Category Archives: Economics

Whan an awful idea

With gas prices rising, it looks like there’s increasing pressure to tap the Strategic Petroleum Reserve to alleviate some of the pain. Now, I’m no fan of $4-a-gallon gas, but is this a strategic emergency? No, it’s me being pissed that my commute got $10 more expensive this month. Hardly a national emergency. Isn’t this thing supposed to be used, you know, strategically?

Then again, it is indeed a strategic emergency from a political perspective. No matter what party is in the majority, if voters drive to the polls with cars burning gas that cost four bucks a gallon or more, that majority is going to get slaughtered.

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The decline of the American worker

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I’ve always liked Fareed Zakaria.

In an Intelligence Squared debate I once saw, he came out in favor of the stupid argument that U.S. guns are fueling Mexican drug violence, but once he had been roundly thumped by the other side, he basically admitted he was wrong and dropped it. That’s the kind of guy he seems to be: reasonable and willing to admit when he’s wrong about something.

I was recently pointed to a fascinating article he wrote about the sort of general gloom and malaise that seems to be accompanying the unfortunate realities of unemployment and economic stagnation in America today. Go read it!

Anyway, Zakaria accurately describes the problems facing middle-class American workers, who predominately work in occupations such as skilled manual labor, managerial work, sales, and minor technical work. He begins with a very macroeconomic argument that holds water: that global competitiveness has opened markets full of workers who are as skilled and productive as Americans in these fields but whose wage requirements are lower. In a nutshell, here’s the core of the problem as he describes it:

Duh, of course a company is going to hire the foreign worker whose income expectation is half the American’s! There’s a lot of truth in his assessments, which are highlighted with striking personal experiences and a light dash of humor.

But sadly, Zakaria’s proposed solutions seem bizarrely unrelated to the issues themselves. While his ideas under the headings “Fiscal sanity” and “Benchmark, benchmark, benchmark” are sensible, and he’s absolutely right that the U.S. tax code is a monster that needs to be nuked from orbit and remade from scratch, there are two big stinkers in his plans.

First is his peculiar fondness for job training. The fact of the matter is that there are basically two types of companies: those that are actively looking for workers, and those that aren’t. The former are willing to train the under-qualified, while the latter may refuse to hire even the perfectly qualified.

Any company that’s looking to hire is a company that’s willing to train new hires to do their jobs. I’ve lived this: I was woefully under-qualified for my current job in terms of concrete skills, but I was hired because of the perception that I would take to on-the-job training quickly.

Obviously there has to be at least a reasonable match between skills and work; a psychologist stands no chance of hired as an aerospace engineer, for example. But there’s no evidence that American higher education is not producing the kinds of skilled workers who earn high wages. As Zakaria himself admits,

[America] has managed to invest in human capital by taking smart, motivated people from around the globe, educating them in the planet’s best higher-education system and then unleashing them in a dynamic economy.

His second idea is even weirder.

Fundamentally, America needs to move from consumption to investment. Everyone agrees that the best way to create good jobs in the U.S. is to create new industries and companies and to innovate within old ones. This means large investments in research, technology and development. As a society, this needs to become our strongest focus.

This paragraph doesn’t seem to follow his focus on workers. Zakaria has spent the whole article talking about how American labor is now at a competitive disadvantage due to above-average wages and more competitive global workers, yet here he goes off on some tangent about consumption and investment. I’m in agreement that consumption is too high, but it’s not clear how this substantially relates to his thesis about the American worker’s wages and competitiveness.

The same challenge can be made to his claim of the necessity for more investment, which he seems to be using as a synonym for “Research and Development”, whatever that actually means. But Zakaria earlier described how operational and technological efficiencies have hurt rather than helped the American worker:

First, technology has produced massive efficiencies over the past decade. Jack Welch explained the process succinctly on CNBC last September. […] Welch gave as an example a company owned by the private-equity firm with which he is affiliated. In 2007 the business had 26,000 employees and generated $12 billion in revenue. It will return to those revenue numbers by 2013 but with only 14,000 employees. “Companies have learned to do more with less,” Welch said.

Moreover, his source of revenue for this perhaps even counterproductive R&D infusion is downright ghastly: a 5% national sales tax. It seems particularly out of place to propose new taxes in an article about how the middle class is screwed. Furthermore, should this tax be allowed to exist, it will surely rise to beyond 5% in subsequent years just as all previous taxes have.

For example, in 1913 when the 16th amendment (which permits congress to tax income) was passed, the lowest tax bracket was 1%, and the top bracket was 7% on incomes over $500,000 (about $10 million in today’s dollars). Today of course the lowest bracket is 10%, and the highest one is three and a half times that.

As another example, the social security payroll tax started as 6%; now it’s 12.4%. And so on and so forth. If Zakaria believes that higher tax burdens will provide the shot in the arm that the middle class needs, he’s nuts.

Furthermore, what would this tax actually fund? Is there a government agency that is so wise and knowledgeable that it accurately knows which companies to subsidize, what industries to promote, and what products to support in the pursuit of this dream? In addition, what’s to prevent the money from being hijacked by the political process and simply used to dole out cash to powerful committee chairs’ favored corporations? In any event, this whole scheme of Zakaria’s contradicts two of his earlier statements:

Ultimately American jobs are created from the bottom up by companies, not from the top down by government fiat.

[…]

[There is an] institutionalized corruption at the heart of the American political process, in which it is now considered routine to buy a member of Congress’s support for a particular, narrow provision that will be advantageous for your business.

Moreover, he later talks about punitive Indian taxes in the 70s, how businesses were driven underground by them, and explains that they are now lower in several ways than they are in the U.S.! Zakaria can’t seem to make up his mind whether or not taxes destroy business.

A REAL solution

Let’s return to that original graph showing the core problem:

Unfortunately, none of Zakaria’s ideas really address the actual issue: American workers’ declining wage-competitiveness with skilled foreign workers.

Since we can’t control the rest of the world, we obviously need to focus on ourselves. In order for American workers to be considered, their wages need to drop:

But of course, this would be disastrous, because Americans need to spend a lot! We’re paying for rent, mortgages, cars, insurance, groceries, and all kinds of stuff. Our expenses are high:

Now at this point, some of you are probably looking at me like I’m trying to eat a grizzly bear. In order for this wage drop not to cause massive pain and suffering, the prices of things we need to buy must fall as well:

It’s important to realize that a diminished standard of living is only caused when prices rise faster than wages: Declining wages DO NOT produce a declining standard of living as long as prices fall as well.

For years, we’ve all been focused on increasing our wages, taking for granted that prices in general will rise and that we need more income to maintain our purchasing power in the face of these rising prices; we’ve all been raised with inflation as a virtual constant so that it’s the most natural thing in the world for us to expect that prices will generally rise forever. So if it’s assumed that prices will constantly rise, then it makes perfect sense that wages should correspondingly always rise to keep pace.

But what if prices could remain the same or in fact even fall? Here’s the shocking truth: from 1774 to 1912, prices remained very stable, never deviating too far from what they would have been in 1774:

Let that graph sink in: a product that cost $1 at America’s founding would cost almost the same amount a few years before the first world war, 138 years later. Now THAT’S price stability! And the trendline is even negative, meaning that over time, prices were in fact generally falling.

With such a bedrock of price stability, it was not necessary for each successive generation of workers to focus on earning dramatically more than their parents. In other words, because prices were stable, wages did not have to continually rise to keep pace with them.

Let’s put that graph in perspective, since it only goes up to 1912, which was deliberate on my part. Let me show you the full graph, which continues onwards to 2010:

Gulp. Those pre-1913 spikes look a lot smaller in comparison, don’t they? For the better part of a century, prices have been constantly rising for most consumer goods. The result is that workers’ wages must constantly be rising to even keep pace so they don’t lose their purchasing power. Wage increases are now basically mandatory to keep the cost of living of the American worker from falling, whereas from 1774 to 1912, that wasn’t the case.

Even worse, there are two products that have historically been especially important to the middle class: housing and college education. Unfortunately, for the last 40 or 50 years, these have increased in price even faster than the general rate of inflation:

Middle-class inflation.png

The terrible truth is that high U.S. wages, debt, and spending have been caused by tremendous inflation in the price of all goods and services, with truly astounding inflation occurring in the prices of housing and college. In order to keep up, we’ve been forced to constantly increase our wages, spend more for what we need and want, and take on debt when we couldn’t manage to.

As long as deflation is not allowed to counterbalance inflation and the prices of essential goods and services are constantly rising, the American worker is going to be stuck on the treadmill of trying to make his income keep up with his rising expenses and using debt to plug holes. Even if what Zakaria wanted came to pass and new industries magically sprung into existence that employed everyone and gave them high wages, the cycle would still continue, and it would only be a matter of time before inflation made a mockery of even those wage levels.

Reporting from the 25th annual Gun Rights Policy Conference

I just got back from the panels of the 25th annual Gun Rights Policy Conference, and let me tell you, I sure am jazzed. I arrived early in the morning and was greeted by a handsome M1 Garand being raffled off by the Golden State Second Amendment Council (who I really need to join):

Garand.jpg

Needless to say, I entered the drawing!

The conference started off with Alan Gottlieb and his wife Julianne discussing the importance of unity among pro-rights groups and of not sitting on our laurels just because we have two major SCOTUS victories. I heartily agree.

One pleasant surprise was that each attendee was given a ton of books, all for free! Among them are Paxton Quigley’s Armed and Female, John Lott’s Straight Shooting, and Alan Gottlieb’s America Fights Back. These are not works of fluff published by nobodies.

John Lott.jpg

John Lott himself (right) was present in fact, and he was there trumpeting his groundbreaking work in criminology to statistically disprove anti-rights myths over and over again. His speech was a bit dry, but he’s an economist so I can’t blame him too much, and besides, it was very informative!

Among the more bombastic speakers was Jim Wallace, a lobbyist with the unenviable task of promoting firearms and freedom to the Massachusetts state legislature. He told a hilarious story of how he cowed the legislature by asking them to indicate how many of them thought that only the government should have firearms (most did) and then asking them what they thought of the at-the-time-in-power Bush administration (it was not polite). This delighted me because I’ve used this trick on liberal friends and family before and heads always explode!

In fact, back before I was a guns and freedom activist, my extremely liberal father once confided in me that he was considering getting a gun out of fear of government thugs enforcing the PATRIOT act against him and his extremely liberal publications. At the time I was shocked and appalled but in retrospect I’m terribly proud of his momentary breaking out of the anti-gun state-is-god box and I wish I had been in a position to help him along rather than disapprove.

I regrettably forgot to snap a photo of Mr. Wallace. Maybe that tells you a little bit about how enthralled I was by his speech!

Alan Gura was of course awesome:

Sorry for the shakycam effect. After I shot these videos I realized that a more stable platform was needed so I cut some stickers up into strips and used them to secure my iPhone to a pile of books. It worked like a charm!

Eugene Volokh.jpg

Eugene Volokh (left) spoke as well and I was really excited to see him, being a big fan of his blog The Volokh Conspiracy. Mr. Volokh ended up being a voice of reason but was therefore hardly telling us what we wanted to hear! His primary argument was that the second amendment will be treated like other amendments — that is to say, it will be found to be a good deal less absolute and off-limits than we would prefer. He pointed out the wide variety of permissible restrictions on such rights as the right to protest and speak, and suggested that even a licensing scheme could be constitutional given its legal acceptance in protests.

Volokh sort of ended up playing the part of the wet blanket. Much to the palpable disappointment of the audience, he included assault weapons bans in the list of likely constitutional gun laws, his reasoning being that banning them would not be found to substantially burden the core right of self-defense provided that other suitable weapons were still available.

Calguns’ Gene Hoffman, however, strenuously disagreed a few hours later, bringing up the excellent example of self-defense against mountain lions, pointing out that California police departments use AR-15s to dispatch such animals when they show up in cities, and that ranchers and other rural folks often encounter four-legged predators against which handguns would be poor choices. These seemed like very strong arguments to me, and I also think that Scalia’s “in common use” language would come into effect as well; in California at least there are over 500,000 bullet button-equipped ARs and AKs. I’m proud to have increased that number by one.

There’s just something about Gene Hoffman that makes you want to follow him. He has a natural leader’s personality and he’s unbelievably eloquent. Here, have a listen:

Don Kilmer also spoke a bit about some of his cases, like the now-famous Nordyke case in which Mr Kilmer was technically the first lawyer ever to have the second amendment incorporated against the states!

Finally, Alan Gura spoke again.

Then there was a free-form discussion. Kilmer, Hoffman, and Gura talked a lot about spurious arrests for possession of bullet button-equipped ARs in California (hint: if it happens to you shut up and call Calguns at 800-556-2109) and other immediate and near-future issues. I couldn’t help but feel optimistic.

I was super-excited to see Massad Ayoob. Back when I was just dipping my toes into the pro-gun waters, his books and articles guided me along. I fondly remember reading In The Gravest Extreme on a bus ride in New England three years ago and feeling the cogs turning in my head as he methodically explained things that made too much sense to deny.

Also, he has an awesome voice.

One slightly unsettling undercurrent I noticed was the pervasive sniping at the NRA. Everyone was mad that they folded on the DISCLOSE act. Gura was pissed that they’ve been trying to take credit for his victories and was actually quite passive-aggressive about it. Smaller organizations like GOA were generally miffed that the NRA wasn’t absolutist enough. And one guy was steamed that they didn’t endorse Libertarians, leading to by far the most awkward moment of the day when he presented this to Bob Barr—who is an NRA board member—and got a good 15 seconds of tense silence as a result.

Given that Alan Gottlieb and his wife Julianne introduced the conference with a plea for unity and cooperation among pro-rights groups, it was somewhat disappointing. I would really have liked to see more solidarity, especially considering that the NRA has done 100 times more than most of the complainants (I’m looking at you, GOA!). We should rally around our power players, not snap at their heels for being more important and influential than we are.

There were a ton more people who were all great in their own ways. Hearing Michael Boldin the tenth amendment guy ask us if we had as much courage as the pot smokers in California who are actively disobeying federal law en masse was something I don’t think I’ll ever forget, and Nikki Stallard’s impassioned defense of gays’ right to defense was really something to behold.

It was a wonderful set of panels. After 10 hours, I felt rejuvenated! It’s great to be surrounded by fellow freedom-lovers, and I really think we have dream teams working all throughout the country to attack statist nonsense on too many fronts to count.

The true nature of the debate

There’s an amazing post over at DocZero that you must to read immediately. No really, go read it. Here’s a snippet:

The debate over who “owns” our money is a serious one, with profound philosophical implications. The collectivist mindset, evolved over the past two centuries, holds that every citizen is obliged to finance the expression of society’s “general will.” We share common resources, and we’re all affected by social problems, so the State has first claim on our time and money. Once the general will has been satisfied, citizens are allowed to keep whatever is left over.

Since individual citizens are presumably greedy and short-sighted, the collectivist finds it absurd to give them final say in how much of their income is seized by the State. Only the highly educated, selfless wardens of the State can make that determination. Of course millionaires don’t want to hand over their fortunes to fund welfare programs, industrial subsidies, and armies of bureaucrats… but those things must be funded, so the money is justly taken by force.

What Tea Party types view as tyranny, the collectivist sees as the virtuous expression of that infallible general will. The real tyranny would be depriving needy people of vital government services, to give rich people money that is the rightful property of the benevolent State. You’ll hear a great deal of rage, accompanied with promises of righteous violence, when the Republican Congress works with the next President to begin cutting our obscenely bloated government down to size. Every penny of those spending cuts will be portrayed as the rightful property of the needy, seized and administered on their behalf by the wise and benevolent political class… whose moral and intellectual superiority entitles them to rich benefits and luxuries. The liberal does not believe any person of good conscience could oppose the general will. The only possible explanation is a species of greed that approaches treason.

Read it ALL.

Just when I thought the UK couldn’t get any more Orwellian

Via Alan, there’s a proposal afoot to pretty much do away with any residual liberty UK citizens still have: the government would directly take employees’ paychecks, deduct whatever is deemed an appropriate level of tax, and deposit the remainder into their checking accounts. Apparently the writer of the linked editorial has no moral qualms against this idea, only questioning some nuts-and-bolts implementation details. God help anyone who proposes something like that here.

A “safe, flexible, and stable monetary and financial system” huh?

And now for another economic interlude. For some time now I’ve been fascinated with the seemingly unending upward trend of prices for things like health care, housing, and college. In my last post on the topic, I concluded that higher education’s problem was that it was tracking the ups and downs of the general rate of inflation, but higher. However, I realize now that I took it for granted that there was inflation. We all do. It’s viewed as a force of nature, simply there no matter what anyone does.

But how natural is inflation really? Most people living today have spent the majority or entirety of their lives during periods of sustained positive inflation, so they know little else, but has it always been this way? I set out discover the truth.

I first tried the Bureau of Labor Statistics, but they only track this stuff from 1913 onwards — the year the Federal Reserve was founded. I wanted data going all the way back. I found an academic paper that lists the historical rates of inflation and consumer price indices for 1774-2010, which was just what the doctor ordered. What time is is? That’s right, it’s GRAPH TIME!

Yearly inflation 1774-2010.png

Okay… well this must certainly tell us something, but it’s a bit hard to make out just what. I see a lot of inflationary spikes in the past but a lot of deflation too. The modern period seems to be marked by much more inflation and no deflation to speak of. Let’s see if I can find a way to visualize this data more effectively.

CPI 1774-2010.png

Gulp. That kinda brings it home a bit, doesn’t it? What astounds me the most is that a single dollar purchased roughly the same amount of goods pretty consistently from 1774 to 1913. That’s 140 years of fairly stable currency value. Wow. But after 1913 things started to change, and inflation really took off.

I blame the Federal Reserve. This is a topic for another post, but since its creation, the Fed has systematically devalued the dollar and ushered in an era of outrageous inflation. Don’t believe me? Just wait for these next two graphs. First, let me show you a graph of the purchasing power of a dollar prior to the creation of the Federal Reserve:

Price of a $1 1774 good pre-fed.png

…Now after the creation of the Federal Reserve:

Price of a $1 1774 good post-Fed.png

Now you begin to understand why the BLS only tracks post-Federal Reserve inflation figures: because of they showed the data from before the Fed was around, it would clearly demonstrate the utter failure of the agency!

Even more ironic is that the stated mission of the Federal Reserve is to provide a “safe, flexible and stable monetary and financial system”. After looking at that last graph, one can’t help but feel that the system was worlds more stable before the Fed started meddling.

Let’s talk a little bit about college tuition inflation

One subject that I’ve wondered about for a long time is the rapid rate at which college tuition is increasing. I myself just recently graduated from college with tens of thousands of dollars in debt. My mother attended the same school I did several decades ago, and her mother was able to pay for the entire tuition out of pocket on a single stenographer’s income, while she and my father were not able to pay for mine after saving for 20 years on two substantially higher salaries. It just didn’t add up.

We all hear that the rate of “tuition inflation” is higher than the rate of “normal” inflation. This is very true:

college tuition inflation vs. general inflation.png

Tuition inflation appears to roughly track the national rate of inflation but it’s almost always higher. so college tuition increases in cost just like everything else, but faster. Here’s exactly how much faster:

Rate of college tuition inflation to general inflation.png

(Ideally, the average ratio should be 1 or lower)

As we can see, in the 1950s, and early 1960s, college tuition costs were increasing as much as seven times faster than the national average! In the last 40 years, though, the rate of tuition inflation has been brought down to only about twice the national average (!!!), but that’s where it’s stubbornly stayed.

Let that sink in a bit: for at the last 50 years, the price of college has been increasing more than twice as fast as the price of everything else, and sometimes faster! Even that last graph doesn’t really do a very good job of expressing just how wildly college prices have diverged from the price of everything else because of this higher rate of inflation:

total cost of college vs. other goods.png

(This graph was created by starting with average 2007 tuition and going backwards to compute the rest of the prices through the value of previous years’ tuition inflation. Figures are not inflation adjusted, as inflation is shown as its own line)

If college tuition had been increasing at the “normal” rate of inflation, then four years in a private college should cost a little under 30 grand. But instead it costs four times that amount.

I’ve included the median family income for the years that it’s available from the U.S. Census Bureau. In 1994, the total price of 4-year college exceeded the average family’s entire yearly pre-tax income. That’s before 7% for Social security, 3% for medicare, federal income taxes, state income taxes, state sales taxes, property taxes, capital gains taxes…

Does graph look familiar? It very closely resembles graphs of the effects of compound interest at different levels. Just like how 40 years later, a financial account at 10% interest will be worth far and away more than twice an account with only 5%, college tuition today costs far more than twice that other products do, despite only having an inflation rate that’s about twice as high.

It’s the miracle of compound interest, and not only does it work in reverse for your debts, but it apparently affects college tuition as well. These things increase faster and faster over time, raising prices to unbelievable levels if left unchecked.

But it gets worse. Here’s how the average family sees it:

total college costs as a percentage of household income.png

Glup. Today, an average family would have to spend almost twice its entire pre-tax income to be able to afford four years in a private college for one child. That’s about 45% of the average household income for each year. Compare that to 1967 when it took less than 4% of the average household income per year. That’s a tenfold increase in 40 years, with not even a doubling of income. Yowzers.

So there’s no sinister plot to destroy American education. There’s no marxist takeover, no corporate collusion that explains the skyrocketing price over the last 40 years; it’s just the ordinary effect of inflation compounded year after year, writ large due to a much higher rate than that of most products and services. So the real question is then why is the rate of inflation for college tuition so much higher than the national average?

That’s the subject for another post. Expect more soon.