Category Archives: Economics

After America: Get Ready for Armageddon

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This book by Mark Steyn is not for politically correct Liberals. There is humor mixed in with the dire predictions, but a friend said he didn’t finish the book because he tired of the “cutesy humor.”

On the dark side, the author writes, “America has caught up with Europe in the great rush to self destruction.” Financial collapse is predicted to be facilitated by “…hapless, indulgent people who think government has the answer for every problem…” An example of wit amidst the doomsday prophesies is that “Nobody writes a doomsday tome because they want it to come true. From an author’s point of view, the apocalypse is not helpful because the bookstores get looted and the collapse of the banking system makes it harder to cash the royalty check.”

To emphasize the insanity of our government and election process there is an insightful reference to Senator Michael Bennet of Colorado, my home state. Bennett voted for all the “…trillion dollar binges…” He then said “We have managed to acquire $13 billion of debt on our balance sheet. In my view, we have nothing to show for it.” Colorado voters then reelected Bennet. The source of the debt is at least as troubling as the magnitude. “If the People’s Republic (of China) carries on buying American debt at the rate it has in recent times, then within a few years U.S. interest payments on that debt will be covering the entire cost of the Chinese armed forces.”

What did stimulus accomplish? Quite a bit if you were a government employee. At the start of the economic crisis there was one Department of Transportation employee earning more than $170,000 per year. Eighteen months later there were 1,690. “In the year after “stimulus” was passed the private sector had lost 2.5 million jobs and the federal bureaucracy had gained 416,000. In 2009 the average U.S. government employee was earning about $123,000 in salary and benefits while the average American in the private sector was earning a total of about $61,000.

The Chinese might be building a military to challenge America, but they have problems too. The one-child policy means that“…unless it’s planning on becoming the first gay superpower since Sparta, the millions of surplus young men…deprived of female companionship is a recipe either for wrenching social convulsions at home—or for war abroad, the traditional surplus inventory clearance method of great powers.”

I found one nugget of hope for America early in the book. Reports about protests of people who want the government to do more for them have dominated the European news. By comparison, millions of Americans have taken to the streets to tell the government they can do just fine if the government will “…just stay the hell out of my life and my pocket.” (Of course much of the media and some politicians have at a minimum made fun of those protestors, and in some circumstances called them racists.)

The book is filled with disturbing examples of how bureaucracy trumps common sense. It now takes so long for the FDA to approve new drugs that people are dying while they wait for the approval to take the drugs. Cynics are calling the new approval process “…the valley of death.”  FEMA sent volunteer firefighters who wanted to help out in the Katrina disaster to Atlanta for diversity training. An inspector prevented a Catholic church from selling homemade pies for a fund raiser unless the volunteer bakers paid $35 dollars apiece to be cleared by a health inspection. On the other side was a woman attending a “federal aid” gathering said she was there to get some money. When asked where the money would come from, she said “Obama money.” When asked the source of the money, she said, “I don’t know. His stash.”

Other disturbing signs of bureaucracy are the examples of emergency workers refusing to rescue people. Police wouldn’t rescue a drowning woman because that was the responsibility of the Fire and Rescue service. Three college students did save her. Police stood watching while a 5 year old girl was trapped in a submerged car, because they were prevented from diving in by safety regulations. A fireman did rescue a drowning girl and was sent to disciplinary investigation. A rescue crew stood by after a person fell into a mine shaft because a recent memo had banned the use of rope equipment. There has also been a loss of chivalry. The rule “women and children first” was mostly followed on the Titanic. When a German ferry sank recently only five percent of the women passengers lived. Forty-three percent of the young men 20 to 24 made it. (Apparently women objecting to doors being held for them has had a negative effect.)

Part of our problem is that high schools are graduating young people who aren’t equipped to do a job. We then send them to years of college to that is costly and ineffective. Testing shows that many college students do not improve their critical thinking skills after two years or even by the time they graduate. The students do accumulate tens of thousands of dollars in student loan debt.

The author is quite critical of the manner in which the world has dealt with the issue of Muslim extremism. He points out that there was a time when the Muslim world seemed to be becoming “Westernized,” but the radical Muslims have put an end to that. There was a photo of the Cairo University class of 1978 with every woman bare-headed. The 2004 class photo shows “…every woman hijabed to the hilt.”

The author makes his point about the comparison of private enterprise to the government with a story about a bridge in New Hampshire. The government studied the project for six years and estimated the total cost at $655,000. They estimated the bridge could be completed in another several years and admitted the cost would probably more than double. The town contracted with a private firm to build a bridge that complied with safety requirements for $30,000.

The book often refers to the H.G. Wells book “The Time Machine.” There are references to the elegant and oblivious Eloi who are living happy lives while the Morlocks also happily prey on the Eloi. Time travel is used to emphasize how much changed in the world from 1890 to 1950, and how relatively little technology has been developed since. However, the U.S. government has had massive growth.

The book ends with the observation that people still have a chance to change the path of the country if they would only stop voting for politicians who want more money to increase the size and reach of government. “This is the battle for the “American idea…to reprise the lamest of lame-o-lines—you can do anything you want to do. So do it.”

Rare Earths

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I became interested in the so-called rare earths after talking to a friend who gave me a quick course on the subject. Traces of these metals are everywhere, but there are only a few places on the planet that have high enough content to be called “ore” and justify mining. He also told me China has the richest deposits of the metals, and they also have less interest in the environmental impact of the mining. (All of that of course brings to mind the metal “unobtanium” being mined on the planet Pandora in the movie Avatar.)

Rare earths enable a long list of products to perform to the standards we take for granted. Smart phones, military night vision goggles, and cruise missiles (naming only a sample) wouldn’t work without them. Batteries for hybrid cars and wind turbines require large amounts.  The one mine in the U.S. that produced these metals was closed in 2002 under pressure from environmentalists, and the Chinese became the only significant source. The Chinese have announced they were restricting exports to levels that were not capable to meet demand, but kindly offered to build factories to build all of the products that used the metals. That created enough concern that the California Mountain Home mine has been reopened after pledging to operate with “zero effluents.”

There is an excellent article in National Geographic titled “The Secret Ingredients of Everything” by Nick Mann on the subject. You can read the entire article at the link, but I’ll provide my summary. The Prius battery has 20 pounds of lanthanum and the magnet in a large wind turbine has more than 500 pounds of neodymium. The red color on our televisions is from europium, and catalytic converters on our cars contain cerium and lanthanum. The dysprosium used in making computer hard drives was selling for $212/pound when the article was written.  Demand for these “ingredients” shows no signs of abating. In 2015 the world’s industries are forecast to consume an estimated 185,000 tons of rare earths, 50 percent more than the total for 2010. With China holding tightly to its reserves, where will the rest of the world get the elements that have become so vital to modern technology? (Russia, Australia, and Canada also have exploitable deposits.)

China is struggling with the environmental impact from the lucrative mining of rare earths (once again bringing to mind the Avatar story). The Chinese are reportedly working to reduce the impact form the large mines around Baotou, but violent criminal gangs are operating dozens of illegal mines without any regard for environmental impact. “If you own a smart phone or a flat-screen television, it may contain contraband rare earths from southern China.”

It seems unlikely that there will be enough of many of the rare earths to meet the world demand, especially with China imposing restrictions on exports. Recycling of older cell phones, etc. is becoming increasingly attractive.

Superfreakonomics, Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance

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Some of our Grandchildren are occasional or even frequent readers of this web site, and this book contains heavily mature information. I don’t want them to read this book.

I reviewed Freakonomics by Steven D. Levitt and Stephen J. Dubner last week, was absolutely fascinated with most of that book, and highly recommend it (even to the grandkids, despite some “mature language”).  I wasn’t as fascinated with Superfreakonomics, but it has some great information.

You will know if you read my blog postings that one of my favorite subjects is global warming and what I believe to be the lack of solid scientific basis for most if not all of the dire predictions. I recommend that everyone should read Chapter 5, which is titled “What do Al Gore and Mount Pinatubo Have In Common?” It describes how the New York Times published an article quoting climate researchers who argued “this climatic change poses a threat to the people of the world.” Newsweek “…cited a National Academy of Sciences report…that climate change ‘would force economic and social adjustment on a worldwide scale’.” Both articles were published in the mid-1970s and were predicting the effects of global cooling. Average temperatures had fallen 0.5 degrees Fahrenheit from 1945 to 1968 and Newsweek declared that the decline “…had taken the planet about a sixth of the way toward the Ice Age average.” I won’t be surprised if the global warming predictions turn out to be just as inaccurate as the global cooling predictions being hyped in the media in the 70’s.

On the subject of predicting climate change, Superfreakonomics observes, “…even the most sophisticated climate models don’t do a very good job of representing…variables, and that obviously makes predicting the climatic future very difficult.” The predictions have obviously been that temperatures will continue to rise with increasing levels of carbon dioxide. However, temperatures have actually been mostly dropping the last few years. That insult imposed on the models by Mother Nature was termed a “travesty” by one of the prominent advocates of global warming.

I will summarize some fascinating information you will find in the book:

*  Drunk walking is proven to be much more dangerous than drunk driving (“…friends don’t let friends walk drunk”)

*  “Smile Train” began saving girls in India with cleft deformities by offering $10 for those delivered to the hospital to offset the $2.50 paid to midwifes to smother them

*  Many (60%) Indian men have penises too small to fit commercial condoms (Marketing suggestion: make a smaller condom and list it as “…tight to enhance sensitivity…”)

*  Horses in the 1900s caused a higher rate of deaths compared to autos today and caused immense health issues because of the huge amounts of manure

*  The media has “…never met an apocalypse it didn’t like…”

*  There were “…chilling tales of rampant shark carnage…” that resulted in the title “Summer of the Shark” in 2001 despite the fact there were an average number of attacks (68 with 4 fatalities)

*  Between the thirteenth and nineteenth century there were as many as a million European women executed for witchcraft after being blamed for bad weather that caused crop failures

*  Realtors take a 5 percent commission to sell a home while FSBMadison.com charges $150 to list a home

*  A Chicago prostitute is more likely to have sex with a cop than to be arrested by one

*  School children are currently likely to be taught by the college graduates with the lowest academic achievement since higher performing women are now becoming doctors, lawyers, etc. instead of teachers

*  Muslim women who become pregnant during Ramadan are more likely to have a baby with disabilities because they fast from food and drink during the day during that entire month

*  Terrorists are likely to be better educated and come from families who aren’t poor

*  There were 1000 extra traffic deaths after 9/11 because people drove instead of flying

*  Increased border security after 9/11 reduced foreign imports of marijuana to California and resulted in a boon to local growers

There are many more interesting facts, so you’ll have to read the rest of the book after you read the fun chapter on global warming.

Freakonomics, A Rogue Economist Explores the Hidden Side of Everything

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This book by economist Steven D. Levitt and New York Times writer Stephen J. Dubner was published in 2005, and I wish I hadn’t waited this long to read it. It describes how “experts” manipulate information to their advantage. Any person who intends to buy or sell a house or car or have a child educated should read this book.

The book is educational and interesting. There is a chapter titled “How is the Ku Klux Klan Like a Group of Real-Estate Agents?”Stetson Kennedy is the hero. He had Klan bloodlines, but went against the Klan after the black woman who raised him was beaten and raped after accusing a white trolley driver of shortchanging her. “So Kennedy decided—as any foolhardy, fearless, slightly daft anti-bigot would—to go undercover and join the Ku Klux Klan,” Kennedy took the Klan oaths, and one was, “Do you further swear to do all in your power to increase the white birth rate?” Kennedy’s first attempts to damage the Klan by telling officials of meeting plans failed. He then had the brilliant idea of enlisting the Adventures of Superman show. Kennedy gave the show a list of the Klan’s childish passwords. The show had several episodes of Superman combating the Klan. Children, including those of Klan members, were soon wearing capes and shouting “secret passwords while chasing others wearing pillowcases in a game called “Superman Against the Klan.” Klansmen were embarrassed, meeting attendance plummeted, and new applications for membership dropped to zero.

The discussion of Norma McCorvey will undoubtedly disturb readers. The authors were criticized by the entire political spectrum for what they wrote. Ms. McCorvey had given up two children for adoption, and was once again pregnant. She wanted a legal abortion, and a court case calling her Jane Roe was filed. The child had been born by the time the Supreme Court issued the Roe v. Wade ruling. She became a pro-life activist, but the ruling in her case allowed millions of women to have legal abortions. There were 750,000 abortions in the first year after Roe v.Wade, and it was estimated that half of those children, if born, would have lived in poverty, and would have been at risk of being criminals. The rate of violent crimes dropped despite universal predictions the rates were going to escalate out of control.

There are several educational tales. A study of real estate agents selling their own homes showed those houses remained on the market an average of ten days longer than homes they were selling for others. Their homes also sold for three percent more. That allowed them to pocket about $9,000 more on a $300,000 home. They had no incentive to hold out longer to put another $135 their pocket with the normal sharing of realtor fees to wait for a better offer.

There is a detailed analysis of teachers and the incentives given when their students do well on standardized tests. Some teachers earn the incentives by doing a good job of teaching while others cheat by giving the students longer than allowed or even changing answers using the eraser on the standard number two pencil. Students who have good teachers continue to test well while those who had teachers who cheated have lower scores from carefully monitored tests.

The authors give a few adages to explain the book: “Incentives are the cornerstone of modern life. The conventional wisdom is often wrong. Dramatic effects often have distant, even subtle causes. Experts…use their informational advantage to serve their own agenda. Knowing what to measure and how to measure it makes a complicated world much less so.”   

I can’t begin to describe all of the fascinating information derived by analyses of data described in the book. I’ve chosen the few samples given below.      

The amount of money spent is not the dominant factor in the outcome of elections. Americans spend more on chewing gum than on political campaigns.

The sales of car seats are more about successful marketing playing on the natural fear of parents than safety.

Baseball player Mark Grace said you aren’t trying if you aren’t cheating. Many people thought Grace had it right. Seven million children disappeared from the United States in 1987 after each child was required to have a Social Security number listed on income tax returns.

There is an interesting section describing how people attempt to attract attention on internet dating sites, and, not surprisingly, some of their self-descriptions are suspect. Less than one percent describes themselves as having “less than average looks.” It is also not surprising that “…men who say they want a long-term relationship do much better than men looking for an occasional lover. But women looking for an occasional lover do great.”

There is a detailed and disturbing discussion of crack cocaine dealers. Sudhir Venkatesh was sent by his graduate advisor into the Chicago ghettos to ask blacks a series of stupid questions about how they felt about being black. He miraculously survived and learned much about the dealers and their systems. The foot soldiers made on the average of $3.30/hour, and had a one in four chance of being killed during the four years he lived with them. They often asked Sid if he could perhaps get them a good job, such as working as a janitor at the University. The few people who made it to the higher ranks were very well paid, and all the foot soldiers took the risk for little pay on the outside chance they could make it to the higher status.

The final chapter of the book is about what effect on the names of kids on their lives. Two kids were named Winner and Loser, and the one named Loser became a respected New York policeman while the one named Winner spent most of his life in prison. Loser never hid from his name, although his friends typically called him “Lou.”  Beyond that, I was disinterested in this chapter.

The next to final chapter about what influences academic performance by school children is surprising. It isn’t surprising that the quality of teaching has the greatest influence. Other factors are counterintuitive. The statistics do not indicate taking kids to museums or reading to them is a positive. I think what the authors are missing is that the parents or grandparents taking the kids to a museum or reading to them is fun and rewarding for the parent or grandparent and the kid. I don’t care what the statistics show. We love the time with the grandkids. We doubt it hurts them that we relish our time with them, and don’t care that it doesn’t provide a statistically positive outcome for the grandchild.

Warren Buffet and his Secretary’s Taxes

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Warren Buffet’s secretary was in the spotlight at President Obama’s State of the Union Address after Mr. Buffet repeated his comments that she is the one paying the higher taxes. I know that Mr. Obama believes this is unfair, because I received a four page letter (perhaps robo-signed) that asks the question, “Do you think it is fair that Warren Buffet’s secretary pays a higher tax rate than Warren Buffet?” He then gives the answer, “I don’t and neither does Mr. Buffet.”

Mr. Buffet believes he and other millionaires should paying higher taxes on their individual returns, but he apparently doesn’t feel the same about Berkshire Hathaway. He owns a big share of that company, and it pays considerable amounts in corporate taxes. However, the company’s annual report discusses the running dispute it has with the IRS about how much it owes. This isn’t new; the IRS has been actively contesting whether Berkshire Hathaway is paying enough for almost a decade.

There are several interesting factors at play in this story. First, do his secretary and everyone else in Mr. Buffet’s office really pay more than Buffet? The answer is obviously no. The secretary does pay a higher rate on her estimated $200,000 salary, although I can’t find how she is paying the reported 35.8 percent of her income. There is a link to a tax calculator that shows a single person with taxable income of $200,000 would pay $50,897 in federal taxes, or 25.45%. A married person filing a joint return with the same taxable income would pay $44,070 or 22.03%. Perhaps Nebraska has really high state taxes or Omaha adds several percentage points for some sort of municipal tax.

Buffet reportedly pays federal income taxes at 17.4 percent of his taxable income, because much of his income is from capital gains that are taxed at a maximum of 15%. The disparity between his tax rates and those for his secretary is what has created outrage and earned her the adoration of those who champion higher taxes for millionaires. I haven’t seen it mentioned in many places that Mr. Buffet pays an estimated seven million dollars on his personal return, which my rudimentary math tells me that he reported about 40 million dollars of income. He wouldn’t have to wait for tax laws to be changed to address his outrage that he pays a lower tax rate than his secretary. He could simply donate another 7 million dollars to the government and there wouldn’t be an issue that needs national attention. I don’t know whether he could claim that donation to reduce his taxable income for the next year. Perhaps he doesn’t really want to send the IRS more of his personal income because his 23% share of the Berkshire Hathaway disputed corporate taxes is over five billion dollars.

It isn’t a surprise that Mr. Buffet is a big fan of Mr. Obama. The President’s decision to cancel the Keystone XL pipeline provides a big boost to earnings of Berkshire Hathaway. The pipeline was to transport oil from the Bakken oil fields in the Dakotas along with Canadian oil, but now much of that oil will have to be moved in railway tank cars operated by Burlington Northern and Santa Fe Railway Company. Berkshire Hathaway already owns 22% of that company and has an offer to buy the rest.

Let’s think about Keystone XL for a bit. The pipeline had been cleared as having minimal environmental impact in a three year study. It would have provided jobs to people making the pipe and installing it. It would have brought large quantities of oil to U.S. refineries that didn’t originate in countries that don’t like us very much. It also would have increased the amount of Bakken oil that would also move to those refineries. Apparently none of those positives would have justified irritating the people who call themselves environmentalists.

George W. Bush and Social Security

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George W. Bush was vilified for “wanting to privatize Social Security” after he proposed allowing younger workers to voluntarily elect to invest a third of their Social Security taxes in a private IRA type retirement account. However, there has been little political outcry as Barrack Obama champions the continuation of reducing personal Social Security taxes from 6.2% to 4.2%. My rudimentary math indicates that workers are being allowed to keep just under a third of the taxes they were originally paying. A friend points out that Obama’s approach has the advantage that the government isn’t involved in what happens with the money left in the paychecks.  Workers can use the money in any manner they elect, and they might even decide to put it into an IRA. However, it doesn’t do anything to repair or improve Social Security.

A brief history of Social Security was given in a posting titled “Weasels and Social Security,” and preparing that posting has me thinking more about the subject. I’m going to focus this posting on what Mr. Bush really proposed, which was a far cry from “privatizing Social Security.” The information I’ll be using is from a link that provides fact checks on several of his speeches beginning in 2000 on the subject.

Mr. Bush said in his State of the Union address on January 20, 2004,” Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account. We should make the Social Security system a source of ownership for the American people.” He continued his advocacy for changes in his acceptance speech at the Republican national convention on September 2, 2004.  “We will always keep the promise of Social Security for our older workers. With the huge Baby Boom generation approaching retirement, many of our children and grandchildren understandably worry whether Social Security will be there when they need it. We must strengthen Social Security by allowing younger workers to save some of their taxes in a personal account a nest egg you can call your own, and government can never take away.”

Mr. Bush clearly stated that his ideas were for workers under 50, and that benefits promised to older workers and people who were already retired would not be changed. However, I learned that elderly relatives were sending money to organizations promising to prevent George W. Bush from gutting Social Security with his plans “to privatize it.”

The outcry against what Mr. Bush had proposed was reinstated when the stock market tanked in 2008. There were frequent news reports that the market collapse would have been even more devastating to people if Bush’s proposal to “privatize Social Security” had been accepted. I’ve done some calculations based on a worker who has a static salary of $50,000/yr to estimate the results. That worker has Social Security “contributions” of $6200/yr. Half would be taken from the paycheck and the employer is required to match it. The Bush proposal would have allowed the worker to voluntarily invest one third of the total, or $2066.67/ year in a private account. The worker could also choose to leave all the money in Social Security.

Everyone who has investments in the stock market knows that 2008 was a scary year. The hypothetical young worker who elected to open the private retirement account would have been just as spooked. There would have been about $8300 added to the account if the account had been opened at the beginning of 2005. The value would have dropped to about $5700 at the end of 2008 if it had been invested in a Standard and Poors 500 index fund. The good news is that more shares are purchased per dollar invested when the market drops if you have the guts to keep buying when the market is plummeting. Continuing to invest the $172/month in the same S&P 500 fund would have resulted in your account being worth about $16,400 (including a net dividend of about 2 % after expenses) versus the $14,469 put into the account by the end of 2011.

What would the account have in it at the end of a career? Who knows? The stock market has historically been a good place to invest. However, as all those financial documents say, “past performance is not an indication of future performance.” Mr. Bush’s proposal was that people could invest the money according to their willingness to take risk. People could have put the money into insured CDs, and those could have very high yields if surging inflation happens a few years as many predict.

I’ve provided a fun link to a calculator to allow a reader to play with various investment scenarios. I entered data for a person opening a private account beginning in 2005 that is worth the $16,400 estimated above. I kept salary static at $50,000/yr for the worker who retires at age 62. The account would be worth $58,000 for a person who began the investments at age 40 and $94,000 for someone beginning at age 30 using an annual rate of return of 2%. The account would be worth about $81,000 for a forty year old and $154,000 for a thirty year old worker with a rate of return of 5%.

I see at least two important lessons. It is important for people to begin preparing for retirement as early as possible. That is especially true for young people who can’t depend on Social Security unless our politicians suddenly develop the courage to improve it.   The other lesson is to be successful in politics you must dress up your policies and criticize others with selective language. For example, you can explain your idea to let people keep about a third of their Social Security contributions is a tax break for the middle class while Bush’s idea about allowing people to voluntarily put a third of the money in a private account is “privatizing Social Security.”