Category Archives: economics

Black folks have no savings (poor whites too)

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The wealth of the mean American household has dropped significantly since 2007, a result of the general de-industrialization of America. It’s not that America has gotten poorer, but in the last 8 years we’ve increased the economic divide, enriching the richest few percent while leaving behind the working and bourgeoise classes. We are beginning to come back, but a particularly nasty legacy remains, especially among black families. Some 47% of black families have no liquid savings  — a far greater fraction than in 2007. The lack of savings also appears in white families (19%), and Hispanics (41%), but it’s most desperate among blacks.

College graduation rates have increased among black students, and along with the increase there has been an increase in salaries, but savings have declined. As of 2015, 22.5% of black students and 15.5% of Hispanic students had completed four years of college. This compares to 36.2% of white students, an inequality, but not a horrible one. By 2013, the average salary of a black college grad was somewhat over $1000/week, somewhat less than the average for whites, but enviable compared to the world as whole. The problem is that black workers manage to save very little compared to other ethnic groups, and compared to previous savings rates as shown by the graphic below. By 2013, the net worth of the median black family (savings, plus paid-off part of home and car) was a mere $11,000 (Pew Research Data, below), down from $19,200 six years earlier, and much lower than the net worth of white families (also down since 2007). Liquid savings among blacks are much lower — near zero — and this is just the mean. Half of all black families are doing worse.

Net worth disparity 2007 - 2011. Black folks are doing poorly and it's getting worse.

Net worth disparity 2007 – 2011. Black folks are doing poorly and it’s getting worse.

The combination of low savings and low net worth puts black folks at a distinct disadvantage to their condition six years earlier. Without savings, it is near-impossible to weather the loss of a job, or even to fix a car or pay a ticket, Surviving through a disease is basically a one-way ticket to the welfare office. Six years ago, when people saved more and prices were lower, problems like these were major annoyances. Now, a job loss or a major repair is a family disaster.

The growth of check-cashing services in black neighborhoods is a symptom, I suspect, of the lack of liquidity. A person without savings will not have a checking account. As such, he or she will not have a credit card or check cashing privileges.  The only way to cash a check will be via a for-fee service, and these tend to come at a steep cost (2-5%). People with savings accounts can cash checks essentially for free, and can usually borrow money by way of a credit card. People without savings can’t get approved. Black people and poor whites tend to use debit cards instead. They look and work like credit cards, but they incur fees upon use, and do not provide instant loans. When black folks and poor whites need quick cash, their options are the loan-shark or the pawn shop: high-cost options that take a giant toll on the family.

As mentioned above, black individuals and families have lower incomes than whites at all education levels. While racism, no-doubt plays a role, as best I can tell, the largest single cause seems to be family stability. Employed, college-educated blacks earn, on average, 95% as much as employed, college-educated whites — not great, but not bad. The real problem with black income is that black unemployment rates are higher, black education rates are lower, and single-parent families are significantly more common among blacks than among whites and Orientals. Roughly 40% of black families are single-mother, or mother+grandparent households compared to “only” 26% in the population generally. In both populations, the number of single parent households have increased dramatically in the last few years, a result I suspect of the government’s desire to help. The government gives more aid to a split-up couple than to one that stays together, but the aid brings with it long-term damage to net worth. A family with one parent will naturally have a lower-income and savings rate than a family with two. The lack of stability and savings that comes from having a single parent family, I suspect, has contributed to crime, births out-of-wedlock, and the tendency of blacks to drop out of college.

Black families don't benefit as much from college --in part a result of the choice of courses.

Black families don’t benefit much from college –in part a result of course choices, in part the result of borrowing. (Forbes, 2015).

One finds that do-gooders in the white communities want to eliminate check cashing businesses and pawn shops in a misguided desire to help the low-income neighborhoods, but the success of these companies tell me that they are needed. Though check services and pawn brokers take a nasty bite, urban life would be much worse without them, I suspect.

Another so-called solution of the do-gooders, is to tax savings and transfer the wealth to the poor. This form of wealth redistribution has been a cornerstone of the Democratic party for the last century. The idea of the tax is that it will transfer “idle wealth” from rich savers to poor folks who will spend it immediately. The problem is that great swathes of the nation don’t save at all currently; net worth is down all across the US — among white and black families both. Taxing savings will almost-certainly reduce the savings rate even further. Besides, savings are the stuff of self-determination and dreams — far more than spending, it is savings that allows a person to start a new business. One does not provide for the dreams of one group by taking them from another — particularly another group chosen to be immediate spenders. That is a route to community disaster, is seen by looking at Detroit.

As it is, many poor, inner city children do not see a path out via education. Detroit school attendance hovers around 50%, and business startups are lacking. As best inner city people can tell, the only ways out are sports, music, prostitution, crime, and the church. With higher savings rates and higher family stability, folks could start businesses, and/or take advantage of job opportunities that come along. People seem to think that wealth redistribution should help, but it just seems to reduce savings and family stability. Every effort to increase wealth redistribution only seems to make things worse in Detroit.  It sometimes seems that the only businesses in Detroit are check cashing, pawn brokers, churches, hair-salons, fast food, and medical marijuana — businesses that require little investment, but provide little community return too. Detroit has lost its manufacturing center, and now has more medical marijuana providers than groceries — a sad state of affairs.

The Check cashing services of south-eastern MI are concentrated in poor black and white neighborhoods.

The Check cashing services of south-eastern MI are concentrated in poor black and white neighborhoods.

In 2016, both presidential candidates touted major infrastructure projects, highways and the like, to help the inner city poor. In principle this can help, but I have my doubts. One basis of doubt: inner city youth do not have the training to build roads and bridges — they have barely the training to work at McDonald’s. For another thing, if the project itself isn’t needed, it becomes another form of income redistribution. There tends to be a lack of pride in doing it well, and the benefits are basically nothing. A major war could provide jobs, of course, but most sane people prefer peace. Trump has made the case for tariffs (closing off free trade) as a way to rebuild the industrial center of cities like Detroit. It’s an approach that I think has merit. He’s also suggested closing the border to low-wage, Mexican workers, and recently signed a bill that raised the minimum wage for foreign workers. This is expected to raise the price of California lettuce and NY hotel stays, but is likely to increase employment among low-skill Americans — blacks and poor whites. Small steps, I think, to solving a serious national problem.

Robert E. Buxbaum, April 21, 2017. I ran for water commissioner 2016 (Republican). I lost. I also have some infrastructure suggestions, including daylighting some rivers and adding weirs to improve water quality and stop flooding. If you like my ideas (or don’t) please provide comments.

The argument for free trade is half sound

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In 1900, the average tariff on imported goods was 27.4% and there was no income tax. Import tariffs provided all the money to run the US government and there was no minimum wage law. The high tariffs kept wage rates from falling to match those in the 3rd world. Currently, the average tariff is near-zero: 1.3%. There is a sizable income tax and a government income deficit; minimum wage laws are used to prop up salaries. Most economists claim we are doing things right now, and that the protective tariffs of the past were a mistake. Donald Trump claimed otherwise in his 2016 campaign. Academic economists are appalled, and generally claim he’s a fool, or worse. The argument they use to support low tariffs was made originally by Adam Smith (1776): “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry.” As a family benefits from low cost products, a country must too. How stupid would you have to be to think otherwise?

A cartoon from Puck 1911. Do you cut tariffs, and if so how much. High tariffs provide high wages and expensive prices for the consumer. Low tariffs lead to cheap products and low wages. Uncle Sam is confused.

A cartoon from Puck, 1911. Should tariffs be cut, and if so, how much. High tariffs provide high prices and high wages. Low tariffs lead to low prices for the consumer, but low wages. Uncle Sam is confused.

Of course, a country is not a family, and there are certain benefits in keeping manufacturing and employment here, in not exporting jobs and expertise. It is clear that some people benefit from a flood of cheap, imported products, while some folks suffer. Consumers and importers benefit, while employees generally do not. They are displaced from work, or find they must compete with employees in very low wage countries, and often with child labor or slave labor. The cartoon at right shows the conundrum. Uncle Sam holds a knife labeled “Tariff Revision” trying to decide where to cut. Any cut that helps consumers hurts producers just as much. Despite the cartoon, it seems to me there is likely an optimal, non-zero tariff rate that allows productive trade, but also provides revenue and protects American jobs.

A job-protecting tariff was part of the Republican platform from Lincoln’s time, well into the 20th century, and part of the Whig platform before that. Democrats, especially in the south, preferred low tariffs, certainly no more than needed to provide money for government operation. That led to a diminution of US tariffs, beginning in the mid- 1800s, first for US trade with developed countries, and eventually with third world as well. By the 1930s, we got almost no government income from tariffs, and almost all from an ever-larger income tax. After WWII low tariff reductions became a way to promote world stability too: our way of helping the poor abroad get on their feet again. In the 2016 campaign, candidate Donald Trump challenged this motivation and the whole low-tariff approach as anti- American (amor anti America-first). He threatened to put a 35% tariff on cars imported from Mexico as a way to keep jobs here, and likely to pay for the wall he claimed he would build as president. Blue-collar workers loved this threat, whether they believed it or not, and they voted Republican to an extent not seen in decades. Educated, white collar folks were uniformly appalled at Trump’s America-first insensitivity, and perhaps (likely) by the thought that they might have to pay more for imported goods. As president, Trump re-adjusted his threat to 20%, an interesting choice, and (I suspect) a good one.

The effect of a 20% tariff can be seen better, I think, by considering a barter-economy between two countries, one developed, one not: Mexico and the US, say with an without a 20% tax. Assume these two countries trade only in suits and food. In the poor country, the average worker can make either 4 suits per month or 200 lbs of food. In the developed country, workers produce either 10 suits or 1000 lbs of food. Because it’s a barter economy with a difference in production, we expect that, in the poor country, a suit costs 50 lbs of food; in the rich country, 100 lbs of food. There is room here to profit by trade.

The current state of tariffs world-wide. Quite a few countries have tariffs much higher than ours. Among those, Mexico.

Tariffs world-wide. We put no tax on most imported products while much of the world taxes our products heavily.

With no tariff, totally free trade, an importer will find he can make a profit bringing 100 lbs of US food to Mexico to trade for 2 suits. He can return two suits to the US having gotten his two suits at the price of one, less the cost of transport, lawyers, and middlemen (relatively low). Some US suit-makers will suffer, but the importer benefits immediately, and eventually US consumers and Mexican suit workers will benefit too. Eventually, US suit prices will go down, and Mexican wages up, We will have cheaper suits and will shift production to what we make best —  food.

In time, we can expect that an American suit maker will move his entire production to Mexico bringing better equipment and better management. Under his hand, lets assume his Mexican workers make 6 suits per month. The boss can now pay them better, perhaps 100 lbs of food and two suits per month. He still makes a nice profit, more than before: he ships two suits to the US to buy the 200 lbs of food, and retains now two suits as profit. Hillary Clinton believed this process was irreversible. “Those jobs are gone and they’re not coming back,” her campaign told CNN. She claimed she’d train the jobless “for the jobs of the future” and redistribute the wealth of the rich, a standard plank of the democratic platform since 1896. But, for several reasons, industrial voters didn’t trust her to succeed, or even to try. Redistribution of wealth rarely works because, even if a politician has the will, and most don’t, manufacturers can usually keep their profits off-shore, and they do.

A very high tariff would stop all trade, but lets see what would happen with Trump’s 20% tariff. With a 20% tariff, when the first two suits come to the US, we’d extract 0.4 suits in tax revenue. The importer still makes a profit, but it’s now 0.6 suits, the equivalent of 60 lbs of food. He can sell suits for less than the American, but not as much less. If the manufacturer moves to Mexico he makes more money, but not quite as much. Tax is still collected on every suit brought to America — now 20% of the 3 suits per Mexican worker that the Boss must export. The American worker’s wages are depressed but he/she isn’t forced to compete with the Mexican dollar-for-dollar (suit for suit). In barter terms, he isn’t required to make 6 suits for every 100 lbs of food.lincoln-national-bank-internal-improvements-tariffs

We find that, in the above fictional economy, a 50% tariff in the maximum to allow any profitable suit trade: the first two suits might enter the US; but they’d be taxed at one suit, just enough to pay for the 100 lbs of food that he’d have to barter for the 2 suits. At that rate, there would be no profit for the importer, and he/she would stop importing. A 50% tariff is thus counter-productive to the consumer and the US gov’t: we would get no imported goods, and we’d collect no import revenue – a bad situation in general, though good for the manufacturer. Lincoln’s “protective tariffs” of 1861 contributed to Southern succession and the start of the civil war. It seems to me that some modest tariff of 10% to 20% is fair and productive — tariff rates that Trump seems to have intuited, and that many other countries have adopted, see map-chart above. As for the academic economists, I note that they also predicted a stock market crash should Trump be elected; it’s gone nearly straight up since November 8, 2016. I find that most economists are not rich despite claiming to be experts on money.

Robert E. Buxbaum, March 27, 2017. I learned such economics as I have from my one course in economics, plus comic books like the classic “Once upon a dime” produced by the New York Federal Reserve. Among the lessons learned: that money is a distraction, just a more convenient way to carry around a suit, 100 lbs of food, or a month of work. If you want to understand economics, I think it helps to work things out in terms of barter, as above.

The game is rigged and you can always win.

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A few months ago, I wrote a rather depressing essay based on Nobel Laureate, Kenneth Arrow’s work, and the paradox of de Condorcet. It is mathematically shown that you can not make a fair election, even if you wanted to, and no one in power wants to. The game is rigged.

To make up for that insight, I’d like to show from the work of John Forbes Nash (A Beautiful Mind) that you, personally, can win, basically all the time, if you can get someone, anyone to coöperate by trade. Let’s begin with an example in Nash’s first major paper, “The Bargaining Problem,” the one Nash is working on in the movie— read the whole paper here.  Consider two people, each with a few durable good items. Person A has a bat, a ball, a book, a whip, and a box. Person B has a pen, a toy, a knife, and a hat. Since each item is worth a different amount (has a different utility) to the owner and to the other person, there are almost always sets of trades that benefit both. In our world, where there are many people and everyone has many durable items, it is inconceivable that there are not many trades a person can make to benefit him/her while benefiting the trade partner.

Figure 3, from Nash’s, “The bargaining problem.” U1 and U2 are the utilities of the items to the two people, and O is the current state. You can improve by barter so long as your current state is not on the boundary. The parallel lines are places one could reach if money trades as well.

Good trades are even more likely when money is involved or non-durables. A person may trade his or her time for money, that is work, and any half-normal person will have enough skill to be of some value to someone. If one trades some money for durables, particularly tools, one can become rich (slowly). If one trades this work for items to make them happy (food, entertainment) they can become happier. There are just two key skills: knowing what something is worth to you, and being willing to trade. It’s not that easy for most folks to figure out what their old sofa means to them, but it’s gotten easier with garage sales and eBay.

Let us now move to the problem of elections, e.g. in this year 2016. There are few people who find the person of their dreams running for president this year. The system has fundamental flaws, and has delivered two thoroughly disliked individuals. But you can vote for a generally positive result by splitting your ticket. American society generally elects a mix of Democrats and Republicans. This mix either delivers the outcome we want, or we vote out some of the bums. Americans are generally happy with the result.

A Stamp act stamp. The British used these to tax every transaction, making it impossible for the ordinary person to benefit by small trade.

A Stamp act stamp,. Used to tax every transaction, the British made it impossible for ordinary people to benefit by small trades.

The mix does not have to involve different people, it can involve different periods of time. One can elect a Democrat president this year, and an Republican four years later. Or take the problem of time management for college students. If a student had to make a one time choice, they’d discover that you can’t have good grades, good friends, and sleep. Instead, most college students figure out you can have everything if you do one or two of these now, and switch when you get bored. And this may be the most important thing they learn.

This is my solution to Israel’s classic identity dilemma. David Ben-Gurion famously noted that Israel had the following three choices: they could be a nation of Jews living in the land of Israel, but not democratic. They could be a democratic nation in the land of Israel, but not Jewish; or they could be Jewish and democratic, but not (for the most part) in Israel. This sounds horrible until you realize that Israel can elect politicians to deliver different pairs of the options, and can have different cities that cater to thee options too. Because Jerusalem does not have to look like Tel Aviv, Israel can achieve a balance that’s better than any pure solution.

Robert E. Buxbaum, July 17-22, 2016. Balance is all, and pure solutions are a doom. I’m running for water commissioner.

Puerto Rico’s minimum wage and statehood

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Puerto Rico is in deep trouble and it’s getting worse. Unemployment is at 12%, double the next worst state or territory (Alaska). Tourism is down and poverty is at 41%. US tourists have begun going elsewhere where prices are lower: Bermuda, Haiti, Jamaica, and Cuba. The island is effectively bankrupt and would have filed for bankruptcy last year except that, as a US territory, they legally can’t. But neither can they pay their bills. The territory will go into default in 2 weeks, on July 1, 2016 unless congress creates a new funding mechanism for them. Statehood would allow Puerto Rico to go bankrupt, but there is no way for statehood to be achieved by July 1. Nor will bankruptcy help them, long term.

Puerto Rico's minimum wage is vastly too high; here it is compared with other US states.

Puerto Rico’s minimum wage is vastly too high for its median wage. From Preston Cooper, Economics21.

It is worthwhile to ask why Puerto Rico is in such bad shape. Why are they worse off than Guam, for example; Guam is far more isolated. Puerto Rico is run poorly, but it’s no worse than Guam or  Illinois. One problem particular to Puerto Rico is that their minimum wage is way too high relative to the median wage.

Because of the climate, living expense are low in Puerto Rico, but Puerto Rico’s economy is mostly tourism. It competes for tourist dollars with lower-wage Caribbean countries, Jamaica, Haiti, and Cuba. Neither Alaska nor Guam must compete this way, with a nearby, low cost alternative. Puerto Rico could compete better if they could lower their minimum wage. Tourism would be more attractive, and the government would not have to spend as much either for minimal-skill workers.

With a lower minimum wage, more Puerto Ricans would be able to find jobs, and the government would likely manage to balance its books. But Puerto Rico is part of the US, and we set the minimum wage. I think the federal government should grant them an exemption. Without one, there is no obvious way for Puerto Rico to pay its bills.

Four years ago, in my first blog post, I suggested that Detroit should lower its $15/hour ‘living wage‘, a wage rate that unduly burdened the city budget, and added to Detroit’s rampant unemployment and corruption. A year later, the city dropped it as part of bankruptcy, and saw significant improvements. I’m not alone in suggesting a lower minimum wage. It’s better than state-hood and immediate bankruptcy.

Robert Buxbaum, June 19, 2016.

Michigan, an emerging economy

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Between 2009 and 2014, Michigan’s per-capita GDP grew at 14% per year, an amazing growth rate similar to that of an emerging, tiger economies. According tot the Bureau of Economic analysis, the only US states that grew faster were Texas and North Dakota, and these oil states were hit badly in the current year 2015-16.
GDPGROWTH

 

Unfortunately, Michigan remains relatively poor despite it’s growth. Its per-capita GDP, $20,263 (2016), lags behind even perennial backwaters like Vermont, Oklahoma, and Missouri. The wealth gap in Michigan is growing, as in an emerging economy, and the cities, e.g. Detroit and Flint, are known for high murder rates, and a large-scale bankruptcy.

Michigan population change, Detroit Free Press

Michigan population change, Detroit Free Press

Then there’s pollution and flooding. Our beaches close for e-coli after every major rain, and we recently found that the drinking water in Flint was contaminated with lead; it seems other MI cities have lead problems too. Add to this, that we’ve  had major floods, a result of mismanagement, cronyism, and rampant growth, and Michigan keeps looking more and more like Vietnam, China, and India.

Everything here isn’t third world, though. We replaced our hapless, ex-governor Granholm with a relatively competent (in my opinion) nerd, Rick Snyder. We’ve jailed the of worst crooks, e.g. Detroit’s walking-crime-wave mayor, Kwame Kilpatrick, and his father, “Pay-for-play”, and the corrupt city manager, Bobby Ferguson. Under the previous administration, the state population shrank. It is now growing slowly.

Flood of 2014; the view at 696 and Mound rd. It's just incompetence.

Flood of 2014; the view at 696 and Mound rd. It’s part incompetence and part growth.

 

We passed a needed roads bill. Taxes are high, but not as bad as Illinois, and even Detroit is beginning to look good, at least in the center city. Industry is coming back, and so is Michigan real-estate. Here are some of my ideas going forward: pay our teachers well, and don’t imprison for so long. Some ideas to keep us on the upswing.

Robert Buxbaum, February 23, 2016. I’m running to be the Oakland county water commissioner, by the way.

Advanced windmills + 20 years = field of junk

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Everything wears out. This can be a comforting or a depressing thought, but it’s a truth. No old mistake, however egregious, lasts forever, and no bold advance avoids decay. At best, last year’s advance will pay for itself with interest, will wear out gracefully, and will be recalled fondly by aficionados after it’s replaced by something better. Water wheels, and early steamships are examples of this type of bold advance. Unfortunately, it is often the case that last years innovation turns out to be no advance at all: a technological dead end that never pays for itself, and becomes a dangerous, rotting eyesore or worse, a laughing-stock blot or a blot on the ecology. Our first two generations of advanced windmill farms seem to match this description; perhaps the next generation will be better, but here are some thoughts on lessons learned from the existing fields of rotting windmills.

The ancient design windmills of Don Quixote’s Spain (1300?) were boons. Farmers used them to grind grain or cut wood, and to to pump drinking water. Holland used similar early windmills to drain their land. So several American presidents came to believe advanced design windmills would be similar boons if used for continuous electric power generation. It didn’t work, and many of the problems could have been seen at the start. While the farmer didn’t care when his water was pumped, or when his wood is cut. When you’re generating electricity, there is a need to match the power demand exactly. Whenever the customer turns on the switch, electricity is expected to flow at the appropriate amount of Wattage; at other times any power generated is a waste or a nuisance. But electric generator-windmills do not produce power on demand, they produce power when the wind blows. The mismatch of wind and electric demand has bedeviled windmill reliability and economic return. It will likely continue to do so until we find a good way to store electric power cheaply. Until then windmills will not be able to produce electricity at competitive prices to compete with cheap coal and nuclear power.

There is also the problem of repair. The old windmills of Holland still turn a century later because they were relatively robust, and relatively easy to maintain. The modern windmills of the US stand much taller and move much faster. They are often hit, and damaged by lightning strikes, and their fast-turning gears tend to wear out fast, Once damaged, modern windmills are not readily fix, They are made of advanced fiberglass materials spun on special molds. Worse yet, they are constructed in mountainous, remote locations. Such blades can not be replaces by amateurs, and even the gears are not readily accessed to repair. More than half of the great power-windmills built in the last 35 years have worn out and are unlikely to ever get repair. Driving past, you see fields of them sitting idle; the ones still turning look like they will wear out soon. The companies that made and installed these behemoth are mostly out of the business, so there is no-one there to take them down even if there were an economic incentive to do so. Even where a company is found to fix the old windmills, no one would as there is not sufficient economic return — the electricity is worth less than the repair.

Komoa Wind Farm in Kona, Hawaii June 2010; Friends of Grand Ronde Valley.

Komoa Wind Farm in Kona, Hawaii, June 2010; A field of modern design wind-turbines already ruined by wear, wind, and lightning. — Friends of Grand Ronde Valley.

A single rusting windmill would be bad enough, but modern wind turbines were put up as wind farms with nominal power production targeted to match the output of small coal-fired generators. These wind farms require a lot of area,  covering many square miles along some of the most beautiful mountain ranges and ridges — places chosen because the wind was strong

Putting up these massive farms of windmills lead to a situation where the government had pay for construction of the project, and often where the government provided the land. This, generous spending gives the taxpayer the risk, and often a political gain — generally to a contributor. But there is very little political gain in paying for the repair or removal of the windmills. And since the electricity value is less than the repair cost, the owners (friends of the politician) generally leave the broken hulks to sit and rot. Politicians don’t like to pay to fix their past mistakes as it undermines their next boondoggle, suggesting it will someday rust apart without ever paying for itself.

So what can be done. I wish I could suggest less arrogance and political corruption, but I see no way to achieve that, as the poet wrote about Ozymandias (Ramses II) and his disastrous building projects, the leader inevitably believes: “I am Ozymandias, king of kings; look on my works ye mighty and despair.” So I’ll propose some other, less ambitious ideas. For one, smaller demonstration projects closer to the customer. First see if a single windmill pays for itself, and only then build a second. Also, electricity storage is absolutely key. I think it is worthwhile to store excess wind power as hydrogen (hydrogen storage is far cheaper than batteries), and the thermodynamics are not bad

Robert E. Buxbaum, January 3, 2016. These comments are not entirely altruistic. I own a company that makes hydrogen generators and hydrogen purifiers. If the government were to take my suggestions I would benefit.

Cross of gold democrats

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While it is dangerous to paint a large organization like the Democratic party with a single, broad brush, there are always patterns that appear, in this case in every presidential platform for a century. Beginning in the late 1800s when the Democratic party gave up on slavery, a stated goal of every Democratic platform has been to help the poor and downtrodden. Republicans claim to help too, but claim to target the worthy. For Democrats, by contrast, the common aim is to provide help without reference to individual worth or work — to help just because the individual needs it. All versions of this classic Democratic goal are achieved through forms of wealth redistribution: taking from the rich to give to the poor, Robin Hood style, at least temporarily. There is some inherent tension here: if the recipient can get free money without working, why would he work — a tension that some find insulting, but others accept as part of the comic nature of society. Many Americans accept that helping poor people is such a worthy goal that they knowingly accept the tension and cheating.

Mayor Quimba of Springfield (from the Simpsons). A classical Democrat, his motto: Corrupts in Extremus

Mayor Quimby of Springfield (from the Simpsons) is a classical Democrat, he has no morals beyond, ‘whatever the public wants’. Quimby is corrupt and an awful manager, but quite likable.

Extracting money from the rich always proves difficult: the rich generally object. The most direct way to extract money is taxation, but Democratic politicians, like Mayor Quimby, right try to shy from this to avoid being branded “tax and spend Democrats.” This year, Bernie Sanders has taken this line, proposing to raise the tax rate on the wealthy to 90% of income so he can do good for the poor and curb the power of rich Republicans. He has no problem with rich Democrats like Ms. Clinton, or perhaps he does, but doesn’t say so. In Britain, under Attlee, the tax rate was raised to 95%, a rate memorialized in The Beatles song “Taxman” (there one for you nineteen for me; 19/20 = 95%). Americans oscillate between accepting high tax rates and acknowledging that the worker and creative must be able to keep most of his/her earnings or he/she will stop working.

Every few years recipient Americans revolt against the way redistribution makes rich Democrats richer, and how high taxes seem to go with crony corruption. The motto of The Simpson’s Mayor Quimby is “corruptus in extremus”, a nod to the observation of how corruption in redistribution favors friends and family of those redistributing the wealth. Redistribution also tends to create poverty. This happened in England, for example. As Quimby says: “I propose that I use what’s left of the town treasury to move to a more prosperous town and run for mayor. And, er, once elected I’ll send for you.”

An alternative many Democrats favor is to print money or borrow it. This appears to be Ms Clinton’s approach, and was proposed famously in the “cross of gold” speech of William Jennings Brian in 1896.  In this speech, one of the finest in American history, Bryan (an unknown until then) proposed to monetize silver and other assets, allowing him to print money. He would spend the money on the poor by debasing the currency, that is by inflation. Bryan claimed that the rich were anyway sitting on unused money: a useless, dangerous pile that he’d inflate away. He also claimed that the poor are the ones who owe money, a burden that he would wipe out with inflation. Bryan’s final line is immortal: “you shall not press down on the people this crown of thorns, you shall not crucify the nation on a cross of gold.” The speech managed to combine God and greed and was an enormous success. Following the speech there was stunned silence, and then whoops and hollers. Bryan was carried around the convention for an hour before being chosen the Democratic candidate for president in 1896, 1900, and 1908. His speech has appeared, to a greater or lesser extent, in the platform of every Democratic candidate since with a greater or lesser reference to God depending on the conservatism of the speaker.

Donald Trump currently the front runner for GOP president reads to his grand-daughter Chloe from that Christmas classic, 'winners aren't lots.' photo by Donald Trump, jr (Chloe's Dad) aboard their car (?) plane (?).

Donald Trump currently the front-runner for GOP president reads to his grand-daughter, Chloe from ‘winners aren’t losers.’ photo by Donald Trump, jr., Chloe’s Dad. Trump seems to revel in the lovable, rich jerk persona as no Liberal or Democrat could.

Republicans have traditionally supported property rights and harder money: gold in the old days, a balanced budget today. They claim that low inflation is good for the rich and poor alike, and especially for the small businessman. Entrepreneurs are pictured as more virtuous than the idle, wastrel Democrats. Free money, the Republicans note, discourages work. Of course, distinguishing worthy from wastrel is easier said than done. Republicans are accused of being uncharitable, and of helping the idle rich once they get into office. Presidential candidate, Donald Trump claimed that until now he’d give big donations to candidates of the left and right so they would repay the favor with interest at a later date. No one knows if it will change when he gets in office, but so far he’s avoided the major rich donors. He’s doing well running as a lovable, rich, jerk who’d do things different.

Inflation is a dangerous mistress, the middle class generally doesn’t like the way it wipes out debts and savings, while supporting a class of rich wastrels, drunks and the chronically unemployed. Many of the poor and middle class save, while the rich tend to build up debts. The rich have better credit ratings than the poor, and thus borrow more. They are also better positioned to increase their borrowing if they think inflation is coming. The money they borrow is invested in hard assets: land, homes, and businesses. When inflation slows, they can sell these assets. And if they pick wrong, the government bails them out!. William Jennings Bryan lost all three of his runs at the presidency, twice to McKinley and once to William H. Taft, who stood for doing nothing.

William Jennings Bryan: for inflation and silver; against alcohol. Lost twice to McKinley and gold.

William Jennings Bryan: for inflation and silver; against alcohol. Lost twice to McKinley and gold.

I think the American people want a balance in all things. They want a balance between helping everyone, and helping only the deserving; between high taxes to help folks, and allowing folks to keep their wealth. They don’t quite know where to draw the line, and will even help the wastrels, even those who refuse to work, because they don’t want them starving in the street. They also seem to accept rich folks getting richer, especially when a big project is needed — a ship or a bridge, for example. We elect an alternating mix of Democrats and Republicans; conservatives, and liberals to avoid false paradoxes, achieve some liberty, and establish one of the richest states known.

As for me, you might as well know, I’m a liberal Republican. I favor low income taxes, but some welfare; taxing imports (tariffs), and low inflation –“bread currency,” I like Peter Cooper, and the Greenback Party, 1876. Cooper claimed that the dollar should always have the same value “for the same reason that the foot should always have 12 inches and the pound 16 ounces.” I also think enforcing morality is a job for preachers, not politicians. For 160 years students of Peter Cooper’s union were getting a free college education and I’m one of those engineering students, see my biography of Peter Cooper.

Robert E. Buxbaum, December 30, 2015. See my view of Scrooge’s economic education in the Christmas Carol.

Flat tax countries: Russia, Mongolia, Hungary

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For no obvious reason, many Republicans and some (few) Democrats are fans of the flat tax. That is a fixed percentage tax on every dollar earned with no deductions, or very few. They see the flat tax as better, or more fair, than the progressive, graduated tax found in the US and most industrial countries. While most Republicans don’t like high taxes, as in Sweden, France, or in the UK, the flat-taxers want a single tax rate: a constant percentage for all. A common version is what Ben Carson described earlier this month, “if you earn ten million dollars your tax will be one million; if you earn ten dollars, your tax will be one dollar.” Herman Caine (R) proposed something similar eight years ago, and (surprisingly) so did Jerry Brown (D).

Ben Carson proposes a 10% flat tax. I'm guessing his source is the Bible.

Ben Carson proposes a 10% flat tax.

As it happens, of the 230 nations on the planet, several already have a flat income tax, and none of them are industrial juggernauts. I will list the larger of these countries in order their tax rate: Mongolia and Kazakhstan, 10% flat tax and hardly any services; Russia and Bolivia, 13% flat tax: moribund, raw-material-based, police-states; Romania and Hungary 16%; Lithuania and Georgia 20%; Zambia 22%; Switzerland, 35% when you include the Cantonal and municipal flat rates, and (topping the list) Greenland at 45%. Not one of these is a productive, industrial powerhouse, like the US, and there is no indication that this will change any time soon.

I suspect that the flat tax enters the minds of conservatives from the Bible, from the 10% of grain that was given to the Levites (Numb. 18:24), and the second 10% eaten of pilgrimage festivals or given to the poor (Deut. 14:22-24). If that’s the source, let me suggest a better modern version is to give out cans of food, or to support ones church. But as a model for government finance, I’d suggest it’s best to leave more in the pockets of the poor, and tax more from the rich. Even in Biblical times, the government (king) levied a substantial tax above the 10%s described above.

A measure of tax rate is the percentage of the total GDP that goes to taxes. As things go, our tax rate isn't particularly high.

A measure of tax rate is the percentage of the total GDP that goes to taxes. As things go, our tax rate isn’t particularly high.

A flat tax does not necessarily imply a low tax, either. Greenland’s flat 45% rate is among the highest in the world, and Israel had a 50% flat tax until fairly recently. It’s also worth noting that personal income isn’t the only thing one can tax. Several countries combine moderate personal income rates with high corporate rates (Venezuela, Zambia, Argentina), or add on a high sales tax, or a transaction tax. Herman Caine’s 9-9-9 tax plan included a 9% transaction tax and a 9% federal sales tax that would have gone on top of whatever the state tax would have been. The revenue collected by the 9-9-9 plan would have been no less than we had, but would be, he claimed, simpler. Cain’s flat tax wasn’t even really flat either, as there was an exclusion, an income level below which you were taxed 0%. That is, he was really proposing a two tier system, with a 0% rate at the first tier. Rand Paul seems to favor something similar today.

The two advantages of a flat tax are simplicity, and that it reins in the tendency to tax the rich too much, a tendency found with many liberal alternatives. The maximum tax rate was 95% in England under Attlee. Their 95% tax-rate appears in the Beetles’s song, Mr Taxman: “…There’s one for you, nineteen for me; ‘Cause I’m the Taxman.” High rates like this caused the destruction of many UK businesses, and caused The Beetles’s to leave and reincorporate in the Cayman Islands. Bernie Sanders recently proposed a top rate that was nearly as high, 90%, and praised Denmark (60% maximum rate) for its high social services. Sorry to say, Denmark seems to have concluded that their 60% maximum was excessive, and earlier this year reduced their maximum to 47.794%. This is below the maximum US rate if you include New York state and city income taxes. History suggests that if you tax the rich at rates like this, they leave or do other socially unacceptable things, like go black-market. On the other hand, if you tax too little, there is no money for education or basic social services, e.g. for the desperately poor. At one point, I proposed the following version of graduated to negative scheme that manages to provide a floor, a non-excessive top rate, and manages to encourage work at every income level (I’m rather proud of it). And there are other key issues necessary for success, like respect for law, and not having excessive minimum wages or other excess regulations.

Bernie Sanders: tax the rich at 90% of income.

Bernie Sanders: tax the rich at 90%; I doubt this is a good idea.

Whatever the tax structure is, there is probably an optimal average rate and an optimal size for the government sector. I suspect ours is near optimal, but have no real reason to think so (probably just nativism). I’ve found that comparing the US tax rates to other countries’ is very difficult, too. Most countries have a substantial Value Added Tax (VAT), that is a tax applied to all purchases including labor, but we do not. Some countries have import taxes (Tariffs, I’m in favor of them), while we have hardly any. And many countries tax corporate profits (and sales) at rates above 60% (France taxes them at 66.6%). To make any sort-of comparison, I’ve divided the total tax income of several countries by the country’s GDP (I got my data here). This percent is shown in the chart above. The US looks pretty average, though a little on the low side for an industrial nation: just where I like to see it.

Robert E. Buxbaum, November 29, 2015. I imagine myself to be a centrist, since all of my opinions make sense to me. When I change my mind on something, I stay at the center, but the center moves. If this subject interests you,  seems to have dedicated his life to following the flat tax.

Is cannibal tourism good for Michigan?

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Governor Snyder has no appetite for it, but ex-governor Jennifer Granholm did, and some of her Democratic colleagues still do. Not cannibal tourism, as such, but movie subsidies paid for by a tax on business property independent of profits. Some seven years ago, in 2008, then-governor Granholm and a majority of our legislature instituted a $132 million/year subsidy program that provided up to 42% of movie production costs. The hope was that films would bring Hollywood-type wealth and glamor, and that they would spark tourism. As it happened, the jobs went to Hollywood transients to such an extent that the total number of MI film employees was reduced. It is now 100 lower than at the start, and virtually all of the money spent went to out-of state employees (quite often the high-priced star) who left as soon as the filming was done. The report concluded that the program returned 11¢ for every tax dollar spent. One of Governor Snyder’s first acts was to diminish the subsidies, and the legislature has just put an end to them: revenge of the nerd.

Offspring, filmed in Michigan. It does not seem to have promoted Michigan tourism.

Offspring: no jobs created, and perhaps no tourism … but think of the cool factor.

The amount spent in the early years, $132 million/year, was about 1/3 of the state’s deficit, a major misuse of funds. Reason magazine claimed it was “stone-crazy” to support movies when the state had, at the time, 14% unemployment, the highest rate in the nation. They argued that the money could be better spent on roads, or schools, or left in folks’ pockets (I agree).

The effect on tourism isn’t quite what was hoped. Movie makers tend to see Michigan as a setting for dystopian films, for example, “Offspring,” a film about cannibal tourism. This film got one of the largest state subsidies. A plot summary is:  “Survivors of a feral flesh-eating clan are chowing their way through the locals.” If this encouraged tourism, it’s not necessarily the tourists you wanted. You can tell it’s Michigan by the Michigan symbol on the police cars. Michigan funds also brought two Batman movies to Detroit, along with Michael Moor’s “Capitalism, a love story“, a  movie billed as showing how capitalism makes life in America a nightmare. The current head of the film board has noted that “realistic cannibalism; the gruesome and graphically violent depiction …. is unlikely to promote tourism in Michigan or to present or reflect Michigan in a positive light.” I can agree.

Batman and Superman in Detroit.

“Batman vs Superman.” They battle in Downtown Detroit, as do “Red Dawn” and “Transformers.”

Opposition to dropping the program came mostly from the Democratic side of the aisle. Rep. Jeremy Moss, D-Southfield, said the film incentives were creating good jobs. Rep. Kristy Pagan, D-Canton, pointed to “… the cool factor. Who doesn’t want to see Ben Affleck or Amy Adams walk down our streets?” (I don’t). In the end, three Democrats and virtually every Republican voted to end the program. Among the Republicans for keeping the program were Kathy Crawford R-Novi, and Mike McCready, R-Birmingham.

You should not feel too bad for the makers of gore films. Subsides are still available in Massachusetts, Oregon, Washington, California, Minnesota, Nevada, and several other states. Massachusetts welcomed Part 2 of The Offspring, a Massachusetts headline proclaimed the victory: “Come to Massachusetts, We Love Cannibals!” Massachusetts folks have been full of themselves for years. As for the money we saved, our Michigan legislature has finally begun balancing the budget and decreasing the destructive personal property tax that helped fund these schemes.

Robert E. Buxbaum, November 5, 2015. I should also commend the legislature for making “talk like a pirate day” a state holiday, and for passing, on November 3, a necessary roads bill. It was signed by most Republicans and two Democrats. Bipartisan-ish. With good management, Michigan might be coming back – lets hope it continues.

Michigan’s road bill — why not?

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Stagnating before the Michigan Senate is a road improvement bill that passed the Michigan house 10 days ago. Though it’s not great, I hope they sign the bill. The bill would raise raise $600 million to $1.2 billion/year, an increase of $60 to $120 per person per year ratcheting up over the next six years. The first stage of the bill would take effect in October 2016, and would raise $400 million by increasing our car/ truck registration fees by about 40%. People with normal sedans would pay about $60 more per car per year. Those with more expensive, heavier vehicles would pay more. Though our registration fee is already among the highest in the nation, raising it further has the potential (It seems to me) to be the most fair and reasonable source of additional revenue. People with fancy cars, I imagine, are wealthy and those with heavy cars (I imagine) do the most road damage. This is the part of the bill that has proven the most contentious.

The next stage would begin in early 2018. It would raise $200 million by increasing Michigan diesel and gasoline taxes. The larger part would be on diesel fuel, an increase of 7.3 cents/gal presumably to soak out-of-state truckers who come through Michigan. These individuals deserve extra taxation, I imagine, because they don’t pay registration fees and probably damage our roads even more than those with fancy cars. Besides, they don’t vote in Michigan. The gas tax increase is smaller, 3.3 cents/ gal on regular gas, but Democrats are correct to point out that it is regressive. It takes a greater fraction from the poorer than from the rich. The hope is that, by the time the tax increase takes effect, we’ll have some inflation and also some more fuel-efficient cars so the bite won’t be as bad. Sorry to say, we already pay the 10th highest gas tax in the country.

The final phase of the road funding bill would not take full effect until 2021. The idea is to transfer $600 million from the general fund to pay for the roads with money left over to reduce home-owner taxes. Underlying the ability to do this is an assumption that Michigan industry and home prices will recover enough between now and then that we’ll be able to stop using the gasoline taxes to fund our schools, ideally with money left over from the regular income and sales tax. While I’d like to see this happen, and while this is possible given that the last few years have seen the state’s GDP recover at a 15.5+% growth rate (third highest in the nation) there is also a basis to say the assumptions are over- optimistic. On the other hand, the Democratic plan, based on 1.6% growth next year is likely over-pessimistic. As The Yogi says, “Predictions are always difficult, especially about the future.”

Whatever your views of the future, our roads are crumbling now, and new money is needed to fix them now before they get worse. If taxes must be raised, I’m inclined to do it with use -taxes, that is by charging those who use the services most. This is a philosophical preference of mine. Not all Republicans agree with this, and only one House Democrat has signed on so far. It was the view of the old-time, labor Democrats I grew up with, but not of today’s Democrats who prefer to tax “the rich” for any and all goods and services. Their point: that there are struggling, poor people who drive heavy, expensive cars. They’ve something of a point on the heavy cars, but I have less sympathy for the rest. I wrote a comic story about a poor guy trying to dispose of an expensive car, a Viper. My guess is that struggling rappers and poser politicians would not find it funny.

Dollars per capita spent on roads, 2013. From MDoT's road funding proposal.

Dollars per capita spent on roads, 2013. From MDoT’s road funding proposal.

Part of the way that MDoT (the Michigan Department of Transportation) justified its target of $600 million to $1.2 billion was by comparison with surrounding states — not my favorite way of analysis. The MDoT graphic shows that Michiganians spend about $57 less per capita on roads than folks in Illinois, Wisconsin, or Ohio, and about $100 less than folks in Indiana or Pennsylvania. Multiply $57 by our state’s population, 10 million, and they conclude we should spend some $570 million more per year. Multiply by $100, and you get $1.0 billion.

While the need for at least $600 million/year sounds about right, I note that the per-capita spending justification seems dubious. If you calculate instead on the basis of dollars per lane-mile, as below, you find that Michiganians are already paying more per mile than Minnesota, Wisconsin, or Indiana. You’ll also note that Ohio and Illinois pays about 1 1/2 times as much their roads aren’t much better. A major part of the variation, I suspect, is corruption, and the rest, I guess is incompetence. Illinois, perhaps the most corrupt state in the mid-west, has seen 4 of its past 5 governors go to jail, along with innumerable Chicago Aldermen and lesser officials. Citizens of Illinois pay for this corruption in over-size construction projects, and over-size construction fees. After the $600 million increase, we’ll pay $8,950 per lane mile suggesting we are still not quite as costly per lan-mile as Illinois or Ohio. If it turns out we need the full $1.2 billion extra, it will suggest we are even more incompetent or corrupt than Illinois.

Road funding state by state comparison.

Road funding state by state comparison, from the same MDoT report, 2013.

An ideal way I’d like to reduce the costs of Michigan’s roads would be to reduce corruption, a trend that’s already helped to revitalize Detroit since the Justice department jailed the mayor and his father plus some associates for “pay for play”. I’m sure it also helped to remove the chief of police (millions in his ceiling) and Bobby Ferguson of the useless, expensive Jail project and Guardian building scandal.

Conviceted IL

It’s somewhat hard to judge the level of general incompetence in a state, and even harder to find a fix. Minnesota had a bridge collapse in 2007, and we had the Zilwaukee in 1982 (and 2008), the 9 mile bridge collapse of 2009, and the Southfield overpass collapse of 2014. It’s been proposed that we should be able to fix both our corruption and our incompetence problems by holding the contractors responsible for any failures. If only it were that easy. Holding contractors responsible might get some contractors to allow the concrete cure for longer periods under water before opening a road, but I’m not sure the public would stand for it. A more-likely outcome is that crooked contractors would charge more for the same bad work, and then go bankrupt as soon as the road fails. If their company were appropriately structured, they could re-appear the next day: the same people and equipment, operating under a new corporate name.

The biggest single incompetence issue that I can see appears to be poor under-road drainage. In Oakland county, where I am, the drain department looks responsible for the major flood of last summer. We’ve had rains this big in previous years without this massive flooding. I suspect a lack of dry-wells, but don’t know. From what I see, the drainage is bad beneath many Oakland roads, too. It seems like the concrete slabs are not deteriorating as much as they are coming apart. That’s a sign of bad drainage. I also see sink-holes, new lakes, and places where the sidewalks sink. Again, that’s a sign of bad drainage; a sign there is a swamp near or beneath the road. If the ground below a major road is a swamp, there is no practical way a contractor can build a long-lasting road over it. Until the drains get better, or the corruption subsides, we’re going to have to replace the roads often at a cost of another $600 million/year. We might as well acknowledge our problems and sign the bill.

Robert Buxbaum, November 2-3, 2015. If you feel like getting involved, contact your state senator and tell him/her to vote yes (or no). Our senator is Vince Gregory. And if anyone would like to put me on a drainage board, I’d be happy to serve for free.