Saturday, October 30, 2010

Book: Investing Revolutionaries

I recently finished a book mostly themed around stock investing. It is more of an introductory book on why you shouldn't time the market and should stick to broad index funds, so if you have read dozens of investing books like I have, you probably won't get anything new out of it. But overall the book is a decent read. However, in one of the intro chapters, there was some interesting economic insights and I feel I should share some of it:

[Edward C.] Prescott [a 2004 Noble prize winner] visited with us on The Investing Revolution in 2007 to discuss the topic. Here’s a startling fact: Based on labor market statistics from the Organisation for Economic Co-operation and Development (OECD), American workers aged 15 to 64 work 50% more than French workers. Comparisons between Americans and Germans or Italians are similar. What’s going on here? What can possibly account for these large differences in the hours people work? It turns out that the answer is not related to cultural differences or institutional factors like unemployment benefits. Rather, “marginal tax rates explain virtually all of this difference,” says Prescott. He goes on to say, “I’ve made this point about tax rates before, but it bears repeating because it reflects a fundamental economic insight that gets to the heart of policymaking: People respond to incentives. You don’t make economic policy for nations; you make it for people. And it’s the responses of those people, when aggregated, that give us those data that we all love to analyze.

In fact, the current marginal income tax rate in the United States shown in Figure 1-1 rewards dual-income households more than it did in the 1970s when the average tax rate doubled when a spouse joined the workforce. Now that more people are working, there is a greater need for labor to do some of the things people often don’t have time to do for themselves—like provide child care, prepare meals, clean the house, and run errands. Prescott goes on to say, “The bottom line is that a thorough analysis of historical data in the United States and Europe indicates that, given similar incentives, people make similar choices about labor and leisure. Free European workers from their tax bondage and you will see an increase in gross domestic product. The same holds true for Americans and Europeans who live and work in America.”
When I first came to this country in the late 1970s, a sort of ethos had been set by John F. Kennedy, who had said earlier that if you’re young, if you’re idealistic, and if you care, join the Peace Corps. Become a public servant. So the idea was that if you work for yourself or if you’re an entrepreneur or an investor, well, you’re kind of a greedy, selfish guy, but if you go work for the Department of Education, you’re a noble person putting the public good ahead of your own.

“Reagan challenged all that, and he said, it’s not the public servant—who would be called, by the way, the bureaucrat—but rather the entrepreneur who is the embodiment of the American dream. And so Reagan was pushing for a cultural shift. And I think we’ve seen that. We’ve seen a cultural shift in America today, so more parents today would probably like their kids to be like Bill Gates rather than, say, Bill Clinton. And that’s going beyond politics. So when I look back at Reaganism, most people would focus on the Cold War and so on, but I think Reagan also produced
an economic and a sort of cultural shift in the United States.”

And politics takes advantage of that, the prejudice against the rich guy, the successful guy, the entrepreneur. The basic idea is that they must be succeeding at the expense of everybody or they must be succeeding by finagling their way to success, and I think ultimately entrepreneurs are in some ways always on the defensive against this kind of thing.”

I keep hearing people say, ‘The rich are getting richer and the poor are getting poorer.’ But when I actually looked at American living standards over the past generation—let’s say from World War II, or even from 1980—what you see is that the rich get richer, and the poor also get richer, although not at the same pace. So, yes, inequality does rise, but it’s rising because more people from the middle class are moving up.

Saturday, October 23, 2010

An academically themed article about the Tea Party. An interesting read for those who have an attention span longer than a garden slug's.

Russia, The Capitalists of the World.

Over the summer Russia moved to eliminate capital gains taxes starting in 2011. Not only are they eliminating capital gains taxes, but they've had a flat tax of 13% since 2001! It begs the question, how in the hell can a former communist country become more capitalistic than America? Here, all the populist rhetoric being spewed by the politicians is class warfare pieces about taxing the 'rich.' And of course somehow you are considered rich if you earn over $200k, even though that means you are likely to live in a high cost metropolitan area.

But I did not see one news article published anywhere on an American news media website about this development in Russia. I read a lot of news articles and I visit several sites each day, so I find this a little strange. Is the liberal media trying to censor pro-capitalist ideas?

Wednesday, October 20, 2010

Higher Taxes Do Matter

Commenting on Mankiw's post, an author wrote "Why Higher Taxes Won't Backfire," and I commented:

Yes, you are right that people who receive fixed paychecks probably will not put in any more or less hours based on the tax rates. But I do not think you can generalize this to all lines of work. People do think at the margin and if something becomes more expensive, you do less of it. If a business owner already works a lot to promote his business, he will have to decide whether it is worth putting in additional hours if those additional hours are less compensating. He already has the incentive not to put in the extra hours because he may want more leisure to spend with his family, or weekends etc.. But then he is going to reduce the financial incentive on top of that? I think the conclusion is clear.

Or what about the person who does currently have a fixed salary and has a business idea. At the 25% tax bracket, perhaps the math works out so that he can earn a profit on the initial earnings. But perhaps at the 39%+3.8%~43%, it no longer works or isn't worth the additional effort. I am in the 50% (all taxes included) bracket and so it not worth it to me to do consulting on the side for my line of work, but which I would do if the taxes were about half. People who aren't affected by high taxes can make all the claims they want, but only those actually affected by them know the real story.

Social Security Reductions

So of course the benefits reduction topic is hot again. Today there is an article that mentions benefit reduction in Europe and is compared to the USA social security model.

I tried to post this comment and a few variations, but for whatever reason, the administrator of this article kept removing my comment. It is not extreme, so I have no idea why it kept getting removed. Anyway, my 2 cents:

I am all for ending social security, but end it sooner than later. It is a depression era relic where the original people who received benefits never paid into the system. It garnered votes for the election, but it didn't make much long-term financial sense.

If benefits are going to be reduced, reduce them now for EVERYBODY, so that everybody has to have skin in the game for the decision. Politicians always cut benefits for later generations, because it is easy to disenfranchise a populous which does understand the true importance of voting, and who discount the importance of their entitlements because they won't be received for 30 years, and so don't bother. But this is dishonorable. Many older people support this decision because "they've paid into the system for all these years," and lets face it, what do they care, they will get all of their benefits at the expense of the young. But, what do you think we are going to have to do? The difference is that you will get all your benefits and the rest of us will be left holding the bag. So if benefits need to be cut, then EVERYBODY should have to have their benefits cut at the same time. None of this repetitive 'Oh, let's raise the retirement age 4 years for those retiring twenty years from now.'

I have also encountered some debates, such as commentary on Businessweek, similar to this article that says, "Hey, if you've saved too much and you have a nest egg, then you don't need social security." Well obviously then the only reason why they won't 'need' it is because they have made responsible decisions throughout their life. If one is cut out of the benefits, then he or she has paid more taxes than 'advertised' over a lifetime and ends up subsidizing those who chose to live a life of debt. If something like this gets passed, what do you think is going to happen? A phrase learned in Economics 101, but which people always seem to forget is that people respond to incentives. People will stop saving. I know I would. I live below my means so that I can pay down my student loan debt and max out my 401k and Roth IRA. But if the incentives are skewed so that I get punished for saving, you can bet your ass that I am going to spend that money on a Porsche instead.

Probably the main problem in this country is that responsibility is not rewarded, but irresponsibility is - repeatedly.

Sunday, October 17, 2010

Tea Party: Karma

There is a good article on WSJ about how the Tea Party represents "Karma." This is a good description of one of the main goals of the movement, because in essence, you reap what you sow -or at least that is what many of us believe. Liberalism over the last half century has damaged this precept. As Milton Friedman stated in his "Free to Choose" book, the new ideaology in this country (new for our country's history, anyway) has changed to a policy of having all citizens "finish the race at the same time." In the article, one survey question asks whether everybody should end up with the same amount of wealth. Liberals were evenly divided on the issue, but tea party libertarians and conservates strongly rejected the idea. This is definitely a concept that bothers us libertarians immensely. Successful people are taxed heavily on the top and subsidized on the bottom, reducing the incentive to work and invest more and encouraging more people to accept handouts. My observation is that Democrats do not want to create opportunities for the middle class to become 'rich' but to make it difficult for anyone to become 'rich.' They want the entire country to be "middle class." The new tax increases that Obama wants to push though on high earners will only strengthen this socialistic principle.

What they obviously do not understand is that reward is what drives people to innovate and pursue careers that are difficult!

Saturday, October 16, 2010

Social Security COLAs

Today's first article is about the prospect that the Democrats may attempt to buy some votes by providing $250 paychecks to Social Security recipients. A cheap election year tactic, no less. This is a classic case of the money illusion, where people look at the number of zeros on the bill as opposed to how many loaves of bread that bill can actually buy. So the last time that the economy had an oil supply shock, the CPI surged ahead, but then the price of oil subsided as the world entered into a recessionary period. So inflation has been flat since then and the price of milk, bread, and many other common items has stayed the same. Social Security recipients are used to receiving yearly COLAS, or cost of living adjustments. So, for the past two years, since the CPI has not increased, they have not received raises. Many are very angry about this, even though they are not worse off. People like to see their incomes going up each year, but they do not factor in how much that income can actually buy them. If inflation is 5%, but a worker gets a 3% raise, he is happy, even though he is worse off. If inflation is zero and his raise is zero, he is not happy, even though his state has stayed the same. Similarly if deflation occurs, he still wants to get a raise. This is one of the reasons why many economists think that the economy should have a slight amount of inflation, because it "greases the wheels." That is an actual quote, either from Bernanke's or Mankiw's text (I don't remember which).

So even though Social Security recipients are not worse off than they were the last time they received a COLA, the Democrats want to spend more taxpayer money to buy votes. That's $14,500,000,000, by the way. That may be the biggest campaign expenditure of all time - with our money.

Saturday, October 2, 2010

Obama Won't 'Give' Money to the 'Rich'

This is kind of a continuation of Sept 12th article, as it follows the same theme. On Sept 20th, referring to keeping the current tax rates the same for everybody, Obama came out and said, "We can’t give $700 billion dollars away to America’s wealthiest people." Obama's main campaign platform throughout his entire presidency has been to bash anyone who has been ambitious and successful, because it is apparently unfair if someone works 60 hours a week, started a company, or went to college for 6-8 years and gets paid accordingly.

Obama is so pompous with that statement, because we are talking about these earners' own money. Nobody is giving them anything if they are the ones that earned it! Hey, guess what, I gave $10,000 to Obama today because I didn't go over to the White House and steal it from him! Am I generous or what? Obama is so disconnected from the concept of capitalism that it is truly frightening.

Who are generally the people who want to raise taxes on the 'rich?' Generally it is people who won't be affected by the impact of a tax increase. Let me explain. So, as I have discussed in a previous post, there are two elements to 'richness:' stock and flow. Your income is what gives you the potential to become rich if you do the right things with it. Your current asset base is what makes you rich. If you make $100k a year and spend every dime of it each year and have no assets, you are not rich! If you have a salary of $100,000 and have $50 billion in assets like Warren Buffet does, then you are rich!

So in Obama's taxing-the-rich snare, anyone with a salary over $200k is labeled rich because taxes are applied to income earned that year. The money for anyone who has millions of dollars already stowed away is not affected. It is clear why someone who is not rich and will never make more than $40k a year would want to raise taxes on high-income earners. Obviously, jealousy, envy and a lack of ever being affected play a role here. But it may not be so clear why a lot of rich people want to raise taxes. A lot of people think that many politicians, actors, and super-rich billionaires (like Warren Buffett) are altruistic for wanting to raise taxes on their own income levels.

But then there's the truth: There are two obvious reasons for why someone who already has a large asset base would want to raise taxes on high-income earners. (1) The first is that it would be harder for other people to attain their level of wealth. This makes them comparatively richer because there will be less people joining the club and less dollars fighting for their luxury goods like summer homes in the Hamptons. (2) Since the money they already have that is stowed away is not affected, what do they care? They already have enough money to live off comfortably for the rest of their lives.

If these people were so altruistic, they would be giving most of their money away that they already have while they were still alive. But instead they generally wait until they are dead before a pledge actually becomes a check.