Costco and the Minimum Wage

The Washington Post reported yesterday that Costco CEO Jim Sinegal is endorsing raising the minimum wage. I don't want to address the article directly because I would just be saying the same things and pointing out the same things that many people (including myself) have already said concerning raising the minimum wage. Rather, I'm posting about this because I read a post on Cato that suggested (rather strongly) an ulterior motive for Sinegal's interest in raising the minimum wage: to stifle low-end competition.

Now, I have no way of knowing Sinegal's motives and I am inclined to give him the benefit of the doubt and assume that he is sincerely attached to a flawed economic policy until proven otherwise.

I just wanted to point out some more unintended consequences of minimum wage increases (or any government intervention, for that matter) and note how it is oftentimes in certain businesses' best interest to endorse government intervention when that intervention will hurt the business' competitors.

From the January 27th WSJ,

In August 2005, Hurricane Katrina flattened two bridges, one for cars, one for trains. Sixteen months later, the automobile bridge remains little more than pilings. The railroad bridge is busy with trains.

The difference: The still-wrecked bridge is owned by the U.S. government. The other bridge is owned by railroad giant CSX Corporation. Within weeks of Katrina's landfall, CSX dispatched construction crews to fix the freight line; six months later, the bridge reopened. Even a partial reopening of the road bridge, part of U.S. Highway 90, is at least five months away.

"It shows the difference between the private sector and the public sector," says a government bureaucrat. "By the time CSX was done with its bridge, we were just getting around to letting the contract on ours."

There is not much more to be said. When the Government is put in charge of "essential resources" it always fails to manage them as well as a private entity would. Those who want the bridge reopened the most are not those in charge of making it happen.

HT Carpe Diem

Outsourcing

When discussing outsourcing, it is first necessary to distinguish it from offshoring. The first is the transfer of a certain internal task or process outside of an organization - regardless of geography. Offshoring is the transfer of an internal task or process outside of the nation in question - but within the same organization. Thus, if IBM decides to move one of it's offices from the US to India, it is an example of offshoring. If IBM decides to hire another organization to do the work that is currently done in the office in question, it is an example of outsourcing. If IBM decides to hire another organization that operates in India to do the work that is currently done in the US office, it is an example of offshore outsourcing. Get it? The two terms operate on two different axes.

Please note how the terms are often used interchangeably in common parlance even though they have very different meanings.

Next, we consider the purpose of outsourcing - why do organizations do it? Well, as I understand it, the motivation is almost always some economic incentive - usually increased profit margin by means of lowering labor costs. Now, there is an important distinction that has to be observed in the intermediate end of lowering labor costs, so bear with me as a I make a quick fly over of labor costs:

An organization's labor cost are composed of multiple elements, including wages, salaries, health benefits, pensions, etc. I will gloss over everything but wages and salaries. Now, obviously, labor costs incurred by salaries are simply a matter of the number of salaried employees an organization has and what it pays each of them. Wages, on the other hand have the added variable of how many man hours are worked.

Depending on which type of employee (salaried vs. hourly), there are different concerns for the organization regarding labor costs: with hourly employees, there is much concern (particularly in such industries as retail) with having the appropriate number of employees on the clock with regard to the volume of business or production at any given time. With salaried employees, the concern is not so much with hours worked, but with the amount of work there is for them to do, after all, it doesn't make any sense to have a salaried employee for a task that only takes 25% of what would normally be considered a decent day's work.

Now, from these two very general concerns regarding labor costs, one can see two different motivations for (and ways of) outsourcing. With hourly positions, labor cost is a function of Wage * Hours. Thus, reducing either one of the variables reduces the labor costs. Thus, a typical goal of outsourcing is to reduce labor costs by reducing the wage paid to employees by filling positions with workers who are willing to accept lower wages (in terms of actual monetary units - not in terms of a ratio between wages/cost of living, etc.) for one reason or another. Conversely, the same goal could, in theory, be obtained by reducing the number of hours worked by employing more productive workers, but I doubt this actually happens all that much due to the fact that more productive workers usually demand higher wages, because they can.

This type of outsourcing, which is known as Task Outsourcing, is what I believe most people think of when they hear the term 'outsourcing.' They instantly think of a corporation of one size or another eliminating jobs in its home territory and "shipping" them somewhere else because of cheaper labor. There are also other connotations that normally accompany this term, most notably a drop in product/service quality, a cold or greedy motive and/or reasoning on the part of the organization leadership, thick accents on the other end of the telephone, etc.

There is another type of outsourcing,Break/Fix Outsourcing, though, that has to do with a situation to which I alluded with the salaried employee with 75% down time. To fill in more of the picture, think of a small organization that has, perhaps, 15 employees. While some of the employees don't need computers or desk phones to fulfill their tasks, most do. Thus, perhaps 12 or the 15 employees need computers and phones. They also need to collaborate with each other on various projects, share files, access the Internet and email, etc. Now, as I'm sure most readers will have already guessed, this is a case where there are going to be a lot of technical problems for the employees. Things are going to go wrong from time to time. New computers are going to need to be set up, old computers are going to need to be upgraded or repaired, new software will need to be installed, all of the computers will need to be networked, the organization's Internet connection will need to be managed, the organization's proprietary data will need to be secured, etc. Since most of the employees will likely only have average knowledge of computers and networking, there will be no one who can address these issues quickly, meaning that the organization will likely suffer a larger than necessary amount of down time, more lost productivity, high fees to have a technician perform service visits, risk having security breaches, etc.

To handle this, the organization would like to hire an IT person to be on staff to handle these types of issues. The problem is that the organization is so small that there is no way even a clever IT manager will be able to occupy his or her days addressing the organization's IT needs. Since IT managers/staffers are usually people who require full time employment, hiring some one part time is simply not an option. The question of whether the position would be hourly or salaried is mostly irrelevant since, as I said, the person would have to earn what amounts to full time pay one way or another. Thus, the organization has a problem: idle capacity - which in this case is made all the worse by the fact that it is the most expensive kind of capacity, labor.

Other types of idle capacity regard things like machinery, facilities, electricity, etc. For example, think of a pizza parlor that has a building, a number of ovens, etc. On Friday and Saturday nights, they do a lot of business and are quite busy - although they are able to keep up because they staff accordingly and have a sufficient number of ovens and tables, etc. On Monday nights, however, even if they staff at a lower level, they still have the idle capacity - the ovens aren't baking any pizzas, the lights are still on even though there are only 4 people in the restaurant, etc. At this point, the owner of the pizza parlor would probably be willing to accept a lower profit margin in return for greater revenue (since, more revenue, even with a lower margin, is still more than nothing). Thus, the reason why so many restaurants of all kinds have special pricing deals on certain weeknights. (For those of you in the area, think of Anthony's and BWW).

One of the options open to the organization in question is to outsource their IT needs to another company that specializes in providing IT support for such organizations. This IT vendor makes its money by providing products and services to a number of similar organizations. Each organization can't afford to hire a full time IT manager, but they would be able to afford a fraction of such an employee. That's what the outsource organization provides - "part-time" IT support at a proportional price. This type of outsourcing is not usually thought of but is quite important to the economy since it provides necessary division of labor. It is also, as far as I know, much less controversial since no real person ever loses a job as a result of it - rather whole new organizations spring up and employee people based on the need for such services.

Now, the reason I embarked upon this discussion of outsourcing was to bring up this article I read the other day. The author attempts to induce from historic precedents in Ireland and India that task outsourcing doesn't actually save money. This is a point that I've heard many times before, but I has always heard it associated with explanations such as lost sales due to increased customer frustration or lost product quality. What is interesting about this article is that it approaches the issue of whether or not task outsourcing is economically beneficial for the organization doing the outsourcing from a much more fundamental perspective.

While you should read the entire article (and, in so doing, discover that I shamelessly borrowed the author's IT example), I'll summarize the argument: when many organizations jump on the outsourcing bandwagon headed for wherever (whether it is Ireland, India, China, etc.), attracted by the prospects of lowering labor costs thanks to cheaper labor, they are increasing the demand for labor which, by definition, raises the price. In the end, they are forced to outsource again in order to pursue cheaper labor costs. Interesting point.

Why Taxes are Necessary

What do you think the government would do with $15,000 worth of Jell-O? Feed the homeless, donate it to The Salvation Army…or make a replica of the city of Scottsdale, AZ? (raisingfarrahzona.com)

When I tell people I think government is bloated and useless and should be pruned back like mutant kudzu, they often respond with something along the lines of, "Our Government provides essential services that no one else can deliver. When markets fail, the people must step in to protect themselves from [insert economic boogie man]. Do you want to disband the military? The public libraries? Why do you hate children?"
Two points:
1. Why I hate children is a long story, involving many children and much hatred.
2. Jello?

More Tax Emigration

One of New Zealand's richest individuals has left for Tasmania to avoid the taxes of her home country. Jan Cameron, founder of the Kathmandu chain of stores, had sold her business and was looking forward to donating the interest from her investments to charity, but the "progressive" NZ taxes prompted her to relocate.

Terror-Free Gas Station

In Omaha, Nebraska, a gas station called "Terror-Free Oil" just opened with an interesting marketing pitch: their gas will come exclusively from countries that do not "export or finance" terrorism. The company is associated with the Terror-Free Oil Initiative. Aside from the obvious socio-political nature of this endeavor, it is interesting to note that they have come up with an interesting differentiator for their business in an commodity industry governed almost exclusively by price and location.

I wonder if this will end up being the next big move in the industry to try to set oneself apart on a basis other than price (since a price war rarely, if ever, ends up benefiting either company) - the last one I can think of being the move towards all-in-one commuter haven represented by such companies as Sheetz, which tries to make itself the one stop shop for gas, breakfast, snacks, etc. such that, even if they don't have the lowest price, consumers will still patronize them for the convenience and variety of products. Previous to that, of course, was the rise of the mini-mart, which Sheetz is now taking to a new level by incorporating a fast-food like product line.

Regarding Terror-Free Oil, again, unfortunately, I expect that this will be another case of "Wal-Mart Hypocrisy" (if I may be permitted the coining of a term), that is, a case where everyone complains about a certain business or industry and then continues to patronize it because it is less expensive, more convenient, etc.

Tax Competition

As Maarek pointed out in his post, Over-Taxed Wealthy Fleeing to Switzerland, there is an interesting situation beginning to play itself out there, namely, Swiss Cantons competing with one another by lowering taxes in order to attract citizens. This is interesting in and of itself, but even more so when one considers that a similar situation is beginning to take shape in the US. As CARPE DIEM points out, several states (Georgia, South Carolina, and Mississippi) are considering repealing their income taxes as a way to spur economic development. (As I pointed out in a previous post, lowering income tax has the effect of removing an economic detterent to actively pursuing the growth of one's productive contribution to society.)

If the states do indeed repeal or lower their income taxes, I expect that they will not have to wait long to see the development heat up. The attraction of low or no state income taxes, which, as everyone knows can cost taxpayers many thousands of dollars a year, will be extremely strong for workers in industries that are either already in these states or soon will be. As well, I expect that a great many workers who can telecommute will be eager to take the states' up on their offer.

If the states lower their taxes, I also expect that we will see a similar effect that we did at the national level, i.e., a tax rate cut will produce a tax revenue increase. On the other hand, if the states repeal their income taxes, I wonder how well the resulting economic development will offset their lost revenue. Obviously, business tax revenue would increase, along with things such as sales tax revenue, but would it be enough? I suppose time will tell. While I know this won't happen, it would be great if the states planned on not making back the money and, as a result, started trimming their budgets.

Follow-up: Two Measures of Wealth

I received a very well crafted set of thoughts from Dane regarding my post, Two Measures of Wealth. I would like to address those thoughts in a new post because:

1. Dane's comments are quite good and I want everyone to see them.
   
2. Both Dane's comments and my response are quite long and I think it would be a bit awkward carrying on the entire discussion in a comment thread.
3. I concede a point to Dane and don't want to hide that fact.
   
4. I hope this encourages others to comment as well.

Before reading my response below, one should read Dane's comments.

My response:

Dane, I agree with your first point regarding what is most important to consider in these matters. I agree with your second point that the first consideration begs the second - whether one's lot is improving.

By the way, thank you for not mentioning the obvious philosophical issues with my use of the word "absolute" in the post. As I hope everyone understands, I meant the word in a very specific, economic context.

Anyway! Back to your comments: As to your third consideration, i.e., whether one class or group is improving as quickly as another, I will partially recant and agree that it is not a foolish thing to consider in, say, an academic way. I do, however, maintain my position regarding its ridiculous, deceitful current use in politics. Since, though, you did not address that statement, I will assume that you do not take issue with that unless you state otherwise.

With regard to your analogy regarding a child's height, I have some thoughts: it is going to be very hard, if not impossible, to hammer out what we should consider stunted, normal, or above average economic growth rates for the various strata of society. This is because, to come up with averages and the like, one needs historical records pertaining to similar situations. I would maintain that our current socio-economic situation is unique in human history (by the way, I would probably argue that most socio-economic situations specified by time and geography are unique). Thus, I think it a Pandora's Box to try to engage in discussions of whether "the poorer economic class(es) in America in 2007 are experiencing stunted, normal, or above average growth."

Thus, I circle back and agree with you that what really matters in these discussions are whether or not people are capable of living humane lives, not whether the growth rate for their economic class is not as phenomenal as that of richer classes nor whether their growth rate is, for lack of a better word, "poor" compared to what "it should be", i.e., the average.

Update: See CAPRE DIEM's article, Economic Growth, for more regarding historical growth rates.

Cigarette Taxes & Organized Crime

Radley Balko has a great article over at Cato about the rise of cigarette taxes and the associated rise in crime. He makes the point that when the price of an item is raised by methods other than market forces (such as taxation), market forces will still work to lower them. When cigarettes are taxed to a significant percent of their actual cost, the incentive to smuggle them and avoid the taxes becomes tremendous. Balko quotes New York city tax official Robert Shepherd as saying ''It is literally more profitable to hijack a cigarette delivery truck than an armored truck.'' Since the profits are so large, powerful interests begin to take advantage of the opportunities.

In recent years, New York City's black or ''gray'' cigarette market has aided a bevy of international terrorist organizations and nefarious elements, including the Russian mafia, Chinatown gangs, the Irish Republican Army, Hezbollah and al-Qaida. In 2002, Hezbollah ringleader Mohammad Youssef Hammoud was arrested in Charlotte, N.C., for operating a cigarette smuggling ring that bought low-tax cigarettes in North Carolina and sold them on the black market in high-tax Michigan. Just one van of cigarettes making the trip could bring in as much as $10,000 for the terrorist group.

London is one of the few cities where cigarette taxes are higher than they are in New York. No surprise, the Irish Republican Army has exploited those taxes for years, and uses smuggling to partially fund its operations.

The rise in crime is so pronounced that Sweden and Canada have both reduced their taxes on cigarettes, deciding that the costs and side effects of the taxes outweighed the benefits.

This situation strikes me as a perfect example of the Law of Unintended Consequences. Politicians and voters want to do something about the "Smoking Problem," so they create a tax. The thought is that by making the death-sticks more expensive, they will encourage the weak-willed to quit their nasty habit without actually banning it, thus gaining revenue for the City and improving the common good by reducing disease and odor. However, while some people do quit smoking, and some money is made, the Unintended Consequences cost the government lives and money by increasing Organized Crime activity.

Even if you think that it is a legitimate role of Government to discourage smoking through taxation (which I don't) and you think that taxing cigarettes will stop significant numbers of people from smoking (which I don't) and you don't care that the people most likely to continue smoking and paying the new taxes are the poor, making the tax extremely regressive (which I also don't, so we would agree there), the benefits must be weighed against the costs. If it turns out that the taxes cost more in crime, increased policing, and lost business in the community, and don't save more lives from smoking than they cost in other ways, the tax should be abandoned.

The fact that the tax was devised with the best of intentions (namely thinking for you and taking your money) does not change the fact that those intentions are not effected by the tax. If a law causes more harm than good it is a bad law, period. This goes for any law. It doesn't matter what you felt the law would do, or who you thought the law would help. What matters is what the law does. Just because the new minimum wage was passed by someone wanting to help the poor does not change the fact that it will hurt them. Your intentions are not sufficient, they must be instantiated, and the fact that you "want to help" does not automatically justify anything. The consequences of any action must always be taken into account.

Over-Taxed Wealthy Fleeing to Switzerland

Cato-at-Liberty notes the "influx of wealthy foreigners seeking to benefit from Switzerland’s attractive tax laws for non-citizens. Driven in large part by competition among cantons, this system enables highly productive people to escape excessive taxation in other nations. High-tax European welfare states despise this policy, not surprisingly, but Swiss lawmakers understandably ignore these complaints. Indeed, as reported by the International Herald Tribune, one Swiss official even explained that there is no such thing as a “just” tax:

“It’s not a question of justice or injustice; there’s no just tax,” said Jean- Daniel Gerber, head of the Swiss State Secretariat for Economic Affairs. . . .

At least eighteen out of Switzerland’s 24 cantons planned to cut rates of taxation in 2006, led by Obwalden, which cut the corporate tax to 6.6% in January 2006, the lowest rate in Switzerland. Obwalden also cut tax for individuals earning over CHF300,000 by 1% to 2.35% and reduced property tax."

More on Relative Wealth

An interesting article in the New York Times by Tyler Cowen, Incomes and Inequality: What the Numbers Don’t Tell Us, addresses the causes of inequality. It also touches on the more important question of why and if we should worry about it.

"Happiness, possibly the most relevant variable for a study of inequality, is also the hardest to measure. Nonetheless, inequality of happiness is usually less marked than inequality of income, at least in wealthy societies. A man earning $500,000 a year is not usually 10 times as happy as a man earning $50,000 a year. The $50,000 earner still enjoys most of the conveniences of the modern world. Even if more money makes people happier, it appears to do so at a declining rate, which places a natural check on the inequality of happiness. . . .

The broader philosophical question is why we should worry about inequality — of any kind — much at all. Life is not a race against fellow human beings, and we should discourage people from treating it as such. Many of the rich have made the mistake of viewing their lives as a game of relative status. So why should economists promote this same zero-sum worldview? Yes, there are corporate scandals, but it remains the case that most American wealth today is produced rather than taken from other people."

Cafe Hayek notes that the marginal value of money falls rapidly after a certain point. This means that taking $100,000 from Bill Gates and giving it to me will not make Bill any less happy, but will significantly improve my state in life.
However, "given that Bill Gates almost surely has a greater talent for contributing to the happiness of humankind than I have [evidenced by his wealth], it's especially important that he continue to confront keen incentives to continue contributing to that happiness. Precisely because an extra dollar in Gates's wallet means less to him the more dollars he earns, he needs to earn ever-more dollars per year in order to keep keen his incentives to innovate and produce and sweat the details of satisfying consumer demands."

Which leads to the interesting thought that Windows Visa sucking can be blamed on taking a large portion of the money Gates would have made, which removed "his incentives to innovate and produce and sweat the details of satisfying consumer demands." If you want a flawless, less broken OS, let Gates keep the money.

The Two Measures of Wealth

There are two ways you can look at almost, if not, everything: absolutely and relatively. That is, you can talk about something in terms of how it is in and of itself or you can talk about something insofar as it relates to another thing. For instance, when describing someone, I can talk about their height either in terms of feet and inches (absolutely) or I can talk about their height insofar as it is more or less than someone else's (relatively).

This pair of perspectives also applies when talking about wealth (or standard of living, for that matter). We can talk about how well off someone is either absolutely or relative to someone else.

To illustrate, think of a young teenager who has spent his summer delivering newspaper and saved $250. During the same summer, the neighbors next door earned a total of $10,000. Thus, the neighbors earned 40 times as much as the boy. The boy spent his money on things like games, movies, etc. The following year, the boy spent the summer mowing lawns for neighbors (including the neighbors in questions) and, thus, saved up $500. His neighbors also did better, earning a total of $25,000, meaning that they earned 50 times as much as the boy. The boy, again, spent his money on things like games, movies, etc., but still had money left over when the summer was over since he had more to begin with.

Question: was the boy better or worse off in the second year? Well, it depends whether you consider absolute wealth as more important than relative wealth. That is, in absolute terms, the boy was much better off (100%, in fact) in the second year. (I'm glossing over the issue of inflation because, even if there were an unusually high inflation rate, the boy would still come out with somewhere north of 90% additional purchasing power.) On the other hand, if you care about relative wealth, than the boy was actually worse off the second year because his neighbors (those to whom we are comparing him) went from earning 40 times more than him to 50 times more than him. Thus, the boy was not "keeping up with the Joneses".

Question: Does it matter that someone else's earnings increased at a faster rate than the boys? Does this affect his purchasing power? No. The boy can still purchase much more than he could in the previous year regardless of the purchasing power of his neighbors (or employers).

To put it a different way, if someone were to ask the boy whether he would rather earn $500 while his neighbors earned $25,000 (a 50 fold difference) or earn $300 while his neighbors
earned $13,500, what do you think he would say? Of course, he would take the $500 since the ratio of how much the neighbors made to how much he made is irrelevant to him (except, perhaps, insofar as them earning more could lead to them paying him more for services rendered or giving him additional opportunities for work for which they would otherwise not have been willing to pay). Meaning, a wealth gap, might actually be an indicator of good economic prospects for him rather than an indicator of his economic demise.

The boy would simply not care that the "wealth gap" was widening between him and his neighbors. What is important to him is his own actual situation.

This issue of a "wealth gap" has come up in the politics recently, as TCS Daily points out. Apparently, Democrats are currently focusing on relative wealth, while President Bush is focusing on absolute wealth. I don't want to focus here on issues being disputed by the political parties because I don't want to become an apologist for either party. What I want to focus on is that some politicians are focusing on relative wealth, while others are focusing on absolute wealth. In case you haven't figured it out already, I think it is absolutely foolish to focus on relative wealth. When the standard of living and amount of disposable income for most of the population is at incredible highs, it seems to be a ridiculous, deceitful tactic to try to describe the middle class as dying out simply because a bunch of CEOs happen to be raking in enormous salaries, thus making the gap between their incomes and those of the average American wider.

The article is worth reading.

Capital Gains Taxes

Capital Gains in a Supply Model is a speech (statement) given by Jude Wanniski before the US Senate Finance Committee on Wednesday, February 15, 1995. It contains one of the best explanations of capital investment in general (stocks, bonds, loans, etc.) that I have ever heard - especially since it is a very personalistic (which I usually shy away from because of my temperament) piece of prose. Consider the following:

"In the kind of capitalism we have here in the United States, people invest in each other. People with capital invest it in people without capital. Old people invest in young people. Rich people invest in middle-class people and the middle class invests in poor people with promise. People in cities invest in country people, and farm people in town people. When all this activity is at a high level, the economy is too."

The funny thing is, the point of the speech is not to explain the nature of capital investment, nor to argue for its ethical rectitude, etc. Rather, the point is to argue that the government tax rate on capital gains should be zero.

His rationale (if I may take the liberty of abstracting a bit) is that, when the government taxes something, e.g., taxing the act of purchasing an item (sales tax), taxing the act of owning a house or car (property tax), taxing being a productive member of society (income tax), etc., or, more precisely, to the extent that the government taxes something, the government thereby discourages that activity. For instance, if I am considering buying a new car that costs $10,000, I will be much more likely to do it if I will get charged 1% sales tax than if I were to get charged 15% sales tax. Likewise, I might not buy it if I will be required to pay a 10% property tax each year. In short, taxation is an instrument of dissuasion - an economic deterrent (as opposed to incentive) - perhaps not per se, but certainly per accidens.

Thus, when you consider whether or not it is prudent to tax a certain activity, one of the key questions ought to be "is this activity either (a) such that it should be discouraged (perhaps only under specific circumstances) or (b) such that it would not be imprudent or overly detrimental to discourage it (perhaps only minimally)?" If the activity in question is a very beneficial activity both for individuals and for society, one would have to present rather compelling justification for discouraging it (even indirectly) via taxation.

To the point of this post, then, capital investment, Wanniski argues, is one of the driving activities of our economy. It is how the market dynamically allocates resources where needed to maximize efficiency and production, while, at the same time, providing a beneficial financial instrument to the owners of the surplus resources. In other words, everyone wins: those who lend money get a return on their money which would otherwise be sitting under a mattress literally losing value due to inflation, and those who receive the money benefit by being able to engage in productive and profitable activities that they would otherwise not be able to perform due to lack of start-up funds.

Thus, Wanniski asks, should we discourage this activity by taxing the gains returned on the lent money. All that does is discourage people to engage in capital investment in the first place, which stunts economic growth by misallocating resources (away from new enterprises and to the space in between the box spring and mattress).

I recommend reading the entire statement - it's only a few pages long and worth the read.

"Free to Choose" Available on Web

IdeaChannel.TV is streaming the entirety of the "Free to Choose" TV series from 1980 as well as the updated version that aired in 1990, featuring Milton Friedman, one of the most important economic thinkers in history (in my opinion). Take some time to watch it. They also have DVDs available for purchase.

By the way, January 29th is Milton Friedman Day.

Tax Cuts

This is a minor, but very important point that I recently saw enunciated quite well. When the government "cuts taxes", what it is really doing is cutting the tax rate. As we've seen recently, these tax rate cuts actually results in increased tax revenue.

This is an extremely important point to keep in mind when considering courses of action designed to help the economy and balance the federal (or any other government) budget. As we've seen, a tax rate cut a) helps the economy and all of the actors (individuals and businesses) in it since they have to give a smaller percentage of their income to the government (which means, no matter whether the actor has the same pre-tax income as before, less, or more, that the actor ends up with more dollars at the end of the day)
, and b) actually helps the government by increasing the amount of revenue it has at its disposal.

One possible phenomenon that could negate (b), though, would be if somehow decreasing the tax rate increased the government's expenses. I have never read anything to suggest that this happens, nor can I think of anything off the top of my head, but I suppose, in theory, it is possible.

How Bad is the Federal Deficit Really?

There seems to be an extremely important issue surrounding the federal deficit - beyond the facts that there is one, it continues to increase, and that it is measured in the billions of dollars. The issue is exactly how big it is. You'd think this would be a fairly simple matter - after all, periodically the deficit comes up as a political issue and is widely reported as being a specific number. The problem is that the federal deficit is a function of the federal budget and the federal budget is a matter of accounting - like all budgets, personal, corporate, etc.

{tangent}

For example, I keep detailed records of all of my expenditures throughout the month. At the end of the month, I enter them all into a spreadsheet and assign them to one of many pre-defined categories, e.g., "groceries", "gas", "medical", etc.

I then analyze that data to determine a) whether my family "operated" in the black or in the red last month, b) where did the money go?, c) how are we trending in general?, d) how is each expense trending on a monthly basis?, e) what are potential areas of improvement?, f) how much are we projected to spend next month?, g)are there any red flags in the way we spend our money or how we expect to have to spend out money in the future.

Often times, an expenditure does not fit neatly into one expense category. For example, we spent a lot of money on gas to drive to Florida for a special event. If I record that expenditure as a gas expense, however, it creates a much higher number of monthly gas expenses than normal. Should I expect to have to spend that much again next month? Not unless I plan on going to Florida again. Likewise, there were others expenditures associated with the trip that could have fallen into other categories. Instead, I chose to create a new category, "trips", into which all such expenditures would fall. This has the effects of a) more accurately representing "where the money went", b) resulting in a more accurate run rate for the expenses concerned, c) allowing me to make more accurate projections about how much those expenses will be next month, and d) allowing me to project how much future trips might cost when they come around.

Now, when I sit down and look at the data and ask "how did we do last month? Is there anything we should try to improve?", the answer inevitably is "well, it's a matter of how you look at it - a matter of accounting. How did we classify those expenditures?"

Thus, you can see how, even with small family budgets, you can fiddle with numbers in many ways and effectively make the data say many different things. For instance, I could have classified all of those things as "recreation" and told my wife to stop having so much fun because it is breaking the bank. Obviously, though, that would not have helped anything - even if our expenses were much less the following month, I couldn't reasonably attribute it to the imposed boredom of my wife.

{sub-tangent}

Just because a predicted effect happens does not mean that it can be attributed to the supposed cause.

{/sub-tangent}

Anyway! The point is, you can cook the books.

{/tangent}

Now, for a little bit of an accounting lesson:

There are two general types of accounting: cash accounting and accrual accounting. The basic difference between the two is that cash accounting records expenses and income only when money actually changes hands. Accrual accounting records transactions when they are agreed upon. For example, if a company has an employee to whom they promise a signing bonus of $1,000 payable after one year (regardless of whether or not he stays with the company that long), when that $1,000 expense is recorded depends on the type of accounting the company is using. If the company is using cash accounting, the expense would be recorded as occurring at the time when the company actually wrote him the check. If, however, the company is using accrual accounting, it will record the expense as occurring the day the employee is hired because it is then that the $1,000 is promised to be transferred. Likewise when someone buys something at a store but puts it on a payment plan.

In the US, by law, all publicly traded companies and all companies or institutions that have more than $1 million in annual revenue must use accrual accounting.

Finally, we arrive back at the point of the post, the federal deficit, which, as I said, is a matter of the federal budget, which, as I endeavored to explain, "is all a matter of accounting."

Specifically at issue currently, as reported in this USA Today article, is the matter of exactly how the federal government records certain expenses. As the article explains, this is part of a much bigger issue, namely, how the government practices accounting in general. That's for another time, though. What the article and this post are primarily concerned with is how large is the actual federal deficit. It seems that the number that is generally touted is not entirely accurate. (BTW, I know you're shocked, SHOCKED to find out that the government of all institutions is cooking the books).

It seems that the government insists on using cash accounting procedures when recording things like Social Security and Medicare benefits. To fill in the blanks: that means that all of the future obligations that the government is racking up vis-a-vis US citizens are not being recorded when they are incurred. Thus, even if the government has promised $1 trillion in benefits, it's not reporting that as an expense because it hasn't actually made good on the obligation yet. The "best" part of this is that the government is justifying this practice by pointing out that Congress can cancel those obligations at any time, i.e., simply pass legislation voiding all previously "promised" Social Security and Medicare benefits.

Digest that for a minute. Both parties are swearing up and down that they're going to save Social Security, etc., while at the same time using the fact that they could, in theory, completely renege on all of those obligations as justification for not including them in accounting records of the federal government.

Now, to be fair, there would be big problems with trying to apply the methods of accrual accounting to the federal government in this way. As Social Security chief actuary Stephen Goss says “A country doesn't record a liability every time a kid is born to reflect the cost of providing that baby with a K-12 education one day.”

On the other hand, as you can see from federalbudget.com, Social Security makes up an enormous part of the federal budget. As such, I can see reasonable people wanting it to be factored into the annual federal expenses in some way.

BTW, if the government were to record these types of expenses using accrual accounting methods, the deficit in 2004 would have been $11 trillion. Now, just to be clear, this is not the national debt (which is currently $8.6 trillion) - the total amount "in the hole" the federal government is. The $11 trillion deficit is how much farther in the hole the government went in just one year (granted, 2004 was an unusual year because of new legislation that was passed)
. Can you imagine what the national debt would look like if this type of accounting were used?

Tortillas Shortage?

Mexico is putting a price ceiling in place for tortillas.

"The unjustifiable price rise of this product threatens the economy of millions of families," [President] Calderon said. "We won't tolerate speculators or monopolists. We will apply the law with firmness and punish those who take advantage of people's need. . . .

The rise is partly due to U.S. ethanol plants gobbling corn supplies and pushing prices as high as $3.40 a bushel, the highest in more than a decade. "

Of course, if you are a maker of tortillas, and your costs are rising, and you are prevented from raising your prices, will you keep making tortillas? As Cafe Hayek notes, "So because of a bad law in the United States (the requirement to put ethanol in gasoline), the Mexicans have decided to pass a bad law that can only lead to a tortilla shortage."

Another interesting note on the situation: One of the solutions is to raise "quotas for duty-free corn imports to 750,000 metric tons (826,733 U.S. tons), most of which will come from the United States."

This means that Mexico keeps out American Corn, in spite of NAFTA, which results in corn being more expensive than it should be.

Oil Companies Getting a Free Ride?

The Tax Foundation has an interesting post regarding legislation intended to end big oil companies' "free ride" in terms of taxes while they enjoy record profits. The post is very short and worth reading. Main point: ExxonMobile paid $26.24 billion in taxes just in 3Q06 - roughly 2.5 times their profits. As Brian Phillips puts it,

"That has to be the most expensive 'free ride' in history."

French Taxes Encourage Expatriation

It seems that France's high taxes (which are intended to support its extensive social welfare program) is contributing to the erosion of the tax base by creating an economic incentive (i.e., encouraging) for wealthier people to leave the country and live abroad.

The problem with stealing from those who have to give to those who do not (particularly those who do not have as a result of their own choices) is that, sooner or later, either those who have will have no more to be stolen from them, or they will find ways of protecting it - whether it be by lobbying for legislation, putting assets in tax-sheltered financial instruments, or just plan getting up and leaving.

French Farm Subsidies

It seems that, even though French farmers receive the equivalent of $11.6 billion per year in government subsidies (under the EU's Common Agricultural Policy), 1) an average of 100 French farms have gone out of business every day for the last 50 years, 2) the number of French farm workers has dropped 2/3 in the last 25 years, 3) France’s farm exports have been declining by 3.4 percent per year since 1999, and 4) farm household income has actually fallen during the past decade, while the incomes of non-farm households in France have been going up.

Cato-at-Liberty suggests this may actually be because of the subsidies, which, qua subsidy, mitigate or remove the economic incentive for innovation that exists in a free-market situation. That is, since the French farms enjoy government hand outs and price protection, they have very little if any reason to innovate, become more efficient, become more competitive, etc. Lacking these advances, the long term outlook for French farms (or any such beneficiary) is actually degraded.

I find what follows next in the article likewise intriguing, but as pertaining to a slightly different issue:

"When the EU’s farm commissioner, Mariann Fischer Boel, warned that French farmers should seek second incomes outside the farm sector to survive, the French farm minister denounced her comments as “an insult to the social model to which European citizens are profoundly and legitimately attached.”

Is an agricultural “social model” that costs billions of euros a year and only adds to the decline of the French farm worth holding on to?"

Canadian and European Unemployment

Carpe Diem points out that, while Canada is celebrating a 30-year low unemployment rate of %6.1 places it behind 47 of the 50 states in the Union. Also, if European countries like Belgium (8.2%), France (8.6%), Germany (8%), Spain (8.4%) were added as U.S. states they would each rank #51 with the highest unemployment rates in the U.S., behind Mississippi (7.5%).

The "DC Effect"

The Club for Growth has an interesting article entitled "The 'DC Effect' on the Stock Market" in which the author, Andrew Roth, presents his calculations regarding the performance of the stock market during times when Congress is in and out of session. His conclusion is that the stock market does phenomenally better when Congress is out of session because the market gets nervous when Congress is in session because of the uncertainty surrounding what Congress might do that could impact the economy. Definitely worth reading.

Changing Natural Laws

The Club for Growth has reported via the Spokesman Review that Idaho Congressman Bill Sali has proposed a bill, the Obesity Reduction and Health Promotion Act, in the House of Representatives that aims to help obese people by lowering the Earth's gravity. The congressman argues that the power of the US House to change natural laws is seen in its ability to manipulate similar economic laws via Minimum Wage legislation. Just as those laws "help poor people", his bill would "help obese people".

All of you opposed to this bill manipulating Earth's gravity should be ashamed, ASHAMED of yourselves - why do you hate fat people!?

Minimum Workforce

Cafe Hayek has a great article entitled "Minimum-Workforce Legislation" that uses a reductio to demonstrate the economic illogic of minimum wage legislation. It's also rather tongue-in-cheek.
The premise is that, if it makes sense to have a minimum wage, which essentially says that no person's work is possibly worth less than whatever the government currently thinks it is, and which is simply the government helping people (especially poorer people) by ensuring that businesses do not pay them anything less than what the government thinks their work is worth, then it also makes perfect sense for the government to determine how many employees a business must employ - after all that would help poorer people by ensuring that there are enough jobs. Definitely worth reading.