Income Inequality is a Deadly Misdirection

January 26, 2012

Income inequality has caused wealth inequality. In fact the latter is a natural result and we should not be surprised or angered by this. These are some of the reasons America has been great. Neither issue would be a problem if that income & wealth were redistributed naturally through healthy economic activity. If every billionaire found a way to live paycheck to paycheck the dollars spent would fuel corporate profits and more growth. Unfortunately for society there is a great correlation to savings rates and wealth creation. The guy who make $10mm per year can easily afford to save 50% of his take home pay whereas the guy making 50k has very little room to save anything at all. If the first guy lived more like the second, his spent dollars would find their way through the tax system via sales tax and further wage tax. Economic activity would be supported and companies would hire to fill demand.

Instead the Great Accumulation of the last 30 years has created a conundrum of sleeping capital. The top 1% of wealthy Americans control 40% of the nations wealth. They are rich beyond their capacity to spend (recycle) those dollars. They have built investment portfolios comprised predominantly of investment assets as opposed to operating assets. Many of those investments (I.e. treasuries paying 2%) are simply unproductive to economic activity.

What this country needs to do is to wake up from the dream that some utopia exists if the highest earners are “justly” taxed. This might help mitigate inequality in the future, bit it will not solve the current problem of 1% controlling 40% of wealth. While there may be a need to alter the tax code, most don’t realize that a dramatic overhaul of our current tax system to raise taxes on the new 1% would serve an ulterior if even an unintended consequence.

If you make it harder for new individuals to create substantial wealth then you will seal the doors to a socio economic class of people who will enjoy added protection of their current status. In short taxing the guy like me who aspires to be in the 1% in a manner that the current 1% has not previously been taxed helps ensure that I will not be able to join their ranks. Doing this would close the doors to the American Aristocracy, sealing the entry for would-be wannabes, and ultimately robbing America of one of its best features, the motivation for creativity, innovation, and visionary thinking.

Let’s not forget that no one has asked what we would do with all the hypothetical tax revenue if the Buffet Rule were put into effect. What would happen to the excess revenues into the Treasury’s coffers? Are we to believe that any future politician when faced with the option of implementing austerity or buying votes will not choose to buy votes? Do we need an even larger entitlement system? Do we need government to continue to step into private industry?

My suggestion is that we leave the rules of the game mostly in tact. Don’t penalize the guy who is at the cusp of massive financial success. Sure, maybe make it a little harder for the wealth gap to grow but after all, most people who have made millions or billions have more than likely created jobs. What needs to be done is we need to address the massive amounts of unproductive sleeping capital: wealth that is not getting recycled and will never get recycled until generational dilution forces a fixed pool of wealth into the hands of many generations of offspring.

Personally a major change to the estate tax would hurt me. However, the privilege of being an American is not the result of my winning the “ovarian lottery” as Warren Buffet likes to call it, but rather the opportunity to create and do anything I want to do. The American Privilege is one of being able to dream and execute your own vision regardless if your original circumstances.

An estate tax policy built upon a “you can’t take it with you” philosophy accomplishes a few things. First, it forces more of that first generation wealth to be consumed rather than saved. Second it ensures that the incentives to “win the game” don’t change so much that we alter the great American Experiment of entrepreneurship, capitalism and democracy. Third it will help mitigate the proliferation of an elite dynasty class that could permanently subvert power from the 99% by controlling the vast majority of American wealth. Fourth it helps rebalance the American opportunity with the true cost of the American economic ecosystem. Defense spending, education, public works, science and technology breakthroughs and a host of other foundations for American success need to be funded with the wealth our system currently creates AND that it HAS ALREADY created.

We also ought to rethink our current philanthropic landscape that enables tremendous amounts of capital to be separated from its highest and best use. Tax exempt endowments and foundations often support worthwhile causes and constituencies. However, left unchecked we have parked trillions of dollars with asset managers looking to earn no less than 5% but often times no more either. 5% is the required
Distribution amount for a non profit to keep their tax status, they must spend 5% of their corpus every year. They typically try to earn more to grow the asset base but their boards are generally risk averse focused first on capital preservation. In a country where wealth preservation is the driving motivation for a substantial amount of the capital base it becomes nearly impossible to reinvigorate wealth creation because risk becomes something that is controlled by the few and no longer taken by the many. This may in part explain the growing popularity of crowd sourcing and micro venture funding. Most of those who have “won the game” are now in a “risk-off” mode.

The US is at a crossroads. We must face the reality that the future can no longer mimic the past. Change is going to happen and somehow everyone will be worse off, at least for a period of time. I implore our leaders to think above the policy and above the zeitgeist so that what sits past the pain is a new utopia with new rules and new limits but with the same general sense of opportunity and patriotism that got us this far. If we continue to debate the pain, we are not ensuring that our future can be better. In order to do that we need to first debate the utopia we want to create. From there the changes and sacrifices will be clearer, more palatable to the many, and ultimately the right sacrifices to make.


Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009 Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009

August 11, 2011

Interesting paper floating around. This paper provides a statistical analysis around the relationship between austerity and anarchy.  Judging by an earlier post I wrote Prodemocracy Revolution in Greenwich Village this paper made me realize that revolutions can be inspired by one large unexpected bill for neglect.

Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009 Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009

Figure 1: Frequency of incidents and the scale of expenditure cuts


Prodemocracy Revolution in Greenwich Village

May 12, 2011

So my NYC co-op just completed its own mid-east style pro-democracy revolution

A crazy proxy fight that lasted 6 months ended with the election of an entirely new board of directors committed to transparency, no conflicts of interest, and better communication with shareholders.

The old board simply stepped down allowing the new board to take over without a hitch. The president of the old board, widely distrusted and despised actually stuffed a 2 page missive under all 350 doors in the building screaming about her own beheading and placing blame for her failures on a group of shareholders who banded together to win hard-to-come-by board seats.

In the end the new board took all 7 seats, a mighty achievement where the original Sponsor still owns 17% of the shares.

The new board, supported by a larger group of concerned shareholders managed to secure 55-60% of proxies before the election sealing their victory going into the election and apparently persuading the incumbents to step aside.

Many people would have preferred a Gaddafi-esqe approach of going after them with real fire power given the anger that was bubbling.

I am amazed by the power of the democratic process. Of course a $30mm facade renovation project was the catalyst for our regime change. That’s enough money to depose about any incumbent.

Lesson: buy a condo not a coop.


Torn

April 18, 2011

Been torn the last few days trying to decide between financial security and professional fulfillment.  It’s a crime that these to principles should ever be separated.  While I know that professional fulfillment breeds financial security, and that in time there is no substitute, what does one do when immediate financial security eliminates as many daily pain points as the job that pays for it creates?  Looking for answers I stumbled on this from the November 2010 Economist .  Not what I expected to see.  What say ye?

Daily chart

Money and happiness

Nov 25th 2010, 14:45 by The Economist online

Measured a different way, the correlation between money and happiness is surprisingly strong

DISMAL scientists who look at happiness often contend that, beyond a GDP per capita of just $15,000 (measured at purchasing-power parity), money does not buy happiness. Up to that point the correlation between the two is strong, but thereafter it falls away. If this is true then some heretical conclusions follow: rich America is no happier than poorer Brazil, so what is the point in people who live in rich countries working harder to get ever richer? Politicians should concentrate on maximising the mental health of their voters, rather than the size of their pay cheques. But plot the data another way, on a logarithmic scale where each increment represents a 100% increase in income per head, and the relationship between wealth and happiness looks more robust.


How to Fire a Teacher in New York City

January 15, 2011

I was reminded of this chart the other day in a conversation with a friend.  I had to re post it here.  The chart illustrates the burden of law on American public schools.  This chart is for New York City, but many such systems are in place around the country.  We will never improve the quality of high school eduction in this country until we alter this system. Imagine the level of productivity and commitment at your job if this was the system used to fire you or your coworkers.  Please note this system is in place for tenured public school teachers.  This does not apply to private school teachers or those without tenure in the public school system.  It does apply to some tenured teachers who are also sex offenders, much of which has been written about, but little of which seems to make it into the public discourse.  Remember a tenured teacher even if you are not allowed to teach, as is the case with convicted sex offenders or the emotionally unstable, you remain on municipal payrolls in “white rooms”.  At a time where municipal budgets are under pressure, I hope this system can be amended.  I encourage you to skip to the end for the punchline after you have taken a little time to get the gist of it.

How do I fire an inept teacher? (Source: http://commongood.org/)


Unspoken but Seemingly True

November 27, 2010

The recent wave of foiled terror plots has to make you wonder if our military and intelligence networks have finally been rebuilt to meet 21st century demands. While this sentiment is filled with apple pie feelings of confidence and safety, I highly doubt it is true. I don’t know that we have or can build technology or weaponry to win the war on terror. And I don’t know that the size of our army has any correlation to better outcomes.

The current administration, thankfully though, has not used terrorism as a device for manipulating the public and resulting policy as was done under Bush. However, with two wars still waging, the economy drifting along a bottom, and the standard disenchantment of the quality of civilian level public servants, it is hard for me to imagine that US security capabilities have been dramatically enhanced over the last two years.

Alternatively and more realistically I can imagine that some smart folks in the intelligence community may have found a low brow way to combat terrorism. It’s beginning to seem to me that our current counter-terrorism strategy is built on the old adage of “if you can’t beat em, join em”, relying on the common street tactic of “sting” operations.

I feel like I keep reading news stories with the same undertow. In today’s news a plot to blow up a tree lighting ceremony was botched by the FBI who had effectively set up a sting operation and waited until the moron tried to detonate explosives before nabbing him. This must mean that the surveillance was early and ongoing, and that the explosives in the idiot’s possession were engineered not to work. This would lead me to believe that our own government may be luring terror suspects into action with the promise to aid them in carrying out their sick sociopaths plots. Doing so of course with the intent of catching them in the act.

While to some this policy may be morally obscure and create some unease, at another level it is quite brilliant, so long as it works in our favor. After all the only way to successfully fight in a guerrilla war is to use guerrilla tactics. Jihadists are constantly testing Western systems to identify and exploit our own weaknesses. I’m shocked its taken us this long to identify a profound weakness in every holy warrior. The greatest weakness of any god fearing guerrilla is his faith in his mission and his belief that his success is preordained by God. This vanity in martyrdom ought to be terribly easy to exploit if you are willing to walk a very fine line, reminiscent of the television series 24. It seems more than obvious that the best way to catch a terrorist is simply to offer to help him. This ought to be a win-win tactic because the downside is that would be terrorists might simply find it more and more difficult to find people they can trust to carry out their horrid plans. This in and of itself would be crippling to a network that relies on speed and flexibility. With all of our technology and military might, it seems covert operations and intelligence are what will be required to “win” the war on terror.

At the end of the day we are all human and susceptible to our own self confidence. If we can make it easier for a terrorist to become a would be martyr by creating more avenues for then to believe they can carry out their mission then we can both control the outcome of events and obscure the trophy of martyrdom while catching a good number of would be martyrs in the process.

As modern terror networks adapt I wonder how long it will take for them to build the sophistication necessary to outsmart this age old tactic.


United States USD Policy is Misguided

September 27, 2010

I begain writing this about a week ago, and am beginning to see some media reports supporting my argument below, thankfully. Hopefuly, these opposing opinions to current US Policy are not too late.

Recent media reports indicate a growing strain between US-Sino relations over the Chinese policy on currency valuation. The fervor of Chinese currency manipulation is once again bubbling within the United States.

The US, or at least those proponents of this agenda believe China’s cheap currency is artificially low and therefore is creating unnatural imbalances in global reserves and global trade.

In layman’s terms these folks think the shit we import from China is too cheap, giving Chinese manufacturers an unfair pricing advantage in global trade. As a result, dollars flow (as well as the currencies of other developed countries) into China and just stay there.

The logic being espoused now is that in order to correct these imbalances the Chinese should be letting their currency appreciate (at least against the dollar) by as much as 20-40% as of recent reports. This is a large movement as it pertains to currencies, and normally would be something that might happen naturally over the course of years, if not the better part of a decade.

Recent reports claim that a growing consensus of US policy makers want to see this kind of movement in the Chinese currency over a far shorter time frame.

For more than two decades US consumers have benefited directly and indirectly from a relatively weak Renminbi (Yuan). We were able to consume more Chinese imported / manufactured goods for less money. Indirectly this helped to keep inflation in check, and benefited industries who were able to capitalize on China’s relentless demand for natural resources and those companies who were able to arbitrage the cheap cost of Chinese labor.

Now that US unemployment stands as high as it has been in over a generation, America seems abruptly convinced that part of our troubles have arisen from the fact that our finished goods cannot compete with the prices of Chinese finished goods and therefore China is “keeping a good man down”. Funny we don’t consider our legacy cost structures part of the problem.

If not absurd, the evangelical approach supporting a rapid rise in the Renminbi is at least short sighted, and may actually dangerous for the US.

The end result of a rapid rise in the Renminbi (RMB) against the US Dollar would certainly help US manufacturers compete better on price in the global market place, this would particularly benefit our durable goods industries like cars that are assembled here. However increasing the purchasing power of the Chinese consumer dramatically and quickly seems to me might have other adverse consequences.

For one, despite continued commentary that inflation is not an issue, anyone who does grocery shopping in the United States can tell you otherwise. Food prices have not benefited from the deflationary recession that took home prices and the prices of other durable goods down. As per-capita purchasing power increase for the Chinese consumer, we here at home will be competing with them more heavily for grains, dairy and protein which will surely drive up global prices.

The same scenario that is described for food would also apply ubiquitously across all commodities and natural resources. In fact a fast rise in Chinese purchasing power might incentivize stockpiling, creating additional pressure on the prices of all natural resources.

In addition a stronger RMB relative to the USD specifically implies not only an increase in the relative purchasing power for the Chinese but concurrently a relative decrease on the purchasing power for Americans, a major double whammy. In the areas where we compete to consume natural resources this could have dramatic, adverse and even rapid consequences.

The direct impact would be modest to severe rise in price driven inflation, particularly for “headline” CPI. Core CPI would be less impacted in the near term as it excludes food and energy prices. I won’t explore how the government gooses these numbers anyway.

The political agenda out of Washington is currently misguided, if not dangerous. An article today appearing in Bloomberg alludes to this as well. In the article Nobel-Prize winning economist Robert Mundell says that U.S. legislation to press China to raise the value of the yuan [RMB] would be a “disaster” and fail to narrow the trade deficit between the two nations. He goes on to say:

The bill “would create a very damaging thing to the world economy and the stability of Asia,” Mundell said. “This would have a wounding effect on the stability of international relations. There’s never been any precedent in economic history where a country through any legal system was forced to appreciate its currency relative to another country.”

“It’s not going to have much of a dent in the U.S. deficit,” he said. “America has had a huge deficit since the 1980s. None of that is going to change if China changes its exchange rate.”

Policy makers should try to keep the currencies within a range to prevent “huge swings” in the price of raw materials such as oil, he said.

The euro-dollar fluctuation “is a terrible thing for the world economy,” Mundell said. “We’ve never been in this unstable position in the entire currency history of 3,000 years.”

I agree with Mundell. What he doesn’t say directly but he alludes to is that US policy smacks of protectionism, and at a time and with a trading partner that could undermine the global recovery. A protectionist policy agenda with China could easily and quickly escalate to stimulate a new geopolitical divisiveness that in its worst form could lead to war(s).

This week in fact the House of Representatives is voting on a China trade tariff that would inflate the cost of more Chinese goods imported into the US. This comes after a handful of other trade tariff disputes since Obama took office on things such as tires and gift boxes. In retaliation earlier this year China proposed a tariff on US chicken going into China.

There is no good that can result from an escalation of trade tariffs, a system that was mostly dismantled through globalization. It is only a matter of time before the US/China trade was draws allies inspired to align their home interests by protecting their own major industries.

At home in the US, the result would further squeeze the middle-class American budget that Obama so adimantly wants to protect. It’s not the wealthy that rely on cheap products from China Mr. Obama, its the men and women who are trying to stretch every dollar.

My alarmist comments are not unfounded by anyone who knows a little bit of history and has a little bit of vision. But the future of human survival will depend on social order. A major imbalance in global resource production and consumption (particularly in food and energy) could tip a boat that has been running evenly for more than half a century. If you want to consider what happens when people cannot eat, consider the Middle East and Africa where poverty rates and lawlessness run hand in hand.

What makes this policy misstep so dangerous in my opinion is that it is driven not by rational thinking that can be tested and rebuffed, but instead by dogmatic Middle-Class zealotry. The administration in its effort to return middle-class Americans to work, may incite the worst bout of protectionism seen since before World War II, an action that could certainly inspire a new Cold War, and as mentioned before possibly a real one. I am not a Republican, nor do I consider myself to be overly conservative, but I think they have got this RMB agenda all wrong.

I believe the Obama Administration has done a tremendous job with what was left behind by the Bush Administration. However, I see forcing China on its currency as having the potential to undermine everything accomplished thus far, and with the potential to recreate a level of global instability far in excess of what was left behind by the Bush Administration.

It seems to me that a better agenda for the administration would be to focus on USD stability instead on RMB parity. The vast majority of the World’s commodities are priced in USD. In addition, US corporations are faced with the onerous task of calculating their currency exposures on a regular basis. Even small and medium sized business who may not have significant overseas sales are victims of price instability caused by commodity fluctuations. Consider the chart below.

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

The USD index has made moves of 10-15% three times now in the last two years. This is unprecedented volatility in the world’s largest reserve currency. The USD Index has spiked when fear spiked, and sank when fear subsided. The US currency has effectively become the beneficiary/victim of the global risk on/risk off trade. With equity and bond markets now chasing highs, the dollar is again heading downward.

At some point, however, I suspect unless we stabilize our currency, it will begin to lose its place as the preferred store of value. Not to mention what this volatility has done to commodity prices effecting everything from food and fuel, to industrial goods. Companies who bare the brunt of controlling costs or raising prices are force to make decisions today that may be totally obsolete a few months from now, based on currency movements alone. Regardless of the structural imbalances between China and the US, and despite objective (or subjective) relative valuations of the RMB vs the USD, I have to believe that price stability predicated by US Dollar stability is the more immediate issue rather than the RMB/USD exchange ratio.

In a world of uncertainty and unprecedented volatility, we need stability. We are so focused on China’s proported currency manipulation when the truth is we ought to be more concerned over our own.

Remember China has about four times the population as the US. The more the RMB appreciates, the greater the increase in 1.2 billion people’s purchasing power. Are we really sure we want to force that agenda? Seems idiotic to me.