Sunday, December 25, 2011

Cookie Dough Christmas



This is my cat, "Cookie Dough", in the minutes leading up to Christmas. Although she posed for the shot, I have to admit that it's Omen who does most of the hunting.

Sunday, November 27, 2011

Occupy Wall Street: the New World Order

I've posted a few essays on this subject, and hope to wrap it up this time 'round. Let's start by saying that I won't address the individual abuses of police or the Occupiers. So tazing, pepper spray, pissing in the bushes and violent anti-Semite hate rhetoric are all off the table. Just because someone else did something else that's wrong doesn't automatically validate your unrelated philosophical argument. So these topics are duly and summarily rejected. On with the show.

The "occupiers" are fond of philosophical quotes such as this one:
"It is manifestly contrary to the law of nature, however defined... that a handful of people should gorge themselves with superfluities while the hungry multitude goes in want of necessities."
Likewise they're fond of Marx, who advocated "from each according to his ability; to each according to his need [or, alternatively, "contribution"]," though often filtered through other "progressive thinkers".

The problem here is that all of these thinkers... Marx, Rousseau -- even Adam Smith, who is often quoted (and mis-quoted) by conservatives -- are mired in the economic realities of their time, which are long obsolete. To use them in the present climate is exactly analogous to asking Sir Isaac Newton to explain quantum flux. For instance, in Rousseau's time the near entirety of the tax burden was shouldered by commoners... the "third estate"... as the "first estate" (the nobility) an the "second estate" (the clergy) had exempted themselves. Today we have no nobility, their economic successors shoulder the vast majority of the taxes in the USA.

One of the biggest differences between then and now is that "money" is no longer chained to a physical standard. We used to be on the "gold standard", meaning that each dollar bill printed represented a quantity of physical gold store in a vault (officially it means that the price of gold is fixed, but by that interpretation it necessarily follows that when you've run out of gold to buy, your money is worthless). "Money" no longer means that. It is now a pure concept of worth. It is an idea that measures the value of ideas. Here I'll use a graph from the xkcd comic in a way they may not agree with.. We couldn't go back to a gold standard even if we wanted to. The total value of all the gold ever mined in the history of mankind is a little over 9 trillion dollars. The public debt of the United States alone is now more than that. The public debt of the European Union is even higher. The only way to get back on the gold standard is to value each ounce of gold so highly as to make instant billionaires of those that have even moderate amounts. But gold has utilitiarian value in electronics and jewelry, which would be cost-prohibitive should we do that. A return to the gold standard would immediately devastate those industries. Money is no longer physical, nor is it possible to be made so without using a currency so common as to make a mockery of its use as money.

In past essays I've mentioned a couple of other things that have changed. Productivity, for example, used to be a measure of labor. That time is also long past. Automation and data processing have made it possible for one person to be, for all practical purposes, infinitely productive. Really. As an example, once you've written a book it is possible to "print" it to a PDF file. That PDF can be copied infinitely without further effort. There is no publisher, no distribution house, no need for central access, no measurable cost. Anyone having the book can make more of it. Divorced of the physical medium the product -- a book -- can be universally accessible. The traditional concepts of supply and demand would tell you that it's worthless. Yet we have evolved the concept of "intellectual property" to hold on to that monetary value. Intellectual property is a concept designed to apply the concept of monetary value to concepts in general. The world has become a very foreign place to 18th century thinkers.

In the world of the 18th century, you made your livelihood by making things. You either owned the means of production (i.e. the factories or shops) or you provided the labor to those who did. And since it was very difficult and expensive to set up shop, then the vast majority of people had no choice but to provide labor. That is, most people had no choice other than to get a job. And, since the world was a much smaller place, once you got a job, you held on to it for life, as jobs didn't grow on trees.

We've all seen graphs like this one...

Figure 1
...as well as other graphs that show even larger gaps of "inequality" by comparing "apples to meat pies"... corporate profits vs. worker take-home salaries, for example. While automation and outsourcing makes many such graphs meaningless, this particular graph does show that the "income gap" has been increasing.

Now take a look at the gross domestic product for the US since data automation was invented and applied:
Figure 2

I hold that we have fewer domestic production-line workers, and that this accounts in large part for the inequality. It is possible for corporate workers to share in that increased profitability through profit-sharing and stock investments, but these aren't exercised by nearly as many people as could.

Competition from foreign labor (such as that which killed our local textile mills) also means that we don't need as many domestic factory workers as we used to. By "need" I mean that our workers aren't cost-competitive. For one thing, looking at these graphs with an envious eye, you naturally want a bigger piece of the pie... a higher wage. Meanwhile, a Chinese worker is just happy to get paid.  If you're the one buying the labor, you're going to buy what makes economic sense to you, just as when buying eggs at the grocery store, most people will look for the bargain rather than fulfilling some perceived or imposed social obligation to local farmers. So the Chinese laborers get the work, as devastating as may it be to the company in the long run. In the end, we are the ones giving preference to the low cost goods at Wal-mart. We cannot seriously point the finger at corporations for giving us exactly what we demanded.

Take another look at Figure 1. All those trend lines are apples-to-apples, and in real dollars, everyone's income has increased. The occupiers argue that the poor get poorer, which is patently untrue. So they argue that the lower percentage hasn't increased enough... it's an argument based on pure envy. They want a slice of the pie, even when they don't own the pie at all. Neither have they contributed to the increased profit through labor provided by automation and outsourcing. Nevertheless, the graph provides an incentive and justification for the envious non-owners to tax part of the pie away from the owners, when they could just has readily have invested in ownership themselves through common stock. They decry bailouts for others, yet demand them for themselves. I'm singularly unimpressed.

What people have not realized is that there is a "New World Order", and it is not something that is planned, it is something that is organic and is already here. The reason we are no longer on a gold standard is not because fat cats have horded wealth. It's because wealth has grown exponentially with automation, outsourcing, and our new ability to be infinitely productive. These have reduced the domestic requirement for semi-skilled labor.

The problem is that the people on the streets are holding to 18th century thoughts about economy in the 21st century. Remember, in the 18th century you had to get a job. Today, anyone with an eBay account can become a shopkeeper. Anyone with a skill can market it. Anyone with an idea can exploit it. There is no physical standard requiring that we get our wealth from an outside source. This is not a zero-sum game. If you haven't noticed it, every trend line in Figure 1 has gone up. This is not a case where one segment grows at the expense of another. Not only does the pie grow, but you can make your own pie.  The moment that people stop looking for jobs and start looking for work, then they have grown the economy, and there is literally no limit to how far or fast it can grow when everybody is contributing. But I cannot stress this enough... it is not necessary for you to eat crumbs from anybody else's table. It is not necessary for you to envy someone for what he has when you have the opportunity to make your own destiny. The answer to the people who are standing in the streets is to stop standing in the fucking streets and do something productive. Not all of them have to become entrepreneurs; but it doesn't take many to provide employment for the rest.

You literally have equal opportunity right now. Many of you don't know it because you've been flatly lied to by Socialists who would keep you mired in an 18th century mindset. But be aware: equal opportunity is not equal results. It never will be if it's to be truly fair. It is up to each of you as an individual to make the most of your own life, and you're never going to get anywhere by losing focus on your life and your opportunities to shout "hey, that's not fair!" at someone else's good fortune.

--==//==--

Hopefully this will be my final post on the subject, as I'm quite tired of the Occupiers. Everything they've done... every position they've taken... has been fueled by envy and ignorance. I have very little patience for either. Look at their slogan: "We are the 99%." It's bullshit. Hell, if they were the 99% I'd be with them. I'm neither rich nor powerful. These are the small percentage of the 99% who'd rather sit on their asses and live for free on the largess of others. These are the would-be kept pets, the whining, ignorant sock puppets for the 1% of would-be socialist organizers, and I have no interest whatsoever in being one of them.


Saturday, October 29, 2011

More Junk Science on TV

Why do I do this to myself? 
At the beginning of the month I started watching a "documentary" miniseries on Hulu called "The Pyramid Code". IMMEDIATELY my B.S. meter started pegging and I became so frustrated at the depth of balderdash that I stopped watching, and posted something close to the following on Google+:
I'm not talking about the usual "aliens did it" retardation...alien visitation crackpots are easily dismissed... those are more entertaining than frustrating.

My major beef lies with totally false claims that advanced technology is required to build the things and that advanced mathematics (beyond algebra) are required to arrive at the dimensions... that their construction necessitated the use of exotic 'power sources' that we don't understand today. It's not remotely true. You can construct a pyramid of those exact dimensions (pi and all) using integer math and bronze age tools. And it appears that "elbow grease" and "puttin' your back into it" have suddenly become exotic power sources (I can't say I'm surprised on that one).

The "it's not possible" claims are maddening. All this does is allow the author to advertise two things: 1. "Even though I have a Ph.D, I'm too frakkin' stupid to think of simple solutions to practical math problems", and
2. "I'm so bloody spoiled that I cannot conceive of an age where people were willing to labor."
BTW, here's something I wrote on the subject a few years back: http://blog.cratchit.org/2007/06/how-to-build-pyramid.html
Well, having rested for a good 20 days, I decided to try another stab at watching it today. I should have known better. Now, having endured the entirety of the show, I get to tell you my opinion.

Dr. Carmen Boulter has the kind of Ph.D. that renders all scholarship suspect and the most outlandish of folk tales credible... in other words, the practically worthless kind. Whether it be giant quartz "crystals" (Dr. Boulter hasn't bothered to pay attention to anyone who can tell her the difference between a crystal and a rock) that act as giant vibrational warm-fuzzy transmitters, or nuggets of esoteric physics like, "sunlight on water... that is energy," Dr. Boulter hasn't met a scientific theory she wouldn't like to replace with a hearty helping of woo.

One thing that's particularly distracting is her love affair with the phrase "Band of Peace", which she apparently uses to refer to the fertile Nile river valley. Do a little experiment for yourself. Using Google, try searching for the phrase "Band of Peace", excluding the name of her program. Here's the search term, and a link for you. I'm excluding only the verbatim phrase "The Pyramid Code"
See anything about Egypt or the Nile in what's left? Right. What these results tell me is that she promoting the hell out of a phrase she dug out of her butt. In fairness, she might have dug it out of somebody else's butt... maybe Hakim's. Either way, the constant repetitions give the viewer the distinct impression that if this program does nothing whatsoever but make this moniker stick, then Boulter will have won her own little private Nobel Prize. It's totally in keeping with her trend of replacing any hard science she may find with shit she made up.

The series makes copious use of Abd'El Hakim Awyan, though it didn't do him many favors. Hakim was a doctor in his own right, yet was credited "Indigenous Wisdom Keeper". Not so great for his credibility, but a damn cool title, nonetheless. I'm so going to have that put on a business card. Hakim brings just the right amount of down-home folklore, but is clearly out of his depth when discussing anything to do with physics. The "sunlight on water" quote above is his.

Hakim makes much of the fact that the Khemetic language had no word for "death" and thus the ancient Egyptians could not have been obsessed with death, despite all the pyramids, mummies, tombs, temples, mustabas, etc. Of course, he says that just before he relates the word for death ("they called it 'Westing', as in 'going to the West'). To be sure, the same "no word for death" claim can and has been said of the Teutonic languages; and English-speaking Christians have a score of words for death, and still believe in resurrection. Also, the origins of words often have only a vague connection to contemporary usage; for instance, a person may collect a "salary", though it's been 2,000 years since Roman soldiers were actually paid in salt. So it was unclear to me what this is supposed to prove. Then came my answer.
"The Egyptians obviously had a very different world view from ours today. They believed in the afterlife and the soul's immortality."
Suddenly I understood why Boulter and co. were having so much difficulty with the subject, and it made me very sad. I then sat through the rest of the episode watching their "scientists" treat with utmost credibility the notion that the ancient Egyptians had a physical means of attaining what the archaeologists themselves reject in their everyday lives. These beliefs are common in today's culture. I thoroughly understand being an atheist. I don't understand in the slightest being so blind to the world around you that you don't see the parallels in what you're studying and the millions of people for whom a central portion of this worldview has persisted to the present day. How was it possible for them to be so perplexed? 

That question carries forward just in general. I watched the section on reading hieroglyphs with a sincere desire to shout at the screen, "would you stop acting stupid and just present the information?!" Look, if you've got 4,000 hieroglyphs and only 26 letters, it's not a news flash to say that there's not a 1 to 1 correspondence between glyphs and letters. With that number of glyphs, it's pretty safe to assume that we're not talking about a syllabary either. Rather, you're going to have a concept per glyph, as in Chinese. None of this was news even before the Rosetta Stone was discovered. So why does Boulter pretend that this is a revolutionary new understanding of hieroglyphs?

Perhaps she's led astray by Laird Scranton, a computer programmer and amateur anthropologist who, starting from an observation by others that the Dogon people of Africa believed the star Sirius had a companion star, leaped to the conclusion that all of Dogon cosmology is scientifically brilliant, and that their rock paintings of water and eggs and grain should be interpreted as describing quantum mechanics as opposed to, say, a recipe for cake. He estimates the science of their ancients to be at least 50 years in advance of our own... which has enabled them to build mud huts and paint rocks. I weep for our children of 50 years hence. The forward of Scranton's book, Sacred Symbols of the Dogon, lays out his qualifications... hey, he's a software designer! Computers have symbols! Hieroglyphics are symbols! Therefore he's an expert. You can't argue with that kind of logic.

Don't get the idea that there's absolutely nothing of value in this series. There are bits of real scientific information embedded in the video, particularly when Dr. Boulter is not on-screen. I actually feel sorry for the legitimate scientists who share the screen here and there. And I suppose there's some entertainment value in cataloging the myriad forms of woo that appear here. Sadly, the signal-to-noise ratio is so poor that I can't recommend the show to anyone as an introduction to the subject of Egyptology. Get familiar with the subject first, then come back and see what you can pick out.



As a reference, here's how you present this sort of information:


And here's part 2:


Whether you agree with his conclusions or not, Thomas Brophy does things strictly according to the scientific method. He has a hypothesis, calls it a hypothesis (knowing the difference between that and a theory), and does the math. Most importantly, he knows that science ain't horseshoes... close isn't good enough. So when his hypothesis is close, but not exact, he discards it and looks for a better one. Nice.

Tuesday, October 25, 2011

Occupy Wall Street: Some Answers to Criticisms

A very good friend of mine is Russ Rogers, 1/2 of the awesome and clever band "Godz Poodlz", and eponymous star of "Rusty's Rocking Jamboree". Russ is one of my favorite people in the world. Russ and I are proof positive that two people do not have to agree politically to get along. We're in very different places as far as our economics go.

Russ not only read through the last four or so lengthy blog posts, but took the time to respond to me on Facebook with some detailed commentary of his own. I was going to talk about something else in this space, but decided to stop and answer a few of Russ' criticisms first.

I've asked Russ to post up his thoughts to the comments section here so I can link to them. He hasn't done it as of this writing, but I'm going to go ahead and respond to them anyway. Since they were pretty lengthy, I'm not going to post the entirety of each complaint. Instead, I'll post enough of it to get the flavor of the writing and also post "the gist" of it as I read it. I'm pretty sure that doing it that way will get Russ to attach his comments directly to these posts.

Oh, and one last thing... if anything I say here can be interpreted as snarky OR humorous, I was going for humor. I'm not kidding when I say Russ is one of my favorite people.

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Since the Seventies, productivity is UP by 80%! It's not just that STUFF like computers and cell phones are better and do more, WORKERS are better too! ...

(The gist: workers are responsible for these productivity increases, and therefore deserve raises that they're not getting, so trickle-down economics doesn't work. I discussed the trickle-down effect in my last post, so I won't do it in detail here.)

That is just wrong. Actually, it's not that workers are better, too. It's that processes are better. I do know a thing or two about that, because it's my business to put processes in place that make workers more productive.

Some examples: I recently implemented a system whereby warranty claims, which used to be written and submitted on paper, are now filled in on a smartphone app. The result? Paper claims used to be paid in 6 to 8 weeks. Electronic claims are paid in 3 days. Are the workers any better at what they do? No, they're not. They're the same workers, doing the same work, the only difference being that they fill in the forms on a smartphone instead of paper. They used to make scores of mistakes and would still be doing it if the new system didn't prevent it. But you'll happily give them credit for the process improvement that was thrust upon them. I've done scores of these kinds of systems over the years. Sales Force Automation, loan analysis, truck load tracking, inventory management, paperless medical storage, etc., all of which are measured in increased productivity. Hell, my very first IT job was when I wrote a system for the USAF that reduced 2 weeks of manual circuit outage ticket analysis down to one pressed button and twenty minutes of printing. A fully-roboticized assembly line doesn't mean the guy pushing the "start" button is five times the worker he used to be.

Let's make this very clear; "the workers" didn't get 80% more efficient at anything.

Automation can make certain processes 2000% more efficient. I've hit that mark, or close to it, a few times. Be that as it may, companies are more profitable, and some of that profit should go to Labor. It does, but as I discussed last time, when outsourcing is involved, it's not our labor. And it's competition from foreign labor that depresses what our workers can earn here. Of course, we're going to re-visit this topic when we talk about hiring, below.

=====================

How are the incomes of the wealthiest of the wealthy doing? How is the top 0.1% doing? Their earnings are up 240% since the 70s! The percentage of income that the top 1% earns (their share of the total PIE) has gone from just under 10% in the Seventies to almost 25% of the TOTAL Income now. The top 1% now earn more than the bottom 50% of wage earners (whose share of the pie is around 15% and shrinking). The top 0.1% have gone from taking a 2.5% share of total earnings (in 1975) to 10.4% (in 2008)).
(The gist: the pie has gotten bigger over the last 35 years. The Economy has grown. But not everyone has shared equally in those rewards.)
There isn't one pie. This isn't a closed ecosystem or an electrical circuit where every electron that flows out eventually winds up back at the battery... it isn't a zero sum game.

First of all, in my last post I talked about the value of ideas. Those that have the valuable ideas are going to make more regardless of the real effort that goes into monetizing them. It's going to be a bigger percentage, too, because until it's shared, and sometimes even afterward, they own 100% of the idea. That's not really a huge concern because, although there's a delay, that money eventually does go back into general circulation. Moguls become philanthropists, and when they die then inheritance taxes bleed off that capital. Financial dynasties do not last forever. They do last long enough to be tremendous incentive for innovation and growth, and that's incredibly good for society.

Now, if things are working the way they're supposed to, then money flows from one company to another and eventually back around again, through salaries to the workers who buy the usual stuff, and from the top 1% from executives who make luxury purchases from other companies with workers of their own who are buying bread and clothing with that money. Remember that the guy who buys a corporate jet just paid a bunch of aircraft builders who are just as much "Labor" as the guys in the plastics plant a mile from my house. At a very high level, it you might think it would tend to resemble a zero-sum game over time. Some capital would flow constantly; some would accumulate to be released back into the economy over time.

Except for three things: the creation of ideas, bringing new wealth in; competition from foreign labor, taking wealth out; and automation, reducing jobs.

We don't have enough competitive Labor to produce all of the products we consume. The companies are American; the products are American; the labor is Chinese (or Malaysian, or what-have-you). So the money that should have flowed back into our labor pool didn't, and our workers are competing with those overseas workers that aren't receiving the bulk of that money. And there's the cause of the discrepancy. We have people who could do the jobs, but they can't compete on price against people who will work all day for a pittance doing tasks that Americans just won't do.

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Corporate profits are at RECORD levels, but that is NOT reflected in corporate hiring? Why? Because there isn't demand. Why? Because Economic times are hard and people are pulling back on spending. So what incentives do Corporations have to raise wages or hire more people if they are already making historic profits? Why should CEOs make changes to a system that is already rewarding them more than handsomely for laying off workers.

This expresses two diametrically opposed thoughts and a big misconception:
1. Profits are way up.
2. Demand is way down.
 
If actually weren't any demand, then profits could not be up. No one would buy the product, and without sales, there could be no product. It is true, however, that most people are pulling back on spending. I know I am. But hold on to that thought; it makes sense if you're talking about the demand for labor.

Corporate hiring is not directly proportional to demand for their products. Who told you that it should be? Most likely, he's going by historical trends while ignoring modern realities. I told you we would re-visit automation, and here we are... because that's the new variable.

You've already noticed that productivity has noticeably increased. Since Labor is expensive here, productivity has to increase for a company to remain competitive. Automation increases productivity, though often at the cost of the net number of jobs. Frankly, I'd rather keep five Americans working than export 25 jobs overseas, and I can help a company do that by devising better tools and processes for them. But when productivity increases, you expect profits to rise and hiring to not rise. It is the natural result of automation. There is no reason to be surprised by this. It's math.

Now, when I automate, the general goal I have in mind is to make the drudgework do itself to free the worker up for more productive tasks. For instance, I designed a business rules engine for a subsidiary of AIG that processes thousands of loan applications in the time a human underwriter does one. The output is basically, "approved", "disapproved", or "refer it to a human". The idea was to apply the "no brainer" business rules where appropriate, and refer to a human underwriter only those loans that required a judgement call. Without removing a single underwriter's job, they became more productive. Electronic claims means you're talking to your customers, not doing paperwork.

Unfortunately, not all automation just frees you up for more important work. A lot of it simply eliminates human jobs. A lot of jobs are nothing but drudgework, though they may be considered skilled positions. Auto manufacturing is a classic example. Skilled welders and painters on assembly lines have been mostly replaced by robots. As we continue to move into the future this will continue to happen. In every case, the next guy to be replaced by a machine is likely to be someone who you thought couldn't be replaced.

We have a lot of unemployed... the figure is bouncing between 9% and 10%, and no amount of hope has changed that. The solution to this is not to look for increased hiring from established businesses; nor is it to get the old jobs back from overseas. The solution is new business, competitive business, run by people who understand the value of local labor and have incentive to hire. And, it means for the laborer that he has to be willing to do something new. You cannot just sit there and pine for the good old days. This kind of change was predicted more than 50 years ago. When people say, "Small business entrepeneurs will be doing most of the hiring. Do not trample on the people who are trying to create jobs," you need to bloody well listen to them because that is 100% accurate in every respect.

For those corporations that use large amounts of human labor... CEOs should make the changes because they can recognize the pain of the horrible mistake they've made from outsourced Labor. There's a great story by Steve Denning in Forbes magazine called "Why Amazon Can't Make a Kindle in the USA". Click through and read it. If that doesn't chill you to the bone, it should. Management should forego short-term maximization of profits in favor of long-term strategy and stability. And Management and Labor should be doing everything they can to work together to make local labor competitive, because without it we're really, really hosed.


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The Tax Laws on investments were designed to encourage REAL investment. But those laws are being GAMED by corporate CEOs and people in the Investment Industry. They take large portions of their compensation (their pay) in Stock and Stock Options, versus a standard salary... 
(The gist: All CEOs are greedy, greedy, greedy, gaming the system, doing everything they can to exploit every loophole, and they -- all of them, to the last man -- are dirty rotten thieving bastards.)
Let's start off by correcting a misconception... this is "real investment". Any time a company makes an expenditure that they expect will return value to them in excess of that expenditure, we're talking about "real investment". And here the Board is making an investment in what they think is going to be sound management.

CEOs don't "take" anything. A board of directors hires them. The compensation is negotiated. They're offered stock and stock options in lieu of cash because that way the Board doesn't have to cough up cash, and as an incentive to perform. Illegal practices should be prosecuted, but taking stock options is neither illegal, immoral, nor "gaming the system". Stock options are worthless unless the company actually performs well. The stock options are there as incentive to do a decent job because you don't get paid at all unless you do. And yes, you get paid very well if the stock performs. So does everyone and anyone who's invested in the company. But let's be clear, offering stock options costs nothing in immediate cash dollars, and the returns for success always exceed the payoff.
(BTW, a stock option isn't a gift of stock. Rather, it's exactly what the name implies. Typically, you're given the option to buy stock in the company at some later date at today's prices. You can exercise that option or not. If the company does well, and the price at the future date is higher than when you were issued the option, you can turn around and sell the stock at a profit. But it doesn't mean you were handed free money.)
This form of compensation becomes high-profile when a company is really on the skids and can't immediately afford to pay someone to fix the problem. I mentioned my previous post the examples of Lee Iacocca and Steve Jobs. It's also used as compensation for start-up companies in lieu of salaries that they can't yet afford to pay because they haven't overcome their start-up costs to become profitable.

I'll say it again: CEOs are employees. They can be fired and forced out, whether they be Carly Fiorina or Steve Jobs. The payouts for some of these folks is outrageous. Here are five examples at moneycentral.msn.com. But not all severance packages are outrageous. Not all CEOs are crooks and not all Board members are cronies. And sometimes the "golden parachute" is not something that you can do much about. In some cases, the "compensation" comes in the form of stock options that were granted at his hiring in lieu of salary (as we've mentioned), and which don't vest until years after the CEO leaves, and then only if his successor manages to do a better job.

Here's how that happens: Mr. Incompetent is hired as CEO and offered stock options instead of a mega-salary. He takes the offer, then does a terrible job, pisses off the Board, and they fire him. He didn't intend to do a poor job, and they didn't intend to hire an incompetent, but what's done is done. So now he's out, but he's already got the stock options. So it looks like he's walking away millions of dollars richer, which might become truth, but the only way to punish the guy through his stock options is for the company to do poorly, which punishes all of the shareholders. They're not going to shoot themselves, so they fix the mess, the stock price goes up and Mr. Incompetent is richer. So why not eliminate the "golden parachute" this way: why not say you only get the stock option if you perform, and if we have to fire you, then you don't get it at all? Because that would be exactly the same as back-dating the stock option.

Board of Directors need to do a better job negotiating compensation and severance packages, and keeping stock options short-term; and shareholders need to keep the Boards' feet to the fire by voting for reasonable limits. It's their money, and they are the ones who have both the right to be outraged and the power to do something about it.

Wanna REALLY occupy Wall Street? Buy some common stock.

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Our Economy was driven into the ditch 4 years ago, and it wasn't put there by welfare moms, it wasn't Social Safety Nets that put us there. We were put there by unscrupulous, under-regulated investment firms that were GAMING the SYSTEM. They over-leveraged themselves and expected that the Country would bail them out...
(The gist: CEOs are still greedy, greedy, bastards, gaming the system, doing everything they can to exploit every loophole. Oh, and trickle-down economics still doesn't work.)
Our economy was aimed at that ditch a long time before that. This economic situation only apparently began when the housing market collapsed in 2007. This caused mortgage-backed securities to fail, mortgage insurance, banks, etc.

So why did the housing market collapse? This article at WTFFinance.com actually explains it just about perfectly. From that point forward you can watch the dominoes collapse.

Lenders were forced by our government into accepting risk that they never would have accepted for themselves, regulation or no. As you have seen, the smooth operation of a lender's business depends on you successfully repaying your loans according to the terms. So they don't want to lend to people who can't afford it. It's the old Catch-22... those who can get credit don't really need it. But we wanted to have our cake and eat it too. We let the politics of envy and applied accusations of racism and social justice to force banks to offer loans to home buyers and businesses that could not repay them. We wanted to make home ownership a right instead of the fulfillment of an aspiration.

If you want to talk about the gaming of the system then by all means do not fail to discuss in full the gaming of the political system by shysters who could play the part of saviors who brought the American dream to their voters back home without any foresight or regard for how encouraging piss-poor investments could bankrupt our country in the very near future. These, incidentally, are the very same politicians who are still gaming the system by playing the part of the outraged everyman who "can't believe" the banks made the very same investments they were forced by these politicians to make! If you have two words of value to say about gaming the system, then let those words be "GET OUT!" to the politicians who set the stage for this mess with their ineptitude.

As for trickle-down... it does work and I showed you where it goes. Now, when huge quantities of money are siphoned off to another country, the effective solution is not to shout that the huge quantities of money don't exist. The solution is either to find ways to siphon it back into this country, or plug the leak that's sending it that-a-way in the first place.

=====================
There is Class Warfare going on this country. And one group of people are winning. And the lower classes and middle class aren't just getting squeezed. We are getting juiced.
(The gist: I like clever slogans)
As an adult, I have been dirt-poor, making just $10,000 per year. Today, I am firmly in the working middle class. I am not and never have been uber-elite rich. Being one of the middle-class being "juiced", and fairly well educated, I nevertheless have a fairly good handle on how the system does work, how it should work, and what's not going to address the problems with which we're faced.

Sloganeering won't solve it. And blaming the affluent simply because they are affluent and therefore convenient scapegoats isn't a solution, either. Storming the castle and divvying up the loot won't make a single job. You should want people to want to be rich, and you should want them to have the opportunities to do that make them more innovative and productive, contribute new ideas to society, and put other people to work... and not just because they put in their 8 hours a day or stood in the right line to get their dollop of the public porridge. I can tell from your complaints that you want that too, although your "solutions" would make exactly the opposite happen.

I want all boats to rise. They don't have to rise at the same rate because we eventually get it back, and if things are done right there's a steady rise while we wait. So here are some things that I think we're not doing right:
  • American companies should prefer American labor. When it comes to outsourcing IT for example (since that's my industry), I really dislike in principle the idea of off-shoring. I prefer what I call "boondocking", which is ... well, let's face it, it's basically hiring folks like me. People living in economically depressed areas where the cost of living is low are a fantastic deal compared to off-shoring. They offer a competitive labor costs, and have no time-zone disadvantages (which far outweigh the fictional and theoretical time-zone advantages pushed by sellers of off-shoring) and have greatly reduced shipping costs.
  • American labor must be competitive to be prosperous. Look -- the unions chose an "us vs. them" business model, so they now have to live with the situation they chose: there are separate pies for them and for the businesses they rely on, so they have no choice but to be competitive or reap more of what they've sown. They've been sidelined in favor of off-shore competition. You might like unions, but I like being competitive, and when my approach makes companies come to me instead of you then you might want to try my approach. The need for gathering IT workers into exhorbitant-dollar neighborhoods to collaborate is long-since obsolete. With today's high-speed Internet, we're all as good as next door.
The same thing goes for manufacturing. BMW built a plant here, not in Detroit. Our folks get good wages and want to work. We want BMW, We want Boeing. We want Amazon, and many more like them... and we're going to get them.
You might read this and say, "It's not fair to ask us to take a step backwards!" Well, guess what? Labor already took that step... and more! So instead of a reasonable salary and a secure job, they get nothing but the claim of being "an unemployed worker". Meanwhile, somebody else is getting paid. Labor is a competitive market, and those who don't want to compete simply shouldn't be surprised when they lose business.
The unions' answer to this is to beg Congress to somehow mandate that people must hire them. That's S-T-U-P-I-D. Businesses simply won't do that. Where they have the choice they'll move to where there is non-union labor. Where there is no choice then they will just discard opportunities as being "not cost-effective". And where the opportunity would have been cost-effective if it weren't for organized labor, then it will not be pursued by an encumbered company, but by new start-ups, in unencumbered areas, started by executives who have quit to pursue the new opportunity. What they won't do is roll over and bleed money. Nevertheless, the unions have actually filed suit against companies that want to open new factories in these same United States, hiring Americans, because the Americans that were hired weren't "those" Americans.
I needed some trees pruned in my yard. I'm terrible with a chainsaw, and I know it, so I called a few landscapers. The guys who gave me quotes understood to a man that labor is a competitive market. The one I hired was the one who wanted and needed my business the most, and this was reflected in his quote. As the day progressed I liked what he was doing and asked him to do some more, so he made a bit more than he originally quoted... as much as I could reasonably afford. When he finished the day, he went home knowing that I would most likely call him back the next time I needed work done (and I'm inclined to call him soon). THAT man understands something about economics that has eluded union negotiators across this country. The proof? Empty factories.
  • I don't mind a hefty estate tax. I did mind it, until I thought about it. Money flows to innovators as a reward for their innovation. We should have no expectation of it being otherwise. But an estate tax does ensure that the money thus collected re-enters the economy. Keep in mind that money thus collected represents only a portion of the value of the wealth already distributed by an entrepeneur.
Warren Buffett rightly points out, "I want to give my kids just enough so that they would feel that they could do anything, but not so much that they would feel like doing nothing." But a guy like Buffett has his own plans for the distributing the money that has nothing to do with taxes. He'll be distributing 99% of it to charities on his death, much of it to the Bill and Melinda Gates Foundation.  
You really need to re-think the assumption that the money just goes to the top and stays there.
  • I don't think you should need an awful lot of incentive to give to charity. I don't itemize charitable contributions. But to the extent that tax deductions encourage some people to make charitable donations, they're a net gain for Society. Charitable spending is far more efficient than government spending, whether it's a Shriners Hospital for Children, or helping the old lady next door with her heating bill. Charitable spending is frankly better than government spending; and any time you hear, "somebody should..." your first thought should be for what you can do, not what the government can do. Government-first thinking is just plain lazy. If everybody taught this to their children in word and deed, we wouldn't need a government dole.

  •  I think commercial banking and investment banking should be separate.  As such, I'd be for re-instatement of key provisions of the Glass-Steagall Act of 1933. But that's boring as hell to talk about and this is already too long.

Monday, October 24, 2011

Occupy Wall Street: Where Does Wealth Come From?

(Russ Rogers made some very cogent points in a response to my last Rumination, and I've asked him to post them in comments so I can respond to them. But before I address those points directly I want to complete a thought that I'd planned, because it's going to be very important for us to understand it in the coming discussion.)
Before we get started I need to define some terms. I need to define them because you're going to find as many different definitions for these terms as there are places to look. Since that's true, I'm not going to debate my definitions and you need to know what they are. First, something that all economists agree upon; money is not wealth. So what are they, and what is the difference between them? Money consists of tokens of value. Slips of paper, bits of metal, bytes in a computer. You cannot produce those tokens; you can merely collect them in exchange for assets of your own. Wealth, on the other hand, is the totality of your assets (things of value). This is more encompassing. It includes money, but also any assets that could be converted to money, or which may be valued more highly than money. You might say that wealth = money + potential money. Cash, property, real estate, reputation, skills, talents, and ideas all constitute wealth. Tangible forms of wealth (land, jewelry, cash) are what I refer to as real assets. Intangible forms of wealth (reputation, copyrights, patents, processes) I refer to as ideas. A third class of wealth is labor... simple effort. Because "labor" is now a politically charged word, in those places where I'd normally use it to mean "effort", I'm simply going to use "effort". I'll use Labor in the political sense, as Marx did, to mean "workers".

Socialism is based on the huge misconception that the Labor produces wealth. Not so, at least not to any great extent. It was so in pre-industrial times, where more effort equaled more product, and there are some cases, such as in some farming and mining, where it's true today, but it has not been generally true since the beginning of the industrial age. Karl Marx's economics were based on outmoded assumptions. His complaints were founded in a transitional era. And he concocted a lie. Reliance on that lie is why the Soviet Union, though they had an ideologically "fair" system where everybody gets the same slice of the jack shit they produced, never managed to produce more than jack shit.

So how is wealth created? In an industrial civilization, with few exceptions, it ain't through effort. It's through ideas. Ideas are the creation of wealth, plain and simple. There's not an appreciably bigger pie out there because people worked it into existence. There's a bigger pie because ideas are valuable. Ideas grow the pie. What Labor does is capitalize the wealth.. convert the intangible wealth to tangible assets. The more industrialized we are, the less effort is required to do that.

Here's an example, and I'm going to strip it down to a very basic act of creation so you can see exactly how it works without distraction: A single mother, broke, living in Edinburgh, Scotland, sat in a train and had a thought. There's nobody else you can ascribe it to. It was and is hers. And in so doing, J.K. Rowling literally dreamed up a billion dollars. The value of the Harry Potter books had nothing whatsoever to do with the effort she put into it. You could hire someone for a very reasonable rate to type up the whole thing, and no one would argue that the printing of the books diminishes Rowling's ownership of the material. The value entirely rests on the creative process... the Idea. That idea fueled seven novels, eight movies, a theme park, and and the industries built around them. It put thousands of people to work, and the billion dollars was just Rowling's portion of it. The total value distributed far exceeded that. But do not forget that exactly none of it would have happened without the Idea she thought up on that train.

Here you can see that it is the Idea that provides the wealth that Labor converts to money for a fee (a wage). It's not the other way around.
(I think it's intriguing that many, if not most of the people that I could hold up as examples would take exception to being used as an example in this context, even when they acknowledge that what I'm saying is true. They know they're being compensated for ideas, not effort, and I'll explore their reaction later.) 
The creative process is the most truly god-like power that can be exercised by a sentient being. It is as close to creatio ex nihilo as we can possibly get. An Idea doesn't even have to have utility to have value: it can be utilitarian invention, sure, but it can simply be entertaining, which is how rock stars and authors become rich. It can be in portrayal... the creation or re-creation of emotion, which is how Hollywood actors become rich. In terms of labor, the leading man doesn't work appreciably harder than the second fiddle, but he's not paid for his labor. He is the box-office draw; he is the reason tickets are sold.

Once upon a time, wealth was simply dug out of the ground, from gold and diamond mines, etc. But these things are not intrinsically valuable; they hold whatever value we agree upon. Wealth is only incidentally associated with effort. Jackson Pollock may not have put as much effort into his paintings as an ordinary house painter; a painting of dogs playing poker requires more technical expertise than his drip technique; yet at $140 million, Pollock's No. 5, 1948, is the most expensive painting ever sold because it embodies an idea. You can work your fingers to the bone for the entirety of your life, live like a miser, saving every spare bit of change, and never approach the value of one single idea conceived in one single moment.

Not every idea is valuable; you get paid far more for shoddy labor than you do for a shoddy idea. Sadly though, we don't get to decide whether our own ideas are good or bad. John Cleese once made an observation that the same qualities that make you hopeless at something ironically make you incapable of recognizing that you're hopeless at it. So as with anything of value, other people decide what that value actually is. We call that the free market. Really good ideas are relatively rare, and people who consistently come up with good ideas are rarer still. When you find such a person he's very likely a millionaire. Like Cleese.

To give you an understanding of the power of the Idea, oil seeping from the ground in Pennsylvania and West Virginia was simply a nuisance to salt miners until the invention of the practical internal combustion engine in the mid-1800s. Owners of oil-soaked land made fortunes practically overnight although their physical assets had not changed at all.

Now, whether you're J.K. Rowling, or Harrison Ford, or Steve Jobs, you're compensated not for your labor, but for the ideas that you bring or embody, and those ideas are directly responsible for putting people to work. The bigger the ideas, the more the disparity between what you earn and what the people around you do. Even the most Liberal corporate-hate-spewing attack dog can agree on this principle... as it applies to himself.
"I'm a millionaire, I'm a multi-millionaire. I'm filthy rich. You know why I'm a multi-millionaire? 'Cause multi-millions like what I do. That's pretty good, isn't it?"
-- Michael Moore
So why is it that some types of ideas are demonized? Why is it that an author can take home millions of dollars for a book, or an actor can take home 20 million dollars for a movie, and that's OK, but a CEO is a greedy bastard for similar compensation for bringing a similar level of success through the force of his ideas? Why is it OK for Michael Moore to live in a million-dollar upper West Side apartment in Manhattan, paid for by bitching about other rich people?

We don't teach economics in school anymore. People simply do not recognize the source of wealth, nor what the CEO's job is. They've been told that Labor creates capital, and they believe it, lock stock and barrel. Yet, when you point out something obviously creative -- like an author, or painter -- they nod and say, "oh, yes, of course!" They even defend it vigorously on "intellectual property" grounds. Many of these people are fiercely Liberal, and have no conception whatsoever of how blatantly, unapologetically, and indefensibly hypocritical they are in this regard.
(Fierce Conservatives have their own problems. By focusing entirely on the creation of wealth, they ignore important truths about the capitalization of that wealth, and they sell our future to other nations. More on that below.)

Steve Jobs was forced out of Apple Computer in 1985. Prior to that they had sizeable market share and had recently introduced the Macintosh. Without him, Apple gets run into the ground. He returns to the CEO position in 1997, and changes everything. Apple Computer becomes Apple, Inc. They go from a computer company to a consumer electronics company. They go from niche market has-beens to cool. They go from bleeding money to profitability. Steve's salary until he died was $1 per year. His compensation was purely stock, which as of last Spring was worth about $2 billion, and he earned every penny of it. How? Because all the workers at Apple combined couldn't keep them profitable. That $2 billion represents a little less than 1 percent of Apple's "public float". But Jobs' ideas are what made that float... float. They were sinking without him.

When I explained the creative aspect of the CEO using Steve Jobs as an example to a friend I was told, "yeah, but Jobs was an exception". Well, NO. He bloody well was not.

When Chrysler faced bankruptcy in the '70s, Lee Iacocca took a $1 salary and stock. It was a gamble, and his decisions turned the company around. The government did not "bail out" Chrysler; the government guaranteed loans that Chrysler obtained from others, and which they repaid in full, seven years ahead of schedule, paying the US government $350 million for the guarantee. Iacocca took that capital and made it work, hard. K-cars? Iacocca. Minivans? Iacocca. First front-wheel drive American small cars? Iacocca. Great ideas. Were there concessions by Labor? Yes, indeed. They spent many long months proposing business as usual until the government legislation required wage concessions by both union and salaried workers as a condition for the loan guarantees.

A CEO isn't hired to warm a desk while business happens all around him. And he's not there purely for analytical thought... he has analysts to help him with that. His job is in large part to be as creative as a scriptwriter or songwriter. You just don't see that aspect of most of them because they don't jump up on a public stage at Comdex.

Today I'm talking about the creation of wealth though... if you're not a miner or a farmer... and in this country you probably aren't... effort is a means to monetize wealth, but the wealth is there in the Idea. That's true of a company, and it's true of individuals. It's true when the Idea is sold as a work-for-hire (as I do with contract programming) or when ownership is retained (as with an author). It is only through the Idea that new wealth is created and the pie truly gets bigger. Without the Idea then all you're doing is shoving existing bits of paper and metal around and it truly is a zero sum game.

Remember, Labor is usually required to monetize wealth. But conversion of wealth to financial capital is not the same thing as the creation of wealth. This isn't a Republican argument or a Democrat argument; it's just how economics works. All of my examples above are Liberals.
(Keep in mind here, too, that I'm as aware as anybody that there are people who break the law and mismanage companies, etc. and who need to be prosecuted. I'm aware that people are broke. That I haven't talked about abuses and checks and balances yet doesn't mean I won't, or that I don't know of the need. But these posts get long enough as it is. In discussing the system as it should (and mostly does) work, I don't feel the need to throw everything at you at once. That would be a book, not a blog. It may take me weeks to get where I'm eventually headed with this.) 
So... if you'd read this far, some of the questions you should be asking by now are these: if wealth is created by ideas in a Capitalist society, and the Socialist experiment failed so miserably for the USSR, how come China is so filthy rich? Where did they get their wealth, except on the backs of labor? And that's a fair question.

When Russ Rogers avers that "trickled down economics" fails, he's absolutely wrong. At least some effort is required to monetize wealth. So why don't we see the trickle down effect that he insists isn't there and I insist is? Because it's not trickling down to our workers. We've outsourced our Labor, and with it we've exported the trickle-down effect. We sent it to China (and India, and Malaysia...). And all you have to do is look at the the wealth that China has accumulated to actually measure the trickle-down effect... and how badly we screw up when we don't keep manufacturing in-country, and when we allow Labor to become over-valued, making it non-competitive.

The Chinese know that the ideas come from the West. They also know the value of those ideas, and that this wealth floats all boats. They want a piece of that wealth, and have arranged to get it, artificially. So, to the West, they sell cheap effort. Because the poor in the US have gotten relatively richer, they've priced themselves out of the labor market.

But the Chinese haven't, and aren't likely to as long as Communists rule. The dirty secret is that the very same income disparity that exists here exists in China, in spades, but they're extremely good at camoflage. Their Big Idea is simple: LIE, and LIE BIG. In the People's Republic of China it's OK to be a Capitalist, so long as you wear the Communist facade.

Footprints Recruiting recruits teachers to work in China. On their website they describe a bit about the standard of living. It's not an ideological missive, but practical advice for prospective teachers who will be living there.  As you read it, know that "RMB" means Renminbi, which is the mainland Chinese currency. As you read it, note the difference between living in Western fashion vs. living "like a Chinese".

Since their income is based on the export of effort, the Chinese, in order to keep themselves competitive, artificially withhold it from the workers. Money that would have been paid directly to US workers is stopped at the top by the Chinese. They simply pretend it doesn't exist. This is not the same as money flowing naturally to the creator of wealth. In the West, each transaction, taken alone, is a reasonable exchange. You buy a book you enjoy at a price you're willing to pay; you see a movie you enjoy at a price you're willing to pay; and while there's satisfaction at every transaction, the end result is that Michael Moore leases a million-dollar penthouse near Central Park. In China, you work where they tell you, for what they allow. And what they allow isn't anywhere near even the sub-minimum student pay-rate in the U.S. The practical upshot is that the income disparity in China is worse than anywhere in the West, even though they themselves don't admit to owning squat. And should the people get uppity, the government can run some tanks down Tiananmen Square and massacre a thousand or so of them.

The Soviets were purer in their ideology. They weren't Capitalists and they didn't want to touch Western money if they could avoid it. But their own system didn't float enough boats to bring them prosperity, and Capitalism finally won. Capitalism won in China, too, though the Chinese pretend otherwise. Every capitalistic abuse leveled at Wall Street execs happens as a matter of policy in China.

So wealth, while generated by ideas, is collected on the backs of Labor... in Communism.

Another question you should be asking right now is "if it's all ideas, what about service industries? What about the guy who landscapes. What about my barber? My plumber?"

The answer to this one is simple. Not all ideas have to be unique. And the most pervasive, effective, and empowering idea is this: you don't have to get a job. You don't have to work for somebody else. The moment someone who's unemployed stops looking for a job and starts looking for work, then he's created a business, and he's created wealth. All he has to do is pick up that idea and run with it. My brother doesn't have a job... he has a business. That business employs one person... my brother. When he needs help, he pays people to help. When it's time to pay taxes, he pays. And with only a couple of very short stints working on a W2 early in his career, he's been doing that since he left school. That's not being "lucky", it's being industrious. It's seeing a need and filling it. Everyone has the ability to see a need, and it doesn't take much education to recognize that every need is an opportunity. Every time you say "Someone should...", replace it with "I could..." and suddenly you're a visionary. Replace "I could..." with "I will..." and you're an entrepeneur.
(This is why I don't mind illegal aliens. Every one of them is an entrepeneur. I have far less respect for people who COULD be working and refuse. The thing to recognize is that if you're going to have a good idea, then you're going to have it whether you're employed or not. That's how new companies come into existence, and we'll talk more about that when we discuss things like salary caps in another post.)
Being an entrepeneur is admittedly not as easy as simply working to achieve someone else's goals. But that "not as easy" aspect is why it's fair that the boss makes more money. You can't simultaneously complain that, "that's too hard for me" and ask, "why does he make more?"

A few years back I met a man from Pittsburg. I asked him what he did, and he told me he was an unemployed steel worker. I asked him how long since he'd been laid off, and he told me 15 years. FIFTEEN YEARS! He wasn't much older than I was! That's not an "unemployed steel worker", that's a bum. Which is the second most empowering idea is this: if what you're doing isn't working... if the approach just isn't achieving results... do something else.

Coming up... 

It ain't one pie, then answering some questions.

Thursday, October 20, 2011

Occupy Wall Street: Rambling through Buffett, Envy, and Housing.

So, I've said a couple of times now that I would post my rant about Warren Buffett with respect to the Occupy Wall Street movement. Earlier this year, Buffett stated that he disagreed with the rich paying less in Federal taxes than the middle class. I don't have a problem with that statement. Also, this year, President Obama proposed "the Buffett Rule", which is billed as introducing a higher minimum tax rate to the richest in the US (those making more than $1 million per year) to ensure that they are taxed at the same rate as the less wealthy. I don't have a problem with that, either.  I do have a problem with the way these data are spun. But before that, one more thing. In 2006 Buffett stated that he paid a lower percentage of of his income in total Federal taxes than his employees, despite their making much less money than he did. "How can this be right?" he asked (much of the above is paraphrased or quoted from Wikipedia, here and here).

The answer is actually in the same article that I quote. Buffett makes much of his money from investments, and in this country investment income is taxed at a lower rate. Why? As an incentive for people to make investments. It's to get money out of the hands of the rich and into the hands of businesses where it can be put to utilitarian use, and make a profit. Only some of that profit returns to investors like Buffett, in the form of loan interest and dividends, and some of the return from the use of that money is kept by the business as their own profit and some is paid out as operating expenses, salaries, etc. In other words, that investment drives an economy that pays salaries. It doesn't just return to Warren Buffett and others like him, but is paid out at every level, from the janitor up. Even when that money isn't used directly to pay such expenses it is used to purchase equipment, etc. which in turn generates the revenue used to pay salaries.

Now, Warren Buffett himself knows all that. He's not really asking how it can be "right" (correct)... he's asking how it can be "Right" (fair). I'm going to be a little guarded in my response here because Buffett is a philanthropist; nevertheless, in just asking the question he's not being entirely honest. There are two areas here where Buffett is complaining about his own behavior... not that of "the system", but his own. First, there is the amount of the profit that's being made: the return on his investments. He's the one who makes his investments. He's not forced into making any particular investment over another. He could, for instance, choose to put it all into loans and accept a lower return, on the theory that more of that profit should stay with the people who earned it. It's 100% entirely within his power to do so. So there's that.

But he's talking about his taxes, not his profit. Some people (and this is where I have a problem with a number of the Occupy Wall Street crowd who've misquoted him severely) take this to mean that he paid less than his employees, like his maid. Unless his maid paid more than $48.1 million in taxes in 2006, that's completely wrong. No, he's complaining not about the amount of his income, but the percentage rate at which it's taxed. And it's not all of his income, but the aggregate amount. For some income he's taxed at a higher rate than for investment income, and he makes a lot of investments. His employees... not so much. But there's a fix for that, too -- if that really bothered him... and I mean if it really bothered him -- then he can simply write a bigger check on April 15th. Nobody would stop him. My taxes aren't Warren Buffett's, but I do them myself, and I know for a fact, as someone who generally overpays[*], that you can write that check for any amount you bloody well feel like, so long as it meets or exceeds the amount you're required to pay. And if he's not writing that check, it just doesn't bother him that badly.
[*] the reason I overpay is simple... I've been audited before. It's a lot of work, and it's not fun. But it's bearable when the government goes to all the trouble of making you dig out years of back tax returns only to have to cut you a check. The next time I get audited I will get paid for the effort I have to put into it, just like I did the last time. And if I never get audited again then the government is free to just use the money that I gave to them, even though I'll never so much as get thanked for it.
I say that bit about "doesn't bother him that badly" with tongue in cheek. While it is factually true that he has control over the top percentage that he chooses to pay, and he chooses not to pay the amount he states would be fair, he does use that money for the public good in other ways. Like most of the filthy rich, he is a philanthropist. It is folks like Warren Buffett who fuel such charitable organizations as the Bill and Melinda Gates Foundation, the Buffett Foundation, even community arts like our theater group here in Union, SC.

The point here is that this money does get distributed back out in the form of charities. There's nothing wrong with that. Now, you might argue that there's nothing that makes the rich be philanthopists... that they can choose to just keep the money. You're right, they could; after all, it's their money. But they rarely ever do. This isn't ideological... if you look at the top philanthropists in the US for 2010 you'll find it populated by Republicans and Democrats alike. (In case you're wondering, Buffett didn't make the top 50, and neither did any of the Waltons. Larry Ellison did: go Iron Man!).

Buffett has announced that most of his money will be distributed that way when he dies, though you'll notice he's hanging on to a lot of it right now. I don't waste concern on that. Bill Gates heads a huge foundation now, but he did pretty much squat, getting and hanging onto that title of "World's Richest Man". Been there, done that, and now he's putting the money to use. It's pointless to whine and cry about how many more millions somebody else has than you when in point of fact you're better off than you were 20 years ago (or than you would have been 20 years ago if you'd been alive).

Twenty years ago, in 1991, if you had a pager on your person you were assumed to be a doctor or lawyer. (Having sold pagers at the time, I report that the next group to get them en masse were pushers and pimps). You wouldn't settle for a pager today, everybody has cell phones. Digital cable TV, once a luxury, is so ubiquitous that I actually had an exchange with somebody on Twitter in which he didn't believe that broadcast television even existed anymore! For the record, it does, and I use it. The worst car you can buy today is better than what you could get then. The worst computer you can buy would have been financially unattainable. In whole, the average low-income person today wouldn't settle for the luxuries of 1991.

The addage "the rich get richer while the poor get poorer" is only true if you ignore the fact that the poor get richer, too. And the "income gap" is a problem only if you so busy looking into somebody else's business that you failed to notice that you got richer, too. This is what Republicans mean when they talk about "the politics of envy" and "class warfare". Even though I had a kick-ass job in 1999 before the tech bubble burst, making more in raw dollars than I do today, I'm not so blind as to ignore the fact that, even with fewer dollars today and two years of being unemployed after the bubble burst, my standard of living has increased, and I'm better off in every regard than I was in 1991.

Actually, that's an interesting point. Someone actually brought up "trickle-down economics" into a conversation a few days ago, stating that it's a failure... that it doesn't work. The problem with this assertion is that it did and does work. Again, unlike the stagnation that persisted for the vast majority of all of history, you would simply not put up with the standard of living that was luxurious only 20 years ago. What someone really means when they say that is that it hasn't made rich people poor.

Nope, it's hasn't. Neither has it made the poor as rich as the richest of the rich, but that target keeps moving. It has, though, made the poor rich by earlier standards.

Now I would be very surprised if you disagree with me thus far and are still reading. What I am NOT suggesting here is that the Occupy Wall Street people do not have valid grievances. I am NOT suggesting that lower income people could not be still better off than they are today. I am NOT suggesting that there are not improvements to be made. What I am saying is that you have gotten a totally lop-sided view from those who have framed the debate from the liberal point of view, and this can push you to the wrong "solutions". The politics of envy is a weapon. It's a political weapon intended to make you focus on anything other than what matters, and that is your personal situation and those things that you can do to control it. You're shown all these "fat cats" that "pull the strings" and you're made to feel as though poverty is something that is thrust upon you rather than a situation you can do something about.

The politics of envy do not stop at class, but are generational as well. Even if you're one of the middle class, or even the rich; if you are just starting out in life, you are made to feel as though need or deserve everything that your parents have, though you're just marching out of the gate and they've been at this "life" thing for a very long time, building slowly up to what they have. This envy is part of our economic problem, and it's something that you totally have the power to control. Envy is what gets you into a credit crisis; it is what causes you to buy more than you can afford. People are encouraged to do these things, and here's the dirty secret... it's not by "greedy bankers".

I am privileged to have worked at a mortgage insurance subsidiary of AIG in the late '90s and early 2000s... I modified their lender evaluation system. I designed their business rules engine. I say "privileged" in the sense that this has put me in a position to understand a little of the housing market, and specifically, the issues that led up to the crisis involving AIG and other lenders. Though I'm far from an expert, I can tell you this with absolute certainty:
LENDERS DO NOT WANT YOUR HOUSE (OR CAR, OR WHATEVER). 
LENDERS DO NOT WANT YOU TO DEFAULT.
LENDERS WILL NOT PUSH YOU INTO LOANS YOU CAN'T AFFORD
LENDERS HATE RISK.
THEY'D RATHER NOT LOAN YOU THE MONEY AT ALL.
I'll repeat that last: THEY'D RATHER NOT LOAN YOU THE MONEY AT ALL. Here's why. If they make a risky loan to you and you don't repay them in full, they're out the money, and they're out the profit they'd have gotten from somebody who wasn't a risk. If they take your house from you, then yeah, they can put it back on the market, but they're in the loan business, not in the housing business. They're only interested in recouping their losses, they have no interest in properly maintaining and preparing houses for sale, so they get pennies on every dollar of that house's value, and that's why foreclosure sales are stupendously great deals for the buyers. I don't care how greedy you think they are, they make more money by not lending to bad risks. That's the whole idea behind a credit rating, for cryin' out loud... to prevent you from taking out risky loans... or more properly, to keep them from making risky loans.

Nevertheless, they were forced to do it. Was it driven by Wall Street? Not on your life. Was it out of greed? Well, not exactly... unless you count Congressmen wanting to bring home some bacon for the purpose of re-election, "greed", and using the politics of envy to sell the idea. This 2008 Op-Ed on Boston.com by Jeff Jacoby explains it clearly and it's 100% on-target. What it doesn't mention, though, is that the risk that was forced on companies by the government was the incentive for them to come up with programs like "credit default swaps", which is a way of spreading the risk (remember, lenders hate risk), as you would with insurance, but with less regulation. In the mortgage insurance business, risk was managed by bundling risky loans with less risky ones and re-insuring them.

That's right, the insurance companies bought insurance, and they did it through "captive reinsurance" companies. They're "captive" because they're owned by the parent insurance companies. It sounds like magic, but it's more like stage magic with smoke and mirrors. The idea is to get the risk off your books so you don't have to keep as much reserves on hand. If you remember my last post, reserves are the money that an insurance company keeps on hand to pay out if they "lose the bet". In this case, it's the money that gets paid out if you default on your loan.  The more risk they have on the books, then the more money they have to have in reserve, and the less they can invest elsewhere. Money is valuable if it's in motion; not so valuable if it's just sitting there doing absolutely nothing. Reserves are the investment equivalent of money stuffed in a mattress. It earns nothing, and it helps nobody else either because they can't borrow it to use it. By forcing more risk, the Feds were forcing money out of circulation, and that's not what anybody in the financial industry wants. Again, from my last post, your bank makes a living by keeping your money in circulation, and that's how you earn interest on your account. Otherwise you'd have to pay them to keep it. At the same time that they're not making money on the increased reserves, they're paying out more on more defaulted loans. So they used captive reinsurance as a way to free up that capital. And it sort of works unless a bunch of folks default at once, and then you have something similar to a run on the bank. And that's what happened.

Sadly, when you took a look at all the regulations in total, it was pretty much pre-destined to happen. Publicly traded corporations have an obligation to their stockholders to maximize profits (remember these stockholders include investments for retirement accounts). They can be sued for not doing that. They can also be sued for not taking risks, as Jeff Jacoby explained. And our Congress made it all possible by relaxing standards, removing oversight, and eliminating checks and balances, using the politics of envy to make it seem "fair". Both parties had a huge hand in that.

So when discussing real solutions it's necessary to have a handle on the real causes, and simplistic "greed" isn't even the half of it.


Coming up... 

Where the money comes from, why there's an income disparity, and why it won't go away no matter what they do.

Sunday, October 16, 2011

Occupy Wall Street: The Serious Demands

OK, the last time I posted it was in response to some of the sillier demands that were posted on OccupyWallSt.org. You can read my previous post here.

I mentioned there that the demands read as if they were written by a child, or perhaps an Underwear Gnome. Well, a new list of demands has been circulating, and it looks as though the child has asked Dad with some help with his homework.


They're generally better thought out than the more puerile demands I previously commented upon.  A quick note, though... these are labeled as "official" demands. Please be aware that there are no "official" demands of the Occupy Wall Street movement, so they've started the discussion with a distortion of the truth. *SIGH*. Our expectations have been set accordingly.

These can be a bit lengthy, so with some exceptions, I'm only reproducing enough of the demand to identify it. Follow the link above to read the whole thing.
1. CONGRESS PASS HR 1489 REINSTATING GLASS-STEAGALL ACT. http://en.wikipedia.org/wiki/Glass–Steagall_Act --- Wiki entry summary: The repeal of provisions of the Glass–Steagall Act of 1933 by the Gramm–Leach–Bliley Act in 1999 effectively removed the separation that previously existed between investment banking which issued securities and commercial banks which accepted deposits. The deregulation also removed conflict of interest prohibitions between investment bankers serving as officers of commercial banks. Most economists believe this repeal directly contributed to the severity of the Financial crisis of 2007–2011 by allowing Wall Street investment banking firms to gamble with their depositors' money that was held in commercial banks owned or created by the investment firms. Here's detail on repeal in 1999 and how it happened: http://en.wikipedia.org/wiki/Glass–Steagall_Act#Repeal . If we wanted to have a BIG IMPACT and we were able to have only one slogan that we could paint on signs and chant during marches within earshot of press, it would be "PASS HR 1489. REINSTATE GLASS-STEAGALL" or "RE-IN-STATE the ACT GLASS-STEAGALL. IT MAKES THE WALL STREET GAMES ILLEGAL"
I reproduced this in full. I have no problem with the above demand, and have nothing to add to what's said here.
2. USE CONGRESSIONAL AUTHORITY AND OVERSIGHT TO ENSURE APPROPRIATE FEDERAL AGENCIES FULLY INVESTIGATE AND PROSECUTE THE WALL STREET CRIMINALS who clearly broke the law... 
 People who broke the law SHOULD be prosecuted, and I'll even one-up this. Not only those that "clearly" broke the law should be prosecuted, but also those who did a fairly decent job of covering their tracks.

Just make sure in your zeal you don't railroad anyone who did NOT break the law, and and don't persecute those whose actions were clearly legal simply because their choices are not your choices.
3. CONGRESS ENACT LEGISLATION TO PROTECT OUR DEMOCRACY BY REVERSING THE EFFECTS OF THE CITIZENS UNITED SUPREME COURT DECISION which essentially said corporations can spend as much as they want on elections. ...
This is not exactly true, so let me take a moment to fill in the missing bits. THIS is the sort of news story they're reacting to: http://www2.ljworld.com/news/2010/jan/22/supreme-court-corporations-can-spend-campaign-ads/ Note the difference between the headline and the text of the story. The headline is accurate... the story is 50% bullshit.

What corporations (and unions, by the way) can do is spend money to produce their own political advertisements. They can not spend any amount they want "on elections". That unfortunate wording would make you think that they are allowed to contribute enormous sums directly to candidates, and they can't. The amount they can contribute to a candidate is strictly limited. (Individual persons can contribute up to $2400 per candidate per election. For a primary + general election, this is $4800. A PAC (political action committee) is limited to $5000 per candidate per election.

That said, persons have always been entitled to free speech. The right to exercise that in elections is not new. This right was challenged before the Supreme Court in 1976 (Buckley v. Valeo - http://en.wikipedia.org/wiki/Buckley_v._Valeo), and the Court ruled in favor of free speech. What the Court did in the more recent decision is recognize the 1st Amendment as applying equally to corporations and unions (which they were obligated to do under the 14th amendment, and we'll talk more about corporate personhood below).

Philosophically, free speech is Constitutionally protected, and I believe it would take more than Congressional legislation to deny it, once it's been recognized by the Supreme Court, as has already happened. So as stated this "demand" would appear doomed. It would need to be an amendment.

The pragmatist in me doesn't care at all whether such ads are allowed or denied so long as the rules apply equally to corporations and unions. Conceptually, a union and a corporation aren't that much different: both are aggregates of people working to a common goal. If you will, a union is like a corporation of laborers; a corporation is like a union of capitalists. That's a bit simplistic, but it pares it down to the essential core for this purpose. As entities, they either both have the right to free speech or they both don't.
4. CONGRESS PASS THE BUFFETT RULE ON FAIR TAXATION SO THE RICH AND CORPORATIONS PAY THEIR FAIR SHARE & CLOSE CORPORATE TAX LOOP HOLES AND ENACT A PROHIBITION ON HIDING FUNDS OFF SHORE. ...

I'm preparing a longer rant about Warren Buffett, so I'll pass on it here.

An apparent commonality among the average Occupiers is their almost complete ignorance of what a corporation is. They seem to think it's a business, larger in scope, but similar in structure to your corner hot dog stand. They sell something, the money flows to the top and into the CEO's pocket. That's completely wrong. Again, I have a longer piece to prepare on this, so I'm going to skip most of it for this "Reader's Digest" explanation:

A corporation is not owned by the CEO... in fact, the CEO is an employee, like any other employee. Although his job is to be "the boss", he is hired by a board of directors, who are elected by shareholders, and it is the shareholders who own the company.

And who are the shareholders? Well, there are a few people who do hold a large number of shares by virtue of the fact that the corporation was their idea in the first place. They're the original owners of all the shares. There are a few who hold a large number of shares because they have bought them, and continued to buy them. The majority of shareholders everywhere, though, are plain, ordinary citizens who have invested in a 401k or a mutual fund, or have bought shares on the stock market.

My twins' grandmother bought them shares of Disney as their first Christmas present, so my kids own Disney, in every sense. It's not a big stake in the ownership, but it's there, and you can consider this my disclosure statement. When you're talking about soaking the corporations, you're talking about soaking my kids. And the neighbors' kids. And the neighbors themselves. And everyone with a 401k. When we talk about corporations maximizing their profit, these are the people to whom that profit flows. Their retirement, their future.

It's not enough that the politicians have ruined Social Security, we now want to go to Washington with pitchforks and torches and demand that they ruin private retirement plans as well? I think not.
5. CONGRESS COMPLETELY REVAMP THE SECURITIES AND EXCHANGE COMMISSION and staff it at all levels with proven professionals who get the job done protecting the integrity of the marketplace so citizens and investors are both protected. This agency needs a large staff and needs to be well-funded. It's currently has a joke of a budget and is run by Wall St. insiders who often leave for high ticket cushy jobs with the corporations they were just regulating. Hmmm.
The intent here is clear, but the mechanics are somewhat lacking. We're supposed to hire "proven professionals' who aren't "Wall St. insiders", so it's not at all clear how these professionals are supposed to have proven themselves. There are bits here that make sense, if by "revamp" we mean to go through the existing regulations; clear out everything that is obsolete, redundant, and contradictory; and re-state in clear, unambiguous language those regulations that should remain. (In programming we call that "re-factoring")

The SEC should be well-funded for the reasons stated. Also, I think that while there shouldn't be an outright ban on moving to the private sector, individuals should be made to sit through a waiting period before working for any company they've previously regulated. In my industry a one-year non-compete contract is pretty common.
6. CONGRESS PASS SPECIFIC AND EFFECTIVE LAWS LIMITING THE INFLUENCE OF LOBBYISTS AND ELIMINATING THE PRACTICE OF LOBBYISTS WRITING LEGISLATION THAT ENDS UP ON THE FLOOR OF CONGRESS. ...
Eliminating the lobbyists is a common refrain among both Republicans and Democrats who want to connect to the masses. It's convenient to cast unnamed "special interests" as villains. Nobody wants those mean old "special interests" to have "undue influence."

Unless, of course, the "special interest" is you. 

You learn pretty quickly that anybody who doesn't agree with you is more than ready to paint your concerns as those of a "special interest". You may be just another wage-earner, concerned with your family's future, but that concern alone makes you a special interest. Only the schmucks who don't give a shit about anything, the ones that flunk Jay Leno's man in the street interviews, are "average Americans".

I'm against this demand for two simple reasons:

1. No law is needed. There isn't any PAC or lobbyist anywhere who has the ability to introduce legislation. All legislation comes from our elected legislators. And they can simply not take the advice of a PAC if they want. But PACs and lobbyists exist for a reason. I don't care if you're Republican, Democrat, or a member of the Silly Party: it is the duty of every legislator to represent his constituents, and it is the purpose of a PAC to communicate the desires of the constituents to a legislator. It is a pure exercise of free speech and Democracy to band together, express grievances, and appoint a spokesman to go see your Senator or Congressman. Nothing should interfere with that. It is that Senator or Congressman who listens and who decides for himself whether he should or should not adopt a position. It is he who decides what language to submit as a bill. He alone is responsible for his legislation, no matter who actually drafted it.

2. We already have a mechanism in place to deal with legislators who do not act in their constituents' best interests; it's call an election.
7. CONGRESS PASSING "Revolving Door Legislation" LEGISLATION ELIMINATING THE ABILITY OF FORMER GOVERNMENT REGULATORS GOING TO WORK FOR CORPORATIONS THAT THEY ONCE REGULATED. So, you don't get to work at the FDA for five years playing softball with Pfizer and then go to work for Pfizer making $195,000 a year. While they're at it, Congress should pass specific and effective laws to enforce strict judicial standards of conduct in matters concerning conflicts of interest. So long as judges are culled from the ranks of corporate attorneys the 1% will retain control.
I have a bit of a problem with this, in that it operates under a false premise... that being that 'expertise' necessarily equals 'conflict of interest'.

Here's a scenario for you: Pfizer, wanting to hire the most highly qualified corporate officers they can in order to assure compliance with government regulations, hires a former government regulator. However, under this plan Pfizer couldn't hire the qualified individual for the job. Nor is this fair to the government worker, who spent a lifetime building skills which are rendered completely unmarketable by legislation. These are government employees, not government slaves. A better solution in my mind is to allow the hire, but prohibit the employee from directly contacting the agency for which he used to work. And again, a waiting period may be in order.

The same thing goes for judges. We want the very most qualified judges we can possibly get... the ones who know the law better than any other. It's completely expected that these individuals, prior to being appointed judges, got that experience as lawyers. It's completely expected that if they actually have the qualifications we seek then they will be highly successful lawyers, at that. Yet here we people suggesting that these people must be excluded from consideration. This can only be because they haven't thought it through. Otherwise they might as well just admit that they want unqualified and ignorant candidates only.
8. ELIMINATE "PERSONHOOD" LEGAL STATUS FOR CORPORATIONS...
The Canadian documentary, "The Corporation", makes much of the fact that the 14th Amendment of the US Constitution was passed to protect the rights of slaves, and concludes that it's therefore improper to apply the rights gained for people to "persons" under the law. What this ignores is that corporations were considered "persons" long before the 14th Amendment was passed, and for very good reason. This was decided during James Monroe's presidency, in 1819, when many of the founding fathers were still alive.

Corporations are aggregates of people, and those people may come and go. CEOs come and go, Chairmen of the Board are elected and replaced; but the corporation lives on. Despite what the "The Corporation" would have you believe, though corporations in former times were often of limited duration, this wasn't always the case. A notable example was the East India Trading Company, which had a lifespan of 274 years. (fun fact: the East India Trading company was incorporated in 1600, 112 years before Thomas Newcomen's steam-driven pump was invented. Just keep that in mind when you're watching "The Corporation").

The persistence of a corporation beyond its inception is in the public interest when the tasks they are incorporated to perform are on-going. It isn't enough for GE to build a hydroelectric dam... it must also be operated and maintained. It isn't enough for them to be incorporated to build one dam; we want their experience to apply to the next one. So long as there's a demand for a corporation's products, there's a need for the corporation to fulfill that demand. By considering the corporation as a person, it gives you -- the citizen -- the right to sue a corporation without having to track down all the faceless execs who may have been in charge at the time of your grievance. It gives you the ability to enter into a contract with a corporation and to have that contract be binding on the corporation as well as yourself.

The 14th amendment states, in part, "...nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws..." Do not forget that Corporations and all corporate assets are owned jointly by the shareholders, and that shareholders are people. Anybody can be a shareholder of a publicly traded company, and millions of Americans do, in the form of investments made by the administrators of their retirement accounts. Publcly traded companies are exactly what we're talking about when we say "Wall Street". If the protections of the 14th amendment were denied to corporations, then there would be a convenient loophole for the government to steal and redistribute the property of these millions of citizen shareholders without any legal recourse on the part of the victims.  When you listen only to half-truths, this demand has the appearance of common sense, but when you consider all of the "whys" of corporate personhood, this demand -- as stated -- isn't reasonable at all.

Now, you and I both know that the "personhood" of a corporation is just legal fiction, so we as a society can decide how much of this fiction we choose to adopt. As I've shown above, there are many societal advantages to treating the corporation as a person. However, as we all know it's not a "natural person", it's reasonable for Congress to sit down and actually decide in legislation exactly what are the limits of that personhood. Then we don't have to depend on the interpretations of judges on the matter, and judges will themselves have a guideline for their decisions.
9. RE-ESTABLISH THE PUBLIC AIRWAVES IN THE U.S. SO THAT POLITICAL CANDIDATES ARE GIVEN EQUAL TIME FOR FREE AT REASONABLE INTERVALS IN DAILY PROGRAMMING DURING CAMPAIGN SEASON. The same should extend to other media. ...
The word "re-establish" here is puzzling and unnecessary. The public airwaves do exist. I don't have cable TV anymore, having discarded it for a simple antenna + the Internet. These frequencies are not the property of the stations using them; they license the use from the government. I have no problem with requiring stations to set aside time for each candidate during the campaign season. "Reasonable intervals" is one of the devil details that needs to be defined.

Coming up...

My Warren Buffet rant, and where wealth really comes from.