Category Archives: Economics

Fair Income Tax Rates

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The primary campaign strategy of President Obama to secure his re-election was to advocate that wealthy (successful) people should pay higher taxes. I assume that resonated because many assumed that the government having more money would provide them more benefits. That discounts the continuous television ads pointing out that Mr. Romney is a Capitalist, that he did not believe it was the place of government to provide free birth control, and the government should pay for Big Bird episodes. (And, yes, I’m oversimplifying.)

So here we are in the midst of a government-created economic crisis about whether the primary objective of Congress is to raise taxes on those who have been successful, to cut spending, or to do nothing and see what might happen next. My bet, and I make that bet without judging whether it is the best approach, is that our highly paid government officials will do whatever they think is best for their political careers.

Government officials from areas where Democrats dominate will hold out for tax increases on the wealthy and will not risk suggesting reform of entitlement programs that they know are economically unsustainable.  Republicans will feebly demand some sort of spending and entitlement reform. The country will continue to be awarded with a lack of leadership from the President and Congressional leaders. I predict President Obama will continue to campaign that everything is the fault of Republican leaders going back to George W. Bush. I also predict that he will be heartily awarded with applause for that meaningless rhetoric. Continue reading →

Panic! The Story of Modern Financial Insanity

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panicThis book was loaned to me by a friend, and it provides useful information and warnings to people interested in or involved in stock market investing It was edited by Michael Lewis, as described on the front flap, is about “…the crash of 1987, the Russian default…the Asian currency crisis of 1999, the Internet bubble, and the ongoing subprime mortgage disaster.” The book is composed of more than fifty articles that were written by numerous authors, and several are by Lewis himself. The approach had both positives and negatives. The chapters are usually short and to the point, but there is obviously no consistency of style. Also, the articles often have redundancies.

I recommend scanning the reviews on Amazon. Many reviewers warn that the book is edited by Michael Lewis, and is not a “Liar’s Poker,” “Money Ball” or “Blind Side.” I will say in Mr. Lewis’s defense that the front cover clearly says at the top “Edited by…” (although in relatively small print). Another point in his defense is that he mentions in acknowledgments that proceeds from the book will go to Katrina victims (and the first person he thanks is himself).

I found the most interesting sections to be about the Internet bubble and the real estate collapse. Perhaps the most interesting theme in the book is that crises often find their beginnings when smart people begin running complicated but legal versions of Ponzi schemes. The nice thing about Ponzi schemes is that early investors can make lots of money if they get out in time. The bad thing is that those getting out late can easily result in losing everything. Overvaluation results from sellers looked for “the greater fool” to buy what they had bought for too high a price. They hope someone else would give them an even higher price before the price collapses. Another theme is that we think of the people who are involved in mind-numbingly complicated financial schemes and “instruments” as geniuses. The author often reminds us those revered experts often don’t understand any better than others. One statement worth remembering is, “The longer the bull market goes on, the more believers there are.” Continue reading →

Dueling Presidential Candidate Gaffes

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With less than a week until we learn who will be elected president it seems the time is right for a mention of gaffes by the two candidates. It wouldn’t be a duel if the subject referred to Joe Biden and Paul Ryan, since Mr. Biden would win on the numbers of gaffes by an overwhelming margin.

Mitt Romney stirred understandable criticism when he foolishly mentioned that he need not campaign to the 47 percent of Americans who are “dependent on government” and consider themselves “victims.” He later said that he understood that he wasn’t going to get the vote of people who expected that the government’s job is to redistribute wealth, and that “I’m not going to get them.” He added “I do believe we should have enough jobs and take-home pay to allow people to pay taxes. I think people would like to be paying taxes.”

Mr. Obama presented a different opinion in an appearance at Loyola University in 1998 when he was an Illinois state senator. The admittedly 14 year-old video has Mr. Obama saying, “The trick is figuring out how do we structure government systems that pool resources and hence facilitate some [wealth] redistribution — because I actually believe in redistribution, at least at a certain level to make sure that everybody’s got a shot.” Continue reading →

The End of Money

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Reviewed by Kathy London

end-of-moneyThis book was written by David Wolman, who would like to dispense with physical money. As he puts it in his book “Physical currency is a bulky, germ-smeared, carbon-intensive, expensive medium of exchange. Let’s dump it” in favor of electronic money.

Money has always puzzled me. How can something so important be so abstract? As Wolman tells us, you may not have a god in your life, but you have faith: Faith in the dollar’s value, faith in each other and in our shared government. We are believers. I guess I have mostly dumped cash already. There is no wad of dollars in my mattress. My money mostly exists in accounts I access on the Internet. A lifetime of labor, distilled into 1s and 0s in some server out there. Talk about faith!

Interwoven with interviews and his personal experiment of living without cash for one year, Wolman offers a lot of fascinating information: the history of money, how issuing currency profits governments and establishes their power, how a shortage of currency helped fuel the American colonies’ revolution, why the U.S. keeps minting pennies and nickels at a cost above face value, how many countries have given up their own currency and use U.S. dollars, and why some people think the end of cash would be the beginning of the Apocalypse. Reading about counterfeiting is, alone, worth picking up the book. (North Korea runs on counterfeit U.S. dollars? That’s infuriating.)

The concept of money is world-changing because it allows for commerce beyond barter. Money lets people store and move value, not just within a village, but across the world. Gold makes excellent physical money. Gold is durable, safe to handle, easy to test for authenticity, and won’t decay or catch fire. And it shines – people love bling. But, until recent industrial uses, it’s been worthless in the sense you can’t eat it or heat with it. Gold has only the value we agree to give it. Bizarrely, a small group of men sitting around a table in the U.S. in 1944 decided an ounce of gold would be worth $35. Today gold trades in a free market and worth over $1600 and ounce. But gold is not perfect money. It can fuel inflation and deflation, and won’t stop revolutions and depressions. Wolman thinks gold is just an older and more comfortable abstraction.

Wolman explains the problems with cash. Cash must be printed, guarded, and lugged around. Cash can be stolen or lost or destroyed. Cash is contaminated with germs and traces of cocaine. Cash enables tax-cheats. If you are poor, all these costs and risks hit you the hardest. Without the ability to convert cash into electronic money, you are excluded from banking and denied a safe and reliable way to save.

Cash offers anonymity in transactions and therefore liberty. But because of this, cash is the choice of criminals worldwide. About 60% of the US currency in circulation is $100 bills. How many are in your wallet?

Wolman thinks technology can now cure the problems of cash. Person-to-person transfers via smart phones counter credit card fees. People accumulate more debt when using credit cards than cash, but if you pay with your smart phone, apps could flash vivid images to make the transaction more “real”. Reading how such transactions will work is a view into a future that is standing on our toes.

This was an interesting book and may help readers see the current move away from cash as a good trend. You can’t fight it anyway. Electronic money is taking over the world already, so the only battle left for Wolman is to convince governments to stop issuing cash. As long as that doesn’t bring on the Apocalypse.

China’s Megatrends, The 8 Pillars of a New Society

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china-megatrendsThis book by John and Doris Naisbitt is a follow-up to his book “Megatrends.” The authors lived and travelled in China, did extensive interviewing, and developed an institute to analyze what had launched the country from the poverty and backwardness under Mao to becoming an economic power with many millionaires and a growing middle class. China is described as being created into an entirely new social and economic system and political model. The system is described as a “vertical democracy.”

Some of the reviewers on Amazon reflect the discomfort I felt when reading the gentle criticism of the control imposed by the Communist government. Late in the book the authors write about the “three T’s,” which are “Tibet, Taiwan, and Tiananmen.” They then give a scathing criticism of Tibet, saying that 90 percent of the people live as serfs in comparison to the millions of Chinese who have been pulled out of poverty by the economic growth engineered by the central government. Taiwan is described as having China as its largest trading partner. Tiananmen receives harsh although brief criticism. It is described as a tragedy that is still casting clouds over China. And, as much sympathy as we have for China, it has not yet done enough to sweep those clouds away.

The descriptions of how Deng Xiaoping began turning China into a free market powerhouse with government control after Mao’s death is a fascinating story. On the question of why the country decided to use capitalism under communist control is explained by Deng with the aphorism, “It doesn’t matter if the cat is black or white, as long as it catches mice.” The current leader Hu Jintao is quoted as saying, “We will improve policies to encourage people to start businesses.”

There is a discussion of the primary conflict between socialism and capitalism over freedom and fairness. “Do we choose a system where all are equally treated so that no one gets too far ahead? Or do we choose freedom for individuals who through their talents and hard work gain levels of achievements far above others?” It seemed to me the author answers that in the book. The people in China who succeed through talent and hard work are allowed to have much more than others, and the system, according to the author, is working.

The Olympics is undoubtedly a good example of what strong government control can accomplish. The Olympics were considered a great success at the cost of $1.9 billion for venues and $42 billion for infrastructure improvements. The fact that 1.5 million people had to move out of their homes makes it obvious that the construction would have been difficult or impossible in a less authoritarian system.

China opened to foreign support and technology transfer to begin development, restricted foreign shareholdings, and strengthened Chinese corporations by encouraging fierce competition among them. Deng commented when touring a Ford plant in the U.S., “We want to learn from you.” However, the U.S. failed to understand the true meaning of that statement. There is a description of opposing Chinese warlords preparing for battle. One sent twenty boats packed with straw across the river separating them, and the other army unleashed a huge assault with arrows. The boats were pulled back and the 100,000 arrows that were collected to be used against those who had shot them. The Chinese who left to learn in other countries and return to build businesses are called “sea turtles.”

What has been accomplished required more than learning from successful foreign companies. The government had to emancipate the minds of the people to make them the engine to the economic successes. Education was emphasized, and people were taught they could succeed with work instead of coasting along and getting what everyone else was getting. The book mentions the eighteen impoverished famers on a collective that wasn’t growing enough food for survival who secretly agreed to divide the collective in Xiaogang village into private plots at risk of being prosecuted. The result was a marked increase in grain production. Their example became a model for converting State Owned Enterprises into successful free enterprise companies. The government frames the policies and priorities and the people create their own roles. Progress is made “while sustaining order and harmony.” This system is compared to the political system in the U.S. where frequent elections freezes the government into inaction while the politicians posture for reelection.  In China, “The constancy of the ruling political party allows long-term planning without the disruption and changing politics of thinking and acting that are focused on elections.”

The book does address problems created by corruption, and describes how the government is working with limited success to eliminate corruption from government. The terrible pollution problems are also discussed. One “sea turtle” commented that she knew she was home when she breathed the polluted air. The book discusses censorship, and mentions that the U.S. has a history of censoring books such as Lady Chatterley’s Lover. I didn’t see how that equates to, for example, the censorship of the Internet. The book mentions two things that surprised me about that. First, it blames companies such as Cisco for building the equipment that allows the censorship. Then it mentions, “Few in China complain about Internet control.” I felt myself wanting to use the crass, “Well duh! when I read that.

China has problems created by the one child policy. There is a large excess of young men. There also is the problem of “six-pocket little emperors,” or little boys with two parents and four grandparents who have no one else to spoil. Oddly, the censorship of the Internet is said to be necessary to keep children from becoming addicted to being on the computer all the time.

I’m guessing the authors would explain the surprisingly low average of three stars of Amazon reviews as being caused by what they call the continuing misunderstanding Americans have of the Chinese people. We impose our views of democracy and freedom when we consider China. The authors end their book with the observation, “To what degree it will match western perceptions troubles on the West. China has its own goals and dreams. How to get there, China and its people will decide.” The Chinese people are accustomed to and comfortable with government control. They don’t care whether the control is a capitalist country with a communist coat. “The Chinese believe in performance legitimacy. If the government governs well, it is perceived as legitimate.” China has achieved its transformation by “actually decentralizing power more than any country in the world.” China calls its market economy “socialism with Chinese characteristics.” The United States is evolving toward socialism with American characteristics.

Health Care Outsourcing

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I recently posted a blog about indications some of the technology and call center jobs that had been outsourced to India are being pulled back because of quality problems related to communication problems. Don Lee of the Los Angeles Times has an article describing how some healthcare companies have begun to shift clinical services and even decision-making on medical care to primarily India and the Philippines. The practice is not new, but the health care law commonly called “Obamacare” is encouraging more jobs to leave the U.S. The new law requires that 80-85 percent of insurance premiums to be spent on medical care. That requirement, which I understand was put into the law to control insurance company profits, will have the unintended consequence of insurance companies reducing as many jobs as possible with outsourcing.

Jobs that had been previously outsourced involved medical activities such as reading X-rays and other diagnostic tests. Task now being outsourced include “pre-service nursing” to evaluate patient needs and to determine treatment methods. WellPoint, owner of Anthem Blue Cross, has formed Radian Services as a separate business unit to set up the outsourcing. A WellPoint spokesperson said there had been 925 jobs outsourced. The explanation why the outsourcing was being done through a separate business unit is that “…it has the technical expertise and can ensure compliance with laws.” My reaction to that quote is that the real reason is to protect WellPoint from lawsuits that might or are likely to be filed when someone has problems with their medical care.

The article says that companies can save 30 percent of labor costs by outsourcing jobs to the Philippines. However,  having medical treatment decisions made overseas sounds risky considering that companies are returning call center and computer work for quality reasons.  It isn’t surprising that nursing organizations are cautious. Patient privacy is also a concern because people’s medical information is being sent to other countries. I didn’t find the quote that “…nearly all countries have laws for protecting patient privacy…” to be all that reassuring.

One person who had processed medical claims for WellPoint was laid off after a colleague went to the Philippines to do training on how she did her job. I doubt that person would be too impressed that the part of a new law designed to control insurance company profits contributed to the decision to have the work done more cheaply in the Philippines.