Archive for the ‘economics’ Category

Capitalism vs. Socialism   Leave a comment

Several recent polls, plus the popularity of Sen. Bernie Sanders, demonstrate that young people prefer socialism to free market capitalism. That, I believe, is a result of their ignorance and indoctrination during their school years, from kindergarten through college. For the most part, neither they nor many of their teachers and professors know what free market capitalism is.

Found on Lew Rockwell

Free market capitalism, wherein there is peaceful voluntary exchange, is morally superior to any other economic system. Why? Let’s start with my initial premise. All of us own ourselves. I am my private property, and you are yours. Murder, rape, theft and the initiation of violence are immoral because they violate self-ownership. Similarly, the forcible use of one person to serve the purposes of another person, for any reason, is immoral because it violates self-ownership.

Tragically, two-thirds to three-quarters of the federal budget can be described as Congress taking the rightful earnings of one American to give to another American — using one American to serve another. Such acts include farm subsidies, business bailouts, Social Security, Medicare, Medicaid, food stamps, welfare and many other programs.

Free market capitalism is disfavored by many Americans — and threatened — not because of its failure but, ironically, because of its success. Free market capitalism in America has been so successful in eliminating the traditional problems of mankind — such as disease, pestilence, hunger and gross poverty — that all other human problems appear both unbearable and inexcusable. The desire by many Americans to eliminate these so-called unbearable and inexcusable problems has led to the call for socialism. That call includes equality of income, sex and race balance, affordable housing and medical care, orderly markets, and many other socialistic ideas.

American Contempt for …Walter E. WilliamsBest Price: $11.23

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Let’s compare capitalism with socialism by answering the following questions:

In which areas of our lives do we find the greatest satisfaction, and in which do we find the greatest dissatisfaction? It turns out that we seldom find people upset with and in conflict with computer and clothing stores, supermarkets, and hardware stores. We do see people highly dissatisfied with and often in conflict with boards of education, motor vehicles departments, police and city sanitation services.

What are the differences? For one, the motivation for the provision of services of computer and clothing stores, supermarkets, and hardware stores is profit. Also, if you’re dissatisfied with their services, you can instantaneously fire them by taking your business elsewhere. It’s a different matter with public education, motor vehicles departments, police and city sanitation services. They are not motivated by profit at all. Plus, if you’re dissatisfied with their service, it is costly and in many cases even impossible to fire them.

A much larger and totally ignored question has to do with the brutality of socialism. In the 20th century, the one-party socialist states of the Union of Soviet Socialist Republics, Germany under the National Socialist German Workers’ Party and the People’s Republic of China were responsible for the murder of 118 million citizens, mostly their own. The tallies were:

No such record of brutality can be found in countries that tend toward free market capitalism.

Here’s an experiment for you. List countries according to whether they are closer to the free market capitalist or to the socialist/communist end of the economic spectrum. Then rank the countries according to per capita gross domestic product. Finally, rank the countries according to Freedom House’s “Freedom in the World” report. You will find that people who live in countries closer to the free market capitalist end of the economic spectrum not only have far greater wealth than people who live in countries toward the socialistic/communist end but also enjoy far greater human rights protections.

As Dr. Thomas Sowell says, “socialism sounds great. It has always sounded great. And it will probably always continue to sound great. It is only when you go beyond rhetoric, and start looking at hard facts, that socialism turns out to be a big disappointment, if not a disaster.”

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Why Worry about Income Inequality?   1 comment

I’m not rich by Alaska standards. I make less than the median Alaska income. That means I’m wealthier than 99% of the world’s inhabitants.

Image result for image of a snap recipient indulgenceIs that unfair? Hmm ….

Well, I can tell you that living at less than the median Alaska income presents challenges for my family. We aren’t as rich as some of our neighbors. There’s a man in this town who makes millions of dollars a year.

Is that unfair? Hmm ….

If I were to make somewhat less … let’s say so I’m in the 1% worldwide, I couldn’t afford to live in Alaska. So if you took the income of the people who live here and distributed it to all the “poor” people in the world, what would happen? People in Alaska would starve and freeze without shelter or fuel.

Would that be fair? Hmm ….

I make a whole lot more money and live in a nicer home than my working class parents did.

Is that fair? Hmm ….

My parents were always able to feed me. My mother’s parents, at the height of the Depression, struggled with that.

Is it fair that I grew up without going hungry, but my mom got rickets as a child? Hmm ….

So, then I think about all the “poor” people in the US who own cars, live in nice apartments, are able to buy food with SNAP benefits, and afford $100 a month smart phones, but they don’t actually work for their living.

Is that fair? Hmm ….

We have to careful not to confuse income inequality and poverty. Standards of living are increasing, albeit unequally, in most of the world. Developing countries are particularly benefiting handsomely from declining barriers to trade and movement of capital. That’s why inequality between countries is actually shrinking. As for inequality within countries, enrichment at the top has not caused mass impoverishment.

The market economy is not a zero-sum game, where someone’s gain must come at someone else’s expense. “The rich get richer and the poor get poorer” is a synopsis of the socialist critique of the market system, implying the perceived inevitability of what Marx called the Law of Increasing Poverty.

But, guess what? It’s a myth unsupported by empirical evidence. Absent government interference in the marketplace, the poor in most developing nations are gaining ground even as those at the top end of the income spectrum are also amassing greater fortunes. Poverty is reducing all across the world.

So what difference does it make if  your neighbor has a million dollars he won’t share with you if you’re making a real income far in excess of your basic needs?

Oh, right, fairness …. It’s not fair. Why can’t he give up some of it so I can be even richer?

Maybe because I didn’t earn it, but also maybe because he’s going to take that money and provide a job that will someday make my kid far wealthier than I ever hoped to be. But if I rob him of that money he earned, he won’t create that job because: a) without resources nobody can create jobs, and b) why should the victim feel beholden to the one who robbed him?

Have We Lost Our Minds?   2 comments

I like my house. When we first bought it, it was painted grey, which I didn’t like so much because on rainy days or winter days (and we have a lot of winter days), it just looked sad and depressed. Besides, the previous owners had messed up on the application so it was peeling less than two years after they painted it. So we power washed off the grey, re-primed and painted the house a kind of dark peach with green trim and it now looks more cheerful no matter what month of the year you see it. I am told by a neighbor who knows the folks we bought the house from that the wife doesn’t like our color choices and that’s okay because she no longer owns the house and we do. She can paint the house she owns any color she likes and I won’t critique it — though I was awfully glad when the new owners of the house across the street painted their black house (with red trim) a nice brown with white trim. I complimented them on the paint job, though I never said word one about the red-on-black scheme to the previous owners, because it was their house and not mine.

But imagine how I would feel if I came home one day and discovered that a renowned artist whose paintings were considered art treasures by experts had graffitied my house. Imagine if it were your house and that happened.

It’s my property, so — unless I really, really liked the graffiti, I’d immediately start cleaning the images from my house. So would you, I suspect. If they didn’t ask my permission, I’d want to sue them for whatever it cost me to restore my house to its preferred condition. You would too.

Then imagine that a few days later, you find you are being sued for breaking a law that protects public art of “recognized stature”. Because the artist who tagged your house is considered by someone to be a great artist, you must pay $6.7 million for whitewashing graffiti from your home.

That’s exactly what happened to Jerry Wolkoff, a Queens real estate developer, when he whitewashed dozens of graffiti murals at the 5Pointz complex, violating the Visual Artists Rights Act, “which has been used to protect public art of “recognized stature” created on someone else’s property.”

Wolkoff purchased the 200,000 square-foot former factory buildings in the 1970s for $1 million. Graffiti artists approached him in the 1990s, asking if they could display their art on the vacant five-story building. Wolkoff agreed. He wasn’t using the buildings and it seemed like a community-friendly thing to allow. In November 2013, Wolkoff decided to demolish the building in favor of new stores and apartments. He contracted painters to whitewash the decades of graffiti away under the cover of night to avoid conflict.

“It’s like a Band-Aid, I just wanted to take one rip off in one time. I felt it was best for them and I,” Wolkoff said. “I had tears in my eyes when I painted this morning.”

Okay, he probably shouldn’t have sneaked behind folks’ backs, but given them a chance to photograph and otherwise document what is ordinarily considered temporary works of art, but he knew what would happen — a long, drawn-out battle over the demolition which would harm his company’s bottom line. Twenty graffiti artists filed a lawsuit against the developer and in March 2017, Judge Frederic Block of U.S. District Court in Brooklyn ruled that their case could go to trail.

The New York Times declared this a great victory for the New York artist community and, indeed artists everywhere. I’m going to mea culpa here and admit that my daughter is a graffiti artist. After a close encounter with an angry building owner when she was 18 that resulted in having to clean his building to avoid jail, our beautiful anarchist renaissance woman now asks permission, often taking suggestions from willing participants, and then takes photos because she knows such art is temporary and adhered to other people’s property. When she travels back through a town, she looks for her murals and is always pleased when she finds them, but she also accepts that one day they may be gone. I haven’t had an opportunity ask her what she thinks of this. If she agrees with the artists, I expect her to change her mind after we’ve discussed it.

Wolkoff contended the graffiti artists knew that it wasn’t a permanent thing and one of them even admitted that in the press. Wolkoff granted only temporary permission. As the area around the complex was redeveloped, it should have been obvious to everyone that he was going to redevelop it and make some money from his investment. After all, it was his private property and he should be able to maintain his property as he sees fit. The fact that he knew announcing demolition would cause a court battle with the people he’d been so generous to for decades says he’d been thinking about how to resolve this issue for a long time before he took action. He had provided them with a place to legally do their particular kind of art and his decades-long willingness to provide that blank canvas for them helped to shift perceptions about graffiti and establish it as a celebrated folk art. Maybe they should have thanked him for that opportunity. Instead, in November 2017, a jury found the developer had violated the Visual Artists Rights Act in 45 cases and awarded the artists $6.7 million — the maximum damages possible.

Have we lost our minds?

 

It is essential for society to have a legal framework that doesn’t undermine private property rights. This happened in the United States where we are supposedly protected by the Fifth Amendment.  This wasn’t communist China where the government has granted itself the author to violate the liberties of its people. This is the United States where we’re supposed to be secure in our persons, property and papers. And a federal judge handed down this ruling.

Some people would argue that this is just a minor inconvenience to a rich developer. We all have to follow certain rules to live in society. He held onto those buildings for years without making substantial money from them, renting them to artists and small manufacturers. He could have developed the interiors and left the graffiti in place. People like graffiti … or if they don’t, they should recognize it as folk art that must be protected … Right?

In order for society to achieve economic prosperity there must be a legal framework that doesn’t undermine property rights. Take a look around the world and you find that the wealthiest nations have strong private property rights protection while the poorest nations do not. If I can come home tomorrow and there’s graffiti all over my house that undermines not only my resale value, but my neighbors’ property values, and I’m not allowed to correct the defacement of my property, that’s a problem … not just for me, but for everyone who owns a home or building or anyone who might want to in the future. One man’s folk art is another woman’s defacement and it is our property, not the graffiti artists’.

But in America today, you can actually find people who have no understanding of what private property rights mean. There’s three dimensions.

  1. The exclusive use of a resource
  2. The right to services or utilities rendered by it
  3. The right to exchange it at any price one considers appropriate.

Here’s a nice link for a deeper discussion of the topic. What happens when these rights are somehow restricted, limited or flagrantly violated by law?

The answer is found in the incentives those laws have created. From an economic point of view, an incentive is a potential pecuniary reward that moves someone to do something. When economists say that incentives matter, they mean that a legal framework that establishes the right incentives will result in economic growth and prosperity while the wrong incentives can lead a country into inescapable poverty. If you think this is just economic theory divorced from reality, Venezuelans might beg to differ since they’re living in the real-life consequence of price controls that violated their property rights..

There are many ways to violate property rights and governments do it a lot. Excessive tax burdens, regulations limiting the right to use your property (as happened to Jerry Wolkoff) or asset seizures by government are blatant violations of private property rights that end up depriving economic agents of incentives to create wealth, thereby demolishing one of the most fundamental pillars of prosperity.

Private property rights are incredibly important for any kind of prosperity … or for that matter, liberty … to exist.

So, again, I ask the question – have we lost our minds?

Electric Car Math   5 comments

These are Fairbanks, Alaska figures.

According to Plug In America, a quality electric car (a Tesla) uses 32 kwh to go 100 miles. For the record, 100 miles is less than one-third of the way to the nearest city in Alaska. I am so looking forward to stopping overnight on my way to Anchorage since the Tesla only has a 300 mile range.

Coincidentally, my car needs to be filled about every 300 miles. $2.38 a gallon for gasoline. I know, we produce the oil, so why is gasoline so expensive here. Nobody can give us an adequate answer. Economies of scale are the explanation given, but we produce the oil, so you’d think we’d get a break on reduced shipping, but apparently not.

Image result for image of tesla carElectricity is 27 cents a kilowatt hour in Fairbanks. So to travel 300 miles in a Tesla would cost me $26.00.

My car holds 18 gallons and can take me 300 miles. That’ll set me back $43. Oh, the cost is half, so get an electric car. But ….

BUT … I need a heater or I’ll die in Alaska’s frigid temperatures. Running a heater in a gasoline engine hardly reduces the gas mileage because it’s excess heat off the engine. Running a heater in a Tesla does reduce the range … by 50%. If I wanted to drive to Anchorage, 380 miles away, I’d have to stop for gasoline in Wasilla. That would take 15 minutes (half an hour if I decide to grab some food and use the facilities) and I’d be on the road again. I would not stop to sleep along the way as it only takes about seven hours to drive 380 miles.

Image result for image 2005 ford taurus covered in snowIf I was driving a Tesla in the winter, with only 150 mile range, I’d have to stop in Healey and Wasilla and sleep overnight – $120 per night for the hotel, $60 a day for meals, and two nights of my time since it takes a Tesla 9.5 hours to achieve a full charge (assuming it can do that when it’s -30 out). So what I save in gasoline over driving electric, I more than make up in other costs.

A $400 trip to Anchorage (round-trip – gasoline, meals and assuming a decent hotel) would become a $1300 trip in an electric car, plus add four days onto my trip.

So please stop telling me about how much money I would save with an electric car versus my gasoline car. Yes, commuting to and from work in a warm climate saves you money, but those savings evaporate in a cold climate and become a liability if you need to travel any distance.

 

Posted February 8, 2018 by aurorawatcherak in economics, Uncategorized

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RIP Sam’s Club   Leave a comment

Sam’s Clubs around the country are being closed, proof positive — according to some of my Democratic friends, that the economy is not doing as well as people think it is.

Image result for image of sam's club closingSam’s doesn’t mean that much to me. We used to be members, but when we stopped spending on credit, we went through a couple of years where we couldn’t afford Sam’s in our budget and by the time we could afford to budget for it again, we were out of the habit of using them. We’d started buying bulk at a local feed store and we’d discovered the Internet, so Sam’s was redundant.

I do acknowledge that it will be hard for some people to lose Sam’s. Small businesses who need bulk items – cups, coffee, etc. – will feel the pinch. Big families who buy bulk. A friend of ours who is a meat connoisseur who buys his meat in primals and does his own butchering. But for our family, it really wasn’t worth the membership. And 150 people lost their jobs here locally and in a community of only 100,000 people, that’s a hit.

But why did Sam’s close? According to our newspaper here, Sam’s nationwide is restructuring and that’s a complicated story. It belongs to the same corporation that Walmart and Walgreen’s belong to. Although Sam’s has not been unprofitable, it has not been growing as fast as Walmart and the fact that about 12 of the closed locations will be turned into e-commerce distribution centers, suggests Sam’s is looking into the future. These new centers will help Sam’s Club build out its e-commerce capabilities by giving it a wider fulfillment network, potentially helping it get online orders delivered to customers faster.

Increasing its commitment to e-commerce may help Sam’s Club compete with wholesale rivals like Cosco and Boxed. E-commerce is becoming more of a focus in wholesale retail, and if Sam’s Club doesn’t invest in it, the company may get left behind. Costco is a major competitor to Sam’s Club (and there’s one in Anchorage, but not in Fairbanks), and in its most recently reported quarter, its e-commerce comparable sales jumped nearly 44% year over year. Additionally, Boxed, an e-commerce only wholesale startup, is starting to establish itself. Sam’s Club’s e-commerce gross merchandise value (GMV) has been between 20% and 29% year over year in recent quarters, Sam’s Club told Business Insider Intelligence. These new fulfillment centers may help the company strengthen this growth, as it looks to better compete in wholesale online.

Turning physical stores into distribution centers is also way for Walmart to leverage its brick-and-mortar network. Walmart has a virtually unmatched brick-and-mortar network — its CEO has estimated that it has a brick-and-mortar location within 10 miles of 90% of the US population. The retailer has made efforts to entice consumers to pickup online orders in-store, but turning underperforming stores into full-blown e-commerce distribution centers as Sam’s Club is doing is another way to take advantage of its proximity to its consumers. If Walmart, and Sam’s Club, hope to thrive online, they’ll need to offer fast delivery times to rival Amazon, and having e-commerce distribution centers close to customers should help with that.

Just as the Piggly Wiggly’s ran the full-service grocery store out of business, online e-commerce is sucking away the business of physical locations. But Amazon isn’t a monopoly yet and it is struggling with its network (hence, it’s desire to build a second HQ). If Walmart moves into ecommerce in a big way, utilizing former Sam’s Club locations as fulfillment centers, it potentially becomes a major contender against Amazon.

It sucks for Alaska because we have to pay individual shipping rather than allowing Sam’s to spread that cost in bulk, but we can still use Cosco, which is in Anchorage and has been suggesting for years that it might move to Fairbanks. They no longer have any competition here, so they just might. And, if they don’t, a local trucking company is advertising that they will be doing twice-a-month 380-mile runs with people’s personalized shopping lists. Yeah, it’s the return to the full-service grocery store.

Ultimately, Sam’s Club is an example of creative destruction. By closing many of their locations, they allow their parent company to become healthier and better able to face the changing needs of a 21st Century society. In 10 years, people will wonder why we went through all the hassle of traveling to a big warehouse to pick up stuff, wandering by stuff we don’t need, but then decide to buy, then try to fit it into our cars when we can now just make our selections online and have it delivered to our door by freight drone.

Posted January 20, 2018 by aurorawatcherak in economics, Uncategorized

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Stealing From Your Neighbor Through Subsidies   Leave a comment

In 2017, the Montana Public Service Commission approved (4 to 1) the renewal of Commnet Wireless’s Eligible Telecommunications Carrier (ETC) certification, authorizing that company to receive a federal “Lifeline” subsidy of $34.25 for every customer on the Northern Cheyenne Reservation – an amount sufficient to render their service free to most users. Previously, this same company received $2.2 million in Universal Service Fund (USF) “high cost” subsidies to build their infrastructure in Rosebud County. This subsidy paid for all of their capital costs in establishing their business, debt-free, while producing for them a tidy annual profit of almost $1 million.

Image result for image of fiber optic cableIt seems that Commnet Wireless is “living the American Dream” – at everyone else’s expense. But that’s not a rare circumstance.

 

The Universal Service Fund was first created by Congress in 1934 then greatly expanded under the Telecommunications Act of 1996 (Clinton was President). It is funded by a dedicated federal tax on consumer phone bills. This, ironically, makes the very services Congress wishes to expand less affordable, especially to lower-income Americans. The program is premised on the belief that an ever-expanding set of telecommunications services are the “right” of all citizens, and should thus be made “universal” by the generosity of Washington’s re-distributional political class.

The program started with landlines, then expanded to wireless and is now being applied to broadband — and not just any broadband, but high-speed fiber-delivered broadband. The Lifeline program gives away free cell phones and subsidizes low-income and tribal households. The Connect America Fund and “High Cost” programs directly subsidize telephone companies, as well as schools, libraries and rural health care facilities to provide “free” Internet. USF’s total annual budget is currently $10.5 billion, or $84 per American household.

That’s a month of Internet at my home, where I can’t get high-speed broadband because the infrastructure doesn’t exist. We can get “high-speed” DSL that drops out 2-3 times a day because people are making phone calls or cable Internet which is slower than high-speed fiber. I’ve never lived anywhere that offered high-speed broadband because our local Internet providers just don’t see a profit in providing it and permitting laws don’t allow competition. So do I have a “right” to high-speed fiber-delivered broadband? I haven’t died without it up to this point and we’ll pursue that thought further down.

Like all federal programs, USF proceeds blindly with the assumption that shoveling federal dollars at something automatically produces the desired outcomes – outcomes that would not otherwise happen if people were left to spend more of their own money, and the marketplace was allowed to respond to human needs and desires absent government intervention. It’s not surprising to learn then, that the FCC has never reliably measured to what extent the subsidized telecommunications services would have expanded just as much – or more – into the targeted high-cost areas, without any subsidies needed – and done so at lower cost. Dollars spent are considered a successful outcome regardless of actual outcomes.

In Alaska, rural villages and the Native corporations that they own came to the conclusion that, since the cities don’t have fiber-based high-speed broadband yet, the villages would have to provide it for themselves. Internet is currently provided via satellite and it sucks. Several corporations made a decision to contract with Anchorage-based Quintillion for a land- and sea-based fiber-optic cable network with an overall capacity of 30 terabits per second. Each of the five communities in the network currently will have access to up to 200 gigabits of data per second. If demand increases, the capacity can be increased according to Quintillion. It went live December 13. Four other villages will be added this coming summer.

This is a side project to a planned Tokyo to London fiber cable. It’s being financied by Leonard Blavatnik, one of the world’s wealthiest individuals, through the Cooper Investment Fund, but there are also Alaska-based investors including subsidiaries of Native corporations Arctic Slope Regional Corp. and Calista Corp, two of the largest “private” companies in Alaska. Eventually, this cable is expected to provide fiber-delivered Internet to Fairbanks and Anchorage.

So what do we learn from that? The time has come to re-think wealth transfer schemes like the USF, that eliminate price signals, supplant the free market, and create the net effect of increased government dependency and a culture of entitlement. As with any other good or service in a free economy, consumer demand for rural high-speed broadband should be based on the willingness of consumers to pay for the full cost of that service – not based on political pandering that subsidizes one man at another’s expense. A shell game with predetermined winners and losers, lacking any credible metrics and amounting to little more than a glorified multi-billion dollar welfare program.

Saying we “want” something as long as somebody else pays for it is not “demand”. Currently, broadband build-out into high-cost areas is based almost entirely on artificial demand – created by subsidy – rather than on true demand, created by value-seeking consumers in the marketplace, responding to the price signals of true cost. If consumers in outlying areas value fiber-delivered high-speed internet enough to pay the full cost, then we have genuine demand and the market will see to it that these services are provided – without any government involvement.

If consumers are unwilling to pay the true cost, then demand does not exist, and presumably won’t exist until private enterprise finds ways of delivering better service at a lower price. But that incentive disappears when the government steps in. Saying we “want” something as long as somebody else pays for it is not demand. It is little more than theft dressed up by the agency and power of government. Personal responsibility – the foundational principle of a free society – is replaced with “but I want it, so you should pay for it.”

According to my research, you can get high-speed broadband for $30 a month in New York City. Here in Alaska’s second-largest city, I can get slower cable-based Internet for $100 a month — actually, I could get cable Internet for as low as $60 a month, but you can’t watch Netflix without going over the monthly limit. Of course, we don’t have high-speed broadband because the current cost for building broadband or wireless infrastructure into rural and low-population areas is obviously higher on a per-customer basis – perhaps 50 to 100 percent more. One of the fundamental principles of sound economics is the alignment of benefits with costs. When you subsidize a good or service, you can no longer know what people are actually willing to pay as consumers because the government has gotten somebody else to pay for them.

This arrangement tends to convince rural customers that the full price is “unjust” to those who have chosen to live in the country. At the same time, it obstructs the very progress that would bring lower prices about. The subsidized companies have a reduced incentive to economize and to innovate since their profit is all but guaranteed without it.

Public service commissioners everywhere need to understand that it is not the job of the state commissions to rubber stamp federal programs that evidence shows are harmful in the long run to the people they serve. Subsidies like USF produce obvious beneficiaries. Government giveaways always do. They are highly visible. The market-driven benefits produced by those same dollars, left in the hands of those who earned them, are always far greater, but cannot be specifically identified. They become the opportunities lost, the blessings of liberty that were aborted before their birth.

Thus, government creates an illusion of value and benefit, when in reality all it has done is substitute government spending for spending in the marketplace by the frugal, self-interested, wage-earning consumer. The fantasy of a net benefit is bestowed on the person who wasn’t involved in the working or the earning – convinced by politicians that he had it coming all along. Surely, high-speed broadband is in the Constitution somewhere.

Once established, climbing out of the Subsidy Entitlement Pit is never easy. The smoke and mirrors of perceived benefit are so effective, that it becomes very difficult for elected officeholders to do the right thing, by choosing freedom over political security. It is far easier to avoid criticism and “go with the flow.”

To be sure, doing the right thing and doing the easy thing are rarely companions that walk the same path. Doing the right thing requires an extra measure of principle, courage and integrity, something most politicians and government workers lack.

What this comes down to is not just an economic consideration, but also the need to educate people on just what is a “right”. I have no right to anyone else’s stuff. I only have a right to what I can produce myself or trade with others from what I can produce myself.

So, for example, I am a writer and administrator. I make money from both of these endeavors. I can take the money and buy stuff with it, stuff that someone else has produced. One-hundred dollars of my earnings go every month to my cable provider to provide Internet service. I don’t have cable television or this would be the biggest bill in my budget. I get what I get. From the perspective of someone with fiber-delivered high-speed broadband, my Internet service is clunky. But would I be willing to pay $200 a month for fiber? No way! I simply don’t have that sort of wriggle room in my budget. If it were available for that cost, I would continue with the service I have now because I make choices of what to do with my money.

My neighbor says he wants high-speed Internet, but he isn’t willing to pay $200 for it. So, he petitions the cable company and the city government to apply for ETC funds. Pretty soon, my cable bill increases because the company is trying to finance fiber. Also my telephone and cable bill taxes increase. Now, even though I have elected to stay with ordinary Internet service because I don’t want to pay for fiber, I am paying for my neighbor’s fiber.

That’s theft. And there is no scenario where you can say that you have a right to steal from someone else, even if you do it through a government program.

Taking the Long View   Leave a comment

So, I ran into my extremely liberal former coworker in the grocery store last night. She was all in a tizzy about corporate tax reform and how it was going to “harm” her financially. Wasn’t I worried about how much more I would pay? When I said my sister-in-law (a CPA with tax experience) had checked my math and assured me we would be saving money not losing it, Michelle asked if my husband’s business had finally taken off. No, Brad is still keeping it small and enjoying being able to take time off to go fishing and hiking when he wants. We’re not rich and current tax reform should save us at least $800 and maybe as much as $2000. And, no, Brad’s business is a sole-proprietorship, not a corporation.

Image result for image of tax cuts helping the economyMichelle is a social worker, not an economist, but that’s really no excuse for ignoring the inconvenient fact that voluntary economic arrangements benefit all participants … else individuals could refuse to participate. In the absence of fraud (government’s failure to protect citizens from criminals) or coercion (government’s invasion on citizens’ rights), self-interest will guarantee a benefit to all parties, regardless of what Congressional Democrats may say at the moment.

The progressive strategy going forward will be to ignore many clear mechanisms by which the rest of us gain from improved incentives for capitalists to use their resources for others.

Corporate tax reform improves after-tax rewards for capital investments, providing tools for increased worker productivity and earnings. It further stimulates innovation, advancing techniques and improving technology, risk-taking, and entrepreneurship. This doesn’t just help company owners, but benefits workers and consumers.

Of course, there is a commonsense caveat here. It takes time for owners of capital to fully respond to improved incentives, meaning the positive effects on workers’ circumstances will appear only with time. The whole strategy of tax-reform opponents will be to focus people’s attention on the short run, before the positive labor effects appear in the data. The hope is that voters will overlook these benefits, which may not be fully realized, in fall of 2018 when they go to the polls to elect Representatives and Senators.

It might be a useful strategy because the benefits to capitalists appear immediately in the data. By comparing the limited benefits to workers in the present to both the present and future benefits to capitalists, opponents of corporate tax rate reductions can cast tax reforms as essentially just “tax cuts for the rich,” even if the vast majority of benefits actually accrue to workers over time.

This is how it works. When the tax burden on a class of assets, say corporate stock, is reduced, it will lead to an immediate increase in those assets’ prices. The asset price increase will not only reflect current gains to their owners, but also capitalize the expected increased after-tax profits that can be expected in the foreseeable future. The more durable the improvements are likely to be, due to future effects, the greater the asset price surge will be.

Additionally, most financial resources are owned by people who have greater wealth and income. Often these are older middle-class households who have had more time to convert unmeasured earning capacity into measured financial wealth, but that still leaves their middle-aged offspring not quite certain they’re seeing a benefit in the first year of tax reform. So, by focusing only on the short run (fall 2018), the results can be made to appear as huge asset gains for “the rich,” with almost no effect on American workers’ financial well-being. That lag lets tax-reform opponents assert that their claim has been “proven”. Of course, the main benefit of these short-term results accrues to older households that have had more time to convert unmeasured earning capacity into measured financial wealth.

Unfortunately for opponents’ supposed “proof”, the improved incentives of higher after-tax returns are the mechanism which produces increased worker productivity and real earnings over time. Those cumulative effects are very large, even when their immediate effect is small. But unlike financial market assets, there is no marketplace in which the higher real earnings of workers in the future (economists call that “human capital”) get capitalized into an easily-observed wage and/or benefit increase.

January’s investor- and owner- class begin to benefit workers later in the year or in January of 2019, but by emphasizing the short-run, the opponents basically just ignore that economic fact.

Michelle insisted that they should have implemented the tax reform starting in 2019 to allow people to adjust. I was stunned at first that anyone would want to delay getting to keep more of their money, but then I remembered, there’s an election in November 2018. She was probably just parroting some talking points she’d heard and taken as gospel. By implementing tax reform staring in January, the GOP gives some hope for businesses to see the benefits of tax relief immediately and to begin to pass those benefits onto their workers and consumers by late summer. As proponents of “taxing the rich” see their prospects for a political win evaporate, they will focus attention on the short-run. “Your wages haven’t gone up spectacularly yet, have they?” Banging that drum throughout the year will make excellent electoral ammunition … unless workers see an increase in their paychecks in late summer.

By the way, we’ve been here before with the Reagan tax reform. There are still people (Michelle is one of them) who will insist that the Reagan reforms had no positive effect for ordinary people. It was just “a tax cut for the wealthy.” Unless you were a worker who say a benefit before the next election, you probably thought your own experience was “proof” that Reagan’s tax reform didn’t work. A short term focus is a massive misrepresentation which diverts attention from the fact that improved incentives reveal themselves in the economy and for workers and consumers over time. If we take a longer-term view of economics, we aren’t fooled by the sleight-of-hand, but most progressive have difficulty with the concept that it can take six to 18 months for a tax cut to be reflected in the growth of real wages. I think that’s the effect generated by a bailout mentality.

Now, here’s the thing – ultimately, tax reform is only part of the picture for a healthy economy. The US economy is burdened by many things in addition to a high corporate tax rate. Unacceptably high levels of debt, private and governmental, also drag on the economy. The evisceration of the manufacturing sector doesn’t help. President Trump is making great progress on the rollback of regulations that was encouraging manufacturers to move overseas and a better tax rate might also help to protect and improve manufacturing in the US, but tax reform alone is not a magic pill. It’s just part of a compound strategy that is essential if any other parts of the strategy are going to work. At some point, government is going to have to cut spending in order to eliminate deficits and address the debt, but that only works if the economy is growing.

Unfortunately, politicians tend to see things in 2-6-year cycles, so don’t often take a long-view approach to the economy. Which begs the question –

Why do we think they should be in charge of the economy?

Posted December 21, 2017 by aurorawatcherak in economics

Tagged with , , , ,

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