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Thursday, November 26, 2009

Happy Thanksgiving

My thanks to the free market for delivering my free range turkey:

The activities of countless people over the course of many months had to be intricately choreographed and precisely timed, so that when you showed up to buy a fresh Thanksgiving turkey, there would be one -- or more likely, a few dozen -- waiting. The level of coordination that was required to pull it off is mind-boggling. But what is even more mind-boggling is this: No one coordinated it.

Happy Thanksgiving!

Hat Tip: MJ Perry (Carpe Diem)

Wednesday, November 25, 2009

Hide the Decline

I'm glad I posted my view of the science, economics, politics, and philosophy of Climate Change before the recent email hack of the Climate Research Unit of East Anglia. It enabled me to be a brave contrarian speaking truth to overwhelming consensus (or something like that), whereas now I seem to be just one of the majority skeptics.

I'm, of course, not even vaguely surprised by the revelations found in the emails, code, and data released by the hack. The revelations in and of themselves are not seriously damaging, in my opinion. However, they completely vindicate skeptical climate folk like McIntyre, Lindzen, Svensmark, Spencer, etc. and make it far more likely that people will listen to them now, and in the future. The tide (so to speak) is turning against climate alarmism, and just might be unstoppable.

I sure hope so.

Monday, November 16, 2009

Smart Phones and Internet Radio

Before last week, I'd never really used Internet radio. That's because if I'm working, I find music distracting, and if I'm not working, I don't want to be near a computer.

My new smart phone (Motorola Cliq) has changed all that. I'm pretty amazed by the concept: a free and customizable set of virtual "radio stations" that learn your preferences over time, with no (audio) advertising, and can be used with headphones or a home or car stereo system. I love it. It's the best thing since sliced bread.

I'm finding it takes about 100 songs to train a station (by hitting the "love" and "ban" buttons appropriately when various songs that you like or don't like play) and after that I end up liking 80 to 90% of the songs it serves up which is certainly better than standard radio (which I rarely listen to) and even most albums that I own.

The business model is pretty cool too. As the song plays, the album and other identifying information is displayed along with an unobtrusive ad at the top. In addition, if you hear a song you'd like to buy, you just hit the "buy" button and it's automatically added to your library (the cost per song is around $1). Unlike iPods, which need to be connected to a computer to download music, it happens automatically.

I realize that iPhone and other smart phone owners probably are mostly all using the Internet radio feature already, but I'm a slow adopter of technology, so it takes me a while to catch on.

Friday, November 13, 2009

House health care bill and jobs

William Jacobson had some key observations on his Legal Insurrection blog:
The message of the bill is that whatever you do, if you want to grow your business without paying the health care tax, do not add employees.

Obama does not understand these provisions. Obama gave a speech this morning in which he stated that these provisions are directed at small businesses operating on thin margins. But these provisions have nothing to do with profit margins. This is a wage-based tax.

Obama does not understand the difference between profit margins and wages. This is exactly what you would expect from someone who always has been on the receiving end of wages, and never had to meet a payroll. Wages are not profits and have nothing to do with the success of a business. Just ask the auto companies.

I don't think Obama and the other Democrats are lying about this aspect of the health care tax. They truly do not understand how the private economy works. In their blissful ignorance they are designing job-killings provisions which they do not understand.
Job losses at large establishments have slowed considerably as monetary policy has helped stem panic. Small businesses are still shedding jobs at a high rate or are failing to even form. When we see net job creation some time next year it would help if a bill like this was not in prospect. Otherwise it will be a nearly jobless recovery for longer than many people expect. It might be so anyway if regime uncertainty doesn't abate.

Betsy McCaughey explains several passages of the bill under categories such as:
What the government will require you to do

Eviscerating Medicare

Questionable Priorities
I think this article gives an appropriate overall characterization of the bill as well as the relevant accounting used for scoring versus a more realistic tally:

The bill is instead a breathtaking display of illiberal ambition, intended to make the middle class more dependent on government through the umbilical cord of "universal health care." It creates a vast new entitlement, financed by European levels of taxation on business and individuals. The 20% corner of Medicare open to private competition is slashed, while fiscally strapped states are saddled with new Medicaid burdens. The insurance industry will have to vet every policy with Washington, which will regulate who it must cover, what it can offer, and how much it can charge.

Perhaps the most unsurprising news in this drama was the collapse of the Blue Dog "deficit hawks." Enough of them always cave in the end to give Mrs. Pelosi her way. It's nonetheless worth noting the surrender of that most vocal scourge of deficits, Tennessee's Jim Cooper, who voted aye on grounds that the bill can be improved in the Senate.

But Max Baucus's Finance Committee bill includes a similar gimmick of making the numbers look good by using 10 years of new taxes to finance only seven years of spending (six in the House). The deficits explode in the second decade and beyond in both bills.

The House also contains a new government long-term insurance program that starts collecting premiums in 2011 but doesn't starting paying benefits until 2016 and then runs out of money in 2029. North Dakota Democrat Kent Conrad called it "a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of" in an interview with the Washington Post in late October. Mr. Cooper has with a single vote made his entire career irrelevant.

I saw an interview of Senator Bob Corker in which he said that a Senate Democrat agreed that if Republicans had proposed this exact same bill, Democrats would all vote it down. Hopefully a bill this bad simply dies in the Senate. Then they can start over again.

Wednesday, November 04, 2009

Imagine that - creating a distraction

Bruce McQuain at Q and O points to an Arnold Kling post
I think there is something even more sinister going on. I interpret the pay czar in terms of Murray Edelman's symbolic uses of politics. The idea is to focus on a symbol of the cause of taxpayer losses--bonuses of the executives of bailed out firms--in order to distract attention from the substance. The substantive issue is the extent to which the losses were caused by political actions and the extent to which they are concentrated at Freddie Mac and Fannie Mae.

The further into this crisis we go, the greater the share of subprime loans and mortgage losses are turning out to be located at Freddie and Fannie. Even one year ago, if you had asked me, I would have told you to expect at least 2/3 of the losses to be at companies like Citi and Bear, with less than 1/3 at Freddie and Fannie. It now looks quite different. Conservatively, 3/4 of taxpayers losses will be at Freddie and Fannie. Perhaps as much as 90 percent of taxpayer losses will be there.

Given the large role of Freddie and Fannie, it makes sense for politicians to create as large a diversion as possible. Hence, the brouhaha over bonuses at bailed-out banks.

Incidentally, the debate over the "public option" in health reform also can be viewed as an exercise in symbolic politics and diversion. The point is to divert attention away from the bankruptcy of Medicare.

The aggressive government push for expanded home ownership and affordable housing in the form of easy credit made a huge contribution to the mess:

Since the early 1990s, the government has been attempting to expand home ownership in full disregard of the prudent lending principles that had previously governed the U.S. mortgage market..

Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.

More F&F reform is needed:
All the debate of the last several weeks on changes to the financial regulatory system has omitted any discussion over reforming the entities at the center of the housing bubble and financial meltdown: Fannie Mae and Freddie Mac.

Total losses from the bailout of Fannie and Freddie are likely to exceed $250 billion — as much as the cost to the taxpayer of all bank failures in American history combined.

Note: F & F bailout loss estimates now exceed $350 billion.

Fannie and Freddie infected capital markets and spread through every sector of the banking system. Before the bursting of the housing bubble, holdings of government-sponsored enterprise (GSE) securities — bonds and mortgage-backed securities as well as preferred stock — constituted more than 150% of core capital for insured banks.

It was not only the commercial banking system that was stuffed with toxic GSE holdings; it was also many of the investment banks. More than 50% of Maiden Lane One, the toxic assets that the Federal Reserve guaranteed in order to persuade JPMorgan to buy Bear Stearns, are GSE securities.

Additionally, more than 40% of money market mutual fund holdings were in the form of GSE securities.

At the height of the bubble, Fannie and Freddie purchased more than 40% of the private-label subprime mortgage-backed securities. Between the two of them, they were the largest single source of liquidity for the subprime market.

Interestingly enough, the very vintages of subprime loans that performed the worst — 2006 and 2007 — were the years in which Fannie and Freddie entered the market in force.

With their massive leverage, Fannie and Freddie were levered more than 100-to-1 — a disaster waiting to happen.

Why then were foreign investors so willing to trust their money to Fannie and Freddie? Quite simply, they were assured by U.S. Treasury officials that their losses would be covered.

Ultimately, Fannie and Freddie were not bailed out in order to save our housing market; they were bailed out in order to protect the Chinese Central Bank from taking losses. Without the implicit federal guarantee of Fannie and Freddie, trillions of dollars of global capital flow would not have been funneled into the U.S. subprime mortgage market.

Some might argue that the problem with Fannie and Freddie was fixed with last year's regulatory reform bill. That bill created a new regulator, one with increased supervisory powers, including the ability to wind down a GSE, and independence from the congressional appropriations process, letting the regulator raise additional funding.

Nothing could be further from the truth. As one of the drafters and negotiators for that bill while on the staff of the Senate Banking Committee, I can say that there was a shared awareness by all parties that the bill was insufficient to prevent the failure of Fannie and Freddie.

It was not the best bill that could be crafted. It was the best bill that could pass, given the continued strength of Fannie and Freddie apologists in Congress.

Most of the worst economic and financial crises in American history have involved real estate. Such is likely to be the case in the future. Reform of Fannie and Freddie is imperative so that American taxpayers will not be on the hook for hundreds of billions of dollars for the next real estate bubble.

There were many contributions by private players but there were also other very large contributions from governmental players.

Sunday, November 01, 2009

The Burden of Taxes

A common belief is that levying additional income taxes on those with high incomes has negligible adverse impacts on the poor. In this post, for a hypothetical economy, I will show why this isn't true. In future posts, I will discuss how this result for the hypothetical economy still has at least some relevance to the real world.

Assume the following:
1. All people have exactly equal talent and capabilities.
2. All markets are perfectly efficient and fair.
3. Return on Investment (ROI) for all occupations is exactly equal, where the definition of "Investment" is non-standard and includes the following:
a. Cost (Money & Opportunity Cost) of Education.
b. Difficulty/Stress/Unpleasantness of the job.
c. Negative of the Satisfaction produced by the job.
d. Other similar considerations.
Note that (b), (c) and (d) have a strong subjective component and even (a) has a significant subjective component via an individualized Discount Rate (a rate of interest that relates the value of future income to current income to a given individual). Because of the differing "Investments" required for various occupations, there would be significant differences in compensation for those occupations since the ROI for all occupations is constrained to be equal.

This means that only those occupations that provide adequate value to justify the ROI will exists. In other words, if an occupation requires a great deal of "Investment" and therefore requires a high wage according to the ROI constraint, but nobody is willing to pay for the goods or services that this occupation would provide at that wage level, the occupation won't exist.

The ROI is an after-tax ROI. In this hypothetical world, nobody cares what their compensation is before taxes and instead they focus on their after tax compensation.

Consider the effect of increasing taxes on a given occupation while leaving the taxes on all other occupations the same. It doesn't matter if it's an occupation with high or low compensation, the effect is the same. If everybody with the occupation stayed in it, the after tax ROI for that occupation would be reduced. However, this violates the ROI constraint, so enough people would leave this occupation and do something else until the supply of people working at this occupation is reduced enough so that supply and demand balance to drive the after tax ROI for this occupation back up to nearly its original level.

Since people have left this occupation and are now competing in other occupations, all occupations' ROIs are slightly reduced (including this occupation with its additional tax burden). Taxes and regulation essentially have the effect of reducing our ROI for the work we do.

That's the first interesting effect. All ROIs are reduced by the same amount. Any attempt at making income taxes progressive is completely thwarted. The ROIs for the occupations with the highest and lowest compensations remain equal after the tax increase.

Since the occupation with the new tax burden has similar after tax compensation, the pre-tax compensation must be higher. That means that the production of goods and services dependent on this occupation incur greater cost, which implies that everybody will end up paying a higher prices for these goods and services. Again, any attempt at making income taxes progressive is lost, since everybody, rich or poor, will pay the same increased cost for these goods and services.

In this hypothetical economy, it is impossible for income taxes, regardless how progressive by design, to actually be progressive in effect. Since the poor feel the burden of reduced ROI and higher prices most acutely, the poor feel the burden of higher taxes more than anyone else.

In future posts I'll argue why the real economy bears significant resemblance to this hypothetical economy in regards to taxation.