU than in the US, due to language barriers and cultural differences and nationalism and whatnot. Even though unemployment is sky high in Spain, it’s still a rather prohibitive task for a Spaniard to move to Germany for work, where the culture and language are vastly different, than it is for, say, an American to move from Nevada to New York.

The other (more relevant to this post) reason Krugman noted is that the EU does not have a federal fiscal union to help mediate severe economic imbalances, such as the imbalances the EU is suffering from today. In the US, when states like Nevada and Florida imploded from the housing collapse, the federal govt was still there to pay for things like entitlements, social safety net programs, unemployment insurance, and even stimulus. In the EU, on the other hand, there’s no fiscal union, so nation states like Spain and Italy, suffering from similar housing collapses, are on their own when it comes to funding their social safety nets. This is severely straining their budgets, forcing them to contract, which only further depresses their economies, causing more unemployment and, in turn, higher safety net costs (and the vicious cycle just goes on and on, with no end in sight). The EU as a whole could easily handle the budgetary problems that the financial crisis has brought about, but the EU as independent fiscal entities is proving that it cannot.

So, getting back to the US, I was curious to see which states receive the most in federal transfers, and from which states those transfers are taken. I found this chart from the economist:

The states in red are net “debtors” — i.e, they receive more in federal funds than they pay in federal taxes. The states in blue are the creditors — they pay more in taxes than they receive in funds. The darker the color, the more extreme the deficit/surplus (in terms of the state’s GDP). So for example, NY, NJ and Minnesota are big creditors, while Mississippi, West Virginia, and New Mexico are big debtors.

All this “red” and “blue”-ness got me thinking about political parties and election results. Here’s the electoral chart from the 2008 presidential election (via npr)

Notice there’s a bit of correlation between the red and blue election results, and the red and blue fiscal positions. In fact, of the 22 states that leaned republican, only 4 are net creditors: Texas, Nebraska, Arkansas, and Georgia (and they’re all the lightest of blue, so just barely in surplus). On the contrary, of the 28 states that voted democratic, 17 are creditors.

Oh, and Florida? A debtor state (tho it did go for Obama in 2008).

So Governor Scott claims that Floridians simply cannot afford the new medicaid provisions under Obamacare, and for his sake, he’s probably right. Because the fact is, over the last 20 years the people of Florida have never been able to afford their entitlement programs.

I suppose you could draw your own conclusions about the correlation here, but it seems like those states that express the most fiery contempt for our overly large and imposing federal union, so happen to be the ones that benefit the most from it.

Fear and gay marriage

February 24, 2012

From the LA Times: Maryland Republican: Meeting gay couples left me ‘changed person’

A chance shake-up of Maryland House of Delegates seating assignments brought Republican Wade Kach face to face with gay couples who had come to make the case for a gay marriage law, and might have proved decisive in its final passage through the state’s General Assembly on Thursday.

Kach, who had previously backed attempts to define marriage as between one man and one woman, found a space right next to the witness table.

“I saw with so many of the gay couples, they were so devoted to another. I saw so much love,” he said. “When this hearing was over, I was a changed person in regard to this issue. I felt that I understood what same sex couples were looking for.”

A week later, Kach voted for the gay marriage bill on the floor of the House of Delegates, one of only two Republicans to do so. Their support proved vital, as the bill squeaked through the 141-member chamber on a 72–67 vote.

If only we could get more conservatives to sit down with gay couples, have a conversation, and realize there’s nothing to be afraid of. Because I believe at the core of every anti-gay-marriage argument, is fear.

Of course, most people would reject that accusation. But I don’t see any way around it.

If they say they “have nothing against gay people”, then I ask why they feel the need to control their behavior, when that behavior has no tangible effect on anyone whatsoever?

If it’s that they’re “protecting the sanctity of marriage”, then I ask what they are protecting it from? “Protecting” it implies there’s somebody out there attacking it, which implies that those “attackers” ought to be feared and stopped.

Or if it’s just that they’re worried about the country’s moral values, then what makes a values system that embraces married gay couples so threatening? Why would such a moral code be a problem for anyone? If it’s a problem at all, then the problem must be gay couples, who must represent some sort of moral disease, a disease that decays our values and thus should be feared and expunged (which gets me back to fear again).

Fear is a powerful and influential emotion, causing people to do and say very irrational things. But there’s no real threat, and we all have the conscious rational capacity to take a moment and realize that our instinctual reaction to people who aren’t like us doesn’t have to be our conscious reaction. That just because they don’t look like us or act like us doesn’t necessarily make them a threat. That just because they don’t think like we do doesn’t make them wrong.

We humans are a widely varying breed. At the lines that divide us, there is often fear, suspicion, and conflict. But we as a species have the conscious ability to overcome our instincts. We have the uniquely-human capacity to communicate with each other using precise terms and intellectual clarity. We’re not grunting beasts anymore. Perhaps one day we all can find solidarity in that.

Lying doesn’t matter

January 2, 2012

Cantor refuses to admit Reagan raised taxes

An excerpt from the 60 Minutes interview between Lesley Stahl and Eric Cantor, shortly after Cantor remarked that he’s willing to cooperate with democrats, but unwilling to compromise his principles:

Stahl: But your idol … was Ronald Reagan, and he compromised.
Cantor: But he never compromised his principles.
Stahl: Well, he raised taxes, and it was one of his principles not to raise taxes.
Cantor: Well, he also cut taxes.
Stahl: But he did compromise.
Cantor: Well, but –
(Cantor’s press secretary, from off camera): That’s not true, and I don’t want to let that stand.

I’m not sure which statement Cantor’s press secretary was challenging, but nothing there is factually untrue. Reagan did cut taxes significantly when he took office; but subsequently he raised them, across all income brackets, several times. Even if you want to argue semantics about the word “compromise”, cue the clip of Reagan speaking to the nation from the Oval Office after signing a tax-hike bill in 1982: “Make no mistake about it, this whole package is a compromise.”

So Cantor’s press secretary is either (a) misinformed about (relatively recent) history, or (b) is lying.

I’m going to give him the benefit of the doubt, and assume it’s (b), he’s lying (for it would take a truly astonishing amount of ignorance to have risen so high in the world of politics — as to become a sitting congressman’s press secretary — and yet still be totally unaware that Reagan in fact raised taxes 12 times during his presidency).

So he’s lying, simply put. And not about complicated stuff like climate change or economic policy, where it’s very easy to sneak in an un-truth, but about easily verifiable facts, like which legislation Reagan signed into law (they keep records of such things).

It makes you wonder: why would he do it? Why make such an obvious lie, on national television no less? Why expose yourself as a disingenuous fraud?

Here’s the reason: because lying works.

Yes, it would be easy to validate his lie, but how many people are going to do that? And if the audience wants to be lied to, if they want their pre-conceived notion of reality confirmed, then they will accept the lie with satisfaction, both intellectually and emotionally. In fact, depending on how emotionally invested they are, they might actively resist anyone who tries to reveal the actual truth of the matter. The truth would have such an emotionally destabilizing effect on them, that their mind and body reflexively resists it. These are the hapless ignoramuses of the world. They are not wantonly ignorant; they are helplessly so. Their emotional tranquility depends on it. We humans are instinctive animals, governed largely by our subconscious emotional lizard brain. To override our emotional instincts requires an exceptional amount of intellectual effort — an effort that most humans, unfortunately, do not have the capacity to summon. We fancy ourselves as rational beings, but for the most part we are slaves to our subconscious. All we really seem to be good at is rationalizing our irrational feelings. Go figure.

So in this case, the easier thing to do here, rather than try to precariously tip-toe around these inconvenient facts — facts that contradict the revisionist image of Reagan that modern republicans try to paint — is to just lie about them. Step right up and lie flat out, bald faced and all.

Dick Cheney once (in)famously quipped, “Reagan proved that deficits don’t matter.” At some point, some idiot self-satisfied overconfident republican is going to let slip: “The modern-day republican party has proven, without a doubt, that lying doesn’t matter.”

Given the abundance of un-truths circulating Washington these days, it appears that more and more politicians have figured this out.

I present you two charts on income inequality in the United States.

The first suggests that income inequality between 1994 and 2010 hasn’t changed at all. The chart presents the “Gini Coefficient”: a measure of income inequality. The data comes from a US Census survey of households.

In another post on the same site, it contends that the appearance of income inequality is created by the way people are grouping themselves into households (or something like that… I couldn’t really follow their point).

With a near rock-steady level of income inequality among individual income earners over time, it is only possible for income inequality to rise among families and households if the most successful income earners group themselves into families and households and if the least successful income earners likewise group themselves together into families and households as well.

If people with very high income earning potential join together to form families and households, and increasingly do so over time, perhaps because such people might have things in common that make forming themselves into families and households an attractive proposition, then income inequality among families and households will increase.

The same holds true for the opposite end of the income earning spectrum. If people with really low income earning potential join together to form families and households, or perhaps if they choose to split apart, and increasingly do so over time, then the resulting low income family and household will also make income inequality among families and households rise, even though there has been no real change in the amount of actual income inequality among individuals.

That last paragraph really stumps me. Apparently, whether low-income earners form households together or split apart, either way this results in increasing income inequality. Yet, according to the first paragraph, the illusion of inequality is merely due to the way we group together into households.

Perhaps I’m just too dense to “get it”. Either that, or this website is trying to coax bullshit down my throat, like trying to force a dog to swallow its medicine. You decide.

Fortunately, there’s a second chart, from the CBO (via Krugman), based on actual tax returns, which I can understand more readily:

…and a pretty easy to understand summary:

CBO finds that, between 1979 and 2007, income grew by:

  • 275 percent for the top 1 percent of households,
  • 65 percent for the next 19 percent,
  • Just under 40 percent for the next 60 percent, and
  • 18 percent for the bottom 20 percent.

So, according to tax data, income in the top 1% grew by 275% over the last 30 years, while the bottom 99% improved by an average of about 40%. But according to the first chart, based on US Census surveys, income inequality hasn’t changed at all. Which one feels like a more accurate depiction of reality to you?

I guess my point is that anyone can get you to believe almost anything, and have some sort of data or chart or fancy-sounding argument to back up their claims. But that doesn’t mean they’re giving you very accurate or useful information.

Unfortunately, the ideologues are out there in droves, deliberately spreading mis-information to anyone who will give them a perch, trying to convince you that black is white, up is down, the earth is flat, or whatever else suits their particular bias.

Peter Schiff – In Defense of the 1%

Peter Schiff recently visited OWS, in an effort to “understand what was motivating these protesters and try to educate them about what caused the financial crisis.” Schiff is an Austrian brand economist who strongly believes the roots of the crisis are found in big govt. But his argument tends to fall apart at the seams, when placed under close scrutiny.

(The protesters) might shout, “the banks have taken over the regulatory agencies, so we need more regulations!” Obviously, this is paradoxical. If they’re blaming government for causing this problem, why would they suggest more government as the solution?

This deductive logic seems to make perfect sense on the surface, but pragmatically it is useless. The German govt was taken over by Nazis. This doesn’t make govt, in and of itself, wrong or ineffective or inevitably susceptible to corruption to the point of being inappropriate for society. The solution post-WW2 wasn’t to create a Germany without a govt. The solution was to replace the Nazi regime with a new govt. Similarly in today’s world, it is indeed true that poor regulations delivered us to this economic debacle. But that doesn’t mean we dismantle or just give up on them. Instead, we replace them with new regulations, ones designed to prevent the general types of malfeasance that caused the crisis.

The vast majority of protesters I met did believe in capitalism – they’re just tired of being screwed over by crony capitalism. Noted school-choice activist Michael Strong calls it “crapitalism,” and that’s what it is. It’s a rotten deal for everyone, and they know it.

On this point, I think we all can (and should) agree.

The problem is that many of these people are under the mistaken impression that Wall Street banks are to blame for this state of affairs. That’s like blaming the dogs for getting into the trashcan. Sure, it’s bad behavior, but the ultimate responsibility lies with the authority figures – in this case, Washington.

This analogy is clever, but it is false and misleading. First, Wall Street is operated by humans, not dogs. We can and should hold them accountable for their bad behavior. Second, Schiff assigns “ultimate responsibility with the authority figures”. Schiff intends to make the point that govt itself is the problem. However, the analogy actually implies that govt needs to restrain misbehaving Wall Street types, lest they run wild due to their inherent impulsive reckless greed. The dog analogy suggests the owner should leash his dog to prevent it from tearing into the trash. Extending it this way, it suggest that Wall Street as well must be “leashed” — by proper regulations decreed by the authority figures. However, Schiff derided regulations in the previous paragraph. So his message here is a bit muddled and inconsistent.

And while wealthy New Yorkers have historically made their living providing essential financial services to the global economy, Washington has always made its living one way: at our expense.

I think it would be hard to convince most people that $600 trillion in credit-default swaps and interest-rate swaps and other financial derivatives currently hanging over the global economy are the bi-product of “essential services”. Meanwhile, govt provides services like school systems, paved roads, police and fire, which most people consider worthwhile. Schiff’s characterizations here are unreasonable and ignorant representations of reality.

I have trouble sympathizing with people calling themselves the “99%”, implying they stand in opposition to wealth no matter how it’s earned.

This is a manipulative and incorrect and flat out ridiculous implication of the “99%” and what they stand for. The 99% are not opposed to wealth. Totally absurd rhetoric from Schiff here.

I own a brokerage firm, but I didn’t receive any bailout money. In fact, I have to work twice as hard to compete with bigger financial firms that are propped up by the US government. The least I deserve is the ability to keep what I earn.

No bailout money? Good. You have to work twice as hard as govt-backed firms? This is bad. It’s part of the problem, and we should work together to fix it. The least you deserve? You don’t “deserve” anything, Peter Schiff. No one does. Remove “deserve” from all your arguments, because it’s entirely too subjective a term for rational debate.

The other tool the government didn’t have to use against us back then was the Federal Reserve. Even if we drastically reduce taxes, the Fed might decide to do what it has been doing: printing money to finance government profligacy. This acts as a secret tax on everyone with a bank account, and is critical in transferring wealth from hardworking Americans to politically connected elites.

Inflation is not a “secret tax”. Calling it such is just a manipulative technique to get people to think of it as some underhanded govt conspiracy to take your money. Nor is it “critical in transferring wealth from hardworking Americans to politically connected elites.” Inflation in and of itself negatively affects creditors — i.e. people with lots of money (i.e. the rich “politically connected elites”). On the flip side, inflation positively affects debtors — i.e. people struggling to make ends meet (i.e the bulk of “hardworking Americans”).

One common refrain I heard at the protests was that our problems result from the rich not paying enough taxes. Most feel that economy was better when marginal tax rates were higher, and that lower rates are a cause of financial decline. Forget about the faulty logic of this assumption, it ignores two key points. First, while it’s true that marginal tax rates were much higher after World War II, the tax code also used to contain many allowances and exceptions, such that very few people actually paid the nominal rate. Second, prior to 1913, the rich paid no income taxes at all; yet, lower- and middle-class living standards rose much faster in the 19th century than in the 20th!

A few misleading statements here. First, the tax code still contains many allowances and exceptions, even as the nominal rates have fallen significantly in the last 30 years. Due to these allowances and exceptions, many huge corporations pay 0% in taxes, and the top 400 earners in America pay an effective rate of 17%. I pay about 28% (and I’m nowhere near the incomes of the top 400). Second, Schiff has absolutely zero evidence to support his claim that “living standards rose much faster in the 19th century than in the 20th”. It’s a baseless statement, without context. Which standards, exactly? At the start of the 19th century, America was a mostly agrarian society with some industry. At the end, we were pretty much the same. At the end of the 20th century, however, we had cars, planes, cell phones, laptop computers, internet, and then some. All of these devices drastically improved the living standards of nearly every American. And they’re all 20th century inventions. So what, exactly, is Schiff talking about? Let’s just write this off as pointless nonsense. And even if he did have some obscure statistic, it’s an ideological leap to think that tax rates had anything to do with it.

Overall, I think there was a real lack of understanding of basic economic principles among the Occupiers. Protesters thought that the rich owed a duty to share their wealth with society. However, they failed to see that in true capitalism, the rich can only acquire their wealth by serving others. No one succeeds in a vacuum. Of course, the idea that Occupy Wall Street protesters have a right to share directly in the private profits earned by others is immoral.

True, no one succeeds in a vacuum. And the “others” that Schiff mentions, acquire the wealth that they eventually transfer to the rich, by serving the rich. We are all in service to each other. That’s a basic principle of an economy. Perhaps Schiff understands this, but he puts greater moral emphasis on the flow of “service” from the rich to the “others”, and on the flow of wealth from the “others” to the rich. This is merely his subjective ideological opinion. He has a right to that opinion, but it doesn’t make it an economic or moral principle (no matter how many times he states it so matter-of-factly using terms like “of course”). The basic economic principle that allows the wealthy to become wealthy is that they charge more for their services than what they’re worth, while the “others” are paid less for their services than what they’re worth. This is economic fact. Does it “deserve” to be this way? No (as I said before, nothing’s “deserved”). But it is this way, and economic advancement works well with this type of asymmetry (i.e. “incentives”). Most people are OK with that — so long as it doesn’t feel like the elites are squeezing the life out of the working class (which, for many people today, it does).

Consider the late Steve Jobs…

I’ll just stop right there. I think it’s fair to say, nobody at OWS has a problem with Steve Jobs. Steve Jobs created his wealth by creating wealth for others. Every reasonably minded person in the world should have no problem with someone getting rich this way. Steve Jobs did not work on Wall Street. It’s not “Occupy Cupertino”. Wall Street created its wealth by peddling financial derivatives that turned the investment world into a casino — one where the odds are heavily tilted in Wall Street’s favor. No iPhones were built thanks to a derivative. The only things derivatives produce are fees for Wall Street banks and big paydays for hedge funds who gamble right.

I’m calling for these protesters to educate themselves on the causes of the current financial decline and not to waste their time attacking the wrong target. They have every right to be angry, but also an obligation to be part of the solution. Yes, I am the 1% – but I’ve earned every penny. Instead of trying to take my wealth away, I hope they learn from my example.

It’s impossible for them all to “learn from his example”, because it is impossible for them all to become wealthy like Schiff. As I mentioned before, it’s a basic economic fact that in order for one to acquire monetary wealth, symmetric economic forces must deprive wealth from someone else. We can’t all be CEO’s for brokerage firms. Somebody’s got to take out Schiff’s garbage and make sure the dogs don’t tear into it. And those people will most likely be paid less than their service is worth, such that Schiff can become rich.

Follow

Get every new post delivered to your Inbox.