In defense of markets

February 1, 2014 by · Comments Off
Filed under: Economics, Freedom, Friends and relations, Newbie Info 

Borepatch has a post up on the destruction of the middle class. I’m not even going to quote it here, because pulling quotes out would not do it justice, and you should really RTWT. Go do that. I’ll wait.

So, I’m not saying he’s wrong. But I struggle with the idea that there is anything we can do to stop it.

I would argue a few things. First, there is no such thing as an American corporation. There are corporations that are headquartered in America. There are corporations whose investors are mostly in America. But there is no such think as an American corporation. If Google could make more money tomorrow by closing up shop here, and moving their Mountain View campus to Singapore, they would do it.

A business must constantly innovate or die. If GE and Siemens are both selling light bulbs, but Siemens can do it more cheaply because they have access to third world labor, then GE has two choices: lower their cost of production, or exit the light bulb market. And that’s a good thing. Everyone gets more light bulbs at a cheaper price.

Would preventing the free trade agreements have kept manufacturing jobs here? Or would the companies have just gone out of business? I don’t know the answer…but I think it is a possibility worth considering.

Borepatch and I are both employed in high-tech fields. The skills that I sold when I graduated college for an enormous premium are not valuable in the market today. The skills that I sell today at an enormous premium did not exist at the beginning of the Obama administration. In 10 years, my current skillset will be useless and I will have to find another one. I can continue to innovate, or I can die (economically speaking, of course).

Manufacturing jobs in the US used to be offered at an artificial premium. Now, they have reverted to (global) market price. Is that a good thing? No, not if you were making a living in manufacturing. Yes, if you are consuming the goods they are producing.

One could argue that the “modern” equivalent of manufacturing jobs (relatively easily accessible, semi-skilled labor that pays well and has upward mobility) don’t exist in the modern economy. But I remember reading an article (wish I had the link) about coal mines looking for workers in West Virginia. They were looking for unskilled workers. All you needed to be able to do was show up every day, do your work, and pee clean. Starting salary was in the $40k range. After 6 months they would train you on machine operation. Then you made in the $80k range. Granted, coal mining is not pleasant work. I sure wouldn’t want to do it…that’s part of the reason I spend a bunch of time keeping my tech skills fresh. But it seemed to have a pretty low bar to entry. Even technology, which pays very well, has a pretty low bar to entry. What does it take to get started on a certification? And the job demand is high, and as you have pointed out, only going to grow.

The reality is that each and every one of us is competition for scare resources in this world. There have always been winners and losers. The good news is that all in all, it has worked out pretty well in the main. The average American has a standard of living that would have been the envy of the wealthiest American even 100 years ago.

The key to making sure that greed works for us and not against us is to keep the barriers to entry for new firms as low as possible. That way, every corporation that earns an “unfair” profit will have two or three firms nipping at their heels to do it faster, better, cheaper. That is where the bureaucrats have done enormous damage. Because big corporations have big money, they can buy politicians to write laws to favor them.

One side would argue, “We need to get the money out of politics.” Um…yeah…good luck with that. Think of it this way: Passing a law that says you can only donate X number of dollars to a candidate is essentially a price ceiling on the cost of a politician’s vote. The market reacts to the efforts to “get the money out of politics” the way they do in every other price ceiling. Because the market value of a vote is above the permitted price, we end up with shortages and a black market. Corporations and other monied interests have access to that black market, you do not.

The solution is not to “get the money out of politics” but to make the vote of a politician less valuable. And we do that by taking away their power. If there isn’t much a politician can do for you, then there isn’t much incentive to buy one. And the market price goes down.

Bottom line, if it is a choice between trusting greed and trusting altruism, out me down for greed every time.

Why didn’t I think of that?

February 20, 2013 by · 2 Comments
Filed under: Economics 

So, the US Postal Service is slowly going bankrupt under a crushing load of unfunded pensions and union wages.  Fortunately, there is an obvious solution.

What?  Re-negotiate the labor contracts to something sustainable?  No, no, no.  The answer we were looking for was promote brand awareness by starting your own clothing line.

“It will make a contribution, but it’s bigger than that,” Betts said. “It’s really brand reputation, brand awareness, in addition to revenues.

I can totally see how this plays out: “Man, what a cool jacket! I think I’ll go home and send some *correspondence*, yo!”

I personally can’t see how this could possibly fail.

So THAT’S why no one is working…

December 2, 2012 by · 1 Comment
Filed under: Economics 

From ZeroHedge, we learn:

…the somewhat startling reality that “the single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045.”

And

The graphic below quite clearly, and very painfully, confirms that there is an earnings vacuum of around $40k in which US workers are perfectly ambivalent toward inputting more effort since it does not result in any additional incremental disposable income.

RTWT

“Bulk Ammo” up as search term

November 30, 2012 by · Leave a Comment
Filed under: Economics, Newbie Info 

From Zero Hedge.

A modest proposal

June 30, 2012 by · Leave a Comment
Filed under: Economics, Gun stuff 

Ed Morrissey points out that income inequality prevents equal access to firearms:

Now that the Roberts Court has affirmed that the government has the power to mandate purchases of private goods and services as long as it’s structured as a tax, I propose that we put this new-found authority in the service of an explicit Constitutional right.  For far too long, too many Americans have suffered from an inequal distribution of firearms, despite the Second Amendment’s express exhortation to “keep and bear arms,” in large part because income inequality in this nation has kept the poor and working classes from having the proper protection for themselves and their loved ones.  We need to end this disparity now by applying the ObamaCare model immediately.

RTWT. Is it bad if I can’t tell if this is satire?

It usually collapses

October 6, 2010 by · Leave a Comment
Filed under: Economics 

Reading about the continuing saga of Gpal led me to the Internet Crime Complaint Center. Among the information up there is a list of online scams.  My favorite:

Ponzi/Pyramid

Ponzi or pyramid schemes are investment scams in which investors are promised abnormally
high profits on their investments. No investment is actually made. Early investors
are paid returns with the investment money received from the later investors. The
system usually collapses.
The later investors do not receive dividends and lose
their initial investment.

Hmmm….what does that remind us of?

More thoughts on the economy

September 30, 2010 by · Leave a Comment
Filed under: Economics 

Peter at Bayou Renaissance Man posted a semi-tongue-in-cheek idea on how to address our economic woes.

Sadly, it won’t work.  All it would do is raise prices where only those beneficiaries of economic largess would be able to afford anything.  Oh, and any savers would be wiped out.  And anyone holding US debt would be wiped out.  And some of those folks might get pissed.

I’ve been using an analogy to describe the current condition with Social Security and Medicare.  We sitting in a lifeboat.  We have a member of our boat that has been grievously wounded.  They are going to die.  This is very sad, but there is nothing we can do.  As a boat, we have two choices.  We can expend all of our resources to try to save our crew member, have them die, and then starve to death ourselves, or we can let the crewman die and still have resources for our own survival.

This may sound dire, but I believe that the math bears me out.  Social Security and Medicare are not sustainable.  They have become giant cancerous tumors that are starving the host.  If it isn’t cut out, the host will die.  We can do this now, while the host is healthy and the “surgery” has a good chance of success…or we can wait until the tumor is so large, the damage so grave, and the surgery so risky that it has a good chance of killing the patient.

I don’t make this suggestion lightly.  I understand that it means that a number of individuals who were counting on their Social Security will probably end up being unable to retire.  That’s very sad.  But the question that I keep coming back to is this: am I willing to ensure my parent’s standard of living at the expense of my child’s?  Am I willing to shackle my daughter with lifelong debt in order to assure the lifestyle of today’s seniors?

No. I’m not.

Playing with house money

September 9, 2010 by · 5 Comments
Filed under: Economics 

A post by my buddy American Manifesto about ObamaCare has worked me to sputtering rage before my trip to the gym, and I feel the need to respond.

I don’t want to get into the ObamaCare thing.  Whether you think it is a Good Thing, or a Bad Thing is, strictly speaking, not really germane to my point.  What I want to do is talk a little bit about business, and why it is that government mandates always raise prices.

As regular readers know, I recently completed an MBA.  Simply put, I have a masters degree in taking piles of money, and converting them into larger piles of money.  That is all a business, any business, does.  They go about it in many different ways, with different strategies (or “business models”) but at the end of the day, that is all they do.  Take money pile A, and make it into larger money pile B.

Now, consistent with the goal of making their money pile bigger, they have two sub goals:

  1. Make the pile as big as possible, as quickly as possible, with as little friction as possible.
  2. Minimize the possibility that the pile will not get as big as they expected, or heaven forbid, even get smaller.

These truths are universal, whether you are talking about a behemoth like Microsoft or GM, or your local mom-and-pop business.  We call the first sub-goal “profit” or “return”.  We call the second “risk”.  Every business wants to maximize return and minimize risk.  And as they decide on their strategy for making their money pile bigger, or business model, they form it around their expectations of return, and their tolerance for risk.

To use examples to illustrate the point, at one extreme a business could take all their assets and put them into low yield Treasury bonds.  Historically, these bonds are considered perfectly safe in that they guarantee a set rate of return with no possibility of default*.  Very low risk, very low return.  At the other extreme, we might invest our assets in a roll of the Roulette wheel, betting all on black.  A possibility that we will instantly double our money, but an equally even possibility that we will loose it all.  Very high return, very high risk.

Which is the better strategy?  There is math behind this, but accept for the sake of argument that the answer is it doesn’t matter.  An investor doesn’t care about risk versus reward as long as they are getting the right return for the risk that they are taking.  In other words, our hypothetical investor doesn’t care about the roulette wheel, as long as his upside is 100% return.  (And considering the number of people who flock to Vegas regularly, there is observational evidence that this is true.)

OK, what happens if the casino owners decide that instead of returning 100%  on black, they will only return a profit of 75%.  The risk/reward calculation has changed.  Our investor isn’t being compensated for his risk.  So, he picks up his chips and goes to another table, or calls his broker and buys some T-bills.

Back to our business.  Our business owner is making decisions that are no different from that of our gambler in Vegas.  He has to decide how to make his money pile bigger, while avoiding the possibility that it will get smaller.  In order to do this, he formulates a plan:  “I’ll take $1,000 out of the bank and use it to build a churro stand at the street fair.  After all my expenses, I can make 1000 churros, sell them for $2.00 each and make a cool $1,000!”  The potential upside of $1,000 is enough to get our investor out of bed early in the morning on Saturday, and to accept the fact that he may not sell 1000 Churros.  He may only sell 500 and will be eating Churros for dinner for the next few weeks.

What happens when the street fair commission decides to impose a $.50 cent per churro tax at the fair?  Our businessman has a problem.  He can eat the tax, and only accept that he can only make $500 selling churros at the street fair.  But that presents him with a problem.  It’s a real pain in the ass getting up at the crack of dawn.  And he HATES eating the leftover churros.  It’s not worth his time and effort any more if he is going to make a lousy $500.  The reward isn’t worth the risk.  So, he has two choices.  He can raise his price to $2.50, thus bringing his risk and reward back into balance.  Or he can say “screw it” and either exit the marketplace or invest his $1,000 somewhere else that will give him the proper return.

One more wrinkle, and then we will get to insurance.  Suppose instead of selling the churros himself, our hero decides to just give some money to someone else to do it?  He could invest his $1,000 in his neighbor’s churro stand, for example.  His neighbor says he will split the profits with him.  A $1,000 investment now gets him $500 return, and without all the fuss and bother of having to get up early and eat left over churros.  Pretty sweet.  But oh noes, the commission comes up with their churro tax!

Now the neighbor has a problem.  He can go back to his investor and say “Sorry, dude, I can only get you a $250 return on your money.”  But then the investor will probably pull his funding and invest his other neighbor’s deep-fried Oreo stand instead, where his $1,000 still gets him the expected $500 return.  He can eat the tax himself, returning the full $500 to his investor.  But this leaves no profit for him.  Or he can pass along the cost to the consumer, keeping his investor happy, and keeping himself properly compensated for his own risk and effort.

This is precisely what happens in the real world.  When government mandates, or taxes, or regulatory items come down from on high, it alters the risk/reward calculation that businesses go through.  A business is faced with the same basic choices:

  1. Accept a lower profit potential.  Without a corresponding change in risk, investors will transfer their capital to businesses offer better returns.  Put simply, if you have a choice of two investments, A and B that are identical in every way, and both return 10%, where do you put your money?  Now what happens when A’s return drops to 5% and B still returns 10%, where do you put your money?  This is a key point. Businesses do not have this option in the real world.
  2. Raise prices to maintain profits at the level necessary to bring things back into balance.  This is the only choice that a business can make and remain a going concern.  This is why we say there is no such thing as a tax on a corporation.  Taxes on corporations are born by either the customers of the corporation, or the investors of the corporation.

Which, finally, brings us back to health insurance.  ObamaCare mandates that certain things must be covered.  Put another way, they must accept that the cost of providing insurance has gone up; services that they didn’t use to have to pay for are now covered.  The insurance businesses can either raise prices or go out of business.  Those are the only two options.  And at the end of they day, that is what a lot of folks who advocate for more mandates and more government intervention forget.  Businesses always have the option of closing up shop.

*(I say historically…the discussion of whether or not this will be true going forward is best kept for another time.)

Enter the HSA

September 7, 2010 by · 1 Comment
Filed under: Economics 

I started my new job today.  I’m very happy to be employed, especially in this economy.  Two interesting notes.

1) I was recommended by a senior executive in the company.  My guy is two levels from the CEO…a pretty senior guy.  When he found out that I was looking, he said “I’d hire you tomorrow.”  Even with this kind of visibility, it took almost two and a half months to get through the hiring process.  Imagine if I was just firing in resumes for a position.  The economy is pretty dismal, people.  I’m really, really thankful.

2) One of the first things you do when  you join a company is go through the benefit process.  When I left my job last November, I went on my wife’s insurance plan.  With my wife and daughter, we paid over $800 a month for insurance.  10 months of insurance came to $8,000.  As far as I know, none of us have made any claims in that period.  In other words, we spend $8,000 for fuck all.

In my new job, I was able to elect a health care savings account.  The government specifies that in order to enroll in an HSA, you need to also have a high-deductible insurance plan.  The plan that our company uses is pretty simple: annual deductible of $2,500.  After that, the plan covers 90% of medical bills.  In other words, you basically pay your own way unless you have some catastrophic, unforeseen circumstance, in which case you still take a hit, but avoid financial catastrophe.  You know…insurance.  I can also set aside up to $3050 per year, tax free for paying health care expenses.

Total price for this service: $160 per month.  So, according to my math, over 12 months:

Wife annual cost: $9,600

HSA Annual cost: $1920

Wife’s plan headroom = $9,6000 – $1920 – $2500 = $5,180.

So, in order to break even, I need to have more than $5,180 in annual healthcare spend in order to break even.  Under my high deductible plan, that would be $51,800 in healthcare spending.

The single most expensive medical event that my wife and I ever had was when my daughter was born.  Total spend (by our insurance company) was about $9,000.  My outlay under this system:

$2,500 + .1 * (7500) = $3, 250.  A big year, but not catastrophic.

HSAs also introduce the right economic incentives.  When I am spending my own money, I’m going to be a lot more careful about when I go to the doctor.  Oh, and when I go to the doctor and say I am paying cash, I get a 20% discount BEFORE I begin to negotiate.

If we are serious about reducing health care costs as a nation, we need to get these kinds of programs to replace the existing “insurance” model.