Thursday, November 24, 2011

America Inc.

The Occupy Wall Street protestors provide an example of what can happen when thousands of unemployed or underemployed people exist even if those people are fed and housed due to public welfare programs. People weren’t protesting because they were starving or because of police brutality, they were bored and had nothing better to do. Idleness, in addition to poverty, is a Public Bad. One of the arguments for Social Insurance, including Welfare, is that by reducing or eliminating the suffering of others is a Public Good in that everybody’s Utility is decreased by seeing others in poverty. However, the welfare programs that exist today exacerbate the Public Bad of idleness.
Everyone agrees that it would be better if they had jobs, but some claim that there aren’t any jobs out there. Poppycock! To say that there aren’t any jobs is akin to saying that scarcity does not exist. They might not be the jobs that the protestors want (and think they deserve), but there are jobs out there. As long as people have unmet wants, then jobs exist. I wonder how many protestors have volunteered to join the military, pick up trash, or harvest crops.
Unfortunately, our system discourages both workers and employers. Welfare programs are based on income levels. Thus, the loss of government assistance to employed people is effectively an extremely high tax rate. People are better off staying on welfare and working on the black market instead of joining the legitimate labor force.
Employees and employers aren’t allowed to agree on wages below the federal minimum. Frankly, some people aren’t worth $7.25 an hour. The real problem is the asymmetric information. Employers don’t want to risk hiring someone with unknown abilities and people can’t show their abilities without getting hired.
America needs an ongoing employment program to help the situation. My vision is to have government-owned enterprises in almost every sector of the economy – agricultural, manufacturing, construction, services, retail, … The government would own farms, plants, and stores whose primary purpose is to employ people, however, the enterprises themselves could be profitable. These enterprises would replace most welfare programs, and there could be some contribution from government. However, the contribution would be fixed so that more people employed in these enterprises would mean lower wages per worker.
The ultimate goal is to get people into private jobs instead of living off the public sector. Private sector employers would be relieved of the burden of testing out and training unqualified workers. This program gives these people training, experience, and an opportunity.
While this program obviously has some Socialistic characteristics, I am in no way a Socialist. However, turning part of the economy socialist is preferable to turning the entire country socialist. I firmly believe that these programs will narrow in scope as people who want to work and do a good job end up with private sector jobs. Meanwhile, those who don’t really want to work end up off the government dole.

Monday, November 21, 2011

Social Security and Consumer Debt

Proponents of Social Security like to say that it is the only thing that keeps millions of
seniors out of poverty. Of course that ignores all the taxes that they paid
into Social Security before retiring. I doubt you’d thank a mugger if he give you
twenty bucks back after stealing your wallet. In order to decide whether or not
social security actually benefits people, you have to look at what they would
have done had they not had to pay all those taxes. Proponents implicitly assume
that people would completely waste all that money and it would just be gone by
the time they retire. Thus, any payment from social security is treated as a
pure gain.

If you look at social security as an investment, you can calculate the return to your investment. Social Security returns are higher for low income workers with long lives. The Social Security administration provides numbers here and more analysis is available here. Suffice it to say that the returns are pretty bleak with an average of 1-2% after inflation.

These returns are pretty pathetic when compared to investing in the stock market
where inflation adjusted returns are closer to 8%. When there are discussions
of privatizing social security, they talk about how risky stocks are and they
revel in every dip in the Dow. The real risk is not having enough money during
retirement and social security is at least as risky for this standpoint.

Instead of looking at the stock market, you can look at debt. Americans, especially the poor, are
drowning in debt – from credit cards, auto loans, underwater mortgages, to
student loans. The Wall Street protestors and community activists like to blame
banks and demand principal reductions and loan forgiveness. Simple math will
tell you that it is foolish to earn 1-2% on your savings while paying 10% on
your debt, but that is exactly what Social Security forces people to do.

Saturday, October 15, 2011

You ARE the 1%

The Occupy Wall Street movement has been focusing on the level and growth of inequality in the US with their "We are the 99%" motto. In reality, they are the 1%, and not just because so many of the protestors are college students that come from priviledged backgrounds. They are the 1% because they live in a nation of great wealth, and that great wealth is largely the result of the corporations, banks, and economic system that they are protesting. Even those in poverty in the US are likely to have cell phones, color TVs, and computers -- luxuries that most of the world do not enjoy. We are a country of haves and have-mores instead of a country of haves and have-nots.

The protestors complain that corporations are unfairly shipping jobs overseas. Of course, providing jobs in developing countries helps the poorest people in the world and reduces global income inequality. Apparently, the 1% are supposed to help the poor, but not the really poor. The protestors really only care about their own well-being, just like the 1%.

The protestors complain that the 1% doesn't pay enough in taxes even though their share of the tax burden is even higher than their share of income. The protestors want that money to be redistributed to themselves to reduce inequality. They are just as selfish as the 1% that they rail against, perhaps just not as good at it.

The protestors want bankers to be held accountable for their part in the financial crisis. Do they want to prosecute people who didn't pay back the amounts that they borrowed? Do they want to prosecute people who lied on their mortgage applications? While I too want anyone who acted illegally to be punished, I am not sure the protestors will get the results that they desire.

Wednesday, August 17, 2011

Good vs. Bad Government Spending

Paul Krugman believes that the problem with the fiscal stimulus is that it just wasn’t large enough and that we are in need of another one to improve the economy. He even went so far as to suggest that a military buildup to protect us from a fake alien invasion would be a good thing.

As support for this he brings back his argument that World War II brought us out of the depression. The idea that war is good for the economy is absolutely wrong. While it may be true that war (or any fiscal stimulus) increases GDP, a higher GDP does not mean an improved economy. (I will give him the benefit of the doubt and assume that he doesn’t believe that the death of 400,000 military personnel isn’t good because of the higher per capita GDP.)
An economy only improves if people have more of the things they want. War does not do this and neither does wasteful fiscal spending. Professor Krugman also argues that cutting federal spending and austerity is bad which is wholly incongruous with his argument that World War II was good for the economy because the war was a period of tremendous austerity with the rationing of many goods.

Now this is not to say that Krugman is entirely wrong about fiscal spending. Government spending is worth it if the benefits outweigh the costs and this is true whether the economy is in a recession or an expansion. Some spending, such as protection against fake alien invasions, provide no benefits and should not be undertaken. I would also include land wars in Asia, most entitlement spending, and most wealth redistribution efforts in this category of wasteful government. Beneficial government spending would include some amounts of national defense, education, infrastructure, legal and regulatory framework, scientific research, and even some entitlements and wealth redistribution.

I would even agree with Keynesians that federal spending should increase during recessions. Not because it stimulates the economy, but because the cost/benefit tradeoff changes resulting in more beneficial projects. If unemployment is high, then the government can hire people at lower wages. If interest rates are low, then future benefits have a higher present value. Thus, a bad project during expansions becomes a good project during recessions. However, paying people to do nothing and trying to keep wages high completely nullifies this.

The main problem with the economy isn’t the lack of fiscal stimulus, it is the excessive use of bad government spending. If the government were to cut the wages of current employees and cut out a lot of the bad spending, then it could fund spending that actually has benefits.

Sunday, August 7, 2011

Social Security does contribute to the deficit

There are many ways to solve the budget deficit and reasonable people may disagree as to which method is the best. Revenues could be increased through some combination of higher levels of GDP, faster growth of GDP, and higher taxes as a percent of GDP through either higher tax rates or eliminating tax expenditures (such as home mortgage interest deductions). Realistically, there is some limit to the ability to raise revenues because higher tax rates may also limit the level and growth rate. I have posted on the Laffer Curve before as have others with opposing views.

The deficit could also be reduced through spending cuts. There is also a limit here as lower spending could lower the growth rate of GDP (higher spending may also reduce growth if the spending crowds out private investment with greater growth opportunities). For convenience, the US budget can be broken down into four broad areas: health care (Medicare and Medicaid), Social Security, Defense, and discretionary non-defense. Right now, health care, Social Security, and defense are all in the $700-$800 billion dollar range, but health care has the highest projected growth rates and is definitely the biggest threat to the deficit. However, today I would like to talk about Social Security.

Many people, including Nobel-prize winning economists, argue that Social Security does not contribute to the deficit because we have historically raised more in revenues into Social Security than we’ve spent resulting in a large surplus in the “trust fund” that won’t run out for many years. While this is technically true, it ignores the fact that by soaking up such a large portion of US tax revenues, there is less opportunity to raise additional revenue.

Imagine if there were a law that said that 50% of all tax revenues were dedicated to the Department of Defense. If the defense department only spent 20%, would that mean that they are saving us money or that we don’t spend enough on defense? Of course not, the problem would be that we are dedicating too much of our revenue on defense.

That is the problem with Social Security. By dedicating 12.6% of most workers paychecks (including the “employers” portion, another myth), we are crowding out revenues that could be used for better purposes. An individual with an income of $50,000 would pay 15.3% in Social Security and Medicare, another 15% in federal income taxes, and maybe 10% in state and local taxes, sales taxes, property taxes, … No wonder so many people feel that they are Taxed Enough Already.

Tuesday, March 29, 2011

Collective vs. Individual Bargaining Rights

We are in the midst of attacks on unions in general and public sector unions in particular. While most critics argue that this unfairly limits workers’ collective bargaining rights, it should also be seen that unions restrict the individual bargaining rights of workers. The value of unions increases with the monopsony power of employers in the hiring process and the similarities among employees. For example, generous health care benefits may not provide as much value to younger, healthier employees and employees who already have coverage through a spouse. Pension plans that reward longevity may not provide as much value to mobile employees. Salaries that are based on experience and degree fail to reward those exceptionally talented teachers. However, these teachers have no voice for their needs. They are stuck with the deal negotiated by the union.