Obama is right about taxation of hedge fund partnerships

One of the most outrageous industry specific tax breaks is the preferential tax treatment of "carried interest" for hedge fund and private equity partnerships.

In a hedge fund or private equity partnership, the fund managers get paid by the limited partners (i.e. investors) in two ways: an annual fee, usually 1-2% of assets under management, and a percentage of any investment gains made by the fund, usually 20%. This 20% participation fee is known as carried interest.

For some reason, our tax code treats carried interest as if it were a capital gain, and is therefore taxed at a 15% rate and is excluded from payroll taxes. But carried interest is not really a capital gain. We are not talking about the hedge fund managers own money here, we are talking about a management fee. Yes it is a highly uncertain, contingent fee, but it is still a fee nonetheless.

Hedge fund managers claim that the preferential treatment is justified because the fee is uncertain and risky. But there are lots of occupations where the ultimate income is highly uncertain - a lawyer who works on contingency, an author or composer who gets paid via royalties, or a salesmen who works on commission - yet all of these folks pay taxes at ordinary rates.

The President has proposed that the preferential taxation of carried interest be eliminated, and I agree with him. His problem is that he may have to fight some members of his own party on this one - particularly Charles Schumer.

By the way, I only agree with the President with respect to the preferential nature of the tax rate, not with the idea that 15% is too low of a tax rate. I think all income should be taxed at a flat 15% rate, whether you work at a hedge fund or not.

Farewell to the Glenn Beck Program on Fox

In honor of the final week of the Glenn Beck TV program on Fox News, I have assembled a list of my favorite moments from the show.

February 2010, Glenn Beck vs. Joe Klein. My favorite comedic moment was this clip where he lampoons Joe Klein and the Ivy League faculty lounge, donning a tweed smoking jacket and a pipe. I've watched it a dozen times or so and it never gets old. Just hilarious.

Look it up Joe, it's true. It almost makes it sound like you don't know what you are talking about. And it also kind of turns your entire nasty little blog entry into...anti-intellectual drivel!

August 2009, Beck exposes Van Jones. Beck makes history by airing a devastating mini-documentary on the radical background of White House clean energy czar Van Jones. Thanks to Beck and a revelation that Van Jones was a 9/11 truther, Van Jones resigned just a few weeks later. Beck 1, White House 0.



July 2010, Beck devotes entire show to Hayek's Road to Serfdom. It wasn't Beck at his best...I am not sure Beck actually read the book before doing the episode. But it didn't matter. Within hours, the book jumped to number one on Amazon.com.



February 2010, Beck addresses CPAC. This was not actually part of his TV program, but it might as well have been. The best moments: his rock star introduction set to the music of Muse, and the moment he brings out his chalkboard.




January 2009, The Inconvenient Debt. This was very early on in the show's history, and I think was one of the first Beck clips that went viral. He parodies Al Gore to demonstrate the dramatic and frightening rise in the nation's money supply. Who said monetary policy makes for bad TV?




May 2010, "The Plan". Yes, he is a self described rodeo clown, but in May of 2010, Beck devoted an entire week to outlining a plan to solve the country's fiscal problems and reversing 100 years of progressivism. He discusses how to cut entitlements, education, health care, and yes, even defense spending. Making policy conversations accessible and entertaining...Beck at his best.



October 2009, Glenn vs. Anita Dunn. In the fall of 2009, White House communications director Anita Dunn spearheaded an unusual White House strategy to attack and marginalize Fox News, calling the network "opinion journalism masquerading as news". A few weeks later, Beck reveals a video of Anita Dunn making a speech where she calls Mao one of her "favorite philosophers". Was she joking when she said that? Most likely. She claims she was "being ironic". But at a minimum, it showed really bad taste. And after going after Fox, did she really think she was going to get the benefit of the doubt? Beck 2, White House 0.

And perhaps the funniest part of all of this was on the next episode, when Beck's staff member manning the White House hotline is dressed in a Mao suit. Hilarious.




March 2009, Beck apologizes to audience for Massa interview. On March 7, 2010, Democratic Congressman Eric Massa accused the White House of orchestrating an ethics investigation "to oust him because he had voted against overhauling health care". Beck is intrigued and lands an hour long interview with the former Congressman, hoping to get some insight into possible Chicago style political tactics from the White House. The interview is a complete disaster, as Massa backs away from his previous statements and is preoccupied with pointing out that he did not engage in "groping", only "tickling". At the end, Beck apologizes to his audience for wasting their time.




January 22 2010, Beck airs documentary "The Revolutionary Holocaust". Beck takes a huge risk and it pays off. Jonah Goldberg, who is featured in the documentary, described it as follows: "It is very, very hard hitting. It’s the sort of thing that would never, ever, have been allowed on TV 20 years ago."



March 13 2009, Beck launches 9/12 project, cries on air. Here is where it became clear that Beck was interested in more than just putting on a news show. The 9/12 project becomes a strand of the tea party movement, and not an insignificant one. Critics are hysterical because Beck cries on air.




April 15, 2009: Beck leads tea party rally at the Alamo. This was perhaps the moment where the tea party movement really started to take hold. As the media and the White House are geniunely confused by the tea party protests (after all, taxes had not gone up yet!), Beck defines the tea party as a non-partisan movement concerned with one issue - the dramatic growth in government spending. From his opening monologue:

(The media) continues to think that the tax day tea parties are all about Barack Obama or they are all for the GOP. It’s not because they don’t try to understand, I don’t think they are capable of understanding. But since the media are watching, I am going to speak very, very slowly. As I understand it, at least the way I see it here, these have nothing to do with the Democratic party, other than the Democrats suck (roar from crowd). However, no more than the Republicans suck (even louder roar from crowd). This has nothing to do with how much Barack Obama is spending, it’s about how Barack Obama AND George W Bush AND both Congresses have been spending for years.- Glenn Beck

Farewell to the Glenn Beck TV program on Fox News. It made history and was unlike anything we have ever seen or will ever see again on TV.

What not to say after losing the NBA championship

Lebron James following the Game 6 loss to the Mavericks:

All the people that were rooting me on to fail, at the end of the day they have to wake up tomorrow and have the same life they had before. They have the same personal problems they had to today. I’m going to continue to live the way I want to live and continue to do the things that I want with me and my family and be happy with that.

Well, I wasn't rooting for him to fail, but after reading that quote, I'm sure glad he did!

Calling all Senate Democrats

.... it's time to do your jobs. It is now 749 days and counting since the Democratic-controlled Senate passed a budget.

Romney doesn't know anything about economics

Maybe that is an exaggeration, but here is my point. Conventional wisdom says that because Mitt Romney was a successful business man, that he is also a great candidate when it comes to economic issues.

Really? I'm sorry, but understanding economics and being able to manage a business are two very different things. The economy doesn't run like a business. And anyone who thinks that it can be managed like a corporation is terribly misguided.

Back in 2008, I recall that Romney was clamoring for a "stimulus!" and was mocking McCain for his proposal to cut government spending as a way to forestall the recession. And of course, you don't need to look much further than his awful health care plan for more evidence of his economic ignorance.

So this line of thinking that says "yes, I know Romney is a flip-flopper who reverses himself on issues like abortion, immigration, campaign finance, etc...but that's okay because he's great on the economy!" needs to end now.

Romney is the quintessential "pro-business" candidate. What we need is someone who is "pro-market" and understands the limitations on the role of government, both practically and constitutionally.

Romney nomination would be as if the tea party never happened and would reverse all of the progress of the last 24 months.

That is why lately I have been leaning in this direction.

Book: Selfish Reasons to Have More Kids

I recently finished the book Selfish Reasons to Have More Kids by George Mason economist and Econlog blogger Bryan Caplan, and it is a wonderful read for anyone interested in the topic of parenting or grandparenting.

Here is the book summary:

We've needlessly turned parenting into an unpleasant chore. Parents invest more time and money in their kids than ever, but the shocking lesson of twin and adoption research is that upbringing is much less important than genetics in the long run. These revelations have surprising implications for how we parent and how we spend time with our kids. The big lesson: Mold your kids less and enjoy your life more. Your kids will still turn out fine.

The book also presents this theory that most of us "overcharge" ourselves for the cost of having a child, because we overestimate the impact we have on our children in the long run. In other words, the costs of having a child are really less than we think they are.

He's not saying that everyone must have a kid, or that if you are happy with 1 or 2, that you have to have 2 or 3. He is simply presenting a point of view, one that may convince someone who is on fence to go ahead and have another child.

Yesterday, Caplan appeared on the Dylan Ratigan show. Link to video here.

T.G.I.Fla.

A week of Florida headlines:

MONDAY, MAY 2

Wearing Only a Smile, Nudists Seek out the Young and the Naked
Loxahatchee Groves, Fla.

TUESDAY, MAY 3

Nothing to see here. Move along. (Why oh why did I promise a week's worth of headlines?). I'll make it up to you later, promise.

WEDNESDAY, MAY 4

Cops: Fighting woman hid knives and drugs in her private parts and fatty skin folds
Fort Myers, FL

THURSDAY, MAY 5

Here we take a break from the kookiness to remember that Florida has its share of wonderful stories, too:

Toddler ready to go after having seven transplanted organs at Jackson Memorial.
Miami, FL

FRIDAY, MAY 6

From the sublime back to the ridiculous

Bicycling Flower Thieves Hit Orlando Florida
Orlando, FL


BONUS ROUND: the best of April

Police arrest man accused of urinating on cough drops at Walgreens
Sanford, FL

BONUS ROUND: the best of All Time

This apparently happened in March, but I just heard about it today.

Herman Cain vs. Bill Clinton

Herman Cain, former CEO of Godfather's Pizza, made quite a debut last night as a candidate for President of the United States. I am not jumping on any bandwagon - I am particularly concerned about his apparent enthusiasm for the TARP bailout back in 2008. He seems to be trying to ride the tea party wave, but since the tea party was in large part a protest against bank bailouts, this makes little sense.

But what is worth watching is the video below from a 1994 Health Care Town Hall with Bill Clinton. Cain, speaking as the CEO of Godfather's Pizza, takes on Clinton and destroys any possibility of the Clinton health care law being enacted into law in a matter of about 6 minutes.

Early on in the discussion, Cain asks Clinton: "If I am forced to do this, what will I tell those people whose jobs I will have to eliminate."

Clinton then responds by trying to convince Cain that the costs will really not be as high as he says, and then suggests that Cain would be able to pass the cost on to his customers. After all, all of his competitors would be in the same boat. And to this comment, Cain's response is simply devastating:

In the competitive marketplace, it simply doesn't work that way, because the larger competitors have more staying power before they go bankrupt, then the smaller competitor.

This is a fantastic insight. Regulations do impose costs on large corporations, but they often have a disproportionately larger impact on smaller businesses. In other words, regulations build a competitive "moat" for the larger players by making it more difficult and more costly for the smaller competitors to compete.

Hayek/Kaynes Round 2!

Tax burden

A friend of mine recently argued, "raising taxes slightly on the highest income earners produces large amounts of revenue. " That seems like a reasonable argument, until you take into account how few rich people there are relative to everyone else. Here are some of my back of the envelope calculations based on numbers provided by the Tax Foundation:

• If you raised everyone's tax rate by 1% you would generate about $17 billion more from the top 1%, and about $67 billion from everyone else.

• If you raise taxes on the top 1% by 20 percentage points, (from 35-55%), you raise about $337 billion. Raise tax rates on everyone by 5 percentage points, and you raise about $421 billion.

• If you raise taxes on the top 1% by 50 percentage points, (from 35-85%) you raise about $842 billion. Raise tax rates on everyone by 10 percentage points, and you raise about $842 billion (not a typo).
  

Of course, all of this ignores behavior changes and incentive effects. If you raise rates 20 or 50 percentage points, the static analysis above would not hold, because people would go out of their way to earn less. It’s not that they would be “lazy”, the word some have used to try and disparage the supply side argument. It’s that at 85% marginal rates, people spend more time sheltering income than earning income. At 85%, the return on sheltering income would be so much higher than just about anything else you could do with your money.

Below is an amazing graph from the American Enterprise Institute. Conventional wisdom says that the payroll tax is progressive because it is capped. But maybe the proper way to measure is to take into account what everyone puts in versus what you get out. If you get more out than you put in, that is a negative tax, and if you put in more than you get out, it’s a positive tax.

The graph below from shows just who is really paying the social security tax. Hat tip to Veronique de Rugy.

Limbaugh brilliance

On today's program, he said something to the effect of:

I keep hearing about how great the 90's were, and that we need to go back to the Clinton tax rates. Well, okay, if the 90's were so great, then let's go back to the level of spending that we saw in the 90's.

I'm mad at myself for not thinking of that one.

Here is inflation adjusted per capita total government spending:


And total spending as a percent of GDP:

Columnist who accuses Douthat of not having a clue, has no clue

Yahoo finance columnist Dan Gross thinks he's really nailed Ross Douthat in his column NYTimes Columnist Douthat Needs a Clue on Taxes. He writes:

I'm not quite sure where Douthat pulled that $94,000 figure from. Perhaps from the same place where he got the notion that a family making $94,000 "pays 15 percent in federal taxes." Look at the Internal Revenue Service's 2010 tax tables and you'll see that a family filing jointly, earning $94,000, is squarely in the 25 percent tax bracket. Because the first $68,000 of their income is taxed at lower rates, their total federal income taxes would come in at about 17 percent.

But there's more to federal taxes than income taxes, especially when you're in the lower tax brackets. This fictional family would also pay payroll taxes for Social Security (4.2 percent, thanks to this year's payroll tax cut) and Medicare (1.45 percent). So a family of four making $94,000 is already paying about 22.5 percent of its income in federal taxes, and is looking at a 30.65 percent marginal rate on income earned up to the Social Security cap.

This is how the math actually works out for this family of four making $94K:

Adjusted Gross Income: $94,000
less Standard deduction: $11,400
less Exemptions: $14,600
Taxable income: $68,000

Tax $9,369

less Child tax credit: 2,000
less Making work pay credit: 800
Tax owed after credits: 6,569

Marginal tax rate: 15%
Effective tax rate: 11%

So, the tax they are paying is actually 11%. Even if you include social security and Medicare payroll taxes, which total $7,191, the effective tax rate would still come in under 15%.

Stunningly sloppy.

Practice makes perfect

I don't know if President Obama is, as Democratic Senator Bob Kerrey once said of Bill Clinton, an "unusually good liar," but he certainly works hard at it.

The impact of George Washington's ignorance of the internet on Constitutional interpretation

In Little Rock on his book tour, Supreme Court Justice Stephen Breyer argued (in the words of an AP reporter) "that judges need to apply the Constitution's values with an eye toward the changing times." The Court's job, he said, was to discern how to apply the Founders' values to the modern world "George Washington didn't really have a view about the Internet," he said, drawing laughter from the crowd of about 650 people at the Statehouse Convention Center. This is a commonly stated observation, and it's always puzzled me that liberals find it clever. I mean, George Washington did not have a view about lots of things: telegraphs, phonographs, typewriters, telephones, microphones, electrified megaphone, radios, televisions, highway billboards, walkie-talkies, and Ubbi Dubbi. So what? The point Justice Breyer is making is that the new technology sometimes raises questions about how pre-existing laws should be applied. But this does not change the judge's job, which is to apply the law as it is written to the new facts. Justice Breyer's comment that the Court "should apply the Constitution's values with a pragmatic view toward present circumstances, rather than focusing only on the document's historical meaning" is at best banal, and at worst pernicious. First, no judge disregards "present circumstances" while "focusing only on the document's historical meaning." The originalist judge does not, for example, define the First Amendment's provision that Congress shall make no law ... abridging the freedom of speech" and define "speech" to mean only those forms of speech available in 1789 such as pamphlets and books, but not radio shows and movies. (This is what Judge Breyer is suggesting his opponents do, with his joke about the internet). Rather, originalist judges are inclined to think that the free speech clause protects only speech, as that term was generally understood, regardless of method of transmission. Thus, an originalist has no doubt that statements on internet blogs qualify as "speech," even though George Washington never read one, but are skeptical about whether nude dancing does. If the judge sees his role as to apply the Constitution's "values" in a "pragmatic" way, it is very tempting for him to think that any result that seems"unpragmatic" or "impractical" must be incorrect. Bans on abortion seem impractical given the judge's views about family arrangements and sexual morality, illegitimacy rates, etc., so ipso facto the bans on abortion must be unconstitutional. "Pragmatism" becomes a synonym for "a result that I like." Honoring the Constitution's "values" can be a way to dodge the limitations of the actual text. But what better encapsulates the Constitution's genuine "values" than the Constitution's words?If the judge sees his task as applying the words of the Constitution to present circumstances, the words themselves as a tether, which can prevent him or her from straying too far from what the people actually agreed to when they approved the Constitution (which is, after all, a document made of words). This approach does not always prevent a judge from allowing his own preferences to cloud his interpretation -- not by a long shot --but it's better than the alternative, which provides no brake at all on judicial willfulness. Justice Scalia tells a joke to illustrate this. Two men are walking in the woods and come across an angry bear. They start running. The first man says, "I don't think we're going to make it." the second guy responds, "I don't need to outrun the bear, I just need to outrun you!" To Breyer's credit, he is aware of this quip and usually includes it in his speeches. Which makes it even more peculiar that he is so impressed with that crack about George Washington and the internet.

Quote of the week from Mark Steyn on the EIB

"Baseball should have a season, not taxes." - Mark Steyn

The MJ of Killer Whales

Remember the killer whale at Sea World who killed its trainer in front of a live audience last year? You may recall he grabbed the trainer by her hair and pulled her underwater, drowning her either before or after severing her spine. Apparently he had been involved in the deaths of two other people before that. The whale's name is Tilikum, which in the language of the Chinook means "friend." Well yesterday Friend made his comeback performance in front of 5,000 animal lovers at Sea World in Orlando. No word yet whether People magazine will characterize this -- as they usually do when a celebrity resumes making money after getting caught doing something awful -- as a "triumph over adversity." Comments one observer:

Death by whale is uncommon, but that’s not to say Tilikum won’t strike again. Trainers are extra cautious around the whale, and no longer rub him manually. What he doesn’t get in human touch, he gets in the form of high-powered hoses.

From an objective standpoint, Tilikum’s return to SeaWorld’s performance lineup must be qualitative. He must be an awesome whale, capable of high jumps and the finest beach-ball balancing. Additionally, considering his massive frame, he must excel at the audience whale splash—a fan favorite.

Tilikum is the Michael Jackson of killer whales. Promoters will book him and crowds will come see him regardless of his personal turmoil.

Via First Thoughts

Social security trust fund accounting

Don Boudreax at Cafe Hayek has some great posts on how the Federal government's accounting in regard to the Social Security Trust Fund is fraudulent. He writes:

When sensible people ... note that these obligations are so massive that honoring them in full will require drastic tax hikes or spending reductions, accounting-challenged defenders of the status quo exclaim “Not to worry! The Social Security trust fund holds lots of U.S. Treasury bonds. Those bonds are assets. So Social Security’s obligations are covered!”

But those bonds are held by the same party that issued them, namely, Uncle Sam; the creditor here is one with the debtor.... The bonds in the ‘trust fund’ are no independent source of revenue for Uncle Sam to tap into to meet his Social Security obligations as these bonds would be if they were issued instead by, say, Microsoft or by Her Majesty’s government in the U.K.

Here is an example:

Suppose I have a savings account with $10K, and I empty it to pay for a car. Most sane people would say that I now have a car worth $10K, and a savings account worth $0.

If I were the federal government, however, the accounting would be a little bit different. When I empty the savings account, I would replace it with an IOU from myself, and claim that the IOU is worth $10K. So I now have a car worth $10K and an IOU (from myself) "worth" $10K. All of a sudden, I have assets worth $20K!

At some point in the future, my income falls short of my expenses, and I need money, so I begin selling assets. I eventually get to the $10K in IOUs and have no choice but to sell them. But here’s the problem: because the person who is obligated to make the IOU payments is me, and I am in no position to make those payments, so the IOUs are worthless!

How did this happen? It was never an asset to begin with.

Who are these greedy owners?

I was in an email discussion with a few friends on various labor issues, and one of them wrote this:

If I had a business where I made shoes and could hire 5 American workers to make let's say 50 pairs of shoes per day, why would I send the work to another country where I could hire 10 people to make more shoes for the same price or less? Because I would make more money....mind you what I was making a profit prior to firing the American workers ...it is greed pure and simple...no one needs that much money.

My question to him was, who exactly are these greedy people? After all, I am a shareholder in thousands of companies through my ownership of index mutual funds. Through those investments, I am seeking a return on my money - a profit. It's these investments that provide money to companies to buy machinery and equipment and factories and offices, i.e. capital. Capital is what makes workers more and more productive, and ultimately allowing workers to demand higher and higher wages.

And regarding the "no one needs that much money", again, who is he talking about? I know that I am invested in thousands of companies, and that some of these companies that I own will be incredibly profitable while others will quickly go bankrupt. On average, I will make a return that is the "market return" - as will the average investor - pensioners, 401K participants, IRA holders, etc. So when you see one highly profitable company, that doesn't mean that the investors in those companies didn't have 10 other investments that fared poorly. So again, I don't know exactly who he is talking about.

Just a reminder

Natural disasters do not create economic growth.



If they did, anytime we had a recession, the remedy would be to destroy as much stuff as possible.

My children's first economics lesson

A couple of weeks ago, I was driving around with my two 4 1/2 year old twins, and we drove by an ice cream place that we used to go to sometimes, and my daughter asked, "Why don't we go that ice cream place anymore?"

I explained to them that I thought the prices were too high for what you get. They didn't quite get it, so I said, "Imagine there are two ice cream stores right next to each other, and both stores served the same exact ice cream. However, one store charged $10 for a cup of ice cream, and the other store charged $3 for a cup of ice cream. Which place would you go to?"

First they said that they would go to the store that charged $10. After all, $10 ice cream sounded better than $3 ice cream. But I reminded them that the ice cream in each store was exactly the same, and asked, "Why would you pay $10 when you can get the same thing for $3?" And finally, the light went off.

I asked, would anyone go to the store that charged $10? And they said "no".

Pushing the issue, I then asked, should the ice cream store that was charging $10 be able to force the other ice cream store to also charge $10, so that it's more "fair". And they said "no". First lesson complete.

Walter Williams on unions

"A union's struggle for higher wages is not against the employer, it's against other workers". - Walter Williams on the EIB Network, 2/28/2011

Collective bargaining vs. individual bargaining

As I said here, I have no problem with collective bargaining. The problem is when it excludes individual bargaining.

Dave Henderson makes a similar point in responding to a WSJ column by Bob Barro, who explains collective bargaining this way:

An analogy for business would be for all providers of airline transportation to assemble to fix ticket prices, capacity and so on. From this perspective, collective bargaining on a broad scale is more similar to an antitrust violation than to a civil liberty.

Henderson makes a correction:

An analogy for business would be for providers of airline transportation to vote to force all airlines, even those that don't want to join, to comply with ticket prices that the business association sets. In other words, the key ingredient that Bob Barro misses is the element of coercion. ... The power to be the sole bargaining agent is a power, not a right. There's no such thing as the right to make peaceful people join something they don't want to join.

Rand Paul on David Letterman

Rand Paul’s performance on David Letterman is a must watch.

Some highlights. Here Paul gets Hayekian:

It’s not that government is inherently stupid, although that is a debatable point, it’s that they don’t get the same signals. You and I get signals…we have to pay our employees, we have to make a profit…the public sector doesn’t have that.

And here he argues for the virtues of competition for solving problems in education:

I think competition makes us better, you have to compete with other late night comedians, I have to compete with other physicians...

Perplexed, David Letterman ends the interview this way:

I think he’s wrong about some of the stuff he’s saying, I just don’t know why.

Rand Paul is very skilled at explaining complicated economic and policy concepts in a way that is both non-threatening and easy to understand. He's a real asset to conservatives and the Republican party, and needs to get on as many of these kinds of shows as possible.

A "problem"? Hardly.

[Update]

Some more reactions, and here.

From mortgage banker to brewer

A wonderful brew pub has just opened in our neighborhood, and below is an excerpt from an article describing how the venture came to be:

“’I started home brewing 17 years ago when I lived in Colorado, after leaving the mortgage business a few years back I met Jim and Lisa Hill from Corner Café and decided to start brewing craft beer for their customers. We removed some old equipment from their kitchen, installed a 35-gallon unit and started brewing. Mr. Webster’s experience and success at Corner Café fueled a desire to expand and Tequesta Brewing is the result.”

"After leaving the mortgage business?"

Economist Arnold Kling has been promoting a new paradigm for thinking about macro-economics. He calls it patterns of sustainable specialization and trade, or PSST for short.

From Econtalk:

Kling rejects the Keynesian approach that emphasizes shortfalls in aggregate demand ...instead, Kling invokes the mutual exploration between entrepreneurs and workers for profitable opportunities that pay well using the workers' skills. This exploration takes time, involves trial and error, and can have false starts because businesses sometimes fail or employees are difficult to find or match with employment opportunities.

I think the story of the brewer fits into this paradigm. The Keynesian story says, we have a decline in demand for mortgage related services, so we need to institute a policy that gets demand back up. It doesn't matter what kind of demand, just get it back up.

The PSST story sees it differently. Here we have an industry that attracted a tremendous amount of capital and labor, (a result of bad government policies perhaps), it was unsustainable, and now a re-calculation is taking place. Many people that made a living in the mortgage business just a few years ago are searching for a new, or perhaps their true, pattern of sustainable specialization and trade, and that process can be painful. I think that is was is happening with the mortgage banker turned brewer. And if the crowds that line up to taste his creations are any indication, I'd say his search is complete.

Russ Roberts tells the truth

On unions:

The effect of unions, to the extent they are effective at all, is to make it harder for people to find work in particular areas. Unions try to raise wages above what they would otherwise be. Employers respond by trying to substitute capital for labor or more skilled workers for less skilled workers.

You want negotiating power? Get educated. Get a skill. What keeps wages up in a world of 7% unionization in the private sector is that I have alternatives. So stay in school and study something serious that has value alongside whatever else you’re interested in. Or study something interesting that has little market value. But if you do that, don’t complain about your low salary and lack of a union.

The bottom line–you don’t need a union to protect you from your employer. You need alternatives–you need to have a skill that more than one employer values. If you have no skills, you are in trouble and the union won’t help you either except at the expense of other workers.

Wisconsin: Some must see videos

Check out this video from the Wisconsin Republican Party.

Watch Joe Scarborough ask, why haven't we seen these signs on the evening news.

And more from Joe Scarborough, who politely destroys Jeffrey Sachs's conspiracy theory by simply reading an excerpt fromthis column from left-wing blogger Richard Cohen.

Ryan makes the connection

"Uncontrolled debt means job creation goes away." -Paul Ryan

It's not just about an accounting formula. Public debt has real effects on expectations, confidence, and ability to plan for the future. In other words, reduce the spending to the reduce the debt and you will get growth.

And he's got it in the right order. It's not growth will take care of the debt, it's take care of the spending and the debt, and we will get growth.

Public servants

I have always found it curious that politicians who make a living commanding and coercing and taxing are called "public servants", while those in the private sector who can only earn a living by providing something of value to the public and literally "serving" others, are not.

"Worker rights"

The term "worker rights" is often used, particularly in the context of collective bargaining. For example, in this column, Governor Walker of Wisconsin is accused of "removing bargaining rights" and "undercutting worker rights".

I have no problem with the concept of unionizing or collective bargaining. What I do have a problem with is when an employee is required to join a union and is not allowed to negotiate outside of the collective bargaining agreement. In other words, collective bargaining is fine, but it crosses the line when it takes away the right of an individual to engage in "individual bargaining".

For example, in Wisconsin, imagine there is a job opening, and the collective bargaining agreement states that that particular position requires a salary of$50K per year and must include X and Y benefits. My question is, can some unemployed person compete for that job by saying, "I really need the work, I would be happy to do the job for $40K". Or can someone say, "You don't need to buy health insurance for me, I already have it through my spouse".

I would consider the right to make those offers and engage in individual bargaining part of "worker rights". But if that is not allowed, then "worker rights" are not actually rights at all, they are just ways that those who are already employed reduce competition for their jobs. In the name of “worker rights”, they actually take away the rights of the unemployed to compete for jobs.

But I am no expert in public employee unions and collective bargaining, so maybe I am wrong about this.

[Update]

Here is another way to think about it:

Imagine you have two people. Both equally qualified for an opening. The union's collective bargaining agreement says the state must pay $50K. The first person doesn't really need the job. Their spouse makes $150K plus per year, they just want the job to make some extra money. And then there is another person who really needs the work. Their family is in big trouble, and they really need a paycheck. Therefore, to get the job, that second person is willing to work for less; they are willing to accept $40K per year.

Generally, the market would handle this problem beautifully; the problem being, which worker needs the work the most? The market signal is the price, in this case the price that the worker is willing to accept as a wage. The offer of the lower wage provides the information regarding who needs the job the most. But with collective bargaining, this market mechanism breaks down.

The union would say to that person - too bad. You are not allowed to compete for that job based on compensation. That would violate our precious collective bargaining agreement.

In the name of "worker rights", the union took away the rights of that person to negotiate directly with the employer. The union says...I 'm sorry if you are about to be put out on the street, we need to keep the wages of our union members nice and high.

I find that morally reprehensible.

What is Mark Levin's problem?

Last week, he was bashing Mitch Daniels, endorsing this silly post over at American Thinker where Daniels is blamed for the Bush/Republican Congress deficits of the early 2000s. This week, Levin is back to bashing Chris Christie, this time over Christie's decision to not join other states in opposing Obamacare.

If Chris Christie thinks he needs to save his political capital for his fight against the unions, then that is what he should do.

Don Boudreaux to Donald trump: "You're fired!"

Economist and serial letter-to-the-editor/open-letter writer Don Boudreaux published this brilliant letter to Donald Trump on his blog Cafe Hayek:

Dear Mr. Trump:

Congratulations on your successful talk at the recent CPAC gathering. Please, though, indulge me as I ask you a few questions.

You promise that, as U.S. President, you won’t raise taxes. But you also promised to obstruct trade between Americans and the Chinese, presumably by raising tariffs. Because tariffs are simply taxes on imports, you can’t avoid raising taxes if you raise tariffs. So will you or will you not raise taxes?

You advocate, not free trade, but “fair trade.” Can you define “fair trade”? If I voluntarily buy from Mr. Lee and Mr. Lee voluntarily sells to me, can such an exchange ever be unfair? Both parties to the exchange presumably gain, while the only people who lose are Mr. Lee’s competitors. Given your claim that the billions of dollars worth of profits that you’ve earned are evidence of your own remarkable “intelligence and abilities,” surely you don’t wish to tilt the playing field in favor of domestic producers, for to do so would be to give these producers unfair advantages in winning the patronage of American consumers. Any profits they make under such unfair circumstances wouldn’t be evidence of intelligence and ability but, rather, of political connections and monopoly power. Wouldn’t such protection from competition be unfair?

You assert that “We are rebuilding China because we buy their products.” What do the Chinese do with the dollars that we use to buy their products? Do they burn these dollars or otherwise not use them commercially? (If so, is that bad?) If the Chinese do not burn their dollars, then they (or other foreigners with whom the Chinese deal) must use these dollars either to buy American products or to invest in the U.S. economy (or both). To the extent that foreigners buy our products, by your reckoning they must be “rebuilding” America. To the extent that foreigners invest in America, they are – what? Do such investments harm America? Does foreign investment in America not help to “rebuild” America? If not, why not?

I’m interested to know your answers.

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University

"Crusoe Ethics"

This was an interesting post over at Ricochet.com.

In this scenario, the desert island dwellers currently survive only by eating fish. Alas, these fish, being hard to catch, are in short supply. Then one day, an entrepreneur, who adores fish, saves up his meager rations, and still goes hungry for days, in order to fashion a technical innovation: a net. This net enables him to catch more fish more efficiently in future. As a result, he can now dine heartily.

In addition, he loves fish so much that he is unwilling share any of them with his fellow island dwellers, who are currently starving. These other islanders offer him what they can in exchange. But as I said, he loves his fish. So he refuses all their offers, and keeps all he catches for himself.

The other islanders are understandably aggrieved. They claim that it is intolerably unfair that he should have many more fish than they do. They also argue that the fish will benefit them more than they will benefit him. After all, whereas they need to fish simply to survive, he only wants them to pleasure his palate. Accordingly, he should share at last some of his fish with them.

In response, while munching on a mullet, he argues that they have no right to the fish. By dint of his own industry and intelligence, he has designed and created the net. He now uses that same net to catch all the fish. No one else was involved, or is involved. So the fish he catches are indisputably his: only his labour is here getting mixed with the natural world, no one else's. Hence, no one else but him is entitled to the fish. This means that, no matter how much other people want the fish, or need the fish, they cannot have the fish, unless he voluntarily decides to share them, which, sadly for them, he will not currently do. Nonetheless, no one has the right to take any fish from him by force: that would be a violation of his inalienable right to the specific fruit of his prsonal labour. Even God has decreed as much, some say.

You--on behalf of your starving self, family, or clan--now have the possibility of stealing fish from his bountiful private stash. Is it right or wrong to steal his fish? And if it is right to steal them, what is wrong in principle with a welfare state supported via taxation? Where and now do you draw the line for when it is right to steal what is indisputably the property of others for the greater benefit of the many?

I can't get past the idea that if the man really wanted more fish, if he really "adores" fish that much, then what he would probably say to the others on the island is the following: "You can't have my fish and you can't have my net, but I'll tell you what. I need some time to sleep and rest and eat my fish. When I am not using my net, you can use my net, and whatever you catch, we will split 50/50."

He would end with many more fish, as would the other islanders. Everyone would be better off.

Under the scenario described above, he is not so so much a self-interested profit maximizer; he is a sociopath. His utility gains come from seeing other people suffer, not from acquiring more fish.

Some might point to this example and argue that this is why we need government - to protect us from sociopaths. But I would argue that this is why we need competition. Competition is the ultimate mechanism for providing consumer protection.

Under this scenario, ultimately someone would adopt his idea and "put him out of business", or at least make him entirely irrelevant.

Spending freeze logic

A college student gets $250/month spending money from his parents, and they promise to increase that amount each year to account for inflation. But then he goes ahead and spends $500/month, using his parent's credit card to make up the difference.

The college student says to his parents: "Don't worry, from here on out, I am going to freeze my spending at $500/month. You don't have to give me that allowance increase that you promised. See, I am saving you money!"

I will never understand

I will never understand why some potato farmer in Idaho needs to send his tax dollars to Washington so that they can be then be used to fix a bridge in South Florida that he will never use.

It's not as if the politicians and bureaucrats in Washington are wizards at allocating resources. The incentives are terrible and more importantly, they don't have the knowledge that is required to make these kinds of decisions. They act as if they are engineering experts that know exactly which bridges and roads need to be fixed better than the people who actually live there.

I saw a pothole on my way in to work today. I'm not sure why Congress didn't know about it already, but maybe I will call them so they can pass legislation to fix the pothole.

Status Update

From a friend of mine on Facebook:

I'm going to sit my Grandfather down today to watch The Jersey Shore so he can see what he risked his life for in WW2

Obamacare does not reduce the deficit

Here is Greg Mankiw on the absurd claim that Obamacare reduces the deficit:

I have a plan to reduce the budget deficit. The essence of the plan is the federal government writing me a check for $1 billion. The plan will be financed by $3 billion of tax increases. According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit. Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit. But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

I tried to make a similar argument last year, but unlike my clumsy attempt, this is brilliant.

Capitalism and free trade in practice

I rest my case

When I saw these headlines, there was no doubt in my mind in which state the events they describe occured. I swear it's the humidity that makes us act this way.

Burglars snort man's ashes, thought it was cocaine

MIAMI Wed Jan 19, 2011 3:11pm EST

MIAMI (Reuters) - Burglars snorted the cremated remains of a man and
two dogs in the mistaken belief that they had stolen illegal drugs, Florida sheriff's deputies said on Wednesday.

Read the whole thing. That took place about 90 minutes south of where I live. This next one happened about an hour north.

Cow attacks man, wife hits animal with truck to save husband

ST. LUCIE COUNTY — A 70-year-old man was flown to a local trauma center with serious injuries over the weekend after a cow attacked him at a ranch, according to a recently released St. Lucie County Sheriff’s Office report.

Oscar Wilcox was flown to Lawnwood Regional Medical Center & Heart Institute in Fort Pierce following the New Year’s Day incident at a ranch in the 10300 block of Carlton Road. He was listed Tuesday in critical condition, a hospital spokeswoman said.

Wilcox’s wife told a deputy that her husband was working on a fence in the pasture when she heard him scream. She drove into the pasture and saw a cow “attacking” her husband.

“She was able to hit the cow several times with the truck to get it off of her husband,” the report states.

That my friends, is what true love is all about. When you see a cow trampling your husband, ram her with your F150 untl she stops.

My beloved Florida, rendering satire impossible since 1845.

The unfortunate result of credit card "reforms"

CNBC has produced an interesting spot on the rise of "Payday lending".

There is no doubt that this trend was in part caused by the weak economy and the "credit crunch", but another factor that should not be overlooked is the credit card "reforms" recently passed by Congress.

Price controls inevitably lead to shortages. There is really no way around that fact. In this case, when you cap fees and rates on credit cards, it sounds like a good idea, but consumers who really need credit (to fix a car or keep the heat on or avoid bouncing checks) go elsewhere, and often end up paying much higher fees and rates, whether it comes from payday lending, pawn shops, or even loan sharks.

Mark Halperin's advice

Put this alongside Eugene Robinson in the living in a parallel universe category.

A cheap shot from the Morning Joe roundtable

The crew on Morning Joe this morning was lecturing Sarah Palin on how important it was for her to make a statement regarding the Giffords tragedy and the tone of political discourse in the country.

Again, what does she have to do with any of this? What a cheap shot. Yet, they were clearly convinced that they were being fair and balanced, and that they were conducting a careful examination of the issue from both sides.

But as Jonah Goldberg said this morning, "You can’t cover a debate that shouldn’t exist in the first place 'fairly.'"

Eugene Robinson: Violent political rhetoric comes exclusively from the right

This is just incredible.

Pima County Sheriff accusses Palin and Angle of being accessory to mass murder; Brokaw praises Sheriff

I was watching MSNBC this morning and Tom Brokaw was praising the Pima County Sheriff for speaking out against inflammatory political rhetoric. This the same man who has made several TV appearances arguing that the Tucson massacre was linked to conservative political rhetoric. He even went so far as to call out Sarah Palin and Sharron Angle. Last night I watched Geraldo Rivera interview the Sheriff, and Geraldo ended the interview by asking him, "Are you sure you don't want to take anything that you just said back?". The Sheriff declined.

So why is Mr. Brokaw praising this guy? How did Mr. Brokaw not notice the fact that the Pima County Sheriff was accusing his political opponents of accessory to mass murder?

As for Palin, I find it infuriating that she is being linked to this. But I guess if you are going to be dumb enough to use "crosshairs" on a map targeting specific Congressman, and something like this happens, then there are going to be consequences.

And she definitely should not have said that thing a couple of months ago about "punishing our enemies".

Correction: It was the President who talked about "punishing our enemies".

GOP "looking backwards" and "living in the past"

Those are the talking point I keep hearing when I turn on MSNBC. The White House and the Democrats are trying to frame any effort to repeal or fix the health care law as a sign that the Republicans don't care about jobs, and are instead "living in the past".

It's a curious approach considering the fact that 1) the law has for the most part not been implemented, and 2) the health care law and the willingness of employers to hire people have a lot do with one another.

The best explanation of the financial crisis

Russ Roberts of George Mason University, host of the wonderful weekly podcast Econtalk (and creator of the Youtube sensation Hayek vs. Keynes rap video) was unsatisfied with many of the competing explanations about why the 2008 financial crisis occurred. He was no fan of Fannie Mae and Freddie Mac or of the Community Reinvestment Act, and he acknowledges that Federal reserve policy was likely a contributing factor. But none of these stories fully explained why privately owned financial institutions acted so recklessly, to the point where they put their own existence in jeopardy. After researching the financial industry and interviewing several dozen experts on the topic, Roberts developed his own theory about why the crisis took place.

His narrative, entitled "Gambling With Other People's Money", focuses on the role of the creditor. He asks, why did creditors continue to lend to financial institutions that engaged in increasingly risky and leveraged activities? After all, creditors don’t participate in the upside of these risky bets, so why in the world did they go along with it without demanding higher and higher interest rates, or asking for more collateral, or requiring covenants that restrict the amount of risk the borrower takes on?

His answer is that over the course of the last three decades or so, with only one or two exceptions (e.g. Drexel Burnham), the government has never allowed creditors of any large financial institution to take a loss. In every case, not only were these institutions bailed out, creditors were made completely whole. They weren’t asked to take 50 cents on the dollar, or even 90 cents on the dollar. In every case, they received 100 cents on the dollar. He then asks “Did the rescue of creditors in the past increase the chances of future rescues sufficiently that creditors were careless?” He concludes yes.

He also makes an important distinction between the incentives of equity holders vs. creditors.

Equity holders don't want to get wiped out, but they are typically diversified, and they want a lot of risk-taking by some of their investments so they can make high rates of return on the upside. But because creditors don't share in the upside, they only care about the downside, and need to make sure the firm stays solvent. So, it's creditors that monitor solvency, not equity holders. It’s creditors who monitor prudence and recklessness.

For me, Roberts's narrative is the most compelling that I’ve read.

Below is a link to the paper, and a link to the podcast where he presents his story.

http://mercatus.org/publication/gambling-other-peoples-money

http://www.econtalk.org/archives/2010/05/roberts_on_the_2.html