Category: Economics

Income Mobility and Inequality in America

There has been much hand wringing on the left about inequality. We are told by the media that the American dream is dead; that the rich get richer while the poor get poorer. Is the American dream dead?

43% of American born into the bottom quintile of wealth stay there as adults. 40% of Americans born into the top quintile will stay in the top quintile as adults. This of course means that 57% of the bottom will rise out of the bottom, 4% of them reaching the top and conversely that 60% of the top will fall, 8% of them to the bottom. Is this really the full picture of inequality?

Consider that quality of life in absolute terms has continued to go up. Being poor in 1950, 1960 or even 1990 is not the same experience as it is today. Most of the poor today have things considered luxuries in the recent past such as cell phones, computers, and air conditioning. The median family today has nearly twice the purchasing power than they would have had in 1960. Therefore absolute income is only a part of the story. The same capitalistic system that rewards those with money with more money also leads to tremendous advancement in quality of life.

Even looking at income alone, 84% of individuals have family income greater than their parents, after adjusting for family size. In the bottom quintile, 75% greater than $10,000 more in income, 44% greater than $25,000 more.

Much of this information comes from reports from the Heritage Foundation, a conservative think tank. I did some research to see what the other side is saying about these numbers. Think Progress took on Heritage’s assertion of relative prices by pointing out that education and healthcare costs have risen in relative cost. So let’s analyze this fact for a moment. College costs have in fact risen dramatically faster than inflation. Is this because of greedy capitalists- no; it is precisely the opposite, cheap government money has allowed higher education costs to rise. Healthcare is more complex, costs are rising because we have much more healthcare choices and technological advancement allows us to live longer and better. Once again Government has also been deeply involved driving up costs with regulations and controls. Obamacare was sold as a way to provide healthcare for all; the president promised it would lower costs; but so far the opposite has occurred as choices do down and costs rise.

Meanwhile the greedy capitalists that the left so often points the finger at have brought us cheaper and better goods and services. The poor can afford cell phones- that make their lives easier. Most of them can access the internet, many even in their own homes. Information that was once costly to consume and learn is now cheap and easy. Henry Ford grew rich by bringing the average American worker a car he could afford. Steve Jobs by revolutionizing products that connect us and entertain us. Products that were once luxuries are now available to almost all.

Healthcare and education need not be exempt from this progress. Technology in healthcare can also bring costs down and increase wellness if we let markets work. Home schooling is thriving in America; parents today have the ability to bring world class instruction into their homes through the internet. If we decouple government money from higher education, we will see choices go up and costs go down as institutions are force to innovate and compete for students.

Much of the philosophical divide in this country comes down to a lack of understanding of economics and capitalism. Progressives fall into the zero sum fallacy- that there is a set amount of wealth in the world and it can be managed by governments to create more equality. The left uses fairness and inequality arguments to further their socialistic philosophies and grow their power.

The reality is that wealth isn’t fixed, capitalists create wealth by serving their fellow man. The more wealth they create the more potential relative prosperity for all.

All of us are born with different circumstances, some of us have advantages over others, and we will never have wealth equality in America. Free Market Capitalism remains the best system to foster income mobility and allow all of us to maximize our potential and live prosperous productive lives.

First “Do No Harm”

Physicians swear to first do no harm. Doctors must carefully weigh their treatments and interventions into the body to be sure not to do more harm than good. They must weigh the pros and cons, they utilize science to make informed decisions and to guide their patients.

If only government understood this simple idea. We have an activists government, a government that sees problems everywhere and is eager to solve them with laws, regulations, prohibitions and interventions of force. It is of course our own fault, we expect our government to take care of us. Governments have always existed to prevent force from outside their borders and maintain an army and defense. In modern times governments have become expected to do many more things. The government is expected to shepherd the economy to make sure the citizens have jobs that pay the bills. Governments are expected to care for the elderly and provide fairness in all things. Drugs are bad- so government must outlaw them and put those who refuse to obey in jail.

When politicians see a problem they immediately start thinking of how to address it with the force of government. All too often we pass laws thought to address a problem that create more harm than good. No one would argue that the disabled should be discriminated against so we passed a law, the ADA. Then we all moved on feeling good about our great society. But the result of that law was that fewer disabled people got jobs as businesses were afraid of the costs of accommodating them or being sued if they didn’t work out. It didn’t matter if a particular disabled person was happy to work somewhere under the conditions, the government wouldn’t allow it making that person a liability- and taking away that choice. Prostitution is demeaning to women so we prohibit it almost everywhere. But the demand remains and so now women who become prostitutes, some willingly some not, are at the mercy of the lawless streets. The intention is to get rid of the behavior we abhor but the result is worse.Regulation of industry is similar. The process was described in comical fashion by Ronald Reagan: “If it moves tax it, if it continues regulate it, if it stops subsidize it!”

In my debates I am often asked to prove that a particular law or regulation is harmful; shouldn’t the burden be on the government- the only institution with the compulsion of law to prove that it isn’t? Shouldn’t we expect our lawmakers to first do no harm? Shouldn’t they examine all the costs and weigh these against the proposed benefits of what they propose? The problem with laws and rules are that they rarely go away once passed. Year after year they persist despite all the evidence of their failure or high cost to benefit ratio. Whole industries thrive on these laws and protect them with powerful lobbyist and lawyers.

We have an ever growing nanny state, the only difference between Republicans and Democrats in recent years has been the size and scope of the nanny state. Mayor Bloomberg of NYC, a quasi Republican has gone after smoking, salt, and now soda in his city all in the name of protection. He has even tried to control the amount of pain killers doctors prescribe in the cities hospitals. We are more enamored today with safety and comfort than we are freedom. We expect to be protected and we have been all too willing to give up choice and freedom to do it. Let the citizens demand that their government first do no harm.

Infinite Growth?

I hear and read over and over again that we have an economy based on infinite growth in a finite world. One common refrain goes something like this: “an economy based on infinite growth is unsustainable.” I have even been “assaulted” by this phrase while listening too and attending a concert by one of my favorite current bands: “Muse.”

The logic is of course partially correct; everything we know if finite. I believe in an infinite God but I cannot logically explain that belief- I accept it on faith. So it is easy to say something is finite on logic alone. Our economy is certainly based on energy and there is a fixed amount of energy- even the sun will stop burning someday.  One of the most common applications of this logic applies to our use of fossil fuels. We use oil, coal and natural gas to provide most of our energy and there are fixed amounts of these natural resources. The question becomes how much of these resources do we have and what are the best way to distribute these resources.

Peak oil is one theory used to try to predict when we will reach a peak in oil production and when we will run out. M. King Hubbert, the author of the theory predicted in 1974 that we would reach this peak in production in 1995. This did not happen, from wikipedia:

M. King Hubbert initially predicted in 1974 that peak oil would occur in 1995 “if current trends continue.”[1] However, in the late 1970s and early 1980s, global oil consumption actually dropped (due to the shift to energy-efficient cars,[2] the shift to electricity and natural gas for heating,[3] and other factors), then rebounded to a lower level of growth in the mid 1980s. Thus oil production did not peak in 1995, and has climbed to more than double the rate initially projected.

History is littered with very smart people predicting all kinds of things that turned out to be completely wrong. The most basic reason for this is we can’t know what we don’t know. It was unthinkable in 1974 that oil consumption would drop in a few short years and then go to more stable growth. It was unforeseeable how good engineers would become at finding more of it and finding unconventional ways to get it. Some other very smart informed scientists and oil men believe we have only scratched the surface of oil production and that we won’t run out for perhaps hundreds of years. But these men, just like the men who claimed we are running out now; can’t know what they don’t know.

So where are we now? Oil production is still increasing but so is demand. We can now drill horizontally using new technology- and old technology in new ways such as the much maligned and misunderstood hydraulic fracturing. We can get oil from tar sands and shale rock. In fact it is now estimated that only 30% of oil reserves are the conventional oil we currently rely on heavily. We also have learned to make cars, homes and factories much more energy efficient. I drive a large car (VW Passat) that gets 40MPG easily, in 1974 an equivalent car may have gotten 15 at best.

Natural gas production has skyrocketed and is one of the few things keeping manufacturing in the United States from contracting. Natural gas can be used to power cars and is already used in many municipal car fleets and mass transit vehicles.

It is ironic that the use of natural gas in the United States is responsible for the majority of the reduction in CO2 emission since 2007. Coal emissions went down as it was replaced by natural gas which was made economically viable by the fracking that environmentalist love to hate. Windmills and solar panels that are so in favor and heavily subsidized by government had little overall effect.

Back to growth. Capitalism and globalism are good things, as we grow in the 1st world the third world grows with us. 20 years ago cell phones were expensive and bulky devices mostly used by wealthy businessmen. My Dad had one that was the size of a small briefcase and it could only be used for work emergencies. Fast forward to today and one of the fastest growing cell phone markets is third world Africa. Shanties are built with solar panels to charge cell phones in places that land line service never reached. A cell phone may allow a poor woman to get more work as she can now communicate quickly and easily and find opportunities to earn money. The wealthy businessman with a mobile in 1986 wasn’t thinking about the poor sub Saharan woman- but by buying and using the technology he made it cheaper and better and eventually almost everyone can afford to use it. Much of the anti capitalist rhetoric presents a false premise that markets are a zero sum game. Our “excessive” consumption leads to the deprivation of someone else is the theory. The reality is that our consumption and desire for a better life allows for more abundance everywhere. As our standard of living increases in real terms so does that of the extremely poor. Growth is good for all and capitalism is the engine of growth in the world. Free markets and simple rule of law lead to prosperity wherever they occur.

We will have to consider our sources of energy and continue to make everything more efficient and find better cleaner ways to power our world. We will also have to continue to consider other resources like food and water as the world gets more populated and people live longer we will need more of everything. Capitalism has proven to be the answer to these problems again and again. Markets allow people to make choices based on costs and ration their needs. A truly free market will continue to produce the most abundance of resources and it will not discount the future for the present either.

Some may say that we have enough things in the modern world and are overly consumeristic. I agree but growth isn’t the problem and neither is capitalism in general. Many people in the world are still living in extreme poverty and growth can and will lift them up also as it has lifted the modern world. Capitalism isn’t perfect and life can be unfair but it is still the best system with which to manage our scarse resources and plan a better more abundant and fair world.

Sacred Economics- A Review Part One

A couple months ago I was challenged by blogger/activist Chris Agnos at Sustainable Man; to read Sacred Economics by Charles Eisenstein. In exchange Chris is reading Applied Economics by Thomas Sowell. The hope is that each will learn something from looking at the antithesis of our own philosophies and beliefs. I have always tried to read and expose myself to ideas from all sides of an issue. Any valid argument seeks to address couter arguments and provide answers and alternatives.

I have finished reading the first part of the book. Eisenstein sets up the first part of the book to attack modern capitalism and society. This isn’t new ground by any means but Eisenstein is no crack pot and he does a good job at making a cogent argument without too much invective and empty rhetoric. Anybody seeking to change a system has to first demonstrate its’ failings and Eisenstein does that with a mix of logic, evidence and history. I am going to summarize a couple of his key points and address them in this article. I am not seeking to write a book here just address some key and common points.

“Today we associate money with the profane, and for good reason. If anything is sacred in this world, it is surely not money. Money seems to be the enemy of our better instincts, as is clear every time the thought “I can’t afford to” blocks an impulse toward kindness or generosity. Money seems to be the enemy of beauty, as the disparaging term “a sellout” demonstrates. Money seems to be the enemy of every worthy social and political reform, as corporate power steers legislation toward the aggrandizement of its own profits. Money seems to be destroying the earth, as we pillage the oceans, the forests, the soil, and every species to feed a greed that knows no end.”- Charles Eisenstein

First let me agree with Eisenstein, society largely does associate money and therefore greed with evil. This is a testament to 100 years of progressive thought in government and education. This association however is just plain wrong headed. Money is good and greed can also be good, especially for society. Adam Smith wrote about this over 200 years ago:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.”

At the time (1776) most men worked in farming to feed their family and bartered some for other services. Women worked from dawn until dusk just maintaining a house and preparing food. There are parts of the world where this is still the case. Money allows us to engage in activities we are best suited for, I can create videos and take photographs and earn currencies which I exchange for food or technology that makes life easier. This exchange allowed innovators to create technology and to innovate new ways of farming, healthcare and countless other things that allow a relatively poor person in modern America to live longer and better than Louse XIV did not that long ago considering the scope of human history.

Han Rosling has studied the progress of human history and demonstrated how much better we live today than our agrarian barter societies did before. Indeed since 1970 world poverty as defined by living on less than a dollar a day has plummeted 80%. Why? Globalization aided by technology allows a subsistence farmer in India to get a job in a call center or a factory servicing a wealthier economy in the United States. As the economy of India grows it impacts even poorer areas in Bangladesh or Africa. That same farmer turned factory workers child may become an engineer and move up the ladder again. It is not benevolence that has created this new prosperity it is the desire to live better lives that creates wealth. In a capitalistic society we trade value for greater value. I spend $300 on an iPhone because I value that iPhone more than alternative items I can buy for the $300. The iPhone is $300 and not $3 million dollars because of a global capitalistic model that allows growth, efficiency and innovation. Money is the tool that allows this all to happen, we agree as a society to recognize currency as a store of value and that facilitates trade. Money also allows for cooperation in an amazing way. Think of all the things needed to create that iPhone, even a simple  pencil is the sum product of thousands even millions of different people in different places cooperating to create a product. A miner digs for the graphite while being feed, clothed and transported by others. That graphite goes to a factory where another worker perhaps around the world uses it combining it with other raw and semi raw materials to create the pencil. That pencil is then transported, marketed and sold by other people. Can a local barter economy even create something as simple as a modern pencil?

Eisenstein seems to understand this- even while glamorizing communal barter and what he calls “gift” economies; but he argues that we are in a different stage now and  uses the current recession to indict the whole system:

“Money is disappearing, and with it another property of spirit: the animating force of the human realm. At this writing, all over the world machines stand idle. Factories have ground to a halt; construction equipment sits derelict in the yard; parks and libraries are closing; and millions go homeless and hungry while housing units stand vacant and food rots in the warehouses. Yet all the human and material inputs to build the houses, distribute the food, and run the factories still exist. It is rather something immaterial, that animating spirit, which has fled. What has fled is money.”

Putting aside the obvious dramatic overstatements and exaggerations of the current or past recession, Eisenstein is attacking the very idea of growth in general. Environmentalist many times phrase this argument as a zero sum game in that we are taking from others or taking from the earth and that our prosperity equates to someone else’s poverty. This idea is completely counterfactual, it is precisely our prosperity and desire for a better life that allows for others to rise out of poverty. As the United States and Europe became richer so did South East Asia and Africa. Many look at the proportion of wealth to poverty, the gap which does tend to grow in absolute terms. This misses the point though and is to say we would rather our neighbor be even poorer as long as we are closer in means. Some have put it this way: Would you rather make $40,000 a year and know that your neighbor makes $1 million or make $10,000 a year knowing your neighbor only makes $40,000. In the second scenario the gap is smaller but you have 1/4 of the means. This argument for fairness is the common tool politicians and leaders use to gain power over men; they promise to make for a more fair society but the result is always less for all with usually the only winner being those connected to the government.

It is mathematically certain that all resources are finite, even the sun will stop reacting at some point. We cannot understand infinity even if we believe in an infinite god. Given this logic some argue that we are running out of resources and that resources cannot be owned and are collective and therefore must be collectively managed. No one can argue that resources are scarse, the question becomes how should these resources be managed? Capitalism has been the system that has worked better than all the rest.

For decades some have predicted that we are running out of certain resources and that costs for a given commodity will continue to rise. They have almost always been wrong, innovative self interested corporations and men continue to find more and more resources and different resources. Other innovators find new uses for resources and ways to use alternatives and less of a given resource. Right now in America manufacturing is starting to come back- in part because of a shale gas revolution that is making energy for factories cheaper. 120 years ago expensive whale oil threatened to empty the sea of whales and made it hard to light the night. Rockefeller discovered oil could be refined into kerosene and in the process saved more whales than Greenpeace ever will. Later Edison discovered how to create electric light and now even most of the poorest Americans have cheap and abundant light at night- something we don’t even really consider living without. I am not arguing that resources such as oil are limitless they clearly are not. However capitalism allows us to use them more efficiently and will someday reward those who replace unsustainable resources with more sustainable ones. The market will force people to ration when necessary and do so more orderly and efficiently than any team of bureaucrats could no matter how smart or well intentioned. No one knows when we will start to run out of natural resources or what new innovations will allow us to use less or alternatives. There is no reason however to believe that this century cannot be full of as much growth as the 20th century was and lead to a more peaceful and prosperous world provided of course reason prevails and we don’t kill the free market engine of growth.

For most of human history Kings and despots controlled all the wealth and almost all where poor. We then moved into democratic capitalism in America, Europe and then Asia and prosperity followed. In the early 20th century Socialists pointed to the obvious injustices and unfairness and successfully convinced nations to try socialistic and communistic governments. These systems lead to despotism and decay because they overlook human nature and motivation. We create and work to attain a better life for ourselves and our families. When we cannot profit from our work and industry we don’t work as hard we don’t take risks and progress stagnates. In a truly free market there are powerful incentives to use resources wisely and efficiently. Eisenstein is not arguing that Communism worked but he doesn’t accept this as the natural progression of his ideas. We have been fighting this battle for more than 100 years and I expect it will endure for at least 100 more. The ideology of from one according to her abilities to one according to her needs is very attractive, it sounds good and noble. Eisenstein attacks Ayn Rand specifically and those of us who believe in true capitalism by comparing us to selfish children and saying that we need to evolve our thinking to a more parental mindset. This is the kind of paternalistic thinking that leads to statism- the idea that an economy must be managed by benevolent high minded people. This is how freedom dies and it does not lead to prosperity it leads to poverty and decay for all.

Eisenstein has some of the problems of modern life correct, we do seek satisfaction in things too much. We are overly consumeristic, we waste our time and energy on things that don’t make us happier and we do live overly on debts that become our masters. This isn’t a byproduct of capitalism it is a byproduct of human nature and ignorance- dismantling capitalism won’t make us desire material things less it will only destroy the engine of prosperity for all. As a society we are more prosperous and therefore can afford to think more about the planet and our role in making it better for all people. We are more conscience of our impact in a multitude of ways and many of us do give of ourselves freely to help others at home and oceans away.

Money isn’t evil but man certainly can be. Capitalism rewards the good far more than the bad, it isn’t perfect but most of the problems blamed on capitalism are the result of less freedom and more management by disinterested benevolent men. We have history and philosophy and evidence that democratic capitalistic free societies work better than the alternatives. We must be careful not to throw out the good seeking an impossible perfection.

I will read the second part of Eisensteins book and comment on his ideas for change.

Tax Policy and Corporate Investment

Wall Street Journal Today:
J.P. Morgan JPM +1.58% research report estimates that there is $1.7 trillion of undistributed foreign earnings held by more than 1,000 U.S. companies overseas. But only 600 disclose how much of their foreign cash is held offshore. Some like Johnson & Johnson JNJ +0.31% and Illinois Tool Works ITW +1.26% have all their cash in foreign subsidiaries.

According to some as much as 60% of corporate cash is overseas, why? Corporations in America make lots of money overseas the majority of which has already been taxed in the nations it was earned. If the corporation wants to bring that money back to the United States they are required to pay again, typically 35%.

From Brookings:

Even though a corporation is eligible for a tax credit equal to foreign taxes paid, the decision to repatriate earnings typically requires that corporation to incur a significant tax cost. As a result, corporations usually find it more attractive to defer U.S. taxation by reinvesting their foreign earnings abroad.

Some Republicans have called for a repatriation tax holiday or a territorial tax system whereby profits are only taxed once in the country they are earned. This seems fair but Democrats have argued that certain profits wouldn’t be taxed at all. The tax code is immense and corporations have whole departments whose job it is to minimize taxes paid. Politicians pass more and more laws and corporations find more ways to get around paying. Massive companies like General Electric have mastered the art of avoiding taxes despite billions in profits.

What is the solution? I propose a corporate income tax rate of zero. Corporations are entities made up of people and those people are all paid in some way eventually whether it be salary, stock or benefits. All of those forms of income are taxed eventually, meaning that a corporate tax is redundant and a form of double taxation. Corporations would still pay plenty of taxes in other forms such as payroll and sales and energy taxes.

Taxation on profits is inefficient as well, The Atlantic:

The corporate income tax encourages firms to waste resources on tax avoidance  In general, taxes are most efficient when they fall on those who have the most difficulty avoiding them.  Big corporations can and do spend an enormous amount of money and human effort transforming their income into more tax-preferred forms–deferring it, moving it, swapping it with entities that have different tax rules, and so forth.  We spend an enormous amount of energy trying to make rules to stop them.  It would be a lot easier to get rid of the thing entirely and focus on getting the money from people, who can’t afford quite such large squads of tax attorneys.  This would also correct an obvious flaw in the corporate tax code: it’s easier for big companies to afford pricey tax lawyers–and pricey lobbyists to get them special tax breaks.

Surely some will argue that with any change to the tax code there will be some who take advantage of it, and they are correct. The question becomes what can we do to make taxes as fair and efficient as possible and encourage growth that ultimately means more revenue. The answer is simpler laws that are enforceable, it shouldn’t require whole teams of lawyers and accountants to do a businesses taxes. Lets make the code simpler and then focus enforcement efforts on the remaining cheats. What we have now are special interests deciding our tax laws. Thousands of lobbyist exert pressure to get favorable laws and regulations that reduce their clients liabilities. Lets remove the complexity and make the code simple and fair and eliminate the need for special interest lobbying.

Imagine the corporations worldwide that would pour billions perhaps trillions of dollars into the US economy if we had a simpler and lower tax policy. We already try to create incentives for all kinds of special interests like the film industry and alternative energy; so clearly we understand that tax policy influences growth and investment. Government shouldn’t be in the business of deciding who gets special treatment with our money, picking winners and losers.

Some of my progressive friends will call this idea a race to the bottom and say that other countries would follow suit. I agree, I hope they do follow suit and eliminate corporate taxes. I believe in growth and if we reduce tax burdens and make taxes work fairly we will all benefit and governments will have the revenue they need. What governments should spend their tax revenue on is a separate argument for another column. Tax policy is complex and I haven’t answered all the problems here- but I know that we can make our system more equitable with simplicity.

The Indefensible? Price Gouging after the storm.

My heart goes out to New Yorkers and New Jerseyites (is it ites or ians?). Sandy has devasted communities – especially the Jersey Shore and Staten Island. One major focus of the media are reports of gas lines stretching miles and shortages of essential supplies. This is a gutsy time to explain why price gouging is good but it is also relevant.

Some of you are tempted right now to take the perfectly moral position that it is bad to take advantage of people in need- right? How could I possibly advocate for price gouging? Stick with me and keep an open mind.

Price is how a market allocates scarce resources. We have all learned about supply and demand, when demand is strong price goes up and usually supply increases allowing price to go down again and the cycle continues. These mechanisms don’t change in a crisis. The supply of gas is constrained after the storm and price should rise but it cannot because we have laws that won’t allow price gouging. So what happens? Since price hasn’t risen demand stays high and people cannot get the gas they need. Perhaps some of those people really need the gas more than others. If the price was allowed to rise people would ration gas. They wouldn’t buy it unless they really needed it- right? Those who really need the gas will pay the price and get the gas. In the system as is though consumers do not ration, or do not ration commensurate with the real supply. Now government comes in and arbitrarily rations by setting limits and/or days that consumers can get gas. This might seem fair but it ignores real need.

Think of price as a signal to producers, when price is allowed to go up producers will act to fill the demand. If flashlights or lanterns suddenly sell for twice the profit, you can bet that producers and shop keppers will work hard to get them into the hands of willing consumers.

Even progressives understand supply and demand and government gouging when it fits in their worldview. Progressives have called for higher taxes on oil and gas at every level of the market to rise costs and force people to ween off of fossil fuels. In Europe gas is taxed at huge levels and private car ownership punished with high taxes and tolls to discourage private cars.

This can be an emotional issue and sometimes logic and reason fail when something just seems wrong.

Perhaps an example from Katrina which has the perspective of time to separate some of the emotions from facts; will help.

From John Stossel (then at ABC News)

Mississippi Attorney General Jim Hood announced a crackdown on gougers after Hurricane Katrina. 

John Shepperson was one of the “gougers” authorities arrested. Shepperson and his family live in Kentucky. They watched news reports about Katrina and learned that people desperately needed things.

Shepperson thought he could help and make some money, too, so he bought 19 generators. He and his family then rented a U-Haul and drove 600 miles to an area of Mississippi that was left without power in the wake of the hurricane.

He offered to sell his generators for twice what he had paid for them, and people were eager to buy. Police confiscated his generators, though, and Shepperson was jailed for four days for price-gouging. His generators are still in police custody. 

Before you say to yourself that is was wrong for Shepperson to “take advantage” of those poor people in need in the gulf coast- consider the facts. If Shepperson couldn’t make a big profit on the generators would he have gone to such lengths? Would he have driven all the way from Tennessee to Mississippi and invested all the money into buying the generators and renting the truck? Would he have risked his safety to go into an unstable region? Certainly not- and he had no guarantee of profits either so he was taking a risk. Also we don’t really know the nature of the deals he made. Maybe many of the people he sold to were wealthier than he, maybe his kids really needed that money. It doesn’t really matter but these kinds of distinctions help some people put morality and economics in perspective. Markets are blind to these things. Was he so wrong to see a need and fill it? Did any of us risk our necks to bring in generators? Surely some charitable people did, I interviewed some of them for my film of the re birth of New Orleans. Those people served a vital role- but history shows that people acting out of self interest are the main driver in the increase in prosperity in the world; not benevolence.

One more example, I frequently celebrate on the road when I get “free” wifi and don’t have to pay high fees at hotels. What I have noticed though is that when wifi is free it almost always sucks. Sometimes I cannot even work because the connection is overloaded and slow. I have learned that free wifi isn’t the blessing it appears at least most of the time. When hotels charge fees for wifi it tends to be much faster and better, people have an incentive to ration it and consumers on a pleasure trip will go without leaving it for business people such as myself who really need it. As an aside, nothing is really free- hotels or businesses decide whether or not they want to charge separately for this service. Wifi is paid for by all when it is free and by some on choice when it is not free. Either way the hotel has its’ cost and will certainly charge the customer or go out of business.

Should all businesses price gouge? Of course not- this week I received three emails from Kimpton, a boutique hotel chain I have stayed at in the past. They were offering discounts on rooms at their hotels in the NYC area. Surely they could have charged double, maybe triple and filled their rooms. I don’t doubt that Kimpton’s management made the decision in large part because they thought it was the right thing to do. However I also believe they saw it as a good opportunity to reward their past clients such as myself and inject some much needed good will. This good will may pay dividends as customers like myself will patronize them in the future. Other gougers will be punished by their customers in the future if they overreach, there are incentives either way in a complex market. When government makes a law they destroy the ability of the market to work and bring goods and services to the areas they are most needed. This hurts the very people the law is intended to help which is frequently the case with laws designed to protect.

-Josh Kline

To the Undecided Voter: The Case for Romney Part Three: Taxes

President Obama and his surrogates have said again and again they want “millionaires and billionaires to pay their fair share.

Obama’s plan is pretty straightforward and available to anyone who seeks it out:

Families making $250,000 or more will have their income tax raised by about 10%. Their capital gains rate 33% more.

The alternative minimum tax and the estate tax would also be restored at levels of 1 million and 3.5 million respectively.

Obama has also targeted many exemptions and tax breaks as well.

So approximately what percentage of the individuals having their income tax raised make over 1 million dollars a year? The answer is less than 1 out of 10, meaning 90% of those paying more are families and individuals making as little as $250,000 a year. $250,000 a year allows for a comfortable life to be sure but it is hardly rich as most people define it and can be just getting by in a city like New York or San Francisco for a family. The other problem is that when we assess tax policy we do it one year at a time. Say that you are a small business person and have struggled for years and years and finally have a good year. That good year suddenly puts you in a much more confiscatory tax bracket and acts as a disincentive to your productivity and expansion. This also would apply to virtually anyone selling a home after more than 20 years in Northern or coastal California. That sudden big profit would elevate even the most average income to a high tax level.

Higher tax rates are also a disincentive to productive work. Ronald Reagan said he learned about the disincentive of taxes when he found that he would take the rest of the year off from working when he reached the highest rate. The problem with tax policy is that too often policy makers think in a vacuum. They do not bother to try to assess the changes in behavior tax policy brings about and when they do they frequently underestimate the effect.

With the globalization of the economy America must compete for capital. Our corporations and foreign corporations have global options and they must exercise them or risk going out of business to a competitor who does. We want our corporations to be competitive and hire our labor, we also want to attract global foreign companies to do business in America.

When President Kennedy and President Reagan cut taxes both saw increases in the amount of tax dollars collected. Economist Art Laffer developed a curve that tried to represent the correlation between tax rates and taxes paid in gross dollars. His curve demonstrated that at a certain level increases brought diminishing returns. Even John Keynes the economist who argued for government intervention and demand side stimulous during recessions said: “given sufficient time to gather the fruits, a reduction of taxation will run a better chance, than an increase, of balancing the budget.”

We are also very close to becoming a society were taxpayers are a minority; that is the percentage of Americans who pay any federal income taxes is close to 50%. Do we really want a society were the majority pay absolutely nothing to the federal government? We fought a revolution over taxation without representation and in modern America fewer of us and paying and being asked to pay more by those who pay nothing.

Of even greater importance is the productiveness of that money. Do we want our businessmen and industrialists using more of their capital or do we want our government. Wealthy people do not put their money under the mattress, they put it to work for them. Can anybody argue that money is better spent in Washington where the congress has disapproval numbers in the 70-80% range. Capital is better spent in the markets where it can fund businesses large and small who will expand and hire with that capital. Do we want to discourage investment with higher capital gains? Obama has decried the wealthy investing in so called tax havens overseas, through smart policy he can convince many more of them to put capital to work in the United States.

What does Romney propose?

  • Reduce statutory income tax rates 20 percent, from 10, 15, 25, 28, 33, and 35 percent to 8, 12, 20, 22.4, and 28 percent.
  • Reduce the corporate tax rate from 35 percent to 25 percent.
  • Repeal the Alternative Minimum Tax for individuals and corporations.
  • Repeal the estate tax.
  • Eliminate, curtail, and reform numerous special provisions in the tax code—the credits, deductions, and exclusions that cause complexity, compliance problems, distortions, and inefficiencies.

    Obama has argued that Romney cannot keep his tax cut revenue neutral but he is basing this assertion on his own characterization of the plan, not the plan itself. See one analysis of the math here. Romney hasn’t outlined every deduction he plans on removing but he has given a framework and suggested a deduction cap as a method of allowing the middle class to use deductions the wealthy cannot. I urge the reader to examine Obama’s plan if they think Romney hasn’t given enough details I think they will find both plans are frameworks.