Wednesday, October 31, 2012

The Meaning of Rainbows


Genesis 9:13 goes: "I do set my bow in the cloud, and it shall be for a token of a covenant between me and the earth." (KJV)

This Bible verse illustrates an ancient view of the rainbow as the deity's weapon aimed up at the sky as a sign of victory. It says: "I am your protector. I battled the storm, and I won."

You'll come back stronger than before, NYC. :)

Tuesday, October 30, 2012

Oil and Diamonds

The Film Bar recently screened a very interesting movie called The Ambassador about a Danish guy who buys diplomatic credentials to go undercover into the world of blood diamonds in the Central African Republic. It really showed how totally dysfunctional and corrupt that region is, which got me thinking about valuable natural resources like oil and diamonds. I remember something a friend of mine once said regarding the Middle East: "Why would the governments of those countries have any respect for their people when all their wealth is pulled out of the ground?"

When wealth comes from the productive capacity of the people - their ability to farm land, process and refine goods, innovate, etc. - then the state benefits from empowering people to be productive through freedom of contract, equal treatment under the law, stability, etc.. That sort of society is well suited to democracy and is inclined to prosper through mutually beneficial, voluntary arrangements (i.e. free enterprise).

But whenever a country's primary source of wealth is raw materials, there is always a high risk of political dysfunction. This is particularly true when the materials in question are highly valuable in their unprocessed form, like oil and diamonds. Ideally you want your natural resources to spur the development of other industries. For instance, iron ore deposits could lead to a thriving steel industry, which could lead to manufacturing, etc. But when you can get fabulously wealthy just by pulling a resource out of the ground and selling it as-is, then land rights are all that matter. Suddenly it begins to matter a great deal how those land rights are first established. It's not like in the US where you could just claim as much land as you could "improve" (farm). Nor is it particularly fair to base claims on ancestral conquests, though this is the norm in the Middle East as in Europe. The remaining alternative is to claim the land for the public at large, which is where things get tricky.

Whenever you have public resources, you must have stewards of those resources - i.e. the politicians in charge of making those resources productive. When those resources are vast diamond or oil deposits that fetch huge returns on investment with minimal refinement, the inducement to corruption is huge. It seems to be virtually impossible to get a functioning political system with that as your starting point.

So how on Earth do you socialize the wealth from oil and diamonds in a way that truly benefits the public and not just the ruling class? Some of the Scandinavian countries, which sit on big oil reserves, seem to have done a pretty good job of it. I don't know the details of Sweden's oil industry, but I assume the oil fields are privatized because you don't want the government trying to run an industry like that. How were those land rights established? My guess is that, like the rest of Europe, most of the land rights probably pre-date the usefulness of oil. But that's ok because another means of socializing the wealth is through super high tax rates.  It may be that where a disproportionate amount of your society's wealth comes from raw materials it makes sense to tax the hell out of it in order to redistribute it. The situation in the Middle East where virtually all of the wealth is concentrated in the hands of the landowners is fairly repugnant, I believe, and could possibly be remedied by a different tax system.

In a situation like Africa where those land rights might be less established, I would think the prudent thing to do would be to auction off the diamond mines to the highest bidder. You want to privatize those resources because if the government tries to run that business you will just get endless wars and corruption. If the bidding process is kept open and competitive, not favoring local bids over international bids, then the mines should fetch the optimal price. The mines could even be leased rather than sold outright. But the challenge, of course, is actually getting that money to the people and not letting it get captured by political corruption. Without angels in charge, it might be impossible.

One way to distribute the money raised from the auction might be to just cut everyone a check. But how do you pull that off logistically? Or maybe you hand it out as a tax credit. But wouldn't that leave out the unemployed who aren't filing tax returns? I'm not sure how you would pull something like that off even in America where we have a vast and powerful IRS. African countries don't have anywhere near the bureaucracy to manage that kind of a wealth transfer. So instead you can try to distribute it through social programs, infrastructure improvements, etc. But now you're back in a situation where every single expenditure is vulnerable to political interests and corruption. That's not a place you want to be, but it might be the only way to do it.

Of course, then you're also stuck with the risk of short-circuiting the private economy by creating all these social programs. How do you ensure that money raised through the auction of public resources is spent in a way that benefits the public fairly but doesn't crowd out private investment and development and doesn't produce a dysfunctional government? You are still stuck with a government with no real accountability because wealth comes from property rights rather than from the productivity of the people. It seems like oil and diamonds are more of a curse than a blessing.

How can functioning 21st century societies develop on a continent whose political institutions lack legitimacy, whose wealth comes from the ground, and whose property rights are not clearly established? I think this all goes to the chicken and egg question of sequence in Africa. It's a hard task indeed to establish legitimate, accountable institutions without a productive populace, and it's hard to foster a productive populace without legitimate, accountable institutions. If you can start from scratch you might have some hope of crawling your way up, step by step. But when you start with oil and diamonds, forget it.

Sunday, October 28, 2012

Karate Rangers!


In Night of the Living Dead: the Musical, Chuck "the Antivirus" Norton leads a militia of Karate Rangers to defeat the zombie hoard. Unfortunately they are waylaid by a lawyer representing the zombie author of the original Chuck Norton joke (of which all subsequent Chuck Norton jokes are deemed to be unauthorized derivatives) who is suing them for copyright infringement. Karate Rangers!

Saturday, October 27, 2012

Friday, October 26, 2012

Freedom, Power, or Happiness

A friend of mine posed this interesting question to me in an email:

"Suppose someone put three jars on the table in front of you and told you to choose one. In the first jar was Power, in the second was Happiness, and in the third was Freedom. You could have whichever jar you choose but at the risk of losing the other two. Which would you choose?"

Of course I would choose Happiness. It would be easy to have power or freedom without happiness, but for me happiness entails a high degree of freedom and some measure of power. And isn't happiness the ultimate measure of utility anyway? What use are freedom or power if they don't bring happiness?

But what if, you might say, by having power you could give happiness and freedom to others? Wouldn't it be selfish to choose happiness? Well, I would dispute the proposition that you can give happiness and freedom to others through power. I suppose it's easy to imagine scenarios where power could liberate the oppressed and lift up the downtrodden, so it depends on the extent and type of power we're talking about. But in general I think that happiness and freedom are not things we can grant each other. They have to come from within.

At any given moment we all have two of those jars on the table, and we don't have to pick just one.

Thursday, October 25, 2012

Consequentialist Libertarianism

If growing disenchantment with political parties and mainstream ideologies has got you on the market for a new label, let me suggest my personal favorite, "Consequentialist Libertarian."

It's a lot like being a normal libertarian, but the standard criticisms don't apply to you. Whereas normal libertarians rally around Ayn Rand and controversial Austrian economists, our consequentialist champions include intellectually unimpeachable giants like Milton Friedman and Richard Epstein. We warn against the dangers of bad monetary policy, but we don't concoct paranoid conspiracies about the Federal Reserve or decry fiat currency as illegitimate. We think there is an acceptable level of government debt, and some of us are even open-minded to certain limited Keynesian measures when the economy is unhealthy.

We don't think the government and taxation are inherently evil. We agree that certain government functions are essential. We even agree that certain non-essential government functions provide enough benefit to make them worth doing. But for us, the presumption is always against government, against regulation, against taxes, because we believe that government has a pernicious tendency to overreach, to bungle, to distort, to entrench, to screw up the balance. We believe in separating the intent of a given policy from the actual consequences of that policy. We are consequentialists who find that nine times out of ten libertarian prescriptions yield better consequences than other policies. And we just love to share empirical evidence as well as deep theoretical reasons for why this is so.

I think a lot of folks are Consequentialist Libertarians but they just haven't taken up the label. People are nervous to associate themselves with the more wacky libertarian element. But on many policy matters, I think we're actually right in line with mainstream economists.

Wednesday, October 24, 2012

Tenants from Hell

My dad owns a rental property in Surprise, AZ. The recent tenants very thoughtfully gave us some remodeling suggestions before they moved out.

an angry teen

Apparently the kid was training to be a boxer. The carpet is a horror scene. How do people do this? How do people live like this?

I spent the last few days patching drywall, replacing doors, and painting. My friend Stuart helped. While on a lunch break we got talking politics. He said that if he were dictator (a proposition he relishes) he would round up everyone with handyman skills and send them into the ghetto where they would teach folks how to fix up and care for their homes. Then, he believes, people would take pride in their homes. But Stu, I said, look at the house we're working on now. This was a nice four bedroom home in a fairly new neighborhood in Surprise, and look what the folks did to it. We have every opportunity and incentive to care for our own bodies and our own homes, yet many people do not. You can't pin that one on the 1%.

A scene like this nightmare house ruins any fantasy I might have that humankind can ever achieve any kind of utopia through sound governance, education, and economic policy. Some people are just awful.

Sunday, October 21, 2012

Does the Romney Tax Plan Add Up?

Recently Romney suggested capping total deductions at a fixed amount in order to make his tax plan revenue neutral. This would seem far more politically attainable than trying to eliminate specific deductions, which would certainly rile up the special interests that benefit from those deductions.

Critics are saying that "the revenue raised even from the stingiest of Mr. Romney’s proposed caps, $17,000, would not come close to replacing the money lost from lowering rates 20 percent and making the other tax changes he proposes." But when they say "money lost," the question is: compared against what baseline? As the Tax Policy Center notes: "As usual, the current law baseline has all expiring tax cuts actually expiring, while the current policy baseline has almost all of them  permanently extended." Whether the Romney tax plan could be revenue neutral depends crucially on whether you take for granted that the Bush tax cuts will expire. You might point out that those tax Bush tax cuts were supposed to be temporary, but I would argue that "temporary" never means temporary when you're talking about tax cuts, tax hikes, spending, or any other government activity. "Temporary" means "pass this now and we'll fight about it later," and I think most people know that at the outset.

So compared to the baseline in which the Bush tax cuts are extended, would Romney's tax plan be revenue neutral? I've been reading claims that it would add about $5 trillion over ten years over and above the Bush tax cuts and only recapture about $2 trillion. So if that's the case, then it looks like no, it doesn't add up.

There are still a couple more things to consider. First is that there's a difference between static scoring and dynamic scoring. Static scoring asks: are tax cuts directly offset by other revenue sources, such as closed deductions? Dynamic scoring asks: are tax cuts offset by additional revenue due to increased growth which the cuts could spur? Greg Mankiw has a great blog post on this issue. It's relatively easy to look at the static effects of a change in tax policy, but predicting the dynamic effects is much more difficult and requires making a lot of assumptions. Statically scored, Romney's plan seems to fail the "revenue neutral" test. Romney has made comments that suggest he is relying on increased growth in order to make his plan work out. That's a lot more dubious, and I think a lot of people agree that the affect on growth would probably be too small to fully recover the lost revenue. It's just too optimistic.

The second point to consider is that Romney says his tax plan would not add to the deficit. My hope is that we would keep him to that promise by making him come up with a plan that is deficit-neutral when statically scored. That would likely mean higher marginal rates than those he is currently proposing. If he could directly offset the rate cuts with the deductions cap, then I think it would be a step in the right direction. As it is now, however, I think his target for marginal rates is probably too low to add up the way he says it does.

On the other hand, his tax plan paired with aggressive entitlement reform and cuts to the military could provide stimulus now (through higher deficit spending) while balancing the budget long-term on the spending side. That is actually what I would prefer.

Saturday, October 20, 2012

No Advertising Allowed

If you ever find yourself wanting to sell equity shares in a company to investors in order to raise capital, beware: you are walking into a legal minefield. Generally speaking you are not allowed to advertise an investment offer to people you don't already know unless you are going through the proper channels of Angel Investors and Venture Capitalists. You can't just go asking folks at a cocktail party or you'll be breaking the law. It has to do with whether an offer qualifies as "public" and is therefore subject to stricter SEC scrutiny.

I've been complaining about this for a long time. I touched on the subject in my post about Title II of the JOBS Act being a ticking time-bomb for the SEC.

What I find interesting is that there are similar rules in other industries. My friend Barry is a newly minted attorney here in Phoenix and was telling me about how he needs to build up a client base. He pointed out that attorneys can't legally solicit clients unless, if I understood correctly, there is a specific known need. That's why you'll see lawyers on TV advertising specific legal services specifically to people in specific situations - "if you were recently in a car accident," "if you participated in this medical trial," "if you took this prescription drug," etc. But you are NOT allowed to put out an ad that says: "Hi, I'm Joe. I graduated in the top ten percent of my law school class at Blah Blah University. I am establishing my practice here in Such-a-town and ask that you keep me in mind the next time you are seeking legal services." The rationale for such a law? Well, it ostensibly has to do with maintaining the dignity of the profession and safeguarding people from unscrupulous lawyers. But in reality it is just there to protect well-connected lawyers from the upstart attorneys who could steal their clients. Protectionism plain and simple.

A plastic surgeon told me not long ago that the same thing almost happened in the medical profession, but entrepreneurial doctors fought it in court on free-speech grounds and won.

The truth is, good legal counsel and good doctors are hard to find. It makes no sense for us to allow laws that bar advertising solely to protect individuals from competition. No business person who has learned the lesson of "you get what you pay for" would throw out their trusted attorney because somebody in the yellow pages offered their services cheaper. However, attorneys might find it much harder to gouge families when settling the estate of a deceased person if others were allowed to advertise the same service at a lower cost.

The idea that we ban public advertising and solicitation in the name of "consumer protection" in any industry is bananas. For one thing, it's much easier to catch fraud that is committed in public than it is to catch fraud that is committed in private. For another thing, public advertising helps us to better evaluate the offers being made to us in private. The free exchange of information is the greatest consumer protection of all. Restricted communication is exactly the opposite! This is true for the legal profession, the medical profession, and investment as well.

Competition favors excellence and it benefits consumers and hard workers alike. The freedom to advertise services and solicit customers is essential to competitive markets. Any time we see a ban on advertising in any industry, a red flag should go up in our heads that the law is only there to protect the entrenched interests of some against the interests of others.

Wednesday, October 17, 2012

Is Romney's Tax Plan Stimulative?

In response to my last post my buddy passed along this great article on the Romney tax plan: http://economix.blogs.nytimes.com/2012/10/16/romneys-tax-plan-and-economic-growth/

I get from it two good critiques:

1. The author is skeptical that Romney's tax plan is politically achievable.

2. While he agrees that it is probably good for long-term growth, he argues that it will not do much to grow the economy in the short-term.

Point 1 is a valid cause for concern. Point 2 says only that Romney's tax plan is good but not necessarily very stimulative because taxes don't actually change, only tax composition. He doesn't say it would have an adverse effect on growth. Personally I think it could help summon the "confidence fairy" which would be at least a little stimulative in the short-run, but maybe we do need more stimulus right now.

So here's an idea: cut tax rates by 20%, but phase in the cuts to deductions over two or three years. That'll give us some temporary stimulus that targets those very areas we deem important enough to give deductions for currently. Then if we keep deductions capped at $17,000 and don't peg that to inflation, hey it'll even turn into a modest incremental tax increase. So the Democrats would get stimulus now and a tax increase later, and the Republicans would get a flatter tax code with less distortions.

Tuesday, October 16, 2012

Tax Thoughts for Tonight's Debate

Are small businesses indeed taxed as individuals? My lawyer friend Kale offered some great insights on this. The important distinction is that when a company is taxed as a partnership, the earnings pass through as income to the shareholders and are taxed accordingly. The BUSINESS isn't taxed; its shareholders are. That's the misleading part that Romney and Ryan are glossing over. If a business has three equal partners and makes $150,000, those partners are each taxed individually on their share - $50k - and are not bumped up into the higher tax bracket. Under that scenario, raising the marginal tax rate above $100,000 would have zero effect on the small business because the shareholders are each still in a lower tax bracket. When Romney says small businesses are taxed as individuals it confuses the point.

 In other words, a higher marginal tax rate would only affect small business owners who are in that tax bracket as individuals. These are the wealthy people we want to fleece, right? Right. BUT here's the rub: these high-income business owners are exactly the folks with their hands on the employment lever. Cutting into their earnings would undoubtedly have an adverse affect on employment. That is a terribly foolish tradeoff, and with that in mind we still reach the conclusion that raising the marginal tax rate on income would be a big big mistake, despite the fact that Romney/Ryan seem to be confusing the issue.

 While I'm at it, here is a poll of major economists on the issue of capital gains: http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_6MzyqvYPzrjhYvb This is a very important concept that all voters need to think about. The cliffsnotes: higher capital gains rate probably means smaller pie. So that's the probable consequence of "fair share" policies.

 And finally, something to remember about the opaque nature of the Romney tax plan is this: all major legislation will adversely affect some and positively affect others. You can't put out the details during an election. That's just political reality. I really like the basic intellectual orientation of the Romney tax plan. But it would be a major piece of legislation - much like the Affordable Care Act - on which Romney would have to expend a lot of political capital if elected. Whether it would be politically achievable is hard to predict. But we shouldn't be at all surprised that the details haven't been more forthcoming - you simply can't expect that during an election. Obama wasn't talking about the painful parts of his health care plan when he was running for office. I think we need to look at the basic direction Romney wants to move the tax code in - lower, flatter rates, far fewer deductions. I personally think it is crucial that we move the tax code in that direction, and I would be singing Obama's praises today if he had fought for Simpson-Bowles and done just that.

Wednesday, October 10, 2012

The Smartest Person Alive

In the game of intellectual Pokemon, I have yet to find anyone who can stand toe to toe with Richard Epstein: 


I've gotten into the habit of just listening to his videos in the morning when I eat breakfast. Hearing him speak is literally an aesthetic experience. He improvises an argument the way you might imagine Bach could improvise counterpoint.

Tuesday, October 9, 2012

Viva Leslie Knope!

NBC's Parks and Recreation has gotten a little stale for me and I'm considering dropping it from my Hulu queue. But I know just the story arch that would spice it up: Leslie Knope should become the dictator of a third world country! Think about it: she believes all the voters are simpletons, she believes all other politicians are corrupt, she believes private companies are evil, and she believes that government (when it's in her hands) can solve all the world's problems. She's like a blonde Hugo Chavez. Viva Leslie Knope!

Should the Government Regulate Kickstarter?

So surprise surprise, some Kickstarter projects that raised loads of money are now reneging on their promises: http://hive.slate.com/hive/made-america-how-reinvent-american-manufacturing/article/quotkickstarter-is-not-a-storequot

This gives us a great view of how these kinds of markets self-regulate. Kickstarter has already instituted new policies to address the problem, like banning realistic renderings of unmade products that might mislead funders into thinking that the product has already been made. Why is Kickstarter doing this? Because its reputation is at stake, and if its users get disgruntled it will lose business. (The profit motive in other words.) There's also the fact that a funder only has to be disappointed once to learn that bidding on a Kickstarter project is not a sure deal, so fund-seekers will have to work harder to persuade people to give them money (perhaps by offering guarantees or other incentives). The big concern is that long after the market has sorted this issue out the government will try to pass clumsy regulations to accomplish the same thing, adding needless friction and redundancy with none of the nuance.

Of course the analogy I want to draw is to the private securities market, the over-regulation of which is, in my view, one of the biggest impediments to economic growth in this country. For a basic illustration of the kinds of things that bother me, check out this article on funding gaps: http://gust.com/angel-investing/startup-blogs/2011/12/06/the-funding-gap/



The lesson the author wants us to draw is that it can be nearly impossible to raise capital in a range that falls between the preferred parameters of standard funding sources, so you have to time your funding rounds accordingly. But I would go a lot further than that. For the first ten grand or so, your only real recourse is friends and family (so it helps to have wealthy family). For the next hundred thousand, your main source is government grants. LOL what government grants??? Most small business government grants I've ever heard of are always targeted in some very specific way. It isn't until you get to the $100k+ range that you can start pitching to Angels, and guess what? Go on gust.com and look at different investor profiles and you'll see almost all Angel funds want to see a 10x return on investment within five years. How many businesses do you think fit that profile? Nobody starts a restaurant or a store going "I'm going to cover costs plus pay myself plus net 10x my money back in five years!" unless they're crazy. So the graph shows funding gaps, but it doesn't show the full picture: there are demographic gaps, industry gaps, even geographic gaps since most professional investors are located in a few key cities.

Sunday, October 7, 2012

The SEC is in for a Rude Awakening

One of the reasons I'm starting this blog is to register a prediction I have been making for months regarding the JOBS Act, a large piece of legislation that passed in the Spring which, among other things, instructs the SEC to modify its rules on how companies can sell shares to investors. The Act has two components that are of particular interest to entrepreneurs and investors alike: Title II (Access to Capital for Job Creators) and Title III (Crowdfunding). A lot of folks get the two confused, but my prediction regards Title II and has nothing to do with Crowdfunding.

Title II basically lifts a decades-old ban on advertising private securities provided sales are made exclusively to "accredited investors." People who make $200k+ per year or who have a million bucks qualify as accredited investors. The rest of us don't. In general I think Title II is a move in the right direction as it lowers some of the barriers between job creators and capital. But it's going to blow up in the SEC's face, and here is why: When companies are allowed to advertise investment opportunities freely, pretty soon we will start seeing billboards and commercials saying "Invest in Company X! Accredited investors only." For most people, this will be their first encounter with the term "accredited investor" or the concept that only rich people may purchase shares in private companies.

In all the comments from or to the SEC, I haven't seen a single speculation about how the public is going to react to this change. That's why I think it will be a complete surprise to the SEC when people get pissed off and start decrying the current regime as unfair. You will have software engineers being told they don't have the sophistication to buy shares in the next hot technology startup. Finance professionals being told they don't know how to evaluate a company's financials. Lawyers being told they are too vulnerable. The situation will be untenable.

Currently, the ban on advertising keeps people in a state of happy ignorance. They don't know they are missing out because companies are not allowed to tell them. But when that ban lifts - which will be soon, as the SEC has already missed its deadline and is hurrying to release the new rules - I predict the SEC is in for a rude awakening.

Saturday, October 6, 2012

A Gift to my Facebook Friends

Ever since I began posting economics-related thoughts on Facebook, my friends have been begging me to start a blog. Though flattered that they considered my little ramblings so important, who was I to cast my lot among the great economists on the internet? I have no formal training in the subject. If I have a field of expertise, it is writing musicals, which I do for my website www.gomusicals.com. I consider myself an artist, an entrepreneur, and a generally curious person. But an economist I am not. Yet as my Facebook posts grew longer, my friends' pleas grew louder: "Get a blog! Facebook is not the forum for this!!!"

So bowing to popular demand, I am creating this blog as a gift to all those Facebook friends who consider my little rants too big for a social network. I will probably post a lot of things about economics and politics because those things happen to really interest me. I probably won't post much about writing musicals or theatre because I do that already at facebook.com/gomusicals or on gomusicals.com. Please keep in mind that the things I write are just my amateur observations and I am always open to revising my opinions based on new facts or good arguments. If you are an executive at an awesome company and you want to offer me a job where I get to use my brain and do meaningful work, shoot me an email!