Yet another fleecing: Social Security.
Issues:
1. Social Security taxation rate continues to rise over time. Social security was invoked in 1939. It was set at 2% of income.
Since that time, here are the increases: 1939: 2.0%, 1950: 3.0%, 1956: 4.0%, 2007: 6.2%
Note: 6.2% now also gets contributed by employer for total of 12.4%. Excludes Medicare, Medicaid, etc. Just Social Security.
Observation: The SS tax rate has tripled since SS was initiated in 1939.
2. Cap Increase. In 1951, earnings subjected to SS Tax was $3,600. After the first $3,600 of income, SS tax was no longer applied. Column C, labeled [3] shows the Government’s own index factor to adjust historical earnings to a “Present Value”. For 1951, this factor is a 13.2 multiplier. So, $3,600 (the max income subject to SS tax in 1951 to 1954), in 2006 dollars is $47,520. However, if you scroll down to 2006, that maximum is now $94,200.
This caught my attention. So I added column [1], which shows the year-over-year increase in the “cap”, or the max income subject to SS taxes. A couple items to note in Column [1]
- Prior to 1972, there are a lot of years where the cap stayed constant. In fact, of the 22 years of 1951 to 1971, only 4 years saw an increase in the cap. In the 34 years between 1972 and 2006, the cap increased by 264.1% (even if we treat it as “simple interest”, which it is NOT….it is more similar to “compound interest”), which is an average of 7.77% annually. In the 22 years of 1951 to 1971, it went up a total of 4 times for a total of 86.7%, which over that 22 years averages out to 3.94% per year.
Observation: In the past 36 years since 1972, the “rate of increase” in the cap has doubled.
3. Comparison of SSA benefit versus privately investing those same funds. As a thought experiment, I took a person born in 1951, and assumed he started working at age 18 in 1969, and continued working to age 62 for a retirement in 2013. The total contribution of he and his employer throughout those 44 years was $375,087 if those funds had been placed in a modest savings account earning 3% interest compounded once annually. Then, I used the SSA’s own tabular calculator to figure out what his benefit would be.
I will continue to work the problem as a 62-year-old retiree. Feel free to run the calculations for retirement at age 66, as the results are within 5% of this analysis. So, per Step 7, he would earn $1,276 per month in retirement. The average age of a US citizen as of 2004 is 77 years old (73.6 for men, 79.4 for women). Based on BLS data, it is likely men work more years than women historically, so if I were being realistic I would round the average down to 75 yrs or so. But, to avoid scrutiny I will call it 77.
Our worker collects $1,276 per month for 15 years, for a total of $230,364. But above we figured out his contribution was $375,087. So, where does the delta of $144,723 go???
Stated another way, this person would need to live to be 86.4 years old (12% longer than average) in order to re-coup the money he paid to the Government. As a closely related subject, Russian Roulette carries odds of 1 in 6, or 16.7%.
Observation: Individuals would have a minimum of 38% more money in their retirement if the funds were allowed to be invested in a private bank at 3% interest, instead of allowing the Government to manage this fund.
4. The dis-incentive to over-achieve in a Socialist environment. Then I started to wonder, if a person who earned twice as much (and, accordingly, paid in twice as much to SSA) would then be paid twice as much monthly in his/her retirement. The person in Ex 1 had total lifetime earnings of $1,063,718. See the table below, for a hypothetical person who had lifetime earnings of $2,840,305. Again this person was born in 1951, and retired at age 62 in 2013. The difference is, I sent him to college so he made 60% more than his Ex 1 comrade at age 22. Then I gave him an 8% (versus 6%) pay raise per year.
Then I used the SSA table to figure his benefit.
To summarize:
· Amount paid in by employee and employer with interest at 3%: $684,270 (Ex 1: $375,087). 1.83 times more than Ex 1.
· Monthly SSA payment: $1,588 (Ex 1: $1,280). 1.24 times more than Ex 1.
· So, basically, for every additional dollar you pay in to the account, you will receive 47.6 cents less of a payment, proportionally for that dollar.
· Also, this guy paid in $684,270. But the total benefit for age 62 to 77 is $230,364. Who gets the $453,906? This poor chap would have to be 98 years old to get his money back.
· To cheat the system, since they use the “top 35 years of earnings” in the calculation, this guy could actually quit working for 9 whole years, and still collect the same amount. What would that do to the growth of our economy? Is that Government’s objective or is it an unintended consequence?
Observation: Due to the graduated nature of this SSA tax, the Government dis-incentivizes achievement.
5. The “full retirement age” has increased from 65 to 67.
Tuesday, December 4, 2007
Tuesday, October 16, 2007
Atlas Shrugged
My favorite book celebrates it's 50th anniversary. A little about the book, from Wikipedia:
The theme of Atlas Shrugged is the role of the mind in man's existence and, consequently, presentation of the morality of rational self-interest.[1]
The main conflict of the book occurs as the "individuals of the mind" go on strike, refusing to contribute their inventions, art, business leadership, scientific research, or new ideas of any kind to the rest of the world. Society, they believe, hampers them by interfering with their work and underpays them by confiscating the profits and dignity they have rightfully earned. The peaceful cohesiveness of the world requires those individuals whose productive work comes from mental effort. But feeling they have no alternative, they eventually start disappearing from the communities of "looters" and "moochers" who bleed them dry. The strikers believe that they are crucial to a society that exploits them, and the near-total collapse of civilization triggered by their strike shows them to be correct.
Like the Greek Titan Atlas, individuals rationally and circumspectly seeking their own long-term happiness believe that they hold the world on their shoulders. The novel's title is an allusion to the Titan, discussing what might happen if those supporting the world suddenly decided to stop doing so. In the novel, the allusion comes during a conversation between two protagonists, Francisco d'Anconia and Hank Rearden, near the end of part two, chapter three, where Francisco tells Rearden that if he could suggest to Atlas that he do one thing, it would be to shrug.
In the world of Atlas Shrugged, society stagnated when independent productive achievers began to be socially demonized and even punished for their accomplishments, even though society had been far more healthy and prosperous by allowing, encouraging and rewarding self-reliance and individual achievement. Independence and personal happiness flourished to the extent that people were free, and achievement was rewarded to the extent that individual ownership of private property was strictly respected. The hero, John Galt, lives a life of laissez-faire capitalism as the only way to live consistent with his beliefs.
Atlas Shrugged is a political book. It portrays fascism, socialism, capitalism, democracy, and communism – any form of state intervention in society – as systemically and fatally flawed. However, Rand claimed that it is not a fundamentally political book, but that the politics portrayed in the novel are a result of her attempt to display her image of the ideal person and the individual mind's position and value in society.[citation needed]
Rand argues that independence and individual achievement enable society to survive and thrive, and should be embraced. But this requires a "rational" moral code. She argues that, over time, coerced self-sacrifice causes any society to self-destruct.
The theme of Atlas Shrugged is the role of the mind in man's existence and, consequently, presentation of the morality of rational self-interest.[1]
The main conflict of the book occurs as the "individuals of the mind" go on strike, refusing to contribute their inventions, art, business leadership, scientific research, or new ideas of any kind to the rest of the world. Society, they believe, hampers them by interfering with their work and underpays them by confiscating the profits and dignity they have rightfully earned. The peaceful cohesiveness of the world requires those individuals whose productive work comes from mental effort. But feeling they have no alternative, they eventually start disappearing from the communities of "looters" and "moochers" who bleed them dry. The strikers believe that they are crucial to a society that exploits them, and the near-total collapse of civilization triggered by their strike shows them to be correct.
Like the Greek Titan Atlas, individuals rationally and circumspectly seeking their own long-term happiness believe that they hold the world on their shoulders. The novel's title is an allusion to the Titan, discussing what might happen if those supporting the world suddenly decided to stop doing so. In the novel, the allusion comes during a conversation between two protagonists, Francisco d'Anconia and Hank Rearden, near the end of part two, chapter three, where Francisco tells Rearden that if he could suggest to Atlas that he do one thing, it would be to shrug.
In the world of Atlas Shrugged, society stagnated when independent productive achievers began to be socially demonized and even punished for their accomplishments, even though society had been far more healthy and prosperous by allowing, encouraging and rewarding self-reliance and individual achievement. Independence and personal happiness flourished to the extent that people were free, and achievement was rewarded to the extent that individual ownership of private property was strictly respected. The hero, John Galt, lives a life of laissez-faire capitalism as the only way to live consistent with his beliefs.
Atlas Shrugged is a political book. It portrays fascism, socialism, capitalism, democracy, and communism – any form of state intervention in society – as systemically and fatally flawed. However, Rand claimed that it is not a fundamentally political book, but that the politics portrayed in the novel are a result of her attempt to display her image of the ideal person and the individual mind's position and value in society.[citation needed]
Rand argues that independence and individual achievement enable society to survive and thrive, and should be embraced. But this requires a "rational" moral code. She argues that, over time, coerced self-sacrifice causes any society to self-destruct.
Tuesday, September 11, 2007
Housing Crash - Plankton Theory
From PIMCO.
Global Central Bank Focus
Paul McCulley March 2007 PIMCO
Watching the on-going meltdown in the sub-prime mortgage market, which is triggering a sharp tightening of underwriting standards to these dicey credits, I was reminded of prescient writings by two serious thinkers: Bill Gross and Hyman Minsky. Both narratives go back a long ways, with something that Bill wrote in August 19801 – 27 years ago! – particularly poignant:
“The Plankton Theory, like life itself, begins and ends in the ocean. Plankton, of course, are almost microscopic organisms that serve as food for higher life forms. Without plankton almost every fish and mammal in the sea could not survive, since most species depend upon other fish for their existence and plankton are the initial building blocks of the entire process. Logic would suggest, therefore, that in attempting to forecast the well being of the Great White Whale, Jaws, or even Jaws II, that one of the factors to consider would be the status and future outlook of the plankton. That, in one hundred words or less, is the Plankton Theory.
Now, what possible significance could this have for the investment world? Plenty. Take for example, the area of real estate, especially that of single family housing. We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?
One way to measure might be via the Plankton Theory. In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can’t pull it off – either through an inability to come up with a down payment, or to service the monthly mortgage – then the ‘plankton’ would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he’ll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton. Without their presence and financial vitality, the market’s not going to repeat the experience of the past 10 years.”
Bill’s call was a good one, as displayed in Chart 1: home price appreciation tumbled in the first half of the 1980s, as the homeownership rate fell: the Plankton Theory at work! Draconian Fed tightening at the beginning of the 1980s had something to do with it, too, of course, as the Plankton were priced out of the market by high interest rates, independent of the availability – or underwriting standards – for home mortgage loans.
But the theory held: it’s the first-time buyer, stretching to buy, that is the life’s blood of vibrant property markets. And intrinsically, there is nothing wrong with a young family stretching to buy that first house; most all of us did, as did our parents (many with the aid of the GI Bill). Optimism about rising incomes and making lives better for our children is the cornerstone of the American Dream.
But the human condition is inherently given to the Mae West Doctrine that if a little of something is good, more is better, and way too much is just about right. Such is the case in capitalist finance, as brilliantly diagnosed by both John Maynard Keynes and his disciple, Hyman Minsky. I first introduced Minsky to these pages way back in January 20012, just as the corporate sector was sinking into recession, taking the aggregate economy with it, and the Fed was initiating a massive easing cycle.
Minsky, who passed away in 1996, was the father of the Financial Instability Hypothesis, providing a framework for distinguishing between stabilizing and destabilizing capitalist debt structures. He first articulated the Hypothesis in 1974, and summarized it beautifully in his own hand in 1992:
“Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified. Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on ‘income account’ on their liabilities, even as they cannot repay the principal out of income cash flows. Such units need to ‘roll over’ their liabilities – issue new debt to meet commitments on maturing debt. For Ponzi units, the cash flows from operations are not sufficient to fill either the repayment of principal or the interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stocks lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes.
It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.
In particular, over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make positions by selling out positions. This is likely to lead to a collapse of asset values.”
Clearly, the explosion of exotic mortgages – sub-prime; interest only; pay-option, with negative amortization, et al – in recent years, as shown in Chart 2, have been textbook examples of Minsky’s speculative and Ponzi units3.
And as Bill Gross explained long ago, such mortgages have been the food of the Plankton, the first-time homeowner, driving the homeownership rate to record highs, as displayed back in Chart 1, while also fueling accelerating home price appreciation. But as Minsky had forewarned, eventually this game must come to an end, as Ponzi borrowers are forced to “make positions by selling out of positions,” frequently by stopping (or not even beginning!) monthly mortgage payments, the prelude to eventually default or dropping off the keys on the lenders’ doorstep.
That is happening. And true to form, Ponzi lenders are now recognizing their sins of irrational exuberance, repenting and promising to sin no more, dramatically tightening underwriting standards, at least back to Minsky’s Speculative Units – loans that may not be self-amortizing, but at least are underwritten on evidence that borrowers can pay the required interest, not just the teaser rate, but the fully-indexed rate on ARMs. From a microeconomic point of view, such a tightening of underwriting standards is a good thing, albeit belated. But from a macroeconomic point of view, it is a deflationary turn of events, as serial refinancers, riding the back of presumed perpetual home price appreciation, are trapped long and wrong.
And in this cycle, it’s not just the first-time homebuyer – God bless him and her! – that is trapped, but also the speculative Ponzi long: borrowers who weren’t covering a natural short – remember, you are born short a roof over your head, and must cover, either by renting or buying – but rather betting on a bigger fool to take them out (“make book”, in Minsky’s words). Thus, the supply of plankton is twice drained.
Which means that the bigger fish in the domestic and global economic sea are going to be living on leaner diets. It also means that any given level of central-bank enforced short-term policy rates will become ever more restrictive with the passage of time. That is nowhere more the case than in the United States, where mortgage originators’ orgy of Ponzi finance stifled the Fed’s ability to temper irrational exuberance in housing with hikes in the Fed funds rate.
More specifically, as long as lenders made loans available on virtually non-existent terms, the price didn’t really matter all that much to borrowers; after all, housing prices were going up so fast that a point or two either way on the mortgage rate didn’t really matter. The availability of credit trumped the price of credit. Such is always the case in manias.
It is also the case that once a speculative bubble bursts, reduced availability of credit will dominate the price of credit, even if markets and policy makers cut the price. The supply side of Ponzi credit is what matters, not the interest elasticity of demand.
Bottom Line
The ongoing meltdown in the sub-prime mortgage market would not matter, except for those directly involved, except that it marks the unraveling of Ponzi finance units that, on the margin, were the plankton of the bubbling property sea of recent years. As the bubble was forming, riding on first-time homebuyers with first-time access to credit on un-creditworthy terms, and first-time speculators riding the same with visions of bigger first-time fools to take them out, all looked well. But as Minsky warned, stability is ultimately destabilizing, as those who require perpetual asset price appreciation to make book are forced to sell to make book. Such is reality presently in the U.S. residential property market, which has flipped from a sellers’ market on the wings of buyers with exotic mortgages to a buyers’ market of only the creditworthy.
This state of affairs need not produce a U.S. recession. But it does unambiguously render any given stance of Fed policy more restrictive: a tightening of credit supply based on underwriting terms means that any given policy rate will elicit reduced effective demand for credit. And that’s the stuff of seriously easier monetary policy to come. Just as mortgage demand seemed inelastic to rising short rates when availability was riding relaxed terms, so too will demand seem inelastic to falling short rates when availability faces the headwind of restrictive terms.
It may be a while before the Fed accepts and recognizes this, waiting for these Minsky style debt-deflation dynamics to become evident in broader measures of the economy’s health, notably job creation. But make no mistake: A Minsky Meltdown in the most important asset in most Americans’ asset portfolio is not a minor matter. Bill Gross’ Plankton Theory ain’t just a theory, but a reality.
Once the Fed begins easing, it will be a long journey down for short rates.
Paul McCulley
Managing Director
February 28, 2007
Global Central Bank Focus
Paul McCulley March 2007 PIMCO
Watching the on-going meltdown in the sub-prime mortgage market, which is triggering a sharp tightening of underwriting standards to these dicey credits, I was reminded of prescient writings by two serious thinkers: Bill Gross and Hyman Minsky. Both narratives go back a long ways, with something that Bill wrote in August 19801 – 27 years ago! – particularly poignant:
“The Plankton Theory, like life itself, begins and ends in the ocean. Plankton, of course, are almost microscopic organisms that serve as food for higher life forms. Without plankton almost every fish and mammal in the sea could not survive, since most species depend upon other fish for their existence and plankton are the initial building blocks of the entire process. Logic would suggest, therefore, that in attempting to forecast the well being of the Great White Whale, Jaws, or even Jaws II, that one of the factors to consider would be the status and future outlook of the plankton. That, in one hundred words or less, is the Plankton Theory.
Now, what possible significance could this have for the investment world? Plenty. Take for example, the area of real estate, especially that of single family housing. We’re all familiar with the rapid escalation of home prices over the last 10 years. For most Americans, their homes have been the best and in many cases the only investment that they have made in their entire lives. Some have gone so far as to invest in several homes and have endured ‘negative carry’ on the cash flow in anticipation of leveraged capital gains a few years down the road. But where does it stop? Can housing continue to increase at twice the Consumer Price Index for the next 10 years?
One way to measure might be via the Plankton Theory. In the case of real estate, the plankton would be the first-time buyer (perhaps a young married couple) with a desire to own their own home but with very little capital to carry it off. When the time comes that they can’t pull it off – either through an inability to come up with a down payment, or to service the monthly mortgage – then the ‘plankton’ would disappear and the rapid escalation in housing prices would ease as well. For, unless the current homeowner has someone to sell his house to, he’ll be unable to afford the house with the view or that extra bedroom, and the process would continue into the echelons of Beverly Hills and Shaker Heights. In the end, the entire market would wither on the investment vine and home prices would stop increasing at the same rapid rate. So to gauge the health of the housing market, look first at the plankton. Without their presence and financial vitality, the market’s not going to repeat the experience of the past 10 years.”
Bill’s call was a good one, as displayed in Chart 1: home price appreciation tumbled in the first half of the 1980s, as the homeownership rate fell: the Plankton Theory at work! Draconian Fed tightening at the beginning of the 1980s had something to do with it, too, of course, as the Plankton were priced out of the market by high interest rates, independent of the availability – or underwriting standards – for home mortgage loans.
But the theory held: it’s the first-time buyer, stretching to buy, that is the life’s blood of vibrant property markets. And intrinsically, there is nothing wrong with a young family stretching to buy that first house; most all of us did, as did our parents (many with the aid of the GI Bill). Optimism about rising incomes and making lives better for our children is the cornerstone of the American Dream.
But the human condition is inherently given to the Mae West Doctrine that if a little of something is good, more is better, and way too much is just about right. Such is the case in capitalist finance, as brilliantly diagnosed by both John Maynard Keynes and his disciple, Hyman Minsky. I first introduced Minsky to these pages way back in January 20012, just as the corporate sector was sinking into recession, taking the aggregate economy with it, and the Fed was initiating a massive easing cycle.
Minsky, who passed away in 1996, was the father of the Financial Instability Hypothesis, providing a framework for distinguishing between stabilizing and destabilizing capitalist debt structures. He first articulated the Hypothesis in 1974, and summarized it beautifully in his own hand in 1992:
“Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified. Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on ‘income account’ on their liabilities, even as they cannot repay the principal out of income cash flows. Such units need to ‘roll over’ their liabilities – issue new debt to meet commitments on maturing debt. For Ponzi units, the cash flows from operations are not sufficient to fill either the repayment of principal or the interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stocks lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes.
It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.
In particular, over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make positions by selling out positions. This is likely to lead to a collapse of asset values.”
Clearly, the explosion of exotic mortgages – sub-prime; interest only; pay-option, with negative amortization, et al – in recent years, as shown in Chart 2, have been textbook examples of Minsky’s speculative and Ponzi units3.
And as Bill Gross explained long ago, such mortgages have been the food of the Plankton, the first-time homeowner, driving the homeownership rate to record highs, as displayed back in Chart 1, while also fueling accelerating home price appreciation. But as Minsky had forewarned, eventually this game must come to an end, as Ponzi borrowers are forced to “make positions by selling out of positions,” frequently by stopping (or not even beginning!) monthly mortgage payments, the prelude to eventually default or dropping off the keys on the lenders’ doorstep.
That is happening. And true to form, Ponzi lenders are now recognizing their sins of irrational exuberance, repenting and promising to sin no more, dramatically tightening underwriting standards, at least back to Minsky’s Speculative Units – loans that may not be self-amortizing, but at least are underwritten on evidence that borrowers can pay the required interest, not just the teaser rate, but the fully-indexed rate on ARMs. From a microeconomic point of view, such a tightening of underwriting standards is a good thing, albeit belated. But from a macroeconomic point of view, it is a deflationary turn of events, as serial refinancers, riding the back of presumed perpetual home price appreciation, are trapped long and wrong.
And in this cycle, it’s not just the first-time homebuyer – God bless him and her! – that is trapped, but also the speculative Ponzi long: borrowers who weren’t covering a natural short – remember, you are born short a roof over your head, and must cover, either by renting or buying – but rather betting on a bigger fool to take them out (“make book”, in Minsky’s words). Thus, the supply of plankton is twice drained.
Which means that the bigger fish in the domestic and global economic sea are going to be living on leaner diets. It also means that any given level of central-bank enforced short-term policy rates will become ever more restrictive with the passage of time. That is nowhere more the case than in the United States, where mortgage originators’ orgy of Ponzi finance stifled the Fed’s ability to temper irrational exuberance in housing with hikes in the Fed funds rate.
More specifically, as long as lenders made loans available on virtually non-existent terms, the price didn’t really matter all that much to borrowers; after all, housing prices were going up so fast that a point or two either way on the mortgage rate didn’t really matter. The availability of credit trumped the price of credit. Such is always the case in manias.
It is also the case that once a speculative bubble bursts, reduced availability of credit will dominate the price of credit, even if markets and policy makers cut the price. The supply side of Ponzi credit is what matters, not the interest elasticity of demand.
Bottom Line
The ongoing meltdown in the sub-prime mortgage market would not matter, except for those directly involved, except that it marks the unraveling of Ponzi finance units that, on the margin, were the plankton of the bubbling property sea of recent years. As the bubble was forming, riding on first-time homebuyers with first-time access to credit on un-creditworthy terms, and first-time speculators riding the same with visions of bigger first-time fools to take them out, all looked well. But as Minsky warned, stability is ultimately destabilizing, as those who require perpetual asset price appreciation to make book are forced to sell to make book. Such is reality presently in the U.S. residential property market, which has flipped from a sellers’ market on the wings of buyers with exotic mortgages to a buyers’ market of only the creditworthy.
This state of affairs need not produce a U.S. recession. But it does unambiguously render any given stance of Fed policy more restrictive: a tightening of credit supply based on underwriting terms means that any given policy rate will elicit reduced effective demand for credit. And that’s the stuff of seriously easier monetary policy to come. Just as mortgage demand seemed inelastic to rising short rates when availability was riding relaxed terms, so too will demand seem inelastic to falling short rates when availability faces the headwind of restrictive terms.
It may be a while before the Fed accepts and recognizes this, waiting for these Minsky style debt-deflation dynamics to become evident in broader measures of the economy’s health, notably job creation. But make no mistake: A Minsky Meltdown in the most important asset in most Americans’ asset portfolio is not a minor matter. Bill Gross’ Plankton Theory ain’t just a theory, but a reality.
Once the Fed begins easing, it will be a long journey down for short rates.
Paul McCulley
Managing Director
February 28, 2007
Light Rail Doesn't Work: CATO
Another interesting article from the CATO Institute, which goes counter to conventional wisdom. Food for thought.
Light Rail Doesn't Work
by Randal O'Toole
Randal O'Toole is a senior fellow with the Cato Institute and author of Great Rail Disasters: The Impact of Rail Transit on Urban Livability.
I have always loved trains, and if light-rail transit worked, I would be the first to support it.
So it is with some dismay that I review the sorry record of transit in Canadian and U.S. cities that have built light-rail lines. For the most part, light rail has increased congestion, harmed transit riders, and wasted taxpayers' money.
Even so, there seems to be a consensus among politicians of all stripes in Ottawa that light rail is necessary, and the only debate left is how to implement it.
But let's look at what light rail can and cannot do.
1. Light rail can spend lots of tax dollars.
Rail construction is extremely costly, so it is a great way for politicians to reward favoured contractors. Siemens, the company that is suing Ottawa over the cancelled north-south light-rail line, is obviously more interested in getting lucrative contracts than in improving your transportation network. If you are a taxpayer, hold onto your wallet: between cost overruns, high maintenance costs, and endless proposals for new rail lines, your costs will never end.
2. Light rail cannot get a lot of people out of their cars.
Studies show that transit riders care more about frequencies and speeds than about whether the vehicle they ride has rubber tires or steel wheels. Light-rail lines may boost ridership because transit agencies run the trains more frequently and (because they stop fewer times per kilometre) faster than buses. But, as the U.S. General Accountability Office has shown, transit agencies can run bus services as fast and as frequent as any light-rail line at a fraction of the cost of light rail.
3. Light rail can inconvenience transit riders.
While rail may improve service in one corridor, it is so expensive that it leads transit agencies to neglect service in the rest of the region. Many U.S. cities that built light-rail lines have seen total transit ridership decline because rail costs forced transit agencies to raise fares and reduce bus services.
4. Light rail increases congestion.
Most light-rail lines operate on streets for at least part of their length, and transit planners time traffic signals to favour trains over automobiles. The delays that result greatly exceed the benefit of getting a handful of people out of their cars.
A new light-rail line in Minneapolis so disrupted traffic signals that people using a parallel highway found they were spending an added 20 minutes or more sitting in traffic. Internal documents revealed that the government knew this would happen, but the state says it can never be completely fixed because federal rules require that signals favour the light rail.
5. Light rail benefits downtown property owners at the expense of property owners elsewhere.
A study funded by the U.S. Federal Transit Administration found that "rail transit investments rarely 'create' new growth, but more typically redistribute growth that would have taken place without the investment." Such redistribution, the study found, was usually to downtowns from other parts of the city.
6. Light rail does not stimulate economic development.
Claims by some cities that rail transit stimulated new construction ignore the tens to hundreds of millions of dollars of taxpayer subsidies going to those new developments. Without the subsidies, rail lines generate little in the way of new development. In fact, street closures during construction and parking limits after light rail opens put many shops and restaurants out of business.
7. Light rail increases energy consumption and greenhouse gases.
Light rail uses less energy and generates less carbon dioxide, per passenger kilometre, than buses (though not necessarily less than autos). But light rail does not replace buses; instead, transit agencies typically reroute corridor buses to be feeder buses for the light-rail line.
Many people choose to drive to light-rail stations rather than wait for a bus and then transfer to a train, so feeder buses are much more lightly used than the previous corridor buses. When Salt Lake City opened its light-rail system, the average number of people riding its buses fell by nearly 50 per cent.
When taken as a whole, then, most transit systems with light rail use more energy and emit more greenhouse gases per passenger kilometre than they did when they operated only buses. Most also use more energy and emit more carbon dioxide, per passenger kilometre, than typical automobiles.
In the rare cases where light rail has reduced energy use, the energy cost of building it swamps any savings. If we want to save energy and reduce greenhouse gases, automotive improvements such as hybrid-electric cars can do far more at a far lower cost than even the best rail projects.
8. Light rail diverts tax dollars that could be used for truly productive transportation projects.
If you want to boost transit ridership, improve bus service. If you want to reduce congestion, improve highways -- particularly with toll roads, which both pay for themselves and can reduce congestion by varying the toll by time of day. If you want to punish people for driving cars, then take the money that could be used for buses or highways and spend it on light rail.
You can see who favours light-rail construction: Downtown property owners; rail contractors like Siemens; and people who hate automobiles.
If you are not in one of these groups -- if you are among the vast majority of Ottawa taxpayers who use automobiles for much of your travel -- then light rail will cost you far more than any benefits you will ever receive.
Light Rail Doesn't Work
by Randal O'Toole
Randal O'Toole is a senior fellow with the Cato Institute and author of Great Rail Disasters: The Impact of Rail Transit on Urban Livability.
I have always loved trains, and if light-rail transit worked, I would be the first to support it.
So it is with some dismay that I review the sorry record of transit in Canadian and U.S. cities that have built light-rail lines. For the most part, light rail has increased congestion, harmed transit riders, and wasted taxpayers' money.
Even so, there seems to be a consensus among politicians of all stripes in Ottawa that light rail is necessary, and the only debate left is how to implement it.
But let's look at what light rail can and cannot do.
1. Light rail can spend lots of tax dollars.
Rail construction is extremely costly, so it is a great way for politicians to reward favoured contractors. Siemens, the company that is suing Ottawa over the cancelled north-south light-rail line, is obviously more interested in getting lucrative contracts than in improving your transportation network. If you are a taxpayer, hold onto your wallet: between cost overruns, high maintenance costs, and endless proposals for new rail lines, your costs will never end.
2. Light rail cannot get a lot of people out of their cars.
Studies show that transit riders care more about frequencies and speeds than about whether the vehicle they ride has rubber tires or steel wheels. Light-rail lines may boost ridership because transit agencies run the trains more frequently and (because they stop fewer times per kilometre) faster than buses. But, as the U.S. General Accountability Office has shown, transit agencies can run bus services as fast and as frequent as any light-rail line at a fraction of the cost of light rail.
3. Light rail can inconvenience transit riders.
While rail may improve service in one corridor, it is so expensive that it leads transit agencies to neglect service in the rest of the region. Many U.S. cities that built light-rail lines have seen total transit ridership decline because rail costs forced transit agencies to raise fares and reduce bus services.
4. Light rail increases congestion.
Most light-rail lines operate on streets for at least part of their length, and transit planners time traffic signals to favour trains over automobiles. The delays that result greatly exceed the benefit of getting a handful of people out of their cars.
A new light-rail line in Minneapolis so disrupted traffic signals that people using a parallel highway found they were spending an added 20 minutes or more sitting in traffic. Internal documents revealed that the government knew this would happen, but the state says it can never be completely fixed because federal rules require that signals favour the light rail.
5. Light rail benefits downtown property owners at the expense of property owners elsewhere.
A study funded by the U.S. Federal Transit Administration found that "rail transit investments rarely 'create' new growth, but more typically redistribute growth that would have taken place without the investment." Such redistribution, the study found, was usually to downtowns from other parts of the city.
6. Light rail does not stimulate economic development.
Claims by some cities that rail transit stimulated new construction ignore the tens to hundreds of millions of dollars of taxpayer subsidies going to those new developments. Without the subsidies, rail lines generate little in the way of new development. In fact, street closures during construction and parking limits after light rail opens put many shops and restaurants out of business.
7. Light rail increases energy consumption and greenhouse gases.
Light rail uses less energy and generates less carbon dioxide, per passenger kilometre, than buses (though not necessarily less than autos). But light rail does not replace buses; instead, transit agencies typically reroute corridor buses to be feeder buses for the light-rail line.
Many people choose to drive to light-rail stations rather than wait for a bus and then transfer to a train, so feeder buses are much more lightly used than the previous corridor buses. When Salt Lake City opened its light-rail system, the average number of people riding its buses fell by nearly 50 per cent.
When taken as a whole, then, most transit systems with light rail use more energy and emit more greenhouse gases per passenger kilometre than they did when they operated only buses. Most also use more energy and emit more carbon dioxide, per passenger kilometre, than typical automobiles.
In the rare cases where light rail has reduced energy use, the energy cost of building it swamps any savings. If we want to save energy and reduce greenhouse gases, automotive improvements such as hybrid-electric cars can do far more at a far lower cost than even the best rail projects.
8. Light rail diverts tax dollars that could be used for truly productive transportation projects.
If you want to boost transit ridership, improve bus service. If you want to reduce congestion, improve highways -- particularly with toll roads, which both pay for themselves and can reduce congestion by varying the toll by time of day. If you want to punish people for driving cars, then take the money that could be used for buses or highways and spend it on light rail.
You can see who favours light-rail construction: Downtown property owners; rail contractors like Siemens; and people who hate automobiles.
If you are not in one of these groups -- if you are among the vast majority of Ottawa taxpayers who use automobiles for much of your travel -- then light rail will cost you far more than any benefits you will ever receive.
Sunday, September 9, 2007
How the "Core CPI" number is a poor model of inflation
When the Main Stream Media quotes inflation numbers, unfortunately, they typically report Core CPI. There are two main problems with the Core CPI. The first problem is, “Core CPI” excludes food and energy costs. I have referenced the data from the most recent CPI data, from the BLS (Bureau of Labor Statistics). It lists 2.5% as the annualized inflations rate for the past three months (June to August, 2007)….excluding energy and food, which is also called the “Core CPI”. However, note the following numbers which are conveniently excluded from that 2.5%:
- Transportation (which includes such things as airfare, bus tickets, and car purchases) increased 9.4%.
- Energy increased 16%
- Food went up 4.4%. Of note here, also from the report, is a rise in the price of milk of 16.9% from January 07 to July 07 – approximately a 30% annualized rate….also excluded from the “inflation” number commonly quoted, but not excluded from the impacts to our pocketbooks.
The other very key discrepancy concerns the housing component of the CPI. To determine housing cost inflation, the survey asks a random sampling of homeowners the following question (again, I quote directly from the BLS CPI website):
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
They define Rental equivalence as follows: “This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market.”
Housing - Owners’ equivalent rent of primary residence (BLS). CPI Data (2003: http://www.bls.gov/cpi/cpid03av.pdf, 2007:http://www.bls.gov/news.release/pdf/cpi.pdf)
2003 - 219.9 (This is the index number they come up with)
2007 - 246.15
Change: 11.9%
Housing - National Average - Based on sales price (Sales price data: http://www.census.gov/const/quarterly_sales.pdf)
2003 - $195,000
2007 - $246,500
Increase: 26.4%
CPI versus "Core CPI".
Fed's comfortzone for inflation is 2%.
Core CPI - 2002 to 2006: 2.1% increase annualized. Adjusted for home sales in place of "equivalent rent": 3.4%
NonCore CPI: 2002 to 2006: 3.2% increase annualized. Adjusted for home sales in place of "equivalent rent": 4.5%
So, I am suggesting that the inflation model used by the Fed may be fundamentally in error. The problem with this is twofold:
It is my understating that the Fed uses Core CPI data to determine monetary policy. Having never been in an FOMC meeting, it is difficult for me to verify the accuracy of that statement, but it is commonly stated in periodicals. “Monetary Policy” includes such things as the Fed Funds Rate and the amount of liquidity they pump into the system. A flawed model could result in the wrong decisions by the Fed. Now, some might say that the Fed is certainly smarter than that, and I will wholeheartedly agree. However, intelligence has a very quiet voice in any bureaucracy when it runs counter to policy. So, what exactly is the stated policy:
“Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985.” Therefore, even if the Fed knows housing prices are increasing rapidly despite moderate increases in equivalent rent, the current policy prevents them from taking that into account when making monetary policy decisions.
In this case, the presumably flawed model could potentially result in an over-exuberant consumer. All markets rely on data and information. Compiling and analyzing the above analysis took me about 2 hours. What percentage of Americans is actually going to do that kind of research? I would guess it is in the 1% to 3% range, most of whom are academics publishing white papers in journals which are read by an even smaller portion of the general population. The question becomes, is an over-exuberant consumer necessarily a bad thing? While I believe the answer to that question is difficult, I do believe that the most efficient markets are based on accurate data.
- Transportation (which includes such things as airfare, bus tickets, and car purchases) increased 9.4%.
- Energy increased 16%
- Food went up 4.4%. Of note here, also from the report, is a rise in the price of milk of 16.9% from January 07 to July 07 – approximately a 30% annualized rate….also excluded from the “inflation” number commonly quoted, but not excluded from the impacts to our pocketbooks.
The other very key discrepancy concerns the housing component of the CPI. To determine housing cost inflation, the survey asks a random sampling of homeowners the following question (again, I quote directly from the BLS CPI website):
“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”
They define Rental equivalence as follows: “This approach measures the change in the price of the shelter services provided by owner-occupied housing. Rental equivalence measures the change in the implicit rent, which is the amount a homeowner would pay to rent, or would earn from renting, his or her home in a competitive market.”
Housing - Owners’ equivalent rent of primary residence (BLS). CPI Data (2003: http://www.bls.gov/cpi/cpid03av.pdf, 2007:http://www.bls.gov/news.release/pdf/cpi.pdf)
2003 - 219.9 (This is the index number they come up with)
2007 - 246.15
Change: 11.9%
Housing - National Average - Based on sales price (Sales price data: http://www.census.gov/const/quarterly_sales.pdf)
2003 - $195,000
2007 - $246,500
Increase: 26.4%
CPI versus "Core CPI".
Fed's comfortzone for inflation is 2%.
Core CPI - 2002 to 2006: 2.1% increase annualized. Adjusted for home sales in place of "equivalent rent": 3.4%
NonCore CPI: 2002 to 2006: 3.2% increase annualized. Adjusted for home sales in place of "equivalent rent": 4.5%
So, I am suggesting that the inflation model used by the Fed may be fundamentally in error. The problem with this is twofold:
It is my understating that the Fed uses Core CPI data to determine monetary policy. Having never been in an FOMC meeting, it is difficult for me to verify the accuracy of that statement, but it is commonly stated in periodicals. “Monetary Policy” includes such things as the Fed Funds Rate and the amount of liquidity they pump into the system. A flawed model could result in the wrong decisions by the Fed. Now, some might say that the Fed is certainly smarter than that, and I will wholeheartedly agree. However, intelligence has a very quiet voice in any bureaucracy when it runs counter to policy. So, what exactly is the stated policy:
“Until the early 1980s, the CPI used what is called the asset price method to measure the change in the costs of owner-occupied housing. The asset price method treats the purchase of an asset, such as a house, as it does the purchase of any consumer good. Because the asset price method can lead to inappropriate results for goods that are purchased largely for investment reasons, the CPI implemented the rental equivalence approach to measuring price change for owner-occupied housing. It was implemented for the CPI-U in January 1983 and for the CPI for Urban Wage Earners and Clerical Workers (CPI-W) in January 1985.” Therefore, even if the Fed knows housing prices are increasing rapidly despite moderate increases in equivalent rent, the current policy prevents them from taking that into account when making monetary policy decisions.
In this case, the presumably flawed model could potentially result in an over-exuberant consumer. All markets rely on data and information. Compiling and analyzing the above analysis took me about 2 hours. What percentage of Americans is actually going to do that kind of research? I would guess it is in the 1% to 3% range, most of whom are academics publishing white papers in journals which are read by an even smaller portion of the general population. The question becomes, is an over-exuberant consumer necessarily a bad thing? While I believe the answer to that question is difficult, I do believe that the most efficient markets are based on accurate data.
Tuesday, August 28, 2007
Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade
From the Cato Institute:
Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade
by Daniel J. Ikenson.
Daniel Ikenson is associate director of the Center for Trade Policy Studies.He is coauthor of Antidumping Exposed: The Devilish Details of Unfair Trade Law (Cato Institute, 2003).
Executive Summary
Reports of the death of U.S. manufacturing have been greatly exaggerated. Since the depth of the manufacturing recession in 2002, the sector as a whole has experienced robust and sustained output, revenue, and profit growth. The year 2006 was a record year for output, revenues, profits, profit rates, and return on investment in the manufacturing sector. And despite all the stories about the erosion of U.S. manufacturing primacy, the United States remains the world’s most prolific manufacturer—producing two and a half times more output than those vaunted Chinese factories in 2006.
Yet, the rhetoric on Capitol Hill and on the presidential campaign trail about a declining manufacturing sector is reaching a fevered pitch. Policymakers point repeatedly to the loss of 3 million manufacturing jobs as evidence of impending doom, even though those acute losses occurred between 2000 and 2003, and job decline in manufacturing has leveled off to historic averages.
In the first six months of the 110th Congress, more than a dozen antagonistic or protectionist trade-related bills have been introduced, which rely on the presumed precariousness of U.S. manufacturing as justification for the legislation. Justification for those bills is predicated on the belief that manufacturing is in decline and that the failure of U.S. trade policy to address unfair competition is to blame. But those premises are wrong. The totality of evidence points to a robust manufacturing sector that has thrived on account of greater international trade.
Full text: http://www.freetrade.org/pubs/pas/tpa-035es.html
Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade
by Daniel J. Ikenson.
Daniel Ikenson is associate director of the Center for Trade Policy Studies.He is coauthor of Antidumping Exposed: The Devilish Details of Unfair Trade Law (Cato Institute, 2003).
Executive Summary
Reports of the death of U.S. manufacturing have been greatly exaggerated. Since the depth of the manufacturing recession in 2002, the sector as a whole has experienced robust and sustained output, revenue, and profit growth. The year 2006 was a record year for output, revenues, profits, profit rates, and return on investment in the manufacturing sector. And despite all the stories about the erosion of U.S. manufacturing primacy, the United States remains the world’s most prolific manufacturer—producing two and a half times more output than those vaunted Chinese factories in 2006.
Yet, the rhetoric on Capitol Hill and on the presidential campaign trail about a declining manufacturing sector is reaching a fevered pitch. Policymakers point repeatedly to the loss of 3 million manufacturing jobs as evidence of impending doom, even though those acute losses occurred between 2000 and 2003, and job decline in manufacturing has leveled off to historic averages.
In the first six months of the 110th Congress, more than a dozen antagonistic or protectionist trade-related bills have been introduced, which rely on the presumed precariousness of U.S. manufacturing as justification for the legislation. Justification for those bills is predicated on the belief that manufacturing is in decline and that the failure of U.S. trade policy to address unfair competition is to blame. But those premises are wrong. The totality of evidence points to a robust manufacturing sector that has thrived on account of greater international trade.
Full text: http://www.freetrade.org/pubs/pas/tpa-035es.html
Monday, August 20, 2007
Self-Interest
One of my favorite quotes from Adam Smith's Wealth of Nations:
"Two greyhounds, in running down the same hare, have sometimes the appearance of acting in some sort of concert. Each turns her towards his companion, or endeavours to intercept her when his companion turns her towards himself. This, however, is not the effect of any contract, but of the accidental concurrence of their passions in the same object at that particular time. Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely."
"Self-Interest" seems like such a bad thing to people. Often times, when I say people act out of self interest, people think my view of the world is so pessimistic. That couldn't be further from the truth. For example, let's examine the act of volunteering. Even when it comes to such an apparently "self-less" act as, say, volunteering to help build a house for an impoverished family; the rule of self-interest is in force:
1. By volunteering, I may be satisfying a personal belief in what I feel is the right thing to do. Therefore, my self-interest is to volunteer so I may feel whole in a way.
2. Volunteering may just help me feel good about what I did, or it might give meaning to my life, or maybe I do it because I see the smiles on the benefactors' faces. All of the above are surely in my self-interest.
I think maybe the reason "self-interest" has gotten such a bad reputation is that on the surface, self-interest sounds like something that would be SOLELY for my own self-interest and with no regard to my fellow men and women or the world around me. However, there are many cases when one's own self-interest can coincide with the interests of others in an unintended, mutually beneficial manner.
"Two greyhounds, in running down the same hare, have sometimes the appearance of acting in some sort of concert. Each turns her towards his companion, or endeavours to intercept her when his companion turns her towards himself. This, however, is not the effect of any contract, but of the accidental concurrence of their passions in the same object at that particular time. Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. A puppy fawns upon its dam, and a spaniel endeavours by a thousand attractions to engage the attention of its master who is at dinner, when it wants to be fed by him. Man sometimes uses the same arts with his brethren, and when he has no other means of engaging them to act according to his inclinations, endeavours by every servile and fawning attention to obtain their good will. He has not time, however, to do this upon every occasion. In civilised society he stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely."
"Self-Interest" seems like such a bad thing to people. Often times, when I say people act out of self interest, people think my view of the world is so pessimistic. That couldn't be further from the truth. For example, let's examine the act of volunteering. Even when it comes to such an apparently "self-less" act as, say, volunteering to help build a house for an impoverished family; the rule of self-interest is in force:
1. By volunteering, I may be satisfying a personal belief in what I feel is the right thing to do. Therefore, my self-interest is to volunteer so I may feel whole in a way.
2. Volunteering may just help me feel good about what I did, or it might give meaning to my life, or maybe I do it because I see the smiles on the benefactors' faces. All of the above are surely in my self-interest.
I think maybe the reason "self-interest" has gotten such a bad reputation is that on the surface, self-interest sounds like something that would be SOLELY for my own self-interest and with no regard to my fellow men and women or the world around me. However, there are many cases when one's own self-interest can coincide with the interests of others in an unintended, mutually beneficial manner.
Sunday, August 19, 2007
The Minnesota Bridge Collapse
In the aftermath of the Minnesota bridge collapse, of course we will find the Government wanting to increase taxes to fund more Government intervention. Article:
http://www.mises.org/story/2670
I think if you'll reference the previous post, you'll find that we re already taxed enough in this country. How about if existing Government expenditures try to become more efficient?
Cato senior fellow Randal O'Toole said: "Now why would I be suspicious that this might not be a good idea, especially when a huge share of federal gas taxes do not go to roads and another large share is 'flexible,' meaning cities can spend it on either roads or rail transit? A federal gas tax increase would just mean more money spent on wasteful rail projects." Mr. O'Toole has it right - the problem with increasing gas taxes is that the funding most often goes to the General Fund, and only a small proportion will be used to fund road repairs.
Also from CATO:
"Many experts believe that gasoline taxes should be increased for a variety of reasons. Their arguments are unpersuasive. Oil is not disappearing, and when it becomes more expensive, market agents will substitute away from gasoline to save money. The link between oil price shocks and recessions, although real in the 1970s, has been much more benign since 1985 because of the termination of price controls. Market actors properly account for energy costs in their purchasing decisions absent government intervention. Pollution taxes, congestion fees, and automobile insurance premiums more closely related to vehicle miles traveled are better remedies for the externalities associated with automobile travel than a simple fuel tax. Gasoline consumption does not necessarily distort American foreign policy, impose military commitments, or empower Islamic terrorist organizations.
State and federal gasoline taxes should be abolished. Local governments should tax gasoline only to the extent necessary to pay for roads when user charges are not feasible. If government feels compelled to more aggressively regulate vehicle tailpipe emissions or access to public roadways, pollution taxes and road user fees are better means of doing so than fuel taxes. Regardless, perfectly internalizing motor vehicle externalities would likely make the economy less efficient—not more—by inducing motorists into even more (economically) inefficient mass transit use.
The arguments advanced against increasing gasoline taxes are applicable to the broader discussion about America's reliance on oil generally. The case for policies designed to discourage oil consumption is nearly as threadbare as the case for increasing the gasoline tax—and for largely the same reasons."
Complete article: http://www.cato.org/pub_display.php?pub_id=8629
http://www.mises.org/story/2670
I think if you'll reference the previous post, you'll find that we re already taxed enough in this country. How about if existing Government expenditures try to become more efficient?
Cato senior fellow Randal O'Toole said: "Now why would I be suspicious that this might not be a good idea, especially when a huge share of federal gas taxes do not go to roads and another large share is 'flexible,' meaning cities can spend it on either roads or rail transit? A federal gas tax increase would just mean more money spent on wasteful rail projects." Mr. O'Toole has it right - the problem with increasing gas taxes is that the funding most often goes to the General Fund, and only a small proportion will be used to fund road repairs.
Also from CATO:
"Many experts believe that gasoline taxes should be increased for a variety of reasons. Their arguments are unpersuasive. Oil is not disappearing, and when it becomes more expensive, market agents will substitute away from gasoline to save money. The link between oil price shocks and recessions, although real in the 1970s, has been much more benign since 1985 because of the termination of price controls. Market actors properly account for energy costs in their purchasing decisions absent government intervention. Pollution taxes, congestion fees, and automobile insurance premiums more closely related to vehicle miles traveled are better remedies for the externalities associated with automobile travel than a simple fuel tax. Gasoline consumption does not necessarily distort American foreign policy, impose military commitments, or empower Islamic terrorist organizations.
State and federal gasoline taxes should be abolished. Local governments should tax gasoline only to the extent necessary to pay for roads when user charges are not feasible. If government feels compelled to more aggressively regulate vehicle tailpipe emissions or access to public roadways, pollution taxes and road user fees are better means of doing so than fuel taxes. Regardless, perfectly internalizing motor vehicle externalities would likely make the economy less efficient—not more—by inducing motorists into even more (economically) inefficient mass transit use.
The arguments advanced against increasing gasoline taxes are applicable to the broader discussion about America's reliance on oil generally. The case for policies designed to discourage oil consumption is nearly as threadbare as the case for increasing the gasoline tax—and for largely the same reasons."
Complete article: http://www.cato.org/pub_display.php?pub_id=8629
The Tax Foundation - America Celebrates Tax Freedom Day®
The Tax Foundation - America Celebrates Tax Freedom Day®: "'Americans will work longer to pay for government (120 days) than they will for food, clothing and housing combined (105 days),' said Hodge. 'Since 1986 taxes have cost more than these basic necessities. In fact, Americans will work longer to afford federal taxes alone (79 days) than they will to afford housing (62 days).' In 2007 Americans will work another 41 days to afford their state and local taxes. That makes taxation a bigger financial burden than housing and household operation (62 days), health and medical care (52 days), food (30 days), transportation (30 days), recreation (22 days), or clothing and accessories (13 days)."
If all of our income were to go directly to the Government until our taxes were paid, Tax Freedom Day is the day which we, as Americans, would have paid those taxes and can begin earning wages for ourselves. The current tax rate is 32.69% if we consider all federal, state, and local taxes. Therefore, in 2007, Tax Freedom Day was April 30th, 2007. In 1930, Tax Freedom Day was Feb 12th (11.61%).
In my opinion, the increase in taxes from 1930 to 2007 is indicative of a government which has become significantly larger over time and has, as a result, found its way increasingly into our daily lives; thereby eroding our personal freedom. To reiterate, I am not an anarchist. Government does have a place in society I just think their role has grown to become quite a burden on the taxpayer. On the whole, I love America and firmly believe it is still the best place in the world to live, despite its faults. If I didn't like this country, I realize I am free to move out and I have no desire to do so. But, I do think we can do better by putting more money into the hands of the people.
If all of our income were to go directly to the Government until our taxes were paid, Tax Freedom Day is the day which we, as Americans, would have paid those taxes and can begin earning wages for ourselves. The current tax rate is 32.69% if we consider all federal, state, and local taxes. Therefore, in 2007, Tax Freedom Day was April 30th, 2007. In 1930, Tax Freedom Day was Feb 12th (11.61%).
In my opinion, the increase in taxes from 1930 to 2007 is indicative of a government which has become significantly larger over time and has, as a result, found its way increasingly into our daily lives; thereby eroding our personal freedom. To reiterate, I am not an anarchist. Government does have a place in society I just think their role has grown to become quite a burden on the taxpayer. On the whole, I love America and firmly believe it is still the best place in the world to live, despite its faults. If I didn't like this country, I realize I am free to move out and I have no desire to do so. But, I do think we can do better by putting more money into the hands of the people.
First posting
"Men and women born to freedom are naturally alert to repel invasion of their liberty by.....rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well-meaning but without understanding". -Justice Louis Brandeis, 1928.
A few disclaimers right off the bat:
1. This blog will not attempt to present a politically balanced position. I consider myself to be a Libertarian and Minarchist. The opinions expressed on this blog by me, will reflect that worldview. A couple tenets of this:
- An individual human being is sovereign over his/her body, extending to life, liberty and property
- Government has a place in society, but that role is best when it is limited in scope and power.
2. I typically vote Republican, as I feel it is the less harmful option. The party is imperfect, but I agree with more items on their platform than I disagree with.
3. I feel strongly that a great deal of legislation which provides subsidies to certain interest groups originates with the best intentions, yet the outcome often has the opposite effect of the intention.
4. I have no formal training in economics other than Econ 101 and some construction economics training courses. I am an engineer by degree, and an amatuer who enjoys learning about economics.
A few disclaimers right off the bat:
1. This blog will not attempt to present a politically balanced position. I consider myself to be a Libertarian and Minarchist. The opinions expressed on this blog by me, will reflect that worldview. A couple tenets of this:
- An individual human being is sovereign over his/her body, extending to life, liberty and property
- Government has a place in society, but that role is best when it is limited in scope and power.
2. I typically vote Republican, as I feel it is the less harmful option. The party is imperfect, but I agree with more items on their platform than I disagree with.
3. I feel strongly that a great deal of legislation which provides subsidies to certain interest groups originates with the best intentions, yet the outcome often has the opposite effect of the intention.
4. I have no formal training in economics other than Econ 101 and some construction economics training courses. I am an engineer by degree, and an amatuer who enjoys learning about economics.
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