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The False Choice

As I’ve said before, I’m universally in favor of more choices because people know their needs better than the experts and most people can deal better with poor choices when they make them themselves.

Right now the US is facing a real choice:

A larger  government – trying to do more things (some well.. but others not so) and consuming more real resources in the attempt. Somebody has to work and produce to create the wealth a welfare state consumes. Economists, Federal Reserve Governors and the CBO can manipulate the numbers but in the end it all comes out in the wash; if the Government does more, the resources must come from the private sector… and that means YOU! Our federal government does not have sufficient revenues to fulfill this vision today.

A smaller government – trying to do fewer things (but maybe doing some better). Most people agree we need national defense but we could spend less than we’re spending now. We all need police, fire protection and the court system.  Public education is broadly supported but we could get better results for our spending. With luck we could stop doing a few things that government already does badly (like wars on drugs and poverty where the other side is clearly winning).  Maybe the government could stop managing the economy (a gold mine for crony capitalists) and making it easy for anyone to get a home or college loan regardless of the losses and waste this enables.  No practical person actually believes the Federal Government can get smaller but if we could slow the rate of growth to less than the private sector growth rate government would take a smaller share in a few years. The federal government has more than adequate revenues to fulfill this vision.

So why aren’t we having that elusive “national conversation” about our choice? 

Because politicians continue to get re-elected by running on a false choice. 

According to our leaders, we can have a big generous government and make someone else pay. Democrats pick “millionaires & billionaires” while Republicans prefer “someone living in the future”. Neither has the guts to tell you the truth.  If you want more government you will have to pay for it. If you aren’t willing to pay you’ll have to make do with less.

Do you ever wonder what might result if we demand that our government do better with the huge share of our resources they already have?

It’s Official: Confirmation Bias Rules at The New Yorker

John Cassidy has a new post up at The New Yorker. His conclusion’s clear from the title “IT’S OFFICIAL: AUSTERITY ECONOMICS DOESN’T WORK”.  Unfortunately there’s some space between the data and his conclusions so let’s take a look.

First, a definition of Confirmation Bias from the You Are Not So Smart website.

The Misconception: Your opinions are the result of years of rational, objective analysis.

The Truth: Your opinions are the result of years of paying attention to information which confirmed what you believed while ignoring information which challenged your preconceived notions.

His piece starts with the preferred conclusion; that cutting government spending, especially during a slowdown, will shrink the economy (reduce GDP) leading to lower tax revenues and increased benefits.  According to Cassidy, “Austerity Economics” will make deficits larger, not smaller.

Here’s Wikipedia’s definition of Austerity:

In economics, austerity refers to a policy of deficit-cutting by lowering spending via a reduction in the amount of benefits and public services provided.[1] Austerity policies are often used by governments to try to reduce their deficit spending[2] and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors.

Let’s look at actual Revenues & Spending (in Billions of British Pounds, data supplied by the UK government):

UK Budgets 2007-12

The UK budget is fine on 4/5/2008 (prior to the financial crisis). A year later, revenues drop and spending grows as does the deficit. In FY 2010 revenues drop again and spending increases by £37.5 billion. FY 2011 (which began in April 2010) shows the reality of the government’s. Tax receipts increased by £37.3 billion! Spending also continued to increase, though at a slower rate.

So how do these numbers fit with Cassidy’s story? When revenues fell, the UK government responded with tax increases. There were no draconian spending cuts, spending increased every year and the economy shrank. Perhaps a conclusion more connected to the data is that when “austerity” consists of higher spending and tax increases it’s likely to tip the economy back into recession. A more accurate headline would be “It’s Official: Taxing and Spending Doesn’t Work!”

Should someone tell President Obama?

Everybody loves a “Going Out of Business Sale”

We ran a chain of retail hi-fi stores for twenty years. A few times, we were asked by the bankruptcy court or a creditor’s committee to help liquidate the inventory of a failed retailer.

“Going Out of Business Sales” always work! Customers wait in line (and will even pay admission) convincing themselves that the deals are so great they’re worth the effort. As sellers, we loved the “it’s all gotta go” ambience of stores crowded with buyers looking for below-cost merchandise that may be missing pieces or not even work!

For a retailer, it’s the most believable sale ever.

It seems the Federal Government is having their own “Going Out of Business Sale” these days and the average voter is right to love the deals. Up to 99 weeks of unemployment… much better than having to take a crummy job. Social Security Disability… far more pleasant than working two part time jobs to make ends meet. A program for every want… and someone else to pay.

The deals get better when you’re rich and powerful. The government extends copyright and patent protection seemingly forever so Disney’s descendants can live for a century off Mickey Mouse. Drug companies are paid by the government for research which fails but when new drugs result, they get the profits as well. It’s great to be a crony in a crony capitalist world!

Now the deals are so good, no one can resist. Perhaps the tipping point is Medicare. Who wouldn’t like a health insurance program if the plan pays out $340 in benefits for every $100 in premiums!  Medicare’s actual deal is 1,000 times that good.  Wouldn’t more people would drive a Ferrari if it sold for $67,500 rather than $229,825.

Of course, the reason a “Going Out of Business Sale” works is urgency; you’ve got to act fast or you’ll miss out.   Unfortunately, there’s no future in failure.  So, while it’s great to liquidate a competitor, it’s no fun when it’s your government that’s going broke and seems unable to stop itself.

Buffett Math comments

I have a new comment up on a Warren Buffett thread at the Grumpy Economist site. I’m a fan of Prof. Cochrane’s and appreciate both the intelligence and the moderate tone of the comments there. Here are my comments:

Warren Buffett’s op-ed supports the Obama administration’s proposal to raise tax rates on capital gains, dividends and the top two income tax brackets. The stated purposes are “fairness” and deficit reduction. I suspect that taxpayers with high incomes or substantial capital gains and dividends are more able (and more likely) to invest than others. Who would argue that higher tax rates would make them more likely to invest or increase the pool of investable funds? I also suspect that high income taxpayers have more control over the amount, character and timing of their income. Doesn’t the historical record show that a lot of the income these rates are designed to tax will simply disappear before it can be taxed?

So, if the President’s proposals (which Buffett supports) are unlikely to raise much revenue and likely to reduce investment, is there an unstated purpose? Every deduction or credit in the tax code is meant to shape behavior. Higher rates increase the value of tax credits and deductions. The principal effect of these higher rates will be to steer private investment into tax favored projects.

Given the trillions in losses from unwise investment in housing (encouraged by the mortgage interest deduction) and given the immense human cost of the “Great Recession” we’re now struggling to overcome, will we really benefit from more direction of private investment by the tax code?

A Failed Analysis

Nicholas Kristof has an opinion piece, A Failed Experiment, up on the New York Times site.  Read it yourself… he tells an appealing story. Here’s the money quote:

That’s how things often work in America. Half-a-century of tax cuts focused on the wealthiest Americans leave us with third-rate public services, leading the wealthy to develop inefficient private workarounds.

The Gist of his argument is:

  1. Over the past few decades “tax cuts for the rich” have defunded governments at all levels.
  2. This defunding has forced governments to reduce investments in “public goods” like infrastructure.
  3. Underfunded public infrastructure was an important cause of the widespread power outages in the Northeast, following hurricane “Sandy”.
  4. “The rich” can protect themselves by installing emergency generators, everyone else has to suffer.

All that’s missing from his narrative are facts.  The evidence points to different conclusions.

1. Here’s a post WWII chart of total Federal, State & Local government revenues (as a share of national GDP).

1950-2012 totals: Federal, state, local government revenues as % of GDP

It shows a steady growth in revenues between 1950 and 2000 followed by sharp fluctuations during the “tech bubble” recession in 2000-1 and the housing bubble “great recession” in 2008-9. Governments have not been defunded.

2. During this period, governments at every level chose to shift much of their spending from paying for things to paying for (and to) people. Spending on pay and benefits for government employees and entitlement programs where governments pay for public pensions and health care costs are the drivers of this shift.

In 1950, total spending by federal, state and local governments was 23.9% of GDP. In 2010, total government spending was 41.0% of GDP (note: total $ spent grew from $70.3 to $5,943 billion; 8,400% increase in 60 years). The growth of government is not a right wing myth. 

The two charts show what we spent it on; pensions, health and welfare are the top growers.  Defense and “remainder” are losing share. The conclusion is any underinvestment in “Public Goods” was a political choice; where to spend public funds and not a lack of public funds.

3. Unlike roads and bridges, the vast majority of the US electrical grid is not publicly funded infrastructure. It is designed, built and maintained by regulated private utilities. Most states have a public utility commission which approves power plants or major changes to the grid and electrical supply. The cost of these improvements is paid by their customers in higher rates. Regulated utilities gain influence with local politicians and get a guaranteed profit on their investments from the rate payers so normally they push for increased construction and maintenance budgets. If there’s been a failure to modernize the US electrical grid as Kristof alleges, isn’t the most likely suspect the utility regulators?

More importantly, Kristof offers no evidence that the initial power outages and subsequent slow repairs have any connection with his claimed defunding of the grid? Isn’t a better explanation that when a major hurricane makes landfall in the most densly populated part of the US, there will be substantial damage to roads, bridges, tunnels and the power grid? Despite the heroic efforts of hundreds of crews from all over the US, damage at this scale won’t be repaired in days or weeks.

4. He’s right here. Rich people have more resources than poor people. When public or private failures occur, rich people will be better prepared and more able to respond and recover. In a real world, how would it be otherwise?

How can we intelligently deal with our very real problems if our leading newspapers run opinion pieces which mislead rather than inform their readers?

We’re made to trade

Adam Smith wrote about it almost 250 years ago.

The propensity to truck, barter and exchange one thing for another is common to all men, and to be found in no other race of animals.  – The Wealth of Nations (1776)

Because value is subjective (and personal), I can value something of yours more highly than you do. When I willingly trade my used iPad for your cash it’s because I consider your offer to be worth more than the tablet I no longer want. You, on the other hand, must consider the tablet to be worth more than the cash or you wouldn’t make the offer.

This is how wealth is created. When we trade, we both end up with more… so we’re both now wealthier! Every voluntary exchange between consenting parties creates wealth.  Setting people free to trade with each other and setting prices free to move up or down as the supply and demand dictate unleashed the prosperity we enjoy today. If we want to alleviate poverty in the world we know how the government can help. Once again, in the words of the master…

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice” – Adam Smith

Price vs. Value

Among the many pithy observations of the hugely successful investor Warren Buffett in the 2008 Berkshire Hathaway Chairman’s letter is the following:

“Long ago, Ben Graham taught me that “Price is what you pay; value is what you get.”

Warren makes it clear he’s talking about his propensity for buying when the price is low as long as the value is high.  I see another, equally important insight. Price (what you pay) is fixed but value (what you get) is highly subjective.

Many people pay close attention to Apple’s new product announcements. Recently, the iPad mini was introduced at $329 which influential “experts” regarded as too high. Ignoring “expert” opinion, millions of actual buyers have been visiting Apple web sites and stores, learning about the features and benefits of this new product, and growing the “value” of the new device in their minds…  until it far exceeds the low $329 ask.

No one doubts that the iPad mini will be hard to get for this holiday season despite Apple offering millions for sale. Apple’s figured out there are two ways to create wealthlower the price or increase the value.

Either way, the customer gets more for their money… and is wealthier as a result.

 

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