Category: regulation

Chasing the Why

Leave a comment

May 25, 2025

By Stephen Stofka

This is part of a series on persistent problems. The conversations are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

Cain said, “We left off last week talking about the strong correlation between personal income and life expectancy in the U.S.”

Abel looked up to the acoustic ceiling tile as he searched his memory, then looked at Cain. “I think it was .85 across the states.”

Cain glanced down at his phone. “I wondered how strong the correlation was among developed countries. It’s not pretty. Mexico and the U.S. are the only two countries below 80 years life expectancy. Oh wait, and the Slovak Republic, what people call Slovakia.”

Abel asked, “Is that where Melania Trump comes from?”

Cain shook his head. “No. Her family is from Slovenia, another central European country. Slovakia is the eastern half of what used to be Czechoslovakia. A fun fact. They are not a top producer of automobiles, but for the size of their population, they have the world’s largest auto manufacturing per capita (Source).

Abel asked, “How small is their population?”

Cain replied, “About 5.4 million. So, a little less than Denmark. Well, I started digging into auto production figures for the other two countries with relatively low life expectancy.”

Abel spread some honey on his toast. “What, like there’s a link between auto production and life expectancy?”

Cain shrugged. “I don’t know. Environmental hazards? Just wandering around in the data maze. Never know what I’ll find. I was surprised to find that the U.S. and Mexico have about the same auto production per capita. Not the same overall. Just per capita. Volume wise, the U.S is the number two producer in the world (Source).”

Abel asked, “Who is #1? China?”

Cain nodded. “Yeah, they produce three times what the U.S. does. Of course, they have four times the population. Anyway, I looked at what has happened to auto production in the U.S. We are producing the same amount of vehicles as we did thirty years ago (Source). Meanwhile, the population in this country has grown 30%.”

Abel raised his eyebrows. “And Trump is going to restore that imbalance with tariffs somehow?”

Cain smirked. “All presidential candidates overpromise. Trump’s not the only one. In a deep housing and financial crisis, Obama promised to do what was best for working class families like the grandparents who raised him. What a bunch of B.S. that was. He did what was best for the banks and broker bonuses as millions lost their homes and most of their net worth.”

Abel sighed. “I don’t think most presidential candidates understand the forces that control the energy in this country. Trump says it’s the deep state. It’s the deep everything. The deep oil and gas industry, the deep defense industry, finance, healthcare, education and the tech ‘bros.’”

Cain laughed. “Good point. And they all have their lobbyists in Washington. It’s the swamp and its deep.”

Abel smiled. “And each president promises to clean up some part of that swamp. Then the gators in the swamp get a hold of their ankle.”

Cain shook his head. “I think it’s us the gators get a hold of. The politicians always seem to get away somehow.”

Abel grunted. “Too true. Anyway, so get back to life expectancy across developed countries.”

Cain replied, “Oh, yeah. So, the correlation between income and life expectancy across developed countries was not as strong the correlation between states, but it was still a moderately strong .6 (Source). I thought GDP growth would help produce better health outcomes and life expectancy, but no.”

Abel asked, “What if a lot of Americans are not benefitting from that economic growth? Too much inequality? We were comparing the U.S. and Great Britain last week on obesity in school kids. Great Britain has a much lower GINI coefficient than the U.S. so incomes over there are more evenly distributed (Source).”

Cain asked. “That measure includes transfer payments in income, right? Pretax or after tax?”

Abel nodded. “Yeah. It includes Social Security, Medicare, Medicaid and supplemental income. Any income that doesn’t involve an exchange of goods or services (Source). The OECD tracks both before and after tax. England has the same GINI index as the U.S. in pre-tax income, but their tax system reduces inequality more than the U.S.”

Cain shrugged. “What’s the GINI for Mexico?”

Abel flicked a finger across his phone. “Wow. The same as the U.S. after taxes. Boy, I thought we would be better than Mexico. Let’s see, what about Slovakia? No, that breaks the trend. They have an even lower GINI index than Great Britain, so more equality, and a low life expectancy as well.”

Cain smiled. “Every time I think, ‘that’s the key indicator,’ the data throws me a curve.”

Abel said, “So far what we are seeing is that average income has a strong influence on life expectancy but not the distribution of income. Is that the secret sauce to longer life expectancy? Raise average incomes?”

Cain replied, “It’s not that simple. We have a high income but relatively low life expectancy. But comparing the U.S. and Great Britain over time was interesting. Forty years ago the two countries had the same life expectancy. Since then the U.S. has averaged 3.6% real GDP growth (Source). That means that real GDP doubles in 20 years. Great Britain, on the other hand, has had only 2.5% annual growth, so it takes like 28 years for their GDP to double. Yet improvements in U.S. life expectancy have been far lower than Great Britain over that time.”

Abel asked, “What about healthcare spending? Inefficient overspending on healthcare and the military increases GDP. Any insights there?”

Cain sighed. “Well, you have a point there. The U.S. spends the highest amount of developed countries on healthcare, almost double the average (Source).”

Abel replied, “So other countries are spending less and getting better health outcomes. The public-private partnership in U.S. healthcare is not working and is not efficient. Are you ready to endorse universal health care?”

Cain smiled. “Them’s fighting words. Mexico has universal health care and it’s life expectancy is worse than the U.S. The same story for Slovakia.”

Abel argued, “Yeah, but Mexico and Slovakia are both rated poor in healthcare quality and innovation. The U.S. has good quality health care and the highest innovation ranking, but poor access and a fiscally unsustainable system (Source). Quality healthcare has to be accompanied by easy access to care. Will you agree with that?”

Cain frowned. “On the face of it, yes, but there are all these other factors we’ve looked at. This is a big country.”

Abel asked, “Ok, what about population density? There was a .5 correlation between life expectancy and density among the states.”

Cain nodded. “That was weird. It was the same between countries, so density has some effect on life expectancy, but the stronger factor was income.”

Abel frowned. “That’s surprising. In many European countries, the government provides healthcare so income should be a weaker factor.”

Cain replied, “The contradictions in these indicators drives me nuts. That’s why I say it’s too complicated to point to one or even two factors and say, ‘fix these and you’ll fix the problem.’”

Abel argued, “Well, we can’t sacrifice the good for the perfect.”

Cain studied the pancake on his fork for a moment. “I want simplicity. I dream of a society where we make clear rules, a society where people play by the rules.”

Abel laughed. “I was reading a book by David Graeber this week called The Utopia of Rules. He says it’s a wish that many of us have. You know, everybody knows and plays by the rules and those who play by the rules can win.”

Cain lifted his eyebrows. “Yeah, it seems like it’s the cheaters who win. That was the bitter truth that many of us learned during the financial crisis. No accountability for the cheaters.”

Abel argued, “Even before that. No accountability for actions in the Iraq war. Abu Ghraib. Hollywood had constructed a noble portrayal of American soldiers in combat. John Wayne. Gregory Peck and the like. Torturing prisoners was something the North Koreans and Chinese did. Not American soldiers.”

Cain sighed. “A reminder of Vietnam? Something’s happened in the past few decades. I’m still trying to get my head around it.”

Abel replied. “Graeber talks about sovereignty, something we normally associate with countries. In the post-Watergate consensus, Congress put constraints on the president. That’s changed in recent decades after 9-11, when Congress began to defer to the president. As Graeber notes, presidents can now order people assassinated, extradite prisoners of war to places where they can be tortured. They can conduct surveillance on ordinary citizens with flimsy pretext and sporadic oversight.”

Cain leaned back in his seat. “In Trump v. United States (Source) last year, the court conferred legal sovereignty on a president. A former president has absolute immunity for ‘official acts,’ although the court declined to define those. They used a previous 5-4 decision in Nixon v Fitzgerald holding that a former president had absolute immunity against civil litigation for damages.”

Abel argued, “But Trump v. United States was a criminal matter, not civil. The court just expanded the scope of the previous decision. I mean, this court has overruled previous court precedents about abortion and gun rights made during the 1970s. Then they base their ruling on a closely decided case in 1982?”

Cain nodded. “They created a radical expansion of presidential immunity, then didn’t have the backbone to establish any limits on official acts. I mean, Fitzgerald was a civil case about back pay and wrongful employment termination, not trying to overturn an election. To use that as a basis for their decision indicates just how arbitrary the conservative justices have become.”

Abel argued, “They might say that it is incremental jurisprudence.”

Cain smirked. “Incremental policymaking is a hallmark of our political system. That’s what these conservative justices have become. Activist politicians.”

Abel raised his eyebrows. “Why did you vote for him?”

Cain took a deep breath. “You keep asking me that. The better of two bad alternatives. Why did you vote for Harris?”

Abel laughed. “The better of two bad alternatives.”

Cain replied, “I thought that there was still a Republican Party that would restrain Trump’s impulses. The party is gone. Only the nationalist radicals and hesitant members remain. The name is an empty shell.”

Abel said, “Last week, you mentioned activist courts and an activist executive branch. I don’t attach much meaning to the word. If people don’t like certain policies they attach the word “activist” to whoever made the policy.”

Cain shook his head. “You’re right. A lot of people do that. I mean it in the sense that some political actor makes a rule that makes it likely there will be more rules to refine that first rule.”

Abel argued, “We’ve got a complex society managed by a big bureaucracy. The proliferation of rules is inevitable.”

Cain took a sip of coffee. “Those are procedural rules. What I’m talking about is something different. ‘Principle’ would be better rule. Like sailors back in the old days using the north star as a guiding rule. Then they had a bunch of procedural rules to help them keep to that guiding rule.”

Abel interrupted, “You said political actors made the rule. So you’re not talking about some rule made at an office meeting.”

Cain nodded. “Right. The Supreme Court’s Heller decision in 2008 established an individual right to have a gun (Source). Since then there have two more decisions. McDonald in 2010 extended that right to include the states. The Bruen decision in 2022 ruled that gun laws could no longer use state interests as a balancing test. They had to be consistent with historic tradition. Three cases in fourteen years made it to the Supreme Court? That indicates that the Heller decision was not a well constructed principle. Of course, that applies to a lot of laws.”

Abel replied, “So compare that to Roe, the abortion decision in 1973. The Casey decision in 1992, then Gonzalez in 2007. That’s 34 years for two refinements.”

Cain nodded. “Someone could argue with the reasoning in Roe, but the length of time between refinements of the rule indicates that it was a well constructed rule, as rules go.”

Abel continued, “Maybe I’m not clear on the distinction. If the precedent or outcome of a rule is flawed, how can it be a good rule?”

Cain smiled. “A rule should be clear. It should have as few exceptions as possible.”

Abel looked doubtful. “That’s unreasonable. Take, for example, the rule against killing. There are lots of exceptions. War, self-defense. Is abortion an act of killing? Depends on your definition. Hunting animals? Isn’t that killing? This is the real world. It’s complicated.”

Cain smirked. “Of course it is. I said, ‘as few exceptions as possible.’ I didn’t say ‘no exceptions.’ When lawmakers make rules, they should ask themselves, ‘Does this rule invite a lot of exceptions? How can I change the wording of the rule to reduce exceptions?’ It’s just a principle to keep in mind.”

Abel asked, “So give me an example of a rule that you like as a rule, even though you might disagree with the reasoning.”

Cain barely paused. “The DOGE cuts. The rule was simple. Cut anyone who had less than a year’s employment, I believe. While the rule was clear, it produced undesirable outcomes. They had to hire some critical people back. We won’t know the full impact of the DOGE cuts for a while.”

Abel nodded. “They will cover up the mistakes. That decision was more a programming rule. Code in a criteria and get a list of employee names, then give them notice. Can you think of a law, like something that a legislature deliberated over?”

Cain stared into his coffee cup as though it held the answer. “How about a so-called bathroom bill? They are clear. Only people of a particular sex as listed on their birth certificate can use a single sex bathroom (Source). I might sympathize with people who are struggling with their gender identity. But the language of the bill is clear.”

Abel shook his head. “That, to you, is a good rule? How many of us carry our birth certificates with us when we use the bathroom? It has an impractical condition.”

Cain nodded. “But that’s not what I’m talking about. That’s the distinction. The language of the bill itself is clear. Take for instance the 1972 Clean Water Act. It gave the EPA regulatory power over the ‘waters of the United States.’ Courts and agencies have been fighting over that term and its, let’s see, boundaries for decades. What does that term include and exclude? A clear rule has terms in it with good boundaries.”

Abel frowned. “The Supreme Court often asks what is the limiting principle.”

Cain replied, “Yeah, a good defining characteristic.”

Abel asked, “So you don’t like the term ‘general welfare’ in the Constitution.”

Cain smiled. “You’re right. I don’t. The anti-Federalists at the Constitutional Convention didn’t like it either.”

Abel nodded. “Right. Yeah, Michael Klarman discussed that in his book ‘The Framers’ Coup.’ Did you ever think that politicians might purposely choose a term that has no clear boundaries? It’s the only way that lawmakers can agree on something. The astronomer Carl Sagan once said that people find agreement when they use a broad term like ‘God,’ which encompasses a lot of different concepts (Source).”

Cain nodded. “Good point. It’s a way of kicking the can down the road. It signals that lawmakers wanted to complete some law, to claim an accomplishment when there were still parts not done. So they take the undone stuff, the stuff they can not agree on, and slap a label on it, like ‘general welfare’ or ‘waters of the united states.’”

Abel set his glass of water down. “Those conservative justices who use a textualist approach to analyze a case may be looking at text that was written using ill-defined terms, terms without clear boundaries, to use your term. The textualists claim that their approach is grounded in empirical evidence, but the evidence itself, the text of the law, lacks definition.”

Cain smiled. “I like that connection. It shows the limits of any judicial interpretation.”

Abel replied, “So let’s get back to activist policies. You sounded fed up last week.”

Cain nodded. “Yeah, Democrats are activist. That’s their brand. A hallmark of the Republican Party used to be a certain policy restraint, a prudent caution. No more. It’s so disappointing and it leaves a lot of voters like me in a political limbo. Neither party represents our approach to governing. You know, quit meddling. This tariff business is meddling in the extreme.”

Abel raised his eyebrows. “It was a Republican president and strongly Republican House and Senate that initiated the Smoot-Hawley tariffs in 1930. They imposed tariffs on more than 20,000 goods.”

Cain interrupted, “And imposed no tariff or low rates on a lot of goods. As I said, the hallmark of a badly constructed rule is a lot of exceptions.”

Abel continued, “Ok, the tariffs were activist policymaking by Republicans who held the Presidency and strong majorities in the House and Senate. The Republicans are all about restraint. They restrain free trade, individual choice, government support of child care, to name a few.”

Cain smirked, “Like the Democrats don’t do the same. Restrict guns, oil and gas drilling, dictate to automakers the kinds of cars they can produce. I mean, it’s the Democrats who created the bureaucratic state. All that rule-making limits choices.”

Abel laughed as he slid out of the booth. “Ironic. In his book, David Graeber writes about a paradox. He calls it the Iron Law of Liberalism. When a government tries to promote the free market, it often creates even more regulations. In their own way, both parties are guilty of making too many rules, of creating bureaucratic tangles.”

Cain looked up at Abel. “I wish we could change that somehow. See you next week.”

Abel gave a short wave. “I’ll pick up the check. Till next week.”

////////////////////

Image by ChatGPT

A Triangle of Income, Health and Education

Leave a comment

May 18, 2025

By Stephen Stofka

This is part of a series on persistent problems. The conversations are voiced by Abel, a Wilsonian with a faith that government can ameliorate social and economic injustices to improve society’s welfare, and Cain, who believes that individual autonomy, the free market and the price system promote the greatest good.

Abel scooped some egg on his waffle. “We’ve talked about the many responsibilities that schools carry and then I was reading a BBC article about clinics in Britain that treat severely obese kids. Since they started these clinics in 2021, they’ve treated almost 5000 kids (Source).”

Cain interrupted. “How many kids are in school over there?”

Abel replied, “Almost 8 million (Source). So this is a small percentage of the school population, but these are the kids referred by their family or school physician. The problem is probably a lot bigger.”

Cain glanced up from his coffee cup. “I always think of obesity as an American problem. I wonder how Britain compares to the U.S.?”

Abel nodded. “A few years back, New York City estimated that over 6% of K-8 kids were severely obese, but they use a slightly different methodology than Britain to classify kids (Source).”

Cain interrupted. “You mean if I walk into a New York City classroom of 16 students, one of them will be severely or morbidly obese?”

Abel shrugged. “They might not even be there. A lot more absences among those kids. They struggle academically.”

Cain frowned. “I expect more obese kids in towns that are car dependent. I always figured New York kids would walk a lot. Anyhow, how do they determine severely obese?”

Abel replied, “Britain uses a BMI over 40. They’ve been referred by a doctor. Some kids have BMIs over 50, like morbidly obese. Thirty percent of the kids who come to the clinics already showed signs of liver disease.”

Cain raised his eyebrows. “Liver disease at that age? Oh, wow. Did they say what the problem was? Does Britain have a program where poor kids get free lunches? Are the schools feeding these kids too much junk food?”

Abel glanced at his phone. “Hold on. I took notes. So, 40% of them came from poor neighborhoods and the schools in Britain do provide free meals for disadvantaged children. FSM they call it. Free school meals.”

Cain asked, “So how many school kids, fat or not, come from disadvantaged homes?”

Abel glanced at his phone again. “Yeah, what’s the baseline? Twenty-seven percent of all kids qualify for the free meal program (Source), but 40% of the severely obese come from disadvantaged neighborhoods. So, that’s a disproportionate amount of severe obesity among poor kids in Britain. New York City found that the percent of children with severe obesity has stayed about the same among all school kids during the past decade, but it has grown among minority students.”

Cain frowned. “My first instinct is to put some blame on the schools for the crap they serve in the cafeteria.”

Abel laughed. “Well, kids are not terribly fond of fruit and veggies. You can’t blame the cafeteria for that.”

Cain was equivocal. “Yeah, but all the white bread, the corn oil, the hot dogs and other prepared foods.”

Abel shook his head. “The kids who come from higher income homes are eating in the cafeteria as well. The only difference is their parents have to pay for it. If the school cafeteria were the chief culprit, there would a growing effect among the whole school population, not just minorities. Overall, though, that report showed a general decline among the entire student population during that decade. Obesity among disadvantaged students ran counter to the trend. So, what’s your next theory, Mr. Einstein?”

Cain smiled. “Hey, I’m improvising. How do they fatten up cattle? Feed them corn. Since the 1960s, we’ve been eating more processed food, more take-out food. What do those foods use? A lot of corn oil. It’s got a neutral flavor and a high smoke point. Great for deep fat fries. Too many Americans eat like it’s the state fair in July. Pass the grease, please.”

Abel argued, “That explains a growing obesity in the general population, but it doesn’t explain why obesity is growing even faster in disadvantaged communities, particularly among minority populations. A lot of those communities are food deserts. The big grocery store chains have moved out. The independent grocery chains struggle because they cannot get competitive pricing from their distributors. What’s left? Convenience stores. Packaged foods. Fried foods, ready to eat.”

Cain smiled. “Like the school cafeteria. Can families use food stamps for hot dogs at the convenience store?”

Abel shook his head. “Nope. Food stamps, or SNAP benefits, can’t be used for ready-to-eat meals.”

Cain argued, “But families can pay for a ready-to-eat hot dog and get a bottled soda with food stamps. Sugar, salt, and mystery meat with a bunch of chemicals, all in one convenient package, aided by taxpayer dollars.”

Abel frowned. “The amount a person gets on the SNAP program is relatively small, a bit over $6 a day (Source). RFK Jr. and his buddies want to ban the purchases of soda or candy with food stamps (Source).”

Cain scoffed. “Money is fungible. Like I said, they’ll just pay for the candy and use food stamps for something else. As we discussed last week, we’ve got an activist court. Now we’ve got an activist executive branch and an impotent Congress.”

Abel smirked. “This is who you voted for.”

Cain laid his hands in his lap. “What I voted for was what I thought was the better of two bad choices. Gallup reported that Biden and Trump have the two lowest average poll ratings in the modern era (Source).”

Abel asked, “Can I guess who has the lowest? Trump?”

Cain smiled. “Yeah. I was surprised. I thought it would be Bush and Trump. Bush had the worst Presidency, in my opinion. He kicked away a budget surplus, lied to the American people…”

Abel interrupted. “Lied to themselves as well. Johnson lied about Vietnam, but he knew he was lying. He’d only been in office a few months after Kennedy was shot and he thought Vietnam was going to be a boondoggle. He was worried that people would say he was weak, that he was an accidental president (Source).”

Cain nodded. “He lied to Congress about the incident in the Gulf of Tonkin to get authorization for an undeclared war (Source). Did the Democratic House impeach him? No. Nixon lies about Watergate and the Democrats impeach him. Noble principles? That’s the lie they tell themselves and the public to cover up the viciousness, deceit and self-dealing that is at the heart of everyday politics.”  

Abel replied, “I hate when you get so cynical.”

Cain shook his head. “It’s realism, not cynicism. Look, politics brings out the worst in people. We see it at City Council meetings, in state legislatures, in the White House and Congress. Lions and hyenas fight over a kill. It’s visible. People fight over invisible things like power and principles, but the carnage is just as ugly as a carcass on the African plain.”

Abel sighed. “So what’s your solution?”

Cain replied, “Make as few rules as possible. The smaller the carcass, the less incentive for politicians to fight over.”

Abel nodded. “Incentives. I was reading a book this week called “Hell To Pay” by Michael Lind. He writes about all the ways that companies suppress workers’ bargaining power. Non-compete clauses, legal and illegal immigration, salary bands.”

Cain asked, “What are salary bands?”

Abel replied, “It’s a way that companies in a sector can collude on wage levels.”

Cain interjected, “Price fixing, in other words.”

Abel nodded. “Yeah. It’s illegal so companies hire a third party HR consultant that tells them what other companies in that sector and area are paying.”

Cain smiled. “Regulatory compliance is a game of cat and mouse.”

Abel continued, “Lind recommends allowing collective bargaining by sector for some industries. Railroads and airlines do it. For small businesses, he suggests a regional or local wage board that would set wages and working conditions.”

Cain looked doubtful. “Let me make this more concrete. Instead of Amazon workers at one facility bargaining for wage increases, all warehouse workers in the entire country would bargain collectively with all employers in warehousing. So all the pay structures are the same throughout an industry?”

Abel nodded. “I suppose so.”

Cain asked, “But there are both large and small employers in the warehouse sector. Are small businesses and their workers subject to a wage board or are they included in the collective bargaining with Amazon and its employees?”

Abel lifted his shoulders. “I have no idea. Lind didn’t get into those kind of details.”

Cain winced. “And if they can’t agree on wages or benefits? Do all warehouse workers go on strike? This scheme complicates contractual relationships.”

Abel replied, “I don’t know. He suggested an independent commission like the FCC that would oversee the whole process. I suppose it could step in and act as a final arbiter and prevent strikes.”

Cain asked, “Almost like a guild system, don’t you think? The merchant guilds protected the interests of shopkeepers and artisan guilds protected some workers in skilled trades, I think.”

Abel smiled. “I hadn’t made that connection. I thought you would like the idea because it allows private parties to resolve things. Lind suggested eliminating non-compete agreements as well. They disembowel workers as a prerequisite for employment. They should be illegal anyway.”

Cain replied, “You’re basically for any regulation that will give workers more pricing power. Companies markup any increase in wages, so workers might make more money, but everyone will be paying higher prices. In response to rising prices, the Fed will raise interest rates. That will make homes and cars less affordable because of the higher loan payments.”

Abel interrupted, “People will be less dependent on government charity. They will eat better. They will live longer. There is a strong correlation between life expectancy and per capita personal income in each state.”

Cain asked, “Will they? Higher rates means less investment growth, fewer jobs added, maybe some job losses. Some workers are making more money, some people are out of jobs, and everyone is paying higher prices. It’s not so simple.”

Abel argued, “The existing system is demeaning for some people. Wal-Mart employees often don’t make enough to provide for their families. They rely on various government programs to supplement their income (Source). That is an indirect subsidy from the government to Wal-Mart. That subsidy goes into the pockets of the Walton family that owns almost half of the stock (Source). If Wal-Mart employees belonged to a retail union, their representatives would be bargaining with Wal-Mart and Kroger and Target and Home Depot.”

Cain shook his head. “It’s too big, too broad. A person with plumbing knowledge working in Home Depot is going to paid the same amount as someone scanning groceries in a checkout lane?”

Abel argued, “Obviously, there would be different classifications of retail employees. However, a plumbing guy working in Home Depot for a certain number of years would get paid the same as a plumbing guy in Ace Hardware or Lowe’s.”

Cain asked, “Who is going to mandate these classifications?”

Abel replied, “No mandates. The stores and employee union will probably agree on some distinctions. They can resolve that in negotiations, I suppose.”

Cain asked, “What about small businesses? Would employees get the same pay and benefits as large businesses? If so, a company like Home Depot would be able to offer employees health care at a lower cost than small businesses. Would there be a law mandating that a small business get the same insurance rates as a big company? What about different living standards in different states? There would have to be an adjustment for that.”

Abel rolled his eyes. “Questions I can’t answer. I don’t know. The private sector would have to work that out. I thought you liked that.”

Cain nodded. “Benefits complicate any solutions. They introduce factors that are outside of the industrial sector that a company operates in. Health insurance, for one. Retirement plans involve the financial industry, also a different sector. Mandated taxes like Social Security and Unemployment insurance involve other government programs. The politicians will be eager to meddle.”

Abel replied, “Ok, so what if there were no benefit package for employees? Start there.”

Cain said, “In 1960, Ronald Coase wrote The Problem of Social Cost (Source). He pointed out that when government imposes a regulation on a firm, the government acts as a super-firm in the sense that it controls a factor of production for each firm subject to the regulation.”

Abel interrupted, “What? That’s like saying that the umpire is a super-team. The government is just there to make sure everyone plays by the rules.”

Cain smirked. “Umpires don’t write the rules. Coase’s point was that private firms must make production decisions within the constraints of the market. They have to adjust to changing market conditions. A government agency has no such constraints. Laws and regulations do not respond to changing conditions. That’s why I favor as few government rules as possible.”

Abel sighed. “Well, we can’t live in an ideal world. I thought this was a realistic solution. I liked the empowerment of workers. Lind gave a lot of examples of how businesses weaken the power of workers to command a living wage. Temporary work visas, for one.”

Cain nodded. “What a racket that is. People with highly specialized skills and there are no American workers to fill the positions? The software company pays visa holders relatively low wages for all these specialized skills. Why is that? Oh, and that knowledgeable visa holder needs to be trained by the same person they will replace. It’s a scam.”

Abel laughed. “You’re familiar with some of the things that Lind talks about in the book. He also mentions the fact that most of those H-1b visas are given to workers from India. It’s almost three-quarters (Source). No other software engineers or computer scientists in the rest of the world? Only in India?”

Cain smirked. “A scam to cut costs by paying workers less. Another persistent problem in Washington is illegal immigration. It increases the labor supply and lowers wages, which benefits employers.”

Abel interrupted, “More demand for housing which increases housing costs and hurts workers. Lind writes about that too. So, if companies can combine to lobby for policies that enhance their power with workers, why can’t workers do the same?”

Cain shook his head. “I have so little faith in politicians to promote self-reliance. They need the public to depend on them. It gives them a sense of purpose and bargaining power.”

Abel argued, “Well, we need an alternative to the current system. Too many workers cannot earn a living wage and have to rely on government programs to get by. Growing obesity in kids from poor families is an indicator of a diseased system.”

Cain sighed. “Now comes the rant against capitalism?”

Abel smirked. “No, no rant. Lind mentions Adam Smith’s comment that a worker should have enough to maintain himself, and extra to raise his family and deal with emergencies. That’s not a recommendation from some socialist economist, but someone who advocated a minimum of regulations. Implementing sectoral bargaining for workers has the promise of lightening government’s role in the marketplace while correcting some of the abuses that our political system has enabled.”

Cain said, “The promise of a lighter role for government? This commission. Is it composed of political appointees?”

Abel shook his head. “Lind, the author, suggested an independent commission.”

Cain asked, “Like the Fed?”

Abel nodded. “Lind gave the FCC as an example, I think, but the idea is the same. I prefer a model along the lines of the Fed, I think. Staggered terms that are longer than four years, so the members of the commission are less subject to the political whims of one party.”

Cain argued, “That’s too much power concentrated in one commission.”

Abel replied, “Look how much power the Fed has. For more than a hundred years, it has given our economy more stability than in the hundred years before the Fed. That stableness attracts capital from the rest of the world.”

Cain looked doubtful. “Talking about the Fed. As I said before, higher incomes will lead to higher prices, higher interest rates. It’s something we could talk about at another time. You said life expectancy had a strong correlation with income. What’s strong?”

Abel replied, “.85. That was based on 2021 figures.”

Cain looked thoughtful. “I wonder what the correlation is in Canada or Britain. I want to check on that. Maybe read that book. Hey, I need to get going. An interesting discussion this week. ”

Abel nodded. “Yeah. See you next week.”

////////////////////

Image by ChatGPT.

Two Natures

Leave a comment

October 13, 2024

By Stephen Stofka

This week’s letter continues my look at the two types of Golden Age voters. Last week’s post was about those who look to the past as more – fill in the blank here. On the TV show All in the Family, Archie Bunker was a comic representation of this type of thinking. The lyrics of the show’s theme song Those Were the Days echoed a nostalgia for an earlier time in American history.

This week’s subject is the second type of voter, those who believe that people can construct a better society. In the extreme, that better society is a utopian Golden Age. Nineteenth century writers called this type of person perfectibilians, who believe that man’s imperfect or corrupt nature can be perfected. They believe that creating institutions and institutional rules which encourage sharing, equality and community can help perfect flawed human nature and improve society. Out with selfishness and exploitation. In with charitable spirit, equity and respect.

Hesiod, the 6th century BCE Greek poet, recounted the myth of the Isles of the Blessed, islands in the Atlantic where reincarnated people lived in an idyllic state. Thomas More placed his Utopia, published in 1516, on an island off the mainland in the New World. More detailed the institutional practices that sustained this utopian society: a society based on agriculture with small democratic urban areas. There existed a welfare state with no private property, but each household had one or two slaves. More’s acceptance of slavery in his vision of utopia distances a modern reader. And the excess population on this idyllic island? They were shipped off to the mainland. Who made those decisions? More’s utopian vision sounded more like a version of hell.

More’s work was fiction. Some hope and believe that human society can improve toward a utopia that lies in the future. Reformers in the 19th century, known as Ricardian Socialists, advocated for reforms that they hoped would correct the social ills that emerged or erupted during the Industrial Revolution. These included poorly paid and overworked people crowded into dense urban areas. Children worked long hours and suffered horrible injuries from dangerous machinery. The reformers sought a more equitable system that distributed the surplus of economic activity and trade to worker cooperatives, not capitalists.

John Stuart Mill (1806-1873) Mill favored the idea of worker’s coops and profit sharing rather than Communism, which he thought did not account for individual differences of talent and effort (Roncaglia, 2005, p. 240). More radical reformers known as Utopian Socialists sought the abolition of private property entirely. Robert Owen was a Scottish financier who set up the utopian community of New Harmony, Indiana in 1826 – 1828. It was a kibbutz style working community with no private property and the workers shared profits. Owen believed that if poor workers were productive, they might improve their habits (Heilbroner, 1997, p. 112). The experiment failed and Owens suffered severe financial losses.

Karl Marx (1818 – 1883) was the most prominent of these utopian reformers. Murray Rothbard, an Austrian economist, considered Marx primarily as a millennial Communist. Watch out, big revolution ahead and the purging of the old ways. Then, the new order and a flourishing of human society.  

Flourishing good. Everybody likes flourishing. Revolution and other cataclysms bad. Some voters are resistant to change or reform because existing arrangements suit them. Last November, I wrote about the many subsidies and tax expenditures that benefit some at the expense of others. Improved society? Check. I’m all for that. Lose my subsidy? Get your hand out of my pocket, comrade. In his 1965 book The logic of collective action public goods and the theory of groups, Mancur Olson (2012) argued that people cling to their benefits, especially when the benefits go to a small number of individuals or companies, but the costs are spread out among all taxpayers. Because the cost to each taxpayer is small, there is less incentive to advocate for reform.

In the United States, the reformers of the Progressive Era advocated more practical and less radical reforms that instituted conditions we take for granted today. These included women’s suffrage, more humane working conditions, laws against child labor, and a civil service system based on merit rather than cronyism and corruption. The Sherman Anti-Trust act and other business reforms curbed the power and growth of vertical monopolies (see notes below) like the Standard Oil Company. In 1914, the Federal Trade Commission was established to prevent price fixing and other forms of collusion between businesses that distorted the free market.

Can human nature be reformed? To those who believe that people are inherently corrupt, there is a flaw in the perfectibilian strategy. There will always need to be regulators to constantly monitor human behavior in the marketplace and our shared social spaces. That puts too much concentration of power in the hands of government regulators. Because regulators are people, they will by nature be corrupt, pursing their own self-interests, their inherent drive for control. Who will regulate the regulators? Who will reform the reformers?

The price system promotes a competition between individual self-interests. In a transaction between John and Mary, John’s corruptible nature is pitted against Mary’s corruptible nature. Out of that contest of self-interest, a benefit to both people emerges. This is the marvel of the price system. Unlike the price system, a regulatory system lacks natural checks and balances. Governments can pass a law that induces people to act more charitably, for instance, but government cannot mandate that people be more charitable. Some people have a more charitable spirit than others. On the other hand, the Greek philosopher Aristotle believed that acting in a virtuous manner would promote a more virtuous character. If a government forces people to act more charitably, will they develop a more charitable character?

Two types. Two visions. One looks to the past. One looks to the future. Simple, isn’t it? Unfortunately, many voters have a complicated set of perspectives and tendencies that defies simple analysis. We might be a blend of nostalgic and perfectibilian. Are people inherently corrupt, seeking to serve their own parochial interests rather than the greater good? What do you believe?

/////////////////////

Photo by Joel Filipe on Unsplash

Keywords: progressive, human nature, prices, regulation

Heilbroner, R. L. (1999). The Worldly Philosophers the Lives, Times, and Ideas of the Great Economic Thinkers (7th ed.). New York: Simon and Schuster.

Heilbroner, R. L. (1997). Teachings from the worldly philosophy. New York, NY: Norton & Company.

Olson, M. (2012). The logic of collective action public goods and the theory of groups. Harvard University Press.

Roncaglia, A. (2005). The wealth of ideas: A history of economic thought. Cambridge: Cambridge Univ. Press.

Vertical monopoly: one company owns or controls the various stages of extraction, refining and production, for instance.

The Protected

Leave a comment

September 3, 2023

by Stephen Stofka

This week’s letter examines the proliferation of lawyers in America and how they are reducing our economic productivity. In grade school civics class, we were taught that America is a nation of laws; that no one is above the law. Since the 1960s we have become a nation of competing rights, not laws. An army of lawyers stands ready to argue the cause of any business or advocacy group with access to sufficient funds. Those who can afford the legal bills can lengthen legal proceedings against them for a decade or more. Conflicts over land use hamper infrastructure projects and housing reform.

In 2018, Steven Brill, author of Tailspin and many other books, wrote an article in Time magazine titled “How Baby Boomers Broke America.” Brill is a Yale educated lawyer who founded Court TV several decades ago. Brill noted that the best and brightest among us, particularly those in the financial and legal professions, have become part of a protected class. They are shielded from the laws that govern the rest of us, the unprotected class. The professional class claims to have the public’s best interest at heart but it often acts to protect itself first at the expense of the public interest and social mobility.   

In 1951 there were 220,000 lawyers for 155 million people in America, according to the American Bar Association (ABA). That represented a ratio of one lawyer to 700 people. is  In the 1960s and 1970s, Congress passed much social and environmental legislation that left the actual rulemaking up to lawyers at federal and state agencies. During the 1970s, businesses hired many lawyers to thwart the impact of this new legislation. By 1984, the number of lawyers had tripled to 664,000 for a population of 237 million, a ratio of one lawyer to 357 Americans. In an annual address to the ABA that year, Chief Justice Warren Burger remarked on this worrisome trend, warning that society would be overrun by hordes of lawyers. By 2018, there were 1.1 million lawyers for 315 million people in America, the highest number of lawyers per capita in the world. Just five years later, there are now 1.3 million lawyers, a ratio of one lawyer for 255 people.

With the advent of Johnson’s Great Society and the Environmental Protection Act in the 1960s, the burden of regulation grew heavy. Large companies hired lawyers to discover and develop loopholes that created a legal safe harbor from the regulatory machine. Burdened by regulation, smaller companies became less efficient, making them less competitive. Wage gains which might have gone to workers now went to accountants, lawyers, government and insurance fees to protect business owners from the fines and liabilities of the new regulations. Larger companies, able to wield more legal power per dollar of revenue, absorbed their smaller competitors, giving larger companies greater pricing power.

In 2021, the American Bar Association listed 175 members of Congress with law degrees, a third of the 535 members of the House and Senate. By design, bargaining or incompetence Congress writes laws in imprecise language, leaving it up to the legal staff of executive agencies and the courts to determine what Congress meant. There is a public outcry against rule by unelected bureaucrats and judges but in an evenly divided electorate, those unelected officials protect the minority of 49 from the abuses of the majority 51. Computer algorithms enable a slim majority in a state to gerrymander voting districts to give one party representative power that enfeebles the 49% who belong to the other party. Those who control the democratic process control the power.

The growing adoption of computer technology in the late 1980s inspired the hope that automation would reduce the need for lawyers. Instead, compliance and regulatory work has increased each year. A 2017 CNBC article speculated that Artifical Intelligence (AI) might replace lawyers. Its doubtful that lawyers would allow that to happen. They write the rules that protect them from the rules, including the rule of competition. John Dingell, former Congressman from Michigan, once said “If I let you write the substance and you let me write the procedure, I’ll screw you every time.” Like an infestation of grasshoppers in a field of plants, too many lawyers diminish the productive vitality of our economy.

//////////////////

Photo by Wesley Tingey on Unsplash

Keywords: finance, law, lawyers, regulations

The Price Box

Leave a comment

April 2, 2023

by Stephen Stofka

This week’s letter is about prices. If you’ve have ever been a business owner – even a micro business like delivering papers – you are aware that price is a label on a box. My wife and I have a cat, Ellie, and we keep all of her toys in a cardboard box in the living room. The price of one product – $24.99 – is like a label on all the objects in that box.

Inside that price are supply factors, the costs of making and distributing the product and the vendor’s costs in selling the product. To a kid delivering papers on a bicycle those costs include broken chains and flat tires and brake repair. There are opportunity costs – what else a kid could be doing when they are out delivering newspapers.[i] The supply of a product entails legal costs and taxes and the institutional costs of maintaining property rights. The court system and the police force are in that price box. Is the market for that product a monopoly or competitive? Trade restrictions and tariffs, supplier subsidies, weather and seasonal factors – It’s in the box.

There are demand components in that box as well. How responsive are customers to changes in price and the trend in income growth. Consumer expectations of price increases or supply shortages for that product and competition from other vendors and goods. Substitutes or complements for the product. Consumer subsidies like low interest loans, mortgage loan government guarantees, bankruptcy laws and favorable tax laws. Time itself is in the box. Our tastes and desires change with the years and that’s in the box.

There is a calculation procedure in linear algebra where a bunch of numbers get multiplied and added together to give just one number. That’s what a price is. It is a piece of information that unfolds into an origami of the structure of our society, government and economy. If uncovers our moral values and the relationships of power within our society.

Economists of the Austrian School of Economics stress that prices help organize production and consumption decisions. They reject the emphasis on regulation as a director of resources. They sometimes refer to Adam Smith’s “invisible hand,” the idea that people seeking their own well-being can act for the benefit of everyone. Prices work in that world. The drive to seek our own well-being has a darker side that Smith explored throughout his book, The Wealth of Nations. In that world, isn’t there a need for regulations to curb individual appetites? Those who craft and enforce the regulations are themselves seeking their own well-being.  

We often say that “no one is above the law.” However, everyone wants to “get around the price,” and the politically powerful are able to do so. Smith advocated a free market only as a last resort after documenting the many instances where policymakers – “magistrates” and “council members” – wrote laws that favored the rich and influential. He was in favor of a well-regulated economy that ensured fair and equitable rules for everyone but there is no one capable of that. Smith found relationships of power corrupted most rule-making.

In Part 1, Chapter 7, he explains the price advantage enjoyed by those who secured a monopoly for their product or service. They were then able to charge the highest price. In Chapter 8, capitalists had contrived to have laws written that permitted the combining of capital but did not permit workers to form unions to increase their bargaining power. Business owners regularly colluded with each other to keep wages low. Smith writes “whoever imagines … that masters [employers] rarely combine, is as ignorant of the world as of the subject.” This from a man who studied the wages and prices in Europe and the colonies. Chapter 10, he notes the Statute of Apprenticeship laws that restricted the free movement of labor from one town to another and from one company to another. The weaving of plain linen and plain silk were similar skills but linen weavers were not allowed to transfer to another company to weave silk. In Chapter 11, he documents how French vineyard owners got a law passed that prevented any new vineyards. This preserved the vineyard owners pricing power. There were money policies and trade rules that preserved the power of the politically powerful in Britain at the expense of the American colonists. The American colonists were allowed to harvest raw materials but were required to ship them to British manufacturers to make the final products from those inputs. The book was published in 1776, the same year that the colonists finally got fed up and declared their independence.

Because prices direct production and consumption, so many of us want to alter that direction for own benefit. In the past weeks I have written that social, political and economic behavior is better understood as a recursive function where the output from the function becomes the input to the next call of the function. As some parties in the free market successfully alter the rules that govern the costs that are in the price box, that raises the call for regulation from those who are disadvantaged by that alteration. So policymakers and regulators write rules that rearrange the costs as a corrective to the distortions committed by the people and companies that they regulate.

Economic purists may envision a market of prices that work like an Antikythera mechanism, directing resources for the general well-being. Economic students are taught the ideal of the perfectly competitive market even though it rarely exists. Aircraft wing designs are tested in a wind tunnel without an engine powering the wing. This eliminates distortions in the interaction between wind and wing. Isaac Newton envisioned a universe without gravity and friction – both of them “unbalanced forces” – to derive the first law of motion. Too much deductive economic theory is founded on the assumption that a social science like economics can be tested with the same methods used in the physical sciences.

Socialist purists clamor for ever more regulation to fix an endless supply of injustice in the market. They open up the price box and see all the dark forces that Smith wrote about – monopoly and collusion and greed and bigotry that harms the general well-being. They claim that regulators and lawmakers are able to overcome their self-centered impulses and act in accordance with democratically created law. To paraphrase Smith, whoever imagines that to be the case is as “ignorant of the world as of the subject.” He did not have a cynical view of human nature but a realistic view of the natural contradictions of human nature.  

////////////

Photo by Katrin Friedl on Unsplash

Keywords: supply costs, demand factors, Austrian Economics, price theory, regulations

[i] Conventional economic theory too often assigns little or no value to leisure. Tate & Fegley (2020) argue that leisure is a complementary good to labor the way that mustard is a complementary good to a hot dog. They countered the neo-classical assumption that people would work all of their waking hours if they were paid enough.  

Fegley, T., & Israel, K.-F. (2020). The disutility of Labor. Quarterly Journal of Austrian Economics, 23(2), 171–179. https://doi.org/10.35297/qjae.010064

Faceless

Leave a comment

April 26, 2020

by Steve Stofka

In the name of public safety, our elected officials are picking winners and losers. In the process, they are selectively destroying businesses. Their job is to protect lives, they claim. Faceless legislative staff craft regulations that destroy some lives while they protect others.

In my neighborhood there is a Sprouts grocery store in a strip mall. That’s open. Next to it are several clothing stores, all closed now. A nail salon – closed. A mattress and bedding store is closed. The liquor store is open.

Across the street is a Walmart with a grocery store inside. The parking lot is almost full. Wal-Mart restricts access to the store entrance to safely stagger customers. There are a lot of signs and tape on the floor to remind people to stay six feet back when waiting in line. Most people are wearing masks.

The chiropractor across the boulevard is temporarily closed. We elect state and local politicians who delegate the work of governing to office staff. A committee decided that people with pinched nerves in their necks and backs are not important. Can’t work because you are having muscle spasms? Too bad. Some bureaucrat has decided that your pain is not essential. Stay home and ease the pain with marijuana or alcohol. Those store are essential. It is a slap in the face to those with chronic pain.

A month ago, the mayor’s office of Denver issued a stay-at-home order that did not include liquor stores and pet stores as essential businesses. What will be closed next? By mid-afternoon, just two hours after the edict was issued, cars crowded the streets of Denver and adjoining counties. People lined up inside liquor stores. Two bottles of Seagram 7. A few quarts of vodka. Four cases of Bud. Panic buying or those looking to profit from the coming shutdown. Social media alerted the mayor’s office and they immediately amended the order.

In some office buildings, therapists cannot get into their office because the building is locked. They are non-essential. Where are their patient notes? In the locked building. Got problems? Try Zooming your therapist. Remember – your government committee is trying to keep you safe.

Therapists and chiropractors not essential. Oil and gas extraction is essential because, well, it just is. The drop in demand for gasoline has produced a glut in oil. Companies are storing the extra in super tankers on the world’s oceans. Got back problems? Rub some crude oil on it.  

President Trump suggested that “medical doctors” – not the other kind of doctors like PhD doctors – but medical doctors could inject disinfectant like Lysol into people infected with the coronavirus. It’s OK if medical doctors do it. The maker of Lysol was quick to issue a warning. Do not inject Lysol into your body, they warned.   

Mr. Trump has become the country’s voodoo doctor. The warm weather was going to kill the virus. Then it was a malaria drug. Now it is Lysol. Put on your voodoo doctor headdress, Mr. Trump. Get your cauldron fired up and cook us up one of your special potions. The folks at Fox News will endorse your medicine. 

The President is the visible menace. The folks who work in our state and local offices are the invisible threat. A select few decide which businesses are essential, whose pain gets treated and who is important. They decide who gets unemployment insurance and who does not.  Many small businesses will not recover. It can take ten years or more to build up enough savings to start a small business. A second mortgage on a house is often used to capitalize a business. A faceless committee in a government building says your business is not important. Bye-bye business. Bye-bye savings. You can give up your dream and find work somewhere. Hope you can keep your house. It’s not essential. You are not important.

If – when – businesses reopen, business owners have a lot of questions. Will the state exempt businesses from liability if a customer or employee gets sick? Does the state have that power, the governor asks. The state has the power to issue edicts that crush small businesses but not the power to help business owners recover. You are not important.

After three deaths due to corona virus, the health department shut down a Wal-Mart store in our area (Butzer, 2020). Wal-Mart has deep pockets and legions of lawyers. Will an insurance company insure a small business against a coronavirus lawsuit? How much extra premium will it cost? What is the protocol? Should a business owner hire someone to screen customers before they come into the establishment? Does anyone have an answer?

The supply chain is an invisible river of goods and services that enables local businesses to service their customers. Is that supply chain broken? We will find out. The pandemic has caused a surge in orders for computers, but China has shuttered computer factories (Brandom, 2020).

Let’s turn to the faces of those we elected. Congress hurriedly passed an 800-page bill to provide $350 billion in loans and grants to small businesses – the Paycheck Protection Program (PPP). 28% of the funds were grabbed up by publicly held companies (Beltran, 2020).  The original provision in the bill was that any business with more than 500 employees was not eligible for the funds. Faceless lobbyists pressured the faceless staffs of lawmakers to make a small change. Just a few words. Change the wording to exclude companies with 500 employees at any one location. Done. No problem. The senator appreciates your support.

Senator Marco Rubio is the chairman of the Senate’s Committee on Small Business and Entrepreneurship. When the Wall St. Journal contacted his staff about large businesses scooping up the funds intended for small business, reporters were told they were mistaken. Mr. Rubio would not allow such language. The staff later admitted their error (The Journal, 2020). Lawmakers routinely vote for legislation without knowing what is in it. Prior to passage of the ACA (Obamacare) bill in 2010, House Speaker Nancy Pelosi replied that legislators wouldn’t know what was in the bill until it passed. Legislative sausage making by faceless staff and anonymous lobby groups. No, we’re not for sale, lawmakers insist. Yes, thank you for your support, they reply to the campaign contributions of the lobbyists.

The pandemic response of government has exposed our vulnerability. With great power and an incomprehension of the effect of their edicts, faceless legislative staff act as the executioners of the French Revolution.  Some small business owners must kneel down at the guillotine and await the fall of the blade.

/////////////////

Notes:

Photo by Simon Migaj on Unsplash

Beltran, L. (2020, April 23). Restaurant Chains Received Many of the Biggest PPP Loans. Retrieved from https://www.barrons.com/articles/restaurant-chains-received-many-of-the-biggest-ppp-loans-51587573556

Brandom, R. (2020, March 27). Electronics companies are getting gridlocked by coronavirus lockdowns. Retrieved from https://www.theverge.com/2020/3/27/21195953/tech-manufacturing-companies-coronavirus-lockdown-apple-electronics-china

Butzer, S. (2020, April 24). Health department closes Aurora Walmart amid COVID-19 deaths, positive cases connected to store. KMGH. Retrieved from https://www.thedenverchannel.com/news/coronavirus/health-department-closes-aurora-walmart-amid-covid-19-deaths-positive-cases-connected-to-store

The Journal. (2020, April 22). How Big Businesses Got Small Business Relief Money. [Audio, 21 mins]. Retrieved from https://www.wsj.com/podcasts/the-journal/how-big-businesses-got-small-business-relief-money/7C5DAB5C-71C0-4D50-9D13-9D9633E633AC

Timing Models

Leave a comment

May 22, 2016

Long term moving averages can confirm the shifting trends of market sentiment and market watchers customarily watch for crossings of two averages.  The 50 week (1 year) average of the SP500 index just crossed below the 100 week (2 year) average, indicating a  broad and sustained lack of confidence.  Falling oil prices since mid-2014 have led to severe earnings declines at some of the large oil companies in the SP500.  The index is selling for about the same price as the two year average.

What to do?  These crossings or junctions can mark a period of some good buying opportunities – unless they’re not – and that’s the rub with indicators like this one.  Downward crossings typically occur after there has already been a 5 – 15% decline from a recent high.  If an investor sells some stocks at that time, they wind up selling at an interim low, and regret  their action when the market rises shortly thereafter.  They should have bought instead of sold.  AAAARGHHH, a false positive!  Twice in the 1980s, the sentiment shift was less than a year long and an investor who did act lost 10 – 20% as the market climbed after several months.

Conversely, after a 10-15% decline, some investors do buy more stocks, figuring that the excess optimism, or “fluff,” has been shaken out of the market.  Then comes that sinking feeling as the market continues to decline, and decline, and decline.  In April 2001 and July 2008, the 50 week average crossed below the 100 week average.  Investors who lightened up on stocks at those times saved themselves some pain and a lot of money as the broader market continued to lose another 30% or so.

There are not one but two problems with timing models: timing both the exit from and entry back into the market.  Over several decades the majority of active fund managers – professionals who study markets – did not get it right.  They underperformed a broad index like the SP500 because the index is actually a composite of the buying and selling decisions of millions of market participants.  John Bogle, the founder of the now gigantic Vanguard Funds, made exactly this point in his dissertation in the 1950s.  A half century later, this “wacky idea” of index investing has taken over much of the industry.

Consistently successful timing is very difficult and has tax consequences in some accounts.  Investors are encouraged to focus instead on their investment allocation to match their tolerance for risk and volatility, and to consider any prospective income that they might need from a portfolio.

Since 1960, the average annual price gain of the SP500 index has been 6.7%.  Add in an average yield (dividend) of 3% and the total return is almost 10% that an investor gains by doing nothing, a formidable hurdle for any timing model.

Within an allocation model, though, is the idea that an investor might shift a small portion of a portfolio from stocks to bonds and back in response to market signals.  In several previous articles I have looked at a Case-Shiller CAPE10 model (here, here, here, and here) as well as another crossing model using the 50 day and 200 day moving averages, dramatically named the Golden Cross and Death Cross (here, here, and here.)  As already mentioned, we want to avoid some of the false signals of crossing averages.

Instead of a crossing, we can simply use a change in direction of both averages.  When not just one, but both, long term averages turn down, we would move a portion of money from stocks to bonds, and in the opposite direction when both averages turned up.

Over the course of several decades, this strategy has been suprisingly successful.  The market sometimes experiences a decade when prices may be volatile but are essentially flat.  From 2000 – 2012 the SP500 index went up and down but was the same price at the beginning and end of that 12 year period.  1967 to 1977 was another such period, a stagnant period when an investor’s money would be better put to use in the bond market rather than the stock market.

In recent decades, this long term weekly model would have favored stocks from 1982 to March 2001 while the market gained 850%, an annual price gain of 11%.  The model would have shifted money back to stocks in August 2003 at a price about 25% less than the exit price in March 2001. In March 2008, the model would have favored an exit from stocks to bonds.  The stock market at that time was about the same price that it had been 7 years earlier in March 2001.  The model captured a 30% gain while the index went nowhere.

In the 1967 – 1977 period, the model did signal several entries and exits that produced a cumulative 8% price loss over the decade but the model favored the bond market for half of that period when bonds were earning 8% per year, a net gain.

In almost two years, the SP500 has changed little; the yield is less than 2%, far lower than the 3% average of the past 50 years.  However, the broader bond market has also changed little in that time and is paying just a little over 2%.  There are simply periods when strategies and alternatives have little effect. Although the 50 week average crossed below the 100 week average earlier this month, they are essentially horizontal.  The 100 week average is still rising, but barely so, a time of drift and inertia.  In hindsight, we may say it was the calm before a) the storm (1974), or b) the surge (1995). Usually the calm doesn’t last more than two years so we can expect some clear direction by the end of the summer.

/////////////////////////////

It’s the economy, stupid!

One of the myths of Presidential politics is that Presidents have a lot to do with the strength or weakness of the economy, a superhero narrative carefully cultivated by the two dominant parties.  Here’s a comparison of GDP growth during Democratic and Republican administrations. The Dems have it up on the Reps since 1928, chiefly because the comparison starts near the beginning of the Great Depression when the Reps held the Presidency.

For several reasons, GDP data is unreliable during the Depression and WW2 years.  First, the GDP concept wasn’t formalized till just before the start of WW2 so data collection was new, primitive and after the fact.  Secondly, this 14 year period includes an extraordinary amount of government spending which warped the very concept of GDP.  The WPA program that put so many to work during the depression years was a whopping 7% of GDP (Source), like spending $2 trillion dollars, or half the Federal budget, in today’s economy.

The Federal Reserve begins their GDP data series after WW2 when data collection was much improved. If you’re a Dem voter, don’t mention this unreliable data.  Just tell friends, family and co-workers that the Dems have averaged 4% GDP growth since 1927; the Reps only 1.7%.  If you’re a Republican voter, exclude the 20 year period from 1928 to 1947 and begin when the Federal Reserve trusts the data. Starting from 1947,  Republicans have presided over economies with 2.75% annual growth during 36 Presidential years.  During the 30 years Dems have held the Presidency, there has been a slighly greater growth rate of 3.1%.

In short, economic growth is about the same no matter which party holds the Presidency.  Shhhh! Don’t tell anyone till after the election is over.  Legislation by the House and Senate has a much greater impact on the economy.

///////////////////////////

Small Business

“If America is going to dominate the world again, the country has to fix the spirit of free enterprise. Small-business startups are in serious decline.”

“Gallup finds that one-quarter of Americans say they’ve considered becoming business owners but decided not to. ”

These foreboding quotes are from a recent Gallup poll.  Small businesses employ more than 50% of employees and are responsible for the majority of job growth yet many politicians and most voters pay little attention to the concerns of small business owners.  The giant corporations get most of the press, praise and anger.  Could the lack of small business growth be responsible for the lackadaisical growth of the entire economy during this recovery?  As the population  continues to age, growth will be critical to fund the dedication of community resources to both the old and young.

The BLS routinely tracks the Employment-Population Ratio, which is the percentage of people over 16 who are working, currently 60%.  But this ratio does not fully capture the total tax pressures on working people since it excludes those under 16, who require a great deal of community resources.  When we track the number of workers as a percent of the total population, we see a long term decline.  As this ratio declines, the per-worker burdens rise for it is their taxes that must support programs for those who are not working, the young and the old.

Regulatory burdens hamper many small businesses. A recent incident with a Denver brewery highlights the sometimes arbitrary rulemaking that business owners encounter.  Agencies protest that their mission is to ensure public safety.  An unelected manager or small committee in a department of a state or local agency may be the one who decides what is the public safety.  As the rules become more onerous and capricious, fewer people want to chance their savings, their livelihood to start a small business.  As fewer businesses start up, tax revenues decline and the debate grows ever hotter: “more taxes from those with money” vs “less generous social programs.”  Policy changes happen at a glacial pace, further exacerbating the problems until there is some crisis and then the changes are instituted in a haphazard fashion. Since we are unlikely to change this familiar pattern, the issues, anger and contentiousness of this election season are likely to increase in the next decade.  Keep your seat belts buckled.

Adults Wanted

Leave a comment

The end of another month ending involving billing customers, paying taxes, balancing the bank accounts and closing the books.  Each month it becomes apparent that one of the reasons why there is not more robust job creation is the “invisible” employee costs, both in dollars and in the business owner’s liability.  By invisible, I mean that these costs are typically out of sight and out of mind to most employees.  These costs are quite visible to the owner who, failing to account for them in their business pricing, soon goes out of business.

These costs were designed to be invisible to employees because if most employees knew all the costs, some politicians might lose their jobs.  A paycheck with a gross amount of $1000 might have $200 or more taken out for taxes and health care premiums.  The net amount of the paycheck is $800, which is what we get to spend on bills, rent/mortgage, food, transportation and a movie. We grouse about the $200 in taxes but that $200 pales in comparison to the invisible costs that don’t show on that paycheck stub.  Most of these costs are mandated by either Federal or State law and include Workmen’s Compensation insurance, Unemployment Insurance, Liability Insurance, and Social Security and Medicare taxes (employer’s half).  The cost of these mandates goes into neither your pocket or the employer’s pocket. Benefit costs include health insurance, retirement contributions, education reimbursements, vacation and sick pay.  Mandated costs and benefits can easily add $500 to $1000 in cost to that $1000 gross paycheck amount.  In addition, there are indirect costs which include office and production equipment, rent, utilities, and transportation, as well as the internal costs of accounting, supervision, and training.  After those costs, that $1000 gross paycheck can have a final cost of $2500 or more. 

The indirect costs are simply a part of any business; they are the costs of producing a dollar of revenue to the business.  My chief concern is the invisible insurance and tax mandates whose costs are hidden from employees.  By making the employer, not the employee, responsible for the payment of these costs, politicians could more easily sweep them under the rug.  Some people strongly object to the health insurance mandate but how many protest or are even aware of the Unemployment Insurance mandate or the Workmen’s Compensation Insurance mandate?  Many are not aware simply because the cost is paid by the employer.  While the employer may write the check, the employer “deducts” the cost from the employee by lowering the gross amount that they can pay to an employee.

I am not making a case against these insurances and taxes that add a safety net for workers.  What I do object to is the surreptitious way that lawmakers have enacted them in order to hide the magnitude of the costs of these safety programs.  Because these mandates are structured as a payment from the business and not the employee, Workmen’s Comp, Liability, and Unemployment Insurance are rated based on the company’s industry classification and claims history.  An employee who has worked twenty years without an accident is charged the same amount of money as his/her co-worker who does not pay attention to safety regulations and common sense.  The same holds true for liability insurance; a thoughtful employee and a careless employee pay the same amount.  In some construction industries, Workmen’s Comp and Liability insurance can be 20% or more of gross pay – not a trivial amount.  Should a careless driver and an accident-free driver pay the same amount in auto insurance?  Of course not.  Yet that is how Workmen’s Comp, Liability and Unemployment Insurance are rated.  Since there is no individual worker history, no individual experience rating, there is no direct cost tied to a worker’s actions.  An employee can become naturally divorced from the consequences of their actions.  Often an employer will not add another employee if they are not sure whether he/she will be able to keep them on six months from now.  The reason is that many, if not all, states will increase the unemployment insurance rate for that business when the employee is let go in six months and files for unemployment insurance.  It can be more cost efficient for an employer to pay some overtime to existing employees to make up the extra work till the employer is sure that business volume is on the increase. 

Unlike the other insurance mandates, the health care mandate at least makes individuals personally responsible for their own insurance.  With no direct responsibility for their own Workmen’s Comp, Liability and Unemployment insurance, employees are effectively treated, in the eyes of lawmakers, like teenage children.  A host of state and federal employment regulations only confirms that status.  In the eyes of our laws,  employees are not quite adults.  Employers are treated by state employment agencies as though they were the parents of not quite fully responsible teenagers and the burden of proof is on the employer to show that the employer complied fully with regulations.

How did we get here?  During the second World War, the Federal Government was running up extremely large war costs and experiencing severe cash flow problems.  One problem the government had was that tax payments were not due till March 15th of each year (in 1954 the date was changed to the current April 15th), which meant the government had to borrow a lot of money each month.  Many people were not paying all of their taxes, either income or the Social Security tax enacted several years prior.  The problem of collecting delinquent taxes presented yet another costly headache for the government.  A noted economist of the time, John Kenneth Galbraith, suggested a solution last used eighty years earlier during the Civil War:  make employers withdraw the taxes before they paid their employees.  This would both solve the problem of timely collection of taxes and curb much of the delinquency.  It would be much easier for the government to go after the far fewer businesses in the country than millions of individual taxpayers.  Thus the withholding system was born again. (A history of taxes)

Once the mechanism of withholding was in place, politicians realized what a boon this was.  Taxpayers dislike taxes and the politicians who enact them. Politicians could now increase existing insurance costs and mandate new ones without the taxpayers – the voters – constantly being reminded of these now invisible costs.  Politicians simply had to change the law, then notify a relatively small number of businesses to pay more.  That created a new problem for business owners.  Politicians had effectively deflected the disapproval of voters onto employers.  When an insurance cost goes up, it is difficult for an employer to say to an existing employee that the employer will have to reduce an employee’s hourly wage or salary to make up for this increased cost.  For subsequent hires, an employer can reduce the hourly wage or salary that they will offer to a new employee.  The employer has two alternatives:  raise the price it sells its product or service; or eat the increased cost.  Employers complain about this state of affairs long and loud. They form trade groups and lobby their state legislatures.  The politicians get the better of a bad situation:  listen to loud protests from a lot of voters and possibly get thrown out of office or have to listen to a relatively few employer lobbyists.

I am not advocating the abandonment of the withholding system, which does solve the problem of timely tax payments.  I am advocating for a system that directly charges those who are going to benefit from the safety net that exists – the employees.  This is no longer the paper and pencil age of World War 2.  Digitized records would enable most state and federal agencies to assign individual ratings to employees based on their history.  A new or existing employee presents their individual rating for various types of insurance to the employer and the employer deducts the amounts and sends to the appropriate agency, just as they do now.  The difference is that the employee gets to see what he/she is being charged for and might in some cases be able to control some of those costs.  Instead of being paid $20 an hour, an employee might be paid $34 an hour.  The cost to the employer is the same.  For many of these mandated costs, the tax write offs to the employer are the same; it is a cost of producing business income.

What can we do about it?  Press your elected representatives for individual ratings for these insurances.  An employee who has never filed for unemployment insurance pays the same as a person who has collected six months of unemployment insurance last year.  Does that seem fair?  Why have an employee half and an employer half of the Social Security and Medicare tax?  It all comes out of the employee’s pocket in the long run.  Why the game of hiding the costs?

Imagine a world where an employer can have a bit more sales volume, hire an employee and let them go if sales subsequently fall off.  An employee who is let go would then make the choice of whether to collect unemployment.  They might absolutely need the unemployment insurance and that would affect their individual unemployment rating the same as it does when we file an auto insurance claim.  They might try harder to get another job or switch to a different job in order to keep their individual unemployment rating pristine.  It would be the employee’s choice.

Imagine a world where the employee controls what they put away for retirement.  If you want to put away $6,000 a year tax free into a 401K retirement plan, why shouldn’t you?  Why have the charade of the employer matching your contribution by some percentage?  How did we get to the point where employee compensation is a haunted house of smoke and mirrors?  

Imagine a world where an employee is not bound to an employer for insurances and benefits and tax benefits.  Imagine a world where the employee has choices.  Imagine a world where the employer pays the total of the employee cost to the  employee and the employee then sees the true scope of deductions.  In fact, we do have that world now.  Employers are increasingly using subcontractors and temporary agencies as a way to sidestep the burdens of employment.  From the BLS July Labor Report: “Temporary help services has recovered 98 percent of the jobs lost during the most recent downturn.” (Source).  Tell your state and federal representatives that you would like a different world – one in which you are treated like an adult.

Reckless Regs

Leave a comment

In a 9/24/09 WSJ op-ed, Jeffrey Friedman, editor of the Critical Review journal, makes the case that the causes of the banking crisis lie more with reckless regulation than reckless bankers. Mr. Friedman notes that several studies suggest that “bank executives were simply ignorant of the risks their institutions were taking – not that they were deliberately courting disaster because of their pay packages.” He notes that “bank CEOs held about 10 times as much of their banks’ stock as they were typically paid per year, ” and that several high profile CEOs lost $500 million and more.

So what role did reckless regulation play in the debacle? In 2001, financial regulators in the U.S. amended international banking rules regarding mortgage backed securities (MBS). These “recourse rule” changes allowed banks to maintain less of a capital risk cushion for MBS than that needed for holding individual mortgages and commercial loans. By 2007, the rest of the G-20 countries implemented the same rules. Thus regulators created a profit opportunity for investment banks.

If banks had been out to take additional risk to maximize profit, Friedman argues, they would have bought far more lower rated packages of MBS. But they didn’t. Many opted for the least risky MBS packages, rated AAA, which provided lower profits. Reassured by the AAA rating, Citigroup brought all of the MBS packages it could. Doubtful of the underlying soundness of these financial products, J.P. Morgan Chase didn’t. In this competition, J.P.Morgan Chase emerged strong from the crisis while Citigroup is a taxpayer supported financial house of cards.

Friedman argues that capitalism is a competition of predictions about which procedures will bring profits. “Regulations homogenize,” he states, promoting a herd behavior on competitors in the market. The investment banking herd, prodded by regulatory ideas of what constitutes prudent banking, ran off the cliff. After this disastrous experiment in regulating capital allocation at banking institutions, the G-20 now wants to write rules on what should be prudent compensation practices in the banking industry.

The responsibility for the crisis is certainly shared by the regulators. Friedman neglects to mention the lobbying by the financial industry during the nineties to loosen up the recourse rules. Friedman contends that the purchasing of AAA rated MBS packages was a desire for safety. In 2001, Marty Rosenblatt, a well recognized expert on securitization, wrote an analysis of the rule changes on the capital requirements for banks. Rather than a desire for safety, as Friedman contends, purchases of AAA and AA rated MBS packages enabled banks to multiply the leverage of their capital by five times. Instead of requiring banks to hold 8 cents in capital for every $1 of risk, banks had to hold only 1.6 cents, a leverage of 60 to 1, or $1 of capital to $60 of risk. This highly leveraged capital to risk ratio dwarfs the high ratios of the late 1920’s, whose high leverages brought on the stock market implosion of 1929.

Why would the the Federal Reserve and other U.S. banking regulators adopt such a lax captial requirement? Because they were using historical data of losses on mortgage securitizations when lending requirements were stricter. Shortly after financial regulators loosened captial requirements for banks, the regulators at the U.S. mortgage giants, Freddie Mac and Fannie Mae, began relaxing lending standards for mortage holders in order to promote President Bush’s “ownership society” in the aftermath of 9/11. This uncoordinated confluence of regulatory changes laid the foundations for the crisis. The imprint of financial rule makers certainly conveyed a sense of sound and prudent financial standards. Investment banks discarded their internal risk management rules to take advantage of the opportunity to make large profits from the securitization boom.

Some, like Friedman, will lay most of the blame on the regulators while some place it at the feet of the investment banks who chose to ignore principles derived from decades of risk management experience. Investment bankers lay some of the responsibility on the “pressure” of savings, particularly savings accumulated in a rapidly industrializing Asia, chasing the higher yields of MBS. The demand for these financial products became a strong persuasion to bankers who scrambled to put financial packages together to meet the demand. To meet that demand, investment bankers reached out to mortgage brokers, who met the demand of the investment bankers by selling mortgages to people who really weren’t good mortgage risks. Those people simply took advantage of an opportunity to buy a house, to ride the wave of escalating property values.

This larger story is too often left out by op-ed writers. It is the gestalt of regulation, profit seeking capital markets and opportunistic savers and consumers that is responsible for the financial crisis. Each of these components are necessary to a well functioning market. Probably the one flaw common to each of these “players” was the decision to ignore an old maxim, “If it sounds too good to be true, it is.”

Financial Regulation

2 Comments

In 1966, Congress passed the Fair Packaging and Labelling Act, which required manufacturers of retail products to list the contents and weights of their products. The food industry fought hard against it. Breakfast cereal makers were accustomed to packing their cereal in big boxes to trick the consumer into thinking that they were getting more product.

In 1969, Congress tried to pass a law mandating unit pricing but the food industry lobbied hard against it and the bill died in the Senate. The reasoning was that consumers could figure out the unit price or the price per ounce of a product by themselves or bring recently introduced battery powered calculators with them when they went shopping. In 1970, some grocery stores began to offer unit pricing as a convenience feature to lure customers. Unit pricing in grocery stores is now commonplace.

Many years ago there was one mortgage product, a 30 year fixed loan, making it fairly easy to compare mortgages. Because easy comparison by a customer is not always good for the seller, mortgage companies competed by introducing a complexity of “points”, closing fees and prepayment penalty packages to distinguish their mortgage product from their competitors.

The 15 year mortgage arose a few decades ago, followed by a variety of mortgage products. This profusion of choices can be a boon to a consumer but it can also be confusing. This variety and confusion is an effective sales tool, making it more difficult for a customer to compare products and prices.

Just as the food industry fought packaging regulations, the financial industry will fight similar regulations on their products. Under proposed financial regulations, teaser rates of “0% interest for 6 months” will have to be followed by plain English of what that teaser rate will reset to in six months. No longer will credit card companies be able to bury the truth in impossibly small print referencing the greater of the LIBOR rate (what’s that?, you ask) or the Federal Reserve discount rate (what’s that?, you ask again). Mortgage companies would have to offer at least 2 – 3 standard products, like a 30 year fixed loan, that a consumer could compare pricing with a competing mortgage company. While this legislation works its tortuous way through Congress, the finance industry will be busy lobbying against it and figuring out how to outsmart it.