Category Archives: Economy

Laffer Curve – Who Is John Galt

Posted on November 8, 2012 | Leave a comment

So, it took, literally, 3 business minutes for our financial planner to e-mail us the morning after the election.  He suggested that we talk, asap, in order to adjust our portfolio.

The call occurred this morning and this is the takeaway:

  • We immediately stopped the auto investment of equities that rely on Capital Gains and Dividends.  The money that was designated for such investments will now be routed to cash
  • Begin the auto investment of purchasing municipal bonds.
  • Develop a plan to determine how much of our cash position should be allocated to those muni’s in a lump sum purchase.
  • Develop a plan to determine how much of our equity position should be sold to protect our risk to the market.
  • Review the household budget and identify the cash flow impact of maxing out 401k contribution.
  • Initiate a tax exposure picture at key levels of income.
  • If our salary  hits a level that triggers negative tax implications strongly consider giving the money away to reduce our taxable income to more favorable conditions.
  • Consider acceleration of retirement.  In essence, negotiate a more work/life balance friendly role at the office in exchange for less money/salary.  Enjoy life more and stress less while maintaining the ties to the corporation until such time as a higher income is better protected.

The advice was jarring.  The analysis was clear, direct and immediate.  The market’s reaction to the election was negative and complete.  Investors all over America were having conversations just like this one.  A massive sell off is underway with people moving money out of equities and into safer tax free vehicles like the bonds mentioned above.

Or just getting the hell out of the equities and sit on the cash.  And wait.

And that wasn’t the most chilling advice, that came in the later recommendations.  The first was somewhat humorous and carried an element of a gut reaction:

If the government is going to take 40% of your property move out of the way of that and just give the money to your favorite charity.

Seriously.  Just give it away.  The thinking is that I’m really only out 60 cents on the dollar and the charity is much more efficient at handling the money than the federal government of the United States.

But it was the third piece that really got me.  The advice was to “Go Galt.”  Negotiate, in essence, a demotion at the office in order to reduce the salary to a more friendly level and have more time to enjoy the things we might be pushing off or rushing through.

Just quit and walk away.

My wife and I hold jobs that are incredibly specialized.  The work we do, the hours we allocate to that work and the degree of competence is exceptional.  In the case of my wife I’m simply reflecting fact and you’ll just have to believe me.  As far as MY level of expertise goes, some of you may have your doubts based on the content and style of this blog; I don’t blame you that discretion.

If we did leave, the jobs wouldn’t be back-filled; they’d be absorbed.  No one would get promoted as a result.  The company would be out our production and expertise and the economy would be out the money we now couldn’t spend because we aren’t earning it anymore.

Now, for the Laffer Curve.

Let’s pretend that I’m right smack dab in the middle of the 28% tax bracket.  If I double the 401k contribution we make I will reduce my tax exposure by $7,929.  That means the government gets $7,929 x 28% = $2,220 LESS than they would have had we not gone and elected this unqualified train wreck of a President.

Not to mention the 28% of the money they lose if I just give it away.  Or the 28% they lose if I take a lower salary.

And if I DO increase my 401k contribution that means I’ll have 8 grand a year less to spend on just random stuff here in North Carolina.  It’ll mean fewer dinners out at my favorite pizza joint.  The BBQ shack down the road?  Out my business.  Ice cream for the kids and coffee at the local coffee joint?  Gone.  Jeans will have to last a few months longer, there will be fewer books paid for and less craft beer from the local beer store that just opened around the corner.

All this on top of the losses they have already incurred as a result of me investing in tax free municipal bonds. [Which, by the way, is how people like Romney get to such a low tax rate – they invest in tax free vehicles.  The nerve, right?]

Any money that Obama THOUGHT he was gonna get as a tax hike has actually resulted in a net LOSS to the coffers of the Federal Government.

But hey, Obama knows better than Romney in things like tax policy and how to increase revenues.

Good job America!

Leave a comment

Posted in Economy, Education, Idiots on Parade, Politics: National

Tagged , , , ,

Obama’s Reelection : Rational Reaction

Posted on November 8, 2012 | 2 comments

Elections have consequences:

After yesterday’s carnage in the stock market, strategists warned bouncing back wouldn’t be easy. Sure enough, today’s slide is starting to pick up some steam in early afternoon trading.

The Dow recently fell 93 points, or 0.7%, to 12840, which comes one day after the blue-chip index tumbled 312 points — the worst drop of the year — following President Obama’s reelection. Cisco Systems  which reported its first monthly sales drop in nine years — and Home Depot are leading the declines, as lingering worries over the looming fiscal cliff are outweighing better-than-expected labor-market and export data.

The S&P 500 is down 0.9% to 1382 (so much for holding that psychologically important 1400 level). The tech-heavy Nasdaq Comp is off 0.8% at 2913 Apple Inc. shares are down nearly 3%, and have now fallen 22% in less than two months.

“The negative equity trade is building steam,” warns Andrew Brenner, global head of international fixed income at National Alliance. “Bonds are gaining traction as the world is becoming more negative on both Europe and the U.S.”

No one thinks that Obama is going to do a good job.

2 Comments

Posted in Economics, Economy, Elections 2012

Tagged ,

Romney’s Tax Plan

Posted on October 30, 2012 | Leave a comment

It seems that the whole campaign season has been about Romney’s tax plan.  Namely that it’s nothing more than a giant gimme to the rich at the expense of the middle class.  The argument goes along the lines of this:

You cannot reduce the marginal rate by 5 points across the board and eliminate enough deductions from the wealthy to make the plan both revenue neutral.  Therefore the plan MUST raise rates on those of us not in the upper 5 to 1 percent in income.

First this: I am a firm believer in the Laffer curve, a concept that describes what people do with their money to expose it to a tax burden.  The idea is that a tax rate of 0% will bring in the same amount of income as a tax rate of 100%.  Revenue increases at the beginning of each end until it reaches some theoretical maximum along the way.  Conservatives like to use the Laffer Curve as an argument against HIGHER taxes.  In this I am using it as an argument against LOWER taxes.  While I disagree with liberals that we need to raise taxes, I think that inserting a level of confidence that we are simply going to keep tax rates consistent is enough to grow the economy.

Second this: Romney’s plan has three planks –

  1. 5 point reduction across the board
  2. Deficit neutral
  3. Revenue neutral

Admittedly I get frustrated by the confusion created when “deficit” and “revenue” are used interchangeably, but it is what it is.

With all of that said, if Romney’s plan IS impossible, all it means is that what he is describing cannot be done.  It does NOT mean that there MUST be a tax hike on the middle class.  Of that he’ll blow a hole in the deficit.

For example, it could mean that he can’t move the rate by 5 points for the wealthy.

Okay, so my two issues aside; is the Romney tax plan impossible as the Obama campaign posits?

Rumor has it at “Yes.”

Princeton professor Harvey Rosen tells THE WEEKLY STANDARD in an email that the Obama campaign is misrepresenting his paper on Romney’s tax plan:

I can’t tell exactly how the Obama campaign reached that characterization of my work.  It might be that they assume that Governor Romney wants to keep the taxes from the Affordable Care Act in place, despite the fact that the Governor has called for its complete repeal.  The main conclusion of my study is that  under plausible assumptions, a proposal along the lines suggested by Governor Romney can both be revenue neutral and keep the net tax burden on taxpayers with incomes above $200,000 about the same.  That is, an increase in the tax burden on lower and middle income individuals is not required in order to make the overall plan revenue neutral.

I’ve always thought that Romney’s plan counted on growth.  Growth of existing salaries and then growth of the transition from unemployed to employed.

Now, do I think that’s the path we need to take?  Not necessarily.  But do I trust Romney more than Obama on anything, and I mean ANYTHING financial?  Most assuredly.

Leave a comment

Posted in Economy, Mitt Romney, Politics: National

Tagged , , , ,

Employment: Socioeconomics vs IQ – The Bell Curve

Posted on September 11, 2012 | Leave a comment

The Impact Of IQ On Employment:

In previous posts I’ve explored the impact that socioeconomic status has on various measurements in society.  For example, we’ve seen that poverty, education and employment, among other measures, are influenced by the socioeconomic status of the family unit.  In fact, I’ve gone through the whole list of factors explored by the authors of the book, “The Bell Curve” and explored just that impact.

But is that the whole story?

The book presents a second half, another “look” if you will.  And that “other look” is the impact of IQ on these various outcomes.  This post will deal with the impact of IQ on employment.

Probability of Being Out of the Labor Force

One of the measures of the employment prospects of an individual is being active in the labor force; are you looking for a job.  I’ve already presented the data that explains an unexpected result.  Namely, that as the socioeconomic status of the family increases, so does the probability that a white male in the study will leave the labor force for at least a month in 1989.

However, the authors asked another question, “What if age, socioeconomic status and race are held constant, what happens then?  What role does IQ play in labor force participation?

It’s pretty straightforward.  Those of us scoring the lowest on IQ tests are predicted to leave the labor force at a 20% clip.  Those of us scoring in the 2nd standard deviation?  We’re leaving the labor force at only a 5% rate.

Whereas socioeconomic status seems to play a “reversed role” here, IQ is a dramatic predictor in labor force participation.

Probability of Being Unemployed

The second measurement of employment prospects is the rate at which folks find themselves unemployed.  Unemployed is different than being out of the labor force, of course, because being unemployed implicitly acknowledges that an individual is looking for work.

Again, I’ve peeked at the impact that the socioeconomic status of the family has on the unemployment prospects of an individual, and the results are in; almost none.  About 1% separates the poorest families from the wealthiest.

And the impact of IQ?

Again, powerful.

Those folks scoring lowest in IQ tests are predicted to have a 16% chance of being unemployed for a month or more in 1989.  Those scoring the highest?  4%.  In other words, those scoring low on IQ tests have a 400% better chance of being unemployed than those scoring on the high end on those same tests.

Being rich or poor has little impact.  Scoring well or not has a massive impact.

 

Leave a comment

Posted in Economy, The Bell Curve

Tagged , , , ,

The State Of “College Material”

Posted on August 29, 2012 | 2 comments

I love me some Jack Chambless.  Dr. Chambless is an economics professor at Valencia College.  He’s a relentless champion of Libertarian ideas.
His most recent post is classic.  In it he describes his tradition at the start of every term:

I start the first day with some sort of essay question designed to uncover socialist thinking among my students.  Over the years I have asked people to comment on everything from Joe Montana selling his mansion for $49 million while others are homeless to their opinion on what the government should do to help them achieve the American Dream.

This week I asked my students – approximately 110 of them – to answer this question:”What one specific thing has President Obama done to make the American economy stronger?”

The responses are awesome:

 “Obama has made taxes according to a households income/class.  He made things stronger for every class by doing that.”

Obviously the income tax has long been progressive.

“President Obama has created jobs since he got elected in 2008.  Before him, the economy was suffering, especially middle class families. His campaign was focused alot on creating jobs. This accomplishment has benefited the economy greatly.”

Even Obama isn’t running on his jobs record.

“President Obama has made it so that everyone must pay taxes and people who are more wealthy pays the most taxes.”

Except, of course, Obama is making it so that fewer people pay taxes.  Though to be fair, he IS trying to make the rich make up for that.

“He has raised taxes on the rich and lowered taxes on the middle class.   Also, he has cut military funding.”

Huh?

“He has offered more financial incentives to the American family with his Cash for Clunkers campaign.  This lead for the American family to upgrade to a new car & supply buisness to the failing America car market.”

The Cash For Clunkers program was a wild failure.  The larger concept of the auto bailout’s is more debatable but a reasonable response is that those bailouts only might have helped Detroit.  But this can only be true by acknowledging that it prevented expansion in other areas that would have made up for the demand.

“the Government, under Obama, has slowed the rate our countries US dollar was inflating at the end of Bush’s terms.”

“One specific thing that Obama has done to make this economy stronger is giving jobs all across the U.S. for the middle class.”

“President Obama’s stimulation package.”

“President Obama has made bigger percentages of taxes that people have to pay for their money.”

“He has tried to make America have more equal classes rather than the rich getting richer and the poor getting poorer and eventually diminishing the middle class.”

“He has funded programs for the research of new alternative energy proving thousands of people job opportunities, and the possibility of the creation of a new type of energy market.”

“President Obama has allow all ages to go back to school.”

“Health care benefits has improved.”

“Obama has made the country stronger by giving his best to try to stabilize the economy.”

“Obama, in his early presidency, verbally excited Americans by the idea of change and this encouraged slight economic growth.”

“One thing I believe President Obama did to make the country stronger is the stimulus check act.”

“Tax cuts to overseas businesses to entice them to bring their work stateside.”

“One thing Obama help improve the economy is to provide more jobs for the unemployed people.”

In my heart I hope that we can beat Obama this fall, in my head, I don’t think we have a chance.  Which is to say that I agree with Dr. Chambliss’ observation:

These are only a sampling of what is rattling around in the brains of our college students.  Imagine what even more ignorant Americans are probably thinking.

President Obama can take great comfort in knowing that we are a nation of economically-illiterate human beings armed with voter registration cards.  He will win in November.  No one wants to hear any sensible economics from Romney or Ryan.

January 20, 2017 – that seems like a long way off….

2 Comments

Posted in Economics, Economy, Politics: National

Tagged ,

If We Try Very Hard We Too Can Be Italy

Posted on August 23, 2012 | 5 comments

This guys is serious.  He’s honestly making the case that the United States doesn’t pay enough in taxes and that if we only paid more, we could enjoy the benefits of Italy:

Italy may be in a funk, with a shrinking economy and a high unemployment rate, but the United States can learn a lot from it, and not just about the benefits of public health care. Italians live longer. Their poverty rate is much lower than ours. If they lose their jobs or suffer some other misfortune, they can turn to a more generous social safety net.

Mr. Porter makes this case with what I can only assume is a straight face.  What he calls a “funk” is really an economy that is one of the worst in Europe, perhaps only behind Greece.  And he’s actually trying to make the case that we, the United States, can learn a lot from Italy.

We can.  But not in the way that the author is trying to point out.  What we have to learn from Italy is what NOT to do.  Certainly not WHAT to do.

Consider:

No wonder we can’t afford to keep more children alive. In 2007, the most recent year for which figures are available, the United States government spent about 16 percent of its output on social programs — things like public health, food and housing for the poor. In Italy, that figure was 25 percent.

Here again, Porter is lamenting the fact that the United States spends “only” 16%  of our output, GDP[?], while Italy spends 25%.  Yet no mention that Italy is deeply in debt and failing to grow its way out of the danger zone.

In short, the government has spent too much money.  So much so that Italy is deeply in danger of economic catastrophe.  Hardly a fair price to pay for  extended unemployment benefits.

It’s safe to say that when presented an argument that we need to raise taxes in order to emulate Italy you are dealing with a deeply partisan statist.

 

5 Comments

Posted in Economics, Economy, Politics: International

Tagged ,

The Middle Class: Definition and Status

Posted on August 22, 2012 | Leave a comment

For a long time now, and especially since the recession of 2008, there has been discussion surrounding the the middle class.  Specifically how that group of Americans are doing.  I admit that I’m late to the game, but I have been very interested in this topic.

One of the most frustrating aspects to looking at this subject is that there isn’t a clear and definite definition of what the middle class is.  Who’s in, who’s out.

For a number of people the middle class represents an idea.  The idea that you can own your own home, send your kids to college and put a little bit away for retirement.  If that sounds familiar, it should.  This is how the president carves out his vision of the middle class.  And while I don’t necessarily disagree with this campy, it doesn’t satisfy my desire for a hard definition.

I think I’ve finally found one:

The middle-income tier—defined in this Pew Research analysis as all adults whose annual household income is two-thirds to double the national median.

In dollars and sense, this comes out to:

The new study reviewed 2010 data from the Census Bureau and Federal Reserve, defining “middle class” as the tier of adults whose household income falls between two-thirds and double the national median income, or $39,418 to $118,255 in 2010 for a family of three.

Note the definition includes household size.  In this case, the household size is 3.  This would include both configurations; two adults and one child or one adult with two children.

As expected, the Pew Report paints a depressing view from the middle:

Since 2000, the middle class has shrunk in size, fallen backward in income and wealth, and shed some—but by no means all—of its characteristic faith in the future.

Is this really true?

I haven’t taken the time yet to read the report, it came out only today, but I’m very interested to see how they ran the numbers and came to their conclusion.  For example, the Associated Press article makes this point:

By this definition, “middle class” makes up about 51 percent of U.S. adults, down from 61 percent in 1971.

However, no attempt has been made, that I’ve yet seen in my scanning, that would take into account a possible morphing of that middle class family structure.  In other words, how many families in 1971 fit into the 2 adults 1 child version of the family of three and how many fit into the 1 and 2 version?  Clearly a family consisting of 2 working aged adults is going to have a higher income than a family consisting of only one such adult with not one, but two children to care for.  Daycare alone is going to be double if even the two parent family has daycare expenses.

Good stuff.

 

Leave a comment

Posted in Economics, Economy, Middle Class

Tagged

Romney’s Tax Plan

Posted on August 9, 2012 | 17 comments

A recent report from the Tax Policy Center is showing that the Romney tax plan will result in an added tax burden on folks with the lowest incomes:

Our major conclusion is that any revenue-neutral individual income tax change that incorporates the features Governor Romney has proposed would provide large tax cuts to high-income households, and increase the tax burdens on middle- and/or lower-income taxpayers.

I haven’t read all of the report nor have I taken much time to study the plan offered by the Governor.  However, the broad brush strokes seem to be that there would be a 20% reduction in the tax rate at all tax brackets.  Further, Romney would broaden the base by eliminating deductions.  Last, Romney claims that his policies would spark the economy into 4% growth as opposed to the anemic sub 2% that we’ve grown accustomed too.

It should be no secret that I’m a small tax small spend kinda guy.  So I’m a little concerned that the main thrust is surrounding tax rates and not spending rates.  Cutting taxes is fine, but unless we shrink government, we’re only left with larger deficits.

I’m also a big believer in the concept of the Laffer Curve.  This is the idea that tax rates of 0% and 100% will result in the same amount of tax revenue.  And that as tax rates increase from 0% more and more tax revenue will be generated until a peak is hit at which point any further increase in the tax rate will result in lower revenue.  I think this is true.  It’s important to emphasize the concept of both sides of the curve and I think that Romney may be forgetting the 0% side and arch of the philosophy.

I’m not so optimistic that we’re sitting on the exact right peak right now and that either a tax hike or a tax cut would reduce revenue.  But I think there might be better ways to spur the economy without introducing tax cuts.  For example, end this continued nonsense surrounding the extension of the Bush tax cuts.  Make ’em permanent and move on.  The taxes in Obamacare?  Remove them too.

Right now, I think that tax certainty would be a sufficient spark to the economy and one that could generate the 4% growth Romney is targeting.

I’ll leave the discussion with one caveat.  I think that we need to reduce our corporate tax so that we’re among the most competitive in the world in this space and not the worst in the world.  Further, I would edit the code to say that all earnings realized in a foreign nation and taxed at the national rate can be brought to America without being subject to further American corporate taxes.  It’s hard to defend the practice of taxing money earned in France, using French -ahem- roads and bridges and then taxing that money further for the construction of American roads and bridges.

17 Comments

Posted in Economics, Economy, Mitt Romney

Tagged , ,

Romney: I know Why Jobs Come And Why They Go

Posted on July 27, 2012 | 4 comments

Without a doubt the main focus on the election so far has been the economy and the lack of jobs.  On one hand you have Romney claiming that he knows how business works, how the economy works.  On the other hand, you have Obama claiming that Romney simply guts American jobs while making himself wealthy.

I think it’s important to note that Obama never runs any ads claiming that HE knows how to grow jobs.

Anyway, I was going through some Obama commercials and found this one:

The point of the ad is that Romney took companies here in America and sent their jobs to other countries, countries like China and India.  The impression being that Romney doesn’t grow jobs, rather, he outsources American jobs.

It’s effective ’till you think it through, which I grant you, isn’t likely to happen considering the American electorate.

Romney claims, “I know how business works.  I know why jobs come and why they go.”  That claim is entirely truthful as it relates to his owning Bain, his restructuring companies and his sending jobs overseas.  When businessmen look at the state of the company before them, one of the things they look at is labor.  And they make a value based decision on where that labor might be better obtained.  Many many things are considered; ease of transition, cost of shipping, risk of client dissatisfaction due to hard accents, time zone difficulties and education of labor force.  And yes, included in that calculation is the tax and wage burden of the companies.

Romney knows why he sent those jobs overseas.  Because regulations and restrictions here in America make it more expensive than it has to be.  Moving work to another country is a painful and difficult decision to come by.  Making that transition is very difficult.  But no one does it because they WANT to.  They do it because business demands it.

Romney doesn’t say that he’s going to outsource jobs.  Not at all.  What he says is that he knows why people do it.  And that he’s going to change those reasons and incent businesses to keep labor here.

And THAT is something that Obama hasn’t clue one about.

4 Comments

Posted in Economics, Economy, Government

Tagged , , , , ,

Obama: Government Invented The Internet

Posted on July 18, 2012 | 1 comment

You might have heard by now that Obama gave a speech in Virgina.  And in that speech he made a statement.  He made a statement that individuals can’t claim credit for their successes.  Rather, they must acknowledge that what they have labored to craft is the result of the collective.  And, more importantly, that leading the way is the government.  After all, it invented the internet.

Right?

Maybe not.

Most people give credit to the invention of the internet to ARPANet, a DOD agency.

The Advanced Research Projects Agency Network (ARPANET) was the world’s first operational packet switching network and the core network of a set that came to compose the global Internet. The network was funded by the Defense Advanced Research Projects Agency (DARPA) of the United States Department of Defense for use by its projects at universities and research laboratories in the US. The packet switching of the ARPANET was based on designs by Lawrence Roberts of the Lincoln Laboratory.

But did ARPANet really invent the internet?  Not so fast say some:

In February of 1966 I initiated the ARPAnet project. I was Director of ARPA’s Information Processing Techniques Office (IPTO) from late ’65 to late ’69. There were only two people involved in the decision to launch the ARPAnet: my boss, the Director of ARPA Charles Herzfeld, and me.

Numerous untruths have been disseminated about events surrounding the origins of the ARPAnet. Here are some facts.

The creation of the ARPAnet was not motivated by considerations of war. The ARPAnet was not an internet. An internet is a connection between two or more computer networks.

-Bob Taylor

Interesting.

But if ARPANet didn’t create the internet, who, or what, did?

On further analysis we come up with at least five distinct theories, each of which can be credibly discussed. We state from the beginning that we do not personally see the theories as mutually exclusive – we have for many years believed in a multiple origins theory rather than a single point of invention one.

But the theories which need to be examined are:

1. Packet switching represents the origins of the Internet
2. The TCP/IP protocol represents the origins of the Internet
3. A range of telco-led activities from the 1960s represents the true origins
4. The birth of the Internet is best explained through a history of applications rather than the protocols
5. The range of inventions and activities emanating from Xerox Palo Alto laboratories, including Ethernet, represent the true beginnings.

All five theories are interesting.  Personally, I find theory 1 and 3 the most compelling with theory 3 possibly encompassing theory 3 almost completely.  Digital transmission and switching was accomplished in 1962, seven years before ARPANet claimed that accomplishment.    Further, the languages of the internet, C and Unix, were developed not by ARPANet but by AT&T.

Who knew?

In any event, what we CAN conclude is this:

So then, where and when did the Internet begin? The only thing historians seem to agree on is that it was not 1969, or the Pentagon, (or for that matter Al Gore). From there on, there is a wide divergence of views as to when, where, and by whom the Internet may have been invented.

Contrary to what Obama would have you believe, it wasn’t the government that created the internet, it was individuals engaging in business that invented the internet.

1 Comment

Posted in Economy, Politics: National, Technology

Tagged , , , ,