Tag Archives: economics

Why a Wealth Tax is a Bad Idea

Here’s How Trump Should Tax The Rich

… Anyone who has a net worth over $5m (or $20m) has to pay 1-2% of that amount each year. It would be like the estate tax, except you paid it while living. Warren Buffett complains he does not pay enough in taxes. This would quiet his moaning; it would also solve some of our fiscal problems.

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The press for such a tax would be too rich to ignore and neuter outrage, if any, from the Left’s normal priest class. It’s repeatedly pointed out how thirty, a dozen, or even just eight men, hold as much wealth as the bottom half of humanity. Bill Gates would be forced to come up with a billion. The Waltons would pay $1.6B. And the Koch brothers would pay $1b.

If a 2% wealth tax was applied to everyone who had a net worth over 5 million, the revenues would be roughly $700 billion a year. That’s just about the right amount to get the budget to where it starts to make sense. This tax increase would not come out of current income, and therefore the economy would not be whacked.

On the surface, a ‘wealth tax’ seems like a good idea to raise revenue: the richest 85 people in the world control more wealth than the bottom 50%, and the top 1% of Americans control 34% of US wealth:

But this invokes a ‘fairness’ argument…is it morally justified for the government to take what isn’t theirs (even if such wealth doesn’t seem to be being put to good use). Taxation may be tantamount to saying that the US government is better at creating/managing wealth than the individuals who themselves created it. Maybe the answer is ‘yes’, to some degree. Taxes are used to pay for ‘public goods’ that keep the entire infrastructure, that even the wealthy depend on, intact – things like military, police, roads, national security, courts, etc. (although libertarian purists argue that these services could and should be outsourced to the private sector). Bill Gates alone could not fund a modern army, so taxes are a way to pool together all this wealth to pay for services that provide some sort of ‘net gain’ for society that any one individual could not possibly create for his or her own self. There is also a social welfare component. The short-term personal inconvenience and imposition of taxation to pay for healthcare and education, in the long run, perhaps is better than the alternative.

Perhaps some taxes, if the money is spent in an efficacious manner, can be a net-positive for society. But the biggest problem is that too many taxpayer dollars are being wasted on low-ROI programs. Gifted education has a high ROI because individuals in the top 5% of IQ are most likely to create economic value to society through job creation and innovation, but too much money is wasted on special education on children who, economically speaking, will amount to little in life. We need more spending for technology and fostering america’s best and brightest, not wasting it on its dullest. The data shows income and wealth is positively correlated with IQ, and that welfare dependency and long-term unemployment is negatively correlated with IQ. Too much money is wasted on public healthcare in treating people with terminal diseases, poor lifestyle choices, and for end-of-life care, when such money could be used for individuals with better prognostic markers. Instead of welfare spending to no end, how about eugenics–to at least in the long-run put a dent in America’s welfare problem, because low-IQ parents, who are often on welfare, tend to have low-IQ children who then later also go on welfare. How about instead of federal student loans for all majors and students, restricting it to high-IQ students and or STEM majors, who are the most likely to not only complete their degree but also pay back the loan. Spending trillions of dollars to spread democracy to the Middle East has been a failure.

The top 1% of income earners already pay their fair share:

The top 1% of earners pay 50% of all income tax. The bottom 20% of earners actually have a negative effective tax rate after taking into account welfare spending.

Part of the allure of the wealth tax is the perception that the wealth of the top 1% isn’t actually ‘doing anything’–in that it’s not being used to buy stuff, but rather it just sits idly in stock, cash, or real estate, while everyone else in the bottom 99% spend their income on food, housing, and other stuff that goes directly into the economy.

Although wealth at the top 1% may seem inactive relative to the bottom 99%, the wealthiest of Americans account for most of private venture capital funding. From the post Why Do The Rich Need So Much Money?:

…capitalism is expensive and the failure rate is high. Venture capital is mostly funded by wealthy, exmaples being the Space-x and Blue Origin rocket programs, both very costly and funded by billionaires Musk and Jeff Bezos, respectively. If taxes were much higher, such programs may not exist.

Investment comes from savings. If the wealthy cannot save, they cannot invest.

Long-term capital gains are taxed at a lower rate than income, but that is to compensate investors for the greater risks that they take, compared to income earners:

What the liberal ignores is that investment involves risk, potentially 100% of invested capital or more, unlike a paycheck. Or in mathematical terms, the cumulative equity curve of a paycheck is monotonically increasing whereas investments have ups and downs.

A major problem with a wealth tax it may create a major crisis of confidence, possibly spiraling into a recession or even depression. Investors may liquidate assets into cash (and then withdraw this cash from the bank) to evade the tax, depressing the overall economy, possibly creating a bank run and reducing total tax revenues, thus more than negating any additional revenues from the tax. When the Greece government in 2013 imposed a 10% wealth tax on all bank deposits, it triggered such a massive run on the banks that they never attempted that again, because it made everything worse.

Another problem with a wealth tax is that it’s essentially socialism, although very gradual. The wealthiest of Americans typically do not hold their wealth in cash but rather in assets such as stocks and real estate. If the government were to tax this wealth, they would own the stock and fractional pieces of the real estate. The government would own shares of Microsoft, Berkshire Hathaway, Google, Facebook, etc., and over many years (at 2% a year tax), this could add up to a substantial amount of ownership if the 2% wealth tax exceeds the ability of the company to grow its own assets. The government could use this ownership to influence how such companies are run, through proxy voting.

What need is policy that grows the tax base (makes the pie larger), not tries to make the pie more equal. And second, we need policy that makes better use of existing tax dollars, instead of the wasteful low-ROI spending we have now.

Why Foreign Real Estate is a Bad Investment

There is some advice that is so bad, as an act of public service it is necessary to debunk it. In this post, it’s about foreign real estate, or more specifically, why you should never buy foreign real estate.

Five reasons not to buy US real estate

12 Reasons to Buy Real Estate Overseas

Despite all the doom and gloom about US real estate bubbles, foreign real estate–with the possible exception of a handful of countries–is an awful investment, and much worse than US real estate both in terms of greater volatility and more risk.

Real estate crashes are not unique to America. Foreign real estate markets crash all the time, and they are often much longer, deeper, and more protracted than US real estate crashes. In the earlier post Advice to Ignore, real estate in the Bay Area and America, overall, has not only recovered from its 2006-07 peak, but has made new highs in many regions:

10 years is a long time to wait to break even, but it sure beats Japan, which 25 years later is still far from its 1989-1991 bubble highs:

During the final stages of Japan’s post-WW2 ‘miracle’, there was the belief that Japan would eventually ‘buy out the world’, having in 1989 bought out Rockefeller Center for $846 million, and in 1990, the Pebble Beach golf course. Many American business leaders emulated Japanese business management, culture, and mannerisms, such as by bowing, taking off one’s shoes at at home, long work hours, and fostering a culture of subservience and loyalty to the corporate hierarchy. All of that came crashing down in the early to mid 90′s when Japan’s bubble economy and buying binge finally burst. America has long since pulled ahead of Japan, which decades later has yet to recover. Buyers of Japanese real estate will likely die before ever seeing a positive return on their investment.

A major risks of foreign real estate investing is currency fluctuations. If you use your US dollars to buy property in Euros or Pounds, and the Euro or Pound loses 20% of its value against the dollar, you lose 20%, which is what happened in 2008 (financial crisis), 2011 (Greece and Spain crisis), 2014, and 2016 (Brexit). The Euro may also make gains against the dollar, but the trend for a long time has been for foreign currencies to lose their value against the US dollar. Since 2014, the US dollar has been very strong, which I predict will continue:

In the unlikely event the US dollar falls a lot, with US real estate it doesn’t matter, because the US dollar is still the world benchmark for wealth, and a store of wealth. The US dollar is not only a reserve currency, but everything (such has oil, gold, etc.) is denominated in US dollars, not Euros, Francs, Pounds, or Yen. Consequentially, the US can print as many dollars as it needs to prop up its assets, as it did in 2008-2014, and buyers of asset classes such as US stocks and US real estate benefit. Some call it fiscally reckless, but the US has the power to do this without suffering from the consequences of ‘wealth destruction’ and hyperinflation, that no other country in the world has. The central bank of Europe can print money to try to boost its economy, but such efforts may destroy wealth by weakening the Euro against the US dollar. America does not have that problem, because of dollar denomination. As an added bonus, when the US dollar falls, it makes America’s exports more competitive.

Especially since 2009, The US economy is pulling ahead of the rest of the world, with the possible exception of China. Since 2009, America has the strongest real GDP growth of all major developed nations (except for perhaps China). Why would the Euro, Aussie (Australian Dollar), Jpy (Japan), Pound, Kiwi (New Zealand), or Cad (Canadian dollar) become a reserve currency when their economies are much weaker. Rising interest rates under an inflationary, stimulus-laden Trump administration will strengthen the US dollar even more.

If Japan wasn’t bad enough, as recently as early 2014, Moscow was in the top-10 list of ‘most expensive cities’. Then came the late-2014 oil implosion, which saw oil prices fall from $100 in 2014, to $45 in late 2015. As a result, the Russian Ruble lost 70% of its value against the dollar in the span of a year, destroying the wealth of anyone who held Russian assets, because Rubles suddenly became much cheaper. Now Moscow is somewhere in the top 100-150, far from top 10.

And then in 1997-1998 there was Asian financial crisis, which saw the currencies of Indonesia, Philippines, and Thailand lose 30-70% of their value against the dollar in just a singe year. Poof–wealth gone.

Other notable examples:

Greece real estate lost over 50% of its value from 2008-2016 and is nowhere near coming back:

Ireland real estate…another train wreck, down 30-40% since 2007:

Romania…down 50% since 2008:

If you look at these charts, it’s immediately obvious that these declines are much longer and deeper than the US housing market crash, yet everyone thinks that the US housing market is the worst world in the world, due to biased media coverage. After accounting for weakness in the Pound and Euro relative to the US dollar, it gets even worse.

Yes, sometimes foreign real estate does well (Norway, Sweden, Hong Kong, Canada), but when things go south, it tends to be much worse than in the US. This is due to currency weakness, bubbles and fads, and smaller economies being more vulnerable to weakness. America is such a big and important economy, that it’s immune to these three things. With US real real estate investing, the returns may not be as great compared to some countries, but they are more consistent and smoother, and there is no currency risk.

A major reason why US real estate is so resilient–in addition to central banks having the power to prop up American assets, is because of huge private equity and foreign demand. Smart, rich Chinese buyers are flocking to the safety of US real estate and the stability of the US dollar. The Chinese know that $1 billion of US dollars is always $1 billion, but a billion US dollars worth of Yen or Euro may be something different tomorrow. With the exception of maybe Monaco, Cayman Islands, and parts of Northern Europe, wealthy Americans seldom buy foreign real estate (Warren Buffett will never touch foreign real estate), but wealthy foreigners love to buy American real estate, so it makes sense to own real estate in the country where all the rich people are buying.

Yes, foreign real estate may have higher yields and maybe you will save some money because the cost of living is lower, but what good does that do when your principal is destroyed in a bubble or currency crash. Also, when prices fall, so too will the rent, so the yields are often unchanged.

Other benefits of US real estate include the overall geopolitical stability of America and its government. As heated as the Trump vs. Clinton campaign was, it pales in comparison to the politics of much else of the world, where the stakes are much higher. In 2013, the government of Greece took 10 percent off the top of each bank account holder. That would be unheard of in America, but such occurrences are not too uncommon in smaller countries.

There are no shortcuts. High yield almost always comes with hidden risk that isn’t manifested until it’s too late, as the investors of Madoff’s fund learned the hard way. US real estate offers solid, consistent returns going back over a century, and with much less risk than foreign countries.

The American Dream Still Exists–If You’re Smart Enough

From Freakanomics Radio: Is the American Dream Really Dead?

It depends how you define it and for whom. The podcast defines the ‘American Dream’ in terms of upward mobility, or the percentage of people born in the bottom fifth of income who advance to the top 20%. Because the size of each bracket is always fixed at 20%, the mobility rate (going from the lowest bracket to the highest) is always between 0-20%. San Francisco and San Jose have higher levels of upward mobility (13%) than Atlanta (5%). The main guest on the podcast, Stanford professor of economics Raj Chetty, argues that environmental factors, specifically the neighborhood a child grows up in an early age (before the age of 9), plays a major role, and that children in who grow up in areas with a lot of ‘social capital’ have higher rates of upward mobility.

Predictably, the podcast doesn’t mention IQ or how some groups may be inherently smarter than others. So does that mean we can discard HBD? I disagree. On an individual basis, all else being equal, smarter people will have a higher likelihood of upward mobility. As discussed in earlier posts, the US economy is becoming increasingly bifurcated and deterministic, with biological factors such as IQ playing an increasingly important role in determining who succeeds (or has the most potential to succeed) or fails, and such determination is made very early in life.

Kids who are ‘wired for success‘can easily learn high-paying skills such as coding. According to an immensely popular Reddit AMA, one such individual taught himself a fairly difficult programming language in under a year using self-help books, upon which he developed a complicated app, making himself and his company presumably a lot of money. His story is the epitome of the American dream – to start from nothing (as he did) and then become successful in a relatively short period of time through one’s own efforts and gifts.

Also, the fact the AMA was so hugely popular, getting over 40,000 votes and 4,000 comments, is further evidence we’re in the era of the ‘STEM celebrity‘, which I wrote about in 2014 and 2015, and is another example this blog correctly predicting and observing nascent social and cultural trends.

For the high IQ, they are on what appears to be a permanent plateau of abundance, for which the American Dream is alive and well. Obviously, they still have to work to attain it, but as the Reddit AMA above shows, success comes much faster and easier than for most, and the payoffs can be huge (as the meteoric success of websites and apps such as Uber, WhatsApp, Instagram, Facebook, Google, and Twitter show). Never before in the history of the world has there been a better time to be smart and rich. But for those who make up the ‘fat middle’ of the Bell Curve, not so much. I believe the sun has set on the American Dream for those people.

This pessimism has to do with how the US economy has evolved, but also the winner-take-all nature of post-2008 American capitalism, in which there are too many losers and few winners, the latter which keep growing by taking advantage of cheap borrowing costs and globalization. Entrepreneurs of average IQ tend to start businesses that deal with tangible products–restaurants, grocery stores, clothing stores, and auto repair shops–but such businesses also have high start-up costs because a lot of space and labor is required. But since the 80′s, overhead costs (rent, insurance, legal, advertising, etc.) have surged relative to inflation, and since 2008 credit has become more scarce because banks are reluctant to lend, increasing the failure rate for businesses that have high initial capital requirements.

The technology industry, especially coding, is largely insulated from these trends because the start-up costs are much lower: you don’t need many employees or a lot of physical space to create an app or a website. A team of three or so people in a singe bedroom or garage can code an app potentially worth millions or even billions of dollars should it go viral. Getting that kind of growth and ROI with a brick and mortar business is unheard of. All this growth in the technology and financial sectors over the past few decades has made the surrounding west and east coast real estate among the wealthiest in the nation:

… 70 of the top 100 ZIP codes nationwide are in California and 20 are in New York state. The remaining 10 include two each in Connecticut, Massachusetts and New Jersey and one each in Florida, Maryland, Nevada and Washington state.

On overage, tech jobs not only pay more than construction and other ‘blue collar’ jobs and sectors, but high-IQ jobs also tend to be more stable. In the 80′ and 90′s, US auto workers were hit hard by foreign imports, the shuttering of domestic auto factories, and the demise of auto unions. Hundreds of thousands of jobs were lost, to never return, and the workers that remained faced lower pay. Then in 2006-2008, the housing market burst, again hurting blue collar workers, in the construction industry, who tend to be of average IQ. Those jobs also didn’t recover even though housing prices have rebounded, because too many homes were already built in the 2003-2007 boom. And in 2014-2015, the energy market imploded as oil fell from as high as $110 in 2013 to as low as $35 in 2016, and as many as a million workers in various energy sectors and industries lost their jobs, due to factory closures. Again, those jobs haven’t returned. The bursting of the the bubble in 2000 hurt tech jobs to some degree, but it was much less longstanding than the prior examples.

Despite record high stock prices and earnings, most of the job growth since 2008 has been in the low-paying service sector. High-IQ jobs that require advanced degrees fared the best and have seen strong wage growth, but middle-class jobs that in the past only required a high school diploma were hollowed out. And then when you add all the student loan debt, compounded by weak job prospects, and it’s understandable why so few are celebrating the DJIA recently crossing the 20,000-point milestone.

It may not seem fair, but that’s the economy we have. For those who are smart, the American Dream dream is still possible. For everyone else, maybe not.

Stagnant Inflation-Adjusted US Wages: Putting Things in Perspective

Headlines about stagnant inflation-adjusted wages in the US, are becoming increasingly common. Real wages have not budged since the 60′s:

However, WSJ had an article discussing how wages are higher when measured by a different inflation index, and also after accounting for increased employee benefits in the form of employer-subsidized healthcare.

This trend is not unique to America; wages have been stagnant in all developed countries:

Also ignored in this often partisan debate that blames so-called corporate greed, is the role of utility and buying power, which has surged despite flat wages.

After adjusting for buying power, utility, and the strong US dollar, American workers are getting a good deal relative to foreign workers. The US dollar is the strongest it has been since 1986 and inflation remains low in the US:

This means American workers can take their dollars and buy far more than comparable workers in the UK, Australia, or elsewhere. Consider a hypothetical economy that has high inflation, high inflation-adjusted wages, but also slow inflation-adjusted GDP growth (stagflation). Because inflation-adjusted wages are rising, it may seem like workers are prospering, but their local currency offers a very poor purchasing value when converted back into US dollars.

For example, in 2014, in the span of just three months, the Euro and Pound lost 20% of their value relative to the US dollar. Did wages rise 20%? No, effectively equating to a 20% pay cut and wealth tax. The US dollar is special because it’s a universal unit of value, so a falling dollar hurts American wealth far less than a falling local currency hurts other countries.

A laborer in such a country may spend a good chunk of his or her income on basic necessities, as the hyper-inflationary crisis in Valenzuela shows, whereas low-skilled workers in America for the same number of hours can buy far more. American wages offer much more utility and value: Netflix, abundant credit, stores stocked with cheap food; cheap computers, phones, and TVs for the entire family. Similar electronics are more expensive in the UK:

Although healthcare and college have become more expensive,

…electronics and most food is cheaper. Additionally, an increasing percentage of healthcare and education costs are subsidized by federal or private lenders. Few pay full tuition or healthcare costs out-of-pocket. But also, there is much more utility. A TV today is superior to a TV made 60 years ago, costs fewer hourly wages to purchase, and has vastly more channels to choose from (instead of just 5 or so, which is how it was half a century ago). There are new drugs that didn’t exist decades ago. The internet has replaced libraries. Amazon has replaced inconvenient department stores.

Although UK, Australia, and Canada have higher wages, everything else is more expensive to compensate. (Such as rent, heating energy, electronics, prioritized healthcare (not universal healthcare that long waits. Even in countries that have universal healthcare, many patients will opt for the private plans if they can afford it).)

Low inflation and strong purchasing power is why America often ranks high on various ‘cost of living’ indexes, which take into account rent, inflation, cost of basic goods and services, and local wages. For this reason, American tourists in Britain are often taken aback by how small and expensive everything is, as they are not accustomed the sudden downgrade in standard of living despite Britain being a ‘first world nation’.

This is probably why so many people want to immigrate to America, because despite rising wealth inequality and stagnant inflation-adjusted wages, it’s still better than their home country. The trend could also be part of America’s transition to a post-scarcity economy where most citizens have near-zero or negative net-worth but have abundant purchasing power and technological utility, as well as subsidized healthcare (expansion of Medicaid) and housing (expansion of public housing).

The ‘New World Order’

From Unz: Risks and Opportunities for 2017

Russia is now the most powerful country on the planet. I know, I know, the Russian economy is relatively small, Russia has plenty of problems and just a year ago Obama dismissed Russia as a “regional power” while McCain referred to her as a “gas station masquerading as a country”. What can I say? – these two imbeciles were simply wrong and there is a good reason, plenty in fact, why Forbes has declared Putin the most powerful man on earth for four consecutive years. And it’s not just because the Russian armed forces are probably the most powerful and capable ones on earth (albeit not the largest ones) or because Russia has successfully defeated the USA in Syria and, really, the rest of the Middle-East. No, Russia is the most powerful country on earth because of two things: Russia openly rejects and denounces the worldwide political, economic and ideological system the USA has imposed upon our planet since WWII and because Vladimir Putin enjoys the rock-solid support of about 80%+ of the Russian population.

Even though I’m on the ‘right’, I’m not so quick to jump on the ‘Russia is the greatest thing ever’ bandwagon. People said the said thing in the late 80′s, too, that Russia would dominate, and then like a house of cards it folded. Putin having 80% support is kinda meaningless considering the country is run like an oligarchy anyway. Russia’s economy is weak and highly dependent on oil and gas prices being high. When oil prices plunged in 2008 and in 2014, Russia’s economy contracted significantly. Russia also has high bond yields on its debt and a weak currency. Unlike America and China, Russia’s very deficient in intellectual property exports.

The ‘new world order’ is not Russia, rather it’s the regions below:

America – west and east coasts; Massachusetts
China – four major cities
Northern Europe – Oslo, Stockholm, Davos

The leader by far is America, with it’s unstoppable dollar, eight consecutive years of GDP growth, the election of Trump, and the biggest and longest stock bull market ever. For 2017, I predict the US dollar will continue to surge as Europe struggles with slow growth, Islamic terrorism, debt, and uncertainty…The only way the US dollar falls is if non-American countries outperform, economically, relative to America, which won’t happen as long as the rest of the world continues to be economically weak as it has been since 2011. There’s no reason why Europe, South America, Russia, and the Middle East will stage a meaningful economic recovery. Another reason is that the fund managers who bid up foreign currencies between 2002-2008 and in 2009-2011 are not going to make that mistake again, having been burned twice. As foreign countries rack up debt to futility inflate their dying economies, this pushes their currencies lower and consequently lifts the US dollar, due to the ‘fight to safety’ trade. Yen, Euro, Pound, Aussie, and Canadian dollar are never going to recover…stick a fork in em’. This also explains why Bitcoin is doing so well and will continue to rise, as a means of transferring capital out of countries with doomed currencies. Bitcoin is going much higher and I have been long Bitcoin since 2013.

Although America, as a ‘whole’, is one of the leaders of this ‘new world order’, not all of America contributes equally. The ‘epicenters’ are the Bay Area (especially, the Silicon Valley–the technology capital of the word, home to Apple, Facebook, Google, etc.). Same for China, which has Ali Baba, Baidu, and many other leading technology companies. Europe and Russia also have technology companies, but they don’t exert nearly as much influence as America’s and China’s tech companies. The Bay Area also has among the best real estate markets in the world too. This tiny region controls so much of how the world consumes and processes information, whether it’s the Twitter feed, the Facebook feed, or Google search results. In this same region, there is also Caltech, UC Berkeley, and Stanford, three of the most prestigious universities in the world. Southern California, which has Hollywood and UCLA, is also important, but not as much as the Bay Area.

Another ‘epicenter’ is Seattle, where Microsoft, Starbucks, and Amazon are headquartered. And also, Massachusetts, which has Harvard and MIT, two hugely influential institutions. Additionally, there is New Haven, Connecticut, home to Yale; Providence, RI: Brown; Hanover, New Hampshire: Dartmouth; and so on. Also, Washington D.C., for obvious reasons. Then there is also New York, specially, Manhattan, home of Wall St. and the two most important stock exchanges in the world: the Nasdaq and the NYSE. And Sagaponac, NY, the most expensive zip code in America. So that pretty much covers the most important and influential parts of America (but also most of the world, too).

Despite the protectionist and anti-globalist sabre rattling during the campaign, China–United States relations will strengthen further with Trump as president, and will remain the two most dominant countries in the world, by far, for the foreseeable future. America, especially the Bay Area and New York, will remain more than ever a magnet for China’s high-IQ rich, as China’s cognitive and financial capital floods America’s coasts. As much as some want to believe we’re in a post-America era, the rest of the world can’t get enough of America. The four major cities of eastern China – Shanghai, Beijing, Guangzhou, and Shenzhen – are also ‘epicenters’ or constituents of this ‘new world order’, and like Silicon Valley, are full of innovation and technology, as well as having a very strong real estate market. Like Silicon Valley, it’s somewhat insular, high-IQ, and high-trust, in contrast to most parts of the world, that are much less intelligent and more corrupt and incompetent. China has become so important in recent years to America that even the smallest of news over there is picked up by the American media, and vice-versa.

Finally, there is northern Europe, specifically, the Nordic countries Denmark, Finland, Iceland, Norway and Sweden, where the global elite retreat, insulated from the occasionally undesirable consequences of their actions and general pubic disdain. Other countries that are part of the ‘elite’ include Austria and Switzerland. The capitals Oslo and Stockholm are like quintessential ‘socialist utopias’ consisting of high living standards and perpetually rising real estate for those who are wealthy enough to afford it, and, overall, are high-trust societies with low crime and no Islamic terror.

Debunking the 90% Eisenhower Income Tax Myth

From Unz: The Trump Bubble

The author, Mike Whiney, cites a study that the US economy did better when income tax rates for top earners were at 80-90% during the Eisenhower administration, compared to around 34% today.

“A study from the Congressional Research Service — the non-partisan research office for Congress — shows that “there is little evidence over the past 65 years that tax cuts for the highest earners are associated with savings, investment or productivity growth.”

In fact, the study found that higher tax rates for the wealthy are statistically associated with higher levels of growth…

The CRS study looked at tax rates and economic growth since 1945. The top tax rate in 1945 was above 90 percent, and fell to 70 percent in the 1960s and to a low of 28 percent in 1986.
The top current rate is 35 percent. The tax rate for capital gains was 25 percent in the 1940s and 1950s, then went up to 35 percent in the 1970s, before coming down to 15 percent today — the lowest rate in more than 65 years.

Lowering these rates for the wealthy, the study found, isn’t aligned with significant improvement in any of the areas it examined…

There is one part of the economy, however, that is changed by tax cuts for the rich: inequality….

The share of total income going to the top 0.1 percent hovered around 4 percent during the 1950s, 1960s and 1970s, then rose to 12 percent by the mid-2000s. During this period, the average tax rate paid by the 0.1 percent fell from more than 40 percent to below 25 percent.” (Study: Tax Cuts for the Rich Don’t Spur Growth, CNBC)

This oft-cited study by the left is easily debunked on several fronts:

To assume high taxes spurred growth is confusing correlation with causation. It’s possible GDP growth would have been even higher had taxes been lower.

Although the top .1% have seen their wealth grow more than the bottom 90%, the top.1% produce economic value relative to the total size of the economy than they did decades go, due to factors such as globalization and technology. But also, declining long-term capital gains taxes also plays a role, since the wealthiest tend to derive their wealth from capital, not income and wages:

There a good article by Misses that debunks the 90% tax rate myth. The highest tax rate, 90%, only applied to those earning over $3,425,766 (when adjusted for inflation), which was pretty much no one:

In 1958, out of 45.6 million tax filers, only about 10,000 reported incomes subject to the 81% rate or above. This means only .02% of filers had any income taxed at the 81% rate, let alone the 91% rate! (note: the 81% bracket was from $140,000-$400,000)

Reliable data concerning what top income earners actually paid in taxes during the 50’s is hard to come by, but ironically, Thomas Piketty (who is best known as the French economist promoting progressive tax rates) compiled data estimating tax rates in 1960, when the top rate was still 91%. According to his data, shown in the chart below, the top .01% of income earners paid an effective 31% income tax rate in 1960, compared with a rate of 25% in 2004. While slightly higher, it’s fairly similar considering the huge variation in marginal rates (91% vs 36%). Piketty does claim the rich were more affected by corporate tax rates in the 50’s, as shown on the chart, but the Manhattan Institute has a good rebuttal to that finding in this paper.

Also, one would assume with taxes so high, that tax receipts as a percentage of GDP would also be much higher, but they weren’t:

This is partly because there were much more generous tax deduction loopholes decades ago, such as being able to deduct significant capital losses from income (instead of just $3000/year). Or the ability to offset income taxes by buying a home and then gradually depreciating the home every year, but while also collecting rental income on the home (to cover the mortgage). Tax reforms of 1964, 1969, and 1986 gradually patched these loopholes.

But what was probably the biggest lost deduction for wealthy individuals was the elimination of deductions on passive investment losses on real estate. Before 1986, wealthy individuals would often buy real estate with no hopes at all of it cash flowing. That wasn’t the point. The point was that real estate is depreciated every year in the eyes of the IRS. Even though in the long run, properties usually go up in value, the IRS assumes that every twenty-seven-and-a-half years a property’s value will depreciate to zero.

This “loss” can be written off. So, for example, say a man earning $100,000 a year buys a property worth $275,000. He rents out the property and breaks even on it. The tax code allows that person to write off $10,000 as a loss which he can count against his income for that year. So now he only has to pay taxes on $90,000. If he owned ten such properties, his income would be zero, at least according to the IRS.

Many decades ago, the IRS actually considered real estate to be a depreciating asset. Not anymore:

When the income tax rates were cut under Reagan, this loophole was mostly closed in exchange under the Tax Reform Act of 1986. Only the mortgage interest deduction remained for real estate for most taxpayers. Under the current code, if a lawyer earns $500,000, they can only deduct $3,000 in all losses, no matter how real or large.

Drugs and Tariffs

I saw this linked from Free Northerner’s blog: An Economist’s Cautionary Note on Free Trade

Targeted tariffs won’t raise consumption. They won’t spur economic growth. They will lead to more expensive goods, and less consumption. David Ricardo was right on all that. Comparative advantage still exists, and be very wary of anyone who talks about free trade without acknowledging this.

But they might also lead to more employment. And this may well be worth it in terms of the quantity that the economist’s social planner is meant to care about, namely total welfare.

It might lead to fewer rust belt whites killing themselves with opiates, because their communities are totally hollowed out with everybody sitting around on welfare without any purpose in their lives.

If steel products cost slightly more as a result, personally that doesn’t strike me as the end of the world.

As I explained a few weeks ago, tariffs both raise prices and hurt employment, hurting the lowest of income earners. The reason is because America exports a lot of stuff, and increasing prices for imports will lower consumer demand for imported goods, but this will also lower foreign demand for America’s own exports, hence hurting American jobs. This is because America trades its exports for imports. Higher import prices hurt American retailers, costing jobs. Also, companies will find ways to evade the tariffs, such as choosing countries that don’t have tariffs.

Here is the cautionary tale regarding tariffs on Chinese tires:

But other trading partners rushed to fill the void. Shipments from South Korea, Thailand and Indonesia doubled in value, more than offsetting the decline in Chinese-made tires.

The Peterson Institute for International Economics reached very different conclusions: The think tank said the duties saved a maximum of 1,200 manufacturing jobs and when factoring in the higher American consumer cost for tires, resulted in the U.S. economy losing about 2,500 retail jobs.

The Smoot-Hawley bill, signed in 1930, is another example of how tariffs can backfire, by making the Great Depression worse:

Eighty four years ago on this day President Hoover signed the now-infamous Smoot-Hawley tariff bill, which substantially raised U.S. tariffs on some 890 products. Other countries retaliated and world trade shrank enormously; by the end of 1934 world trade had plummeted some 66 percent from the 1929 level.

Regarding opioid abuse, the author seems to be making a generous assumption that more jobs will equal less drug abuse in ‘rust belt’ states such as Ohio, Michigan, and Pennsylvania. Ohio is like the ‘opioid capital’ of the United States, due to the rampant abuse there:

If there were a one-to-one correlation between unemployment and opioid abuse, we would expect unemployment to be highest in those states, but it’s not:

Ohio’s unemployment rate is close to the national average. Look at Oklahoma: low unemployment, lots of opioid abuse.

Although Ohio lost 300,000 manufacturing jobs between 1999-2009, it gained back those jobs in other areas:

This suggests the problem has more to do with drug addiction and welfare than insufficient jobs. Although the unemployed are more likely to abuse drugs, there is more to it than that. For example, there are two questions regarding causality: does drug abuse cause unemployment or are people taking drugs because they are unemployed? I’m skeptical that drug addicts who are on welfare are going to suddenly ‘go clean’ if jobs become available. Another problem is that welfare may be a ‘better deal’ than going to work:

We should be more honest about the difficulty of persuading people on that $12 dole to give it up and work for $8. They are not irrational to find that bargain unappealing, especially when a private-sector economy groaning under the titanic burden of government has a hard time producing good employment opportunities for marginal workers.

Fallacy of Composition

Between 2008-2010, during the depths and aftermath of the financial crisis, pundits envisioned that the ‘old’ status quo would be replaced by a more egalitarian ‘new’ one of less wealth inequality, as well as slower economic growth and asset price stagnation, which some called ‘the new normal’. With the U.S. stock market and and U.S. economy in its eighth strait year of expansion, how wrong they were. All pre-2008 trends are not only intact, but have accelerated, as I predicted in 2011 they would. Had you asked pundits in 2009 that seven years later we would still be in an economic expansion and bull market, the answer would have been a unanimous ‘no’, save for myself and maybe one or two others out of hundreds. But the expansion, already in its eight year, is actually accelerating right now, prompting the fed to raise rates and boost the rate hike outlook for 2017-2019. The fed foresees three rate hikes for 2017 alone, although I doubt more than two will materialize.

The biggest and most common pitfall in predicting the economy, and why so many people got the 2009-2016 bull market wrong, is the fallacy of composition, in which one assumes that a singe single piece of data is indicative or representative the entire economy, when it’s really just predictive of the single data point and not necessarily more. Or in the words of Freud, sometimes a cigar is just a cigar.

The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole (or even of every proper part). For example: “This fragment of metal cannot be fractured with a hammer, therefore the machine of which it is a part cannot be fractured with a hammer.” This is clearly fallacious, because many machines can be broken apart, without any of those parts being able to be fractured.

Weak job data and a low labor force participation rate is evidence of a weak labor market but not necessarily a weak economy, nor does weakness in one area (labor)mean weakness in another (profits and earnings). The United States economy is bigger than the labor market, although the labor market is an important component of it.

Culture, states, politicians, and national and local governments, too, are just components of a bigger conglomeration. The fallacy is invoked again in the assumption that the failure of one component means failure of the entire system. So the question is, how many components must fail before the entire system fails, and when. That is harder to answer.

Related: The Overton Bubble

Trump Presidency Analysis

A Rising Stock Market Does Not Signal Economic Health

Are we in a stock market bubble? No. Will there be a crash anytime soon? No. Those are just opinions, not facts, but they are no worse than 1000+ word analysis by ‘experts’ who are often wrong all the time. My record, backed by years of blogging here and elsewhere, is almost always right.

The stock market and economy economy is driven primarily by four things: consumption, production, profit & earnings, and innovation. All of those things are doing well: consumer spending is at record highs, S&P 500 profits and earnings are at record highs, there is a lot innovation in Silicon Valley (such as Amazon and Google delivery drones and self-driving cars), and America produces and exports a lot of intellectual property. As far as the stock market and economy is concerned, the importance of GDP growth is overstated. GDP has to be put in the proper context as only a single piece of data in bigger economic picture, which the media often fails to do, treating GDP and employment as the only two pieces of data that matter and ignoring the role of profits & earnings.

The media has pages of content to fill in order to sell advertising. Every year the media proclaims it’s a ‘new paradigm’, because if it weren’t, who would listen to them and click the virus-filled ads next to the story? Clicks are the lifeblood of the news media.

When Presidents Defy Economic Gravity, Gravity Usually Wins

If Mr. Trump really wants to boost manufacturing employment he would figure out how to train workers to fill some of the 334,000 manufacturing jobs that are now vacant. If he doesn’t have the patience for that, he should just raise tariffs across the board. It would hurt consumers and could start a trade war, but at least they’d be transparent.

The problem with job training is it inevitably hits the barriers imposed by biology: age (all else being equal, it’s typicality harder for older people to learn new skills than younger people) and IQ (not everyone can be a coder). And also economic and incentive barriers: there simply may not be any jobs, so no training will help, or the jobs pay so little and or are so difficult and tedious that going on welfare or faking disability is better. Should technology render too may jobs obsolete (should the Luddite Fallacy cease being a fallacy), warehousing may the the only option, whereby the millions of people who are rendered obsolete by technological and economic fores are housed in cheap communal dwellings at taxpayer expense, along with birth control and immigration restrictions, to control population growth.

Something similar happened when Mr. Obama imposed tariffs on Chinese tires in 2009: Chinese imports plummeted while other countries’ jumped. The action saved at most 1,200 jobs, a study by the Peterson Institute for International Economics found, at a cost to consumers of $900,000 per job because of higher prices.

As the passage above shows, tariffs would increase costs, making it harder to fund a post-labor welfare state. It’s better to have cheap goods and higher unemployment under a welfare state than high inflation and overpaid jobs, and also a large welfare state (because tariffs wont create jobs, but actually destroy them.)

Tariffs make everything worse: Tariffs Won’t Bring Back American Jobs – They Will Destroy Them:

According to a study commissioned by the Consuming Industries Trade Action Coalition, steel-users — such as the U.S. auto industry, its suppliers, heavy construction equipment manufacturers and others — were harmed by higher steel prices.

It is estimated that the steel tariffs caused at least 4,500 job losses in no fewer than 16 states, with more than 19,000 jobs lost in California, 16,000 in Texas and about 10,000 each in Ohio, Michigan and Illinois.

But Trump and his staff are not idiots and are not going to ruin the longest uninterrupted bull market and economic expansion ever, by passing tariffs and provoking unnecessary trade wars. Trump will probably focus initially on the tax cuts and defense spending, both which will inflate the economy, inflate the stock market, and energize his base of voters and thus helping his odds of being reelected. Trump needs the economy to not go into recession (the odds are slim, but if it happens, it may doom his re-election). Such spending will also create debt and inflation, but most voters will not notice either. Nominal stock market gains and nominal GDP growth are what matter most, because the media doesn’t differentiate between real growth and nominal growth.

Those who expect Trump to initially enact sweeping border and immigration control and trade policy renegotiation may be disappointed, as I predict Trump will put those issues on the back burner to focus on tax cuts, stimulus, and defense spending. I could be wrong, but what has to be understood is that Trump is virtually guaranteed the nomination in 2020. The only way he could conceivably lose is if the economy fails or the left has a really good candidate. If Trump reneges on immigration and jacks up the national debt even more, neither the left nor the right can use it against him in 2020, being that the left is pro-immigration and also, to a slightly lesser extent, pro-deficit spending. And given that Trump is guaranteed the nomination in 2020, he doesn’t need too toe a hard line on immigration like he did in 2015. By passing a lot of stimulus early in his presidency, he can post good GDP and stock market gains that will help his reelection.

Trump’s policies of handouts and cronyism, should they be enacted, will boost nominal profits and earnings, and hence the stock market, due to inflation. Even if Congress balks on the tariffs and handouts, the tax cuts and defense spending will pass and help the market a lot. If I had to predict, the US economy will see 2-3% YOY GDP growth, which is considered slow or average, but 5-10% YOY earnings expansion and at least a 20-30% rise in the S&P 500 over the next four years.

Trump and the Secretary of State “Brand” Decision

Trump is just a month from assuming office…unless he’s trying to convince Congress, persuasion is less important being that he won. All he needs to do now is not screw things up until reelection. Cabinet picks don’t matter much, and owing to rational ignorance and apathy, most people are unable to name more than two current members of Obama’s cabinet [1] (excluding Biden). Even if he wanted to, Trump can’t mess things up too badly, because the economy and society is becoming increasingly autonomous. Since 2008 or so, we’ve been in an autopilot economy where we’re like automatons just carrying out the motions, as the economy becomes less and less dependent on the actions or input of any one individual, or even politicians. Also, we’re reached a point where the ‘business cycle’ has been mastered or tamed (sorta like a hydrostatic equilibrium that keeps a star intact), meaning far fewer recessions or bear markets in America. The boost-bust cycle has become a permanent protracted boom.

[1] Here are all off them courtesy of Whitehouse.gov:

Department of State
Secretary John Kerry

Department of the Treasury
Secretary Jack Lew

Department of Defense
Secretary Ashton Carter

Department of Justice
Attorney General Loretta E. Lynch

Department of the Interior
Secretary Sally Jewell

Department of Agriculture
Secretary Thomas J. Vilsack

Department of Commerce
Secretary Penny Pritzker

Department of Labor
Secretary Thomas E. Perez

Department of Health and Human Services
Secretary Sylvia Mathews Burwell

Department of Housing and Urban Development
Secretary Julián Castro

Department of Transportation
Secretary Anthony Foxx

Department of Energy
Secretary Ernest Moniz

Department of Education
Secretary John King

Department of Veterans Affairs
Secretary Robert McDonald

Department of Homeland Security
Secretary Jeh Johnson

Understanding Marx

Aaron dismisses the study of Marx as useless , but possibly falls into the the tempting trap of reductionism.

The study of Karl Marx is more than Communism, which of course is a failure, as mass deaths during communists regimes or the economic under-performance of communist countries versus capitalistic ones (North Korea v. South Korea, for example), shows. No one disputes this.

Likewise, studying Hitler doesn’t mean you legitimize Nazism. One should learn from the mistakes of history to avoid repeating them. Also, just learning about this stuff is interesting in and of itself.

Mark had some beliefs that even some on the ‘right’ can support – such as post-labor and post-scarcity societies in which technology and automation supplants the needs for work. The far-left, such as Obama, Keynes, and FDR, on the other hand, advocate ‘full employment’ even if such jobs create no economic value, are unprofitable for employers, and or are subsidized by taxpayers.

Post-scarcity economy

Karl Marx, in a section of his Grundrisse that came to be known as the “Fragment on Machines”,[22][23] argued that the transition to a post-capitalist society combined with advances in automation would allow for significant reductions in labor needed to produce necessary goods, eventually reaching a point where all people would have significant amounts of leisure time to pursue science, the arts, and creative activities; a state some commentators later labeled as “post-scarcity”.[24] Marx argued that capitalism—the dynamic of economic growth based on capital accumulation—depends on exploiting the surplus labor of workers, but a post-capitalist society would allow for:

Keynes, whose ideas are the intellectual forebear of Obama, believed full-employment at any cost was an ideal to always strive for, in contrast to Marx who rejected such idealism. But I’m not saying Marx is right about everything – Marxism is predicated on the belief workers are exploited by capitalism. I disagree, arguing that workers are NOT exploited and have a ‘good deal’. Marx also believed capitalism is self-limiting and would eventually fail, which I again disagree with.

Some of Marx’s ideas, such as Historical Materialism, which the exception of the parts about ‘revolution’, ‘liberation’, and ‘class struggle’, are not much different from introductory economics, or just plain common sense:

The basis of human society is how humans work on nature to produce the means of subsistence.

There is a division of labor into social classes (relations of production) based on property ownership where some people live from the labor of others.

The system of class division is dependent on the mode of production.

The mode of production is based on the level of the productive forces.

Society moves from stage to stage when the dominant class is displaced by a new emerging class, by overthrowing the “political shell” that enforces the old relations of production no longer corresponding to the new productive forces. This takes place in the superstructure of society, the political arena in the form of revolution, whereby the underclass “liberates” the productive forces with new relations of production, and social relations, corresponding to it.

Also, the ‘Marxian framework’ or ‘Marxian dialectic’ is an economic-centric one, referred to as ‘historical materialism’ or ‘dialectical materialism’ (the two are different in subtle ways that can be ignored for the sake of this discussion). In contrast to Weber and Hegel, Marx believed the entire world ‘revolves’ around economics – that economics, not culture or religion, is of foremost importance to all facets of human nature and society. Marx was obsessed with economics and believed it to be the driving force behind everything, and that all societal problems could be reduced to economic ones. In that regard, pretty much all economists, including even Milton Friedman, Rand, Hayek, and Rothbard, are at least tangentially intellectually related to Marx, in seeing the world from an econo-centric point of view, not a religious, cultural, or nationalistic one.

For example, Hayek:

In the book’s postscript, “Why I Am Not a Conservative,” Hayek distinguished his classical liberalism from conservatism. Among his grounds for rejecting conservatism were that moral and religious ideals are not “proper objects of coercion” and that conservatism is hostile to internationalism and prone to a strident nationalism.

This is related to Historical materialism:

Central to Marx’s thought is his theory of historical materialism, which argued that human societies and their cultural institutions (like religion, law, morality, etc.) were the outgrowth of collective economic activity.

Marx’s theory was heavily influenced by Hegel’s dialectical method. But while Marx agreed with Hegel’s basic dialectical thesis of social change, he disagreed with the notion that abstract ideas were the engine. Rather, Marx turned Hegel on his head and argued that it was material, economic forces—or our relationship to the natural, biological, and physical world—that drove the dialectic of change. More specifically, the engine of history rests in the internal contradictions in the system of material production (or, the things we do in order to produce what we need for survival).

And from Wikipedia:

Employing a critical approach known as historical materialism, Marx propounded the theory of base and superstructure, asserting that the cultural and political conditions of society, as well as its notions of human nature, are largely determined by obscured economic foundations. These economic critiques would result in influential works such as Capital, Volume I (1867).

I discuss this in more detail here:

Why Progressives Lose Their Minds When They Lose Elections

The Slavoj Žižek-NRx Connection

This difference between materialists and idealists is that for the former, matter is the antecedent of spirit; for the latter, it’s reversed.

Unexpectedly though, Marx and Rand tenuously share similarities, in both advocating a ‘materialist’ view of the world:

Now we begin the process of the deconstruction of Rand’s views. The role of materialism in the philosophy of Marx and Rand can be used as a good starting point. Rand advocated in her writing as a materialist, not doing any less in that regard than Marx. The latter seems, however, by several orders of magnitude a more sophisticated philosopher, as he thoroughly knew the German philosophy, with its deep interest in the complexities of the process of cognition. The main principle of the philosophy of “objectivism” Rand formulated as: “Facts are facts and are independent of human feelings, desires, hopes or fears.” Adjacent to the other premise – a principle of the “identity” – “A is A”, meaning that “the fact is a fact” (the third part of “Atlas Shrugged” is subtitles “A is A”) strikes with primitivism, as well as her critique of Kant. Only Lenin, in his book Materialism and Empirico Criticism published in 1908, had a philosophy almost exactly like Rand’s which was formulated a half-century later: “Consciousness is the mirror image of reality.” Any further than Lenin, the layman in philosophy, though educated for those times, Rand did not go.

Whether materialism is the same as objectivism is heavily debated.

Somewhat similar to Hegel, Max Weber believed that religion underpins capitalism:

This Weber called the “spirit of capitalism”: it was the Protestant religious ideology that was behind – and inevitably led to – the capitalist economic system.[84] This theory is often viewed as a reversal of Marx’s thesis that the economic “base” of society determines all other aspects of it.[73]

The weird thing is, Weber was actually a liberal, founding the German Democratic Party in 1918, the German-equivalent of Bernie Sander’s brand of democratic socialism today, and his analysis influenced the creation of the Frankfurt School – or what some call ‘Cultural Marxism’.

Weber also made a variety of other contributions in economic history, as well as economic theory and methodology. Weber’s analysis of modernity and rationalisation significantly influenced the critical theory associated with the Frankfurt School. After the First World War, Max Weber was among the founders of the liberal German Democratic Party.

The Frankfurt School, related to post-structuralism, rejects the Marxian and positivist ideal that the complexity of society can be reduced to economics. Although it’s related to Marxism, adherents oppose the ‘Stalinesque’ centralized version of communism, in addition to rejecting democracy. Frankfurt School, despite being ‘leftist’, is critical of both mainstream liberal and conservative critiques. Mainstream liberals assume democracy and freedom will fix everything, but the Frankfurt School is critical of this reductionist view.

Regarding religion, Émile Durkheim (considered one the l’principal architects of modern social science’, along with Marx and Weber) shared views similar to Weber and, like Marx, that capitalism gives rise to inequality:

In an advanced, industrial, capitalist society, the complex division of labor means that people are allocated in society according to merit and rewarded accordingly: social inequality reflects natural inequality, assuming that there is complete equity in the society. Durkheim argued that moral regulation was needed, as well as economic regulation, to maintain order (or organic solidarity) in society with people able to “compose their differences peaceably”.[2] In this type of society, law would be more restitutive than penal, seeking to restore rather than punish excessively.

Durkheim saw religion as the most fundamental social institution of humankind, and one that gave rise to other social forms.[60][76] It was the religion that gave humanity the strongest sense of collective consciousness.[81] Durkheim saw the religion as a force that emerged in the early hunter and gatherer societies, as the emotions collective effervescence run high in the growing groups, forcing them to act in a new ways, and giving them a sense of some hidden force driving them.[54] Over time, as emotions became symbolized and interactions ritualized, religion became more organized, giving a rise to the division between the sacred and the profane.[54] However, Durkheim also believed that religion was becoming less important, as it was being gradually superseded by science and the cult of an individual.[57][76]

This is an example of how the the political spectrum may actually be a loop or horseshoe-shaped, with the far-left and far-right meeting on certain issues.