Category Archives: Economics

The Bridge Club Gets The Vapors

Posted on by

There is a lot to dislike about libertarians. In fact much of what makes libertarianism unpleasant is libertarians. Even so, there are some laughs to be had. This post as Marginal revolution is a good example.

Maybe less than you thought, at least after adjusting for other variables. The Economist reports:

In Sweden the age of criminal responsibility is 15, so Mr Sariaslan tracked his subjects from the dates of their 15th birthdays onwards, for an average of three-and-a-half years. He found, to no one’s surprise, that teenagers who had grown up in families whose earnings were among the bottom fifth were seven times more likely to be convicted of violent crimes, and twice as likely to be convicted of drug offences, as those whose family incomes were in the top fifth.

What did surprise him was that when he looked at families which had started poor and got richer, the younger children—those born into relative affluence—were just as likely to misbehave when they were teenagers as their elder siblings had been. Family income was not, per se, the determining factor.

That suggests two, not mutually exclusive, possibilities. One is that a family’s culture, once established, is “sticky”—that you can, to put it crudely, take the kid out of the neighbourhood, but not the neighbourhood out of the kid. Given, for example, children’s propensity to emulate elder siblings whom they admire, that sounds perfectly plausible. The other possibility is that genes which predispose to criminal behaviour (several studies suggest such genes exist) are more common at the bottom of society than at the top, perhaps because the lack of impulse-control they engender also tends to reduce someone’s earning capacity.

The original research, by Amir Sariaslan, Henrik Larsson, Brian D’Onofrio, Niklas Långström and Paul Lichtenstein is here, here is how the authors report the conclusion:

There were no associations between childhood family income and subsequent violent criminality and substance misuse once we had adjusted for unobserved familial risk factors.

There seems to be a trend in economics to take all controversial topics over to Scandinavia if possible. If it is race related, then South Africa is the place. Neither place is representative of anywhere else on earth. Sweden has one of the lowest crime rates on the planet. Maybe that’s why a lot of crime studies done by economists are done in Sweden or Norway. There are so few criminals, the researchers can pretend they are casting a wide net.

It also avoids the big taboos. Black crime is different from white crime. For instance, whites commit far more sex crime than blacks. Assault is also more common with whites than blacks. On the other hand, blacks commit many more murders. It gets even more thorny when you look at theft. Whites and blacks both prefer to rob white people, for example. When you bring Hispanics in to the mix, it gets more dangerous, because not all Hispanics are the same, no matter what the left claims.

As far as what causes crime, people have known since human settlement that criminals cause crime. There’s no fun in that as it takes real science and real intellect to tease out why criminals are criminals. You’re not doing that with Excel or a statistics program you barely understand. That leaves no room for economists to gas-bag about it.

Maybe less than you thought, at least after adjusting for other variables.  The Economist reports:

In Sweden the age of criminal responsibility is 15, so Mr Sariaslan tracked his subjects from the dates of their 15th birthdays onwards, for an average of three-and-a-half years. He found, to no one’s surprise, that teenagers who had grown up in families whose earnings were among the bottom fifth were seven times more likely to be convicted of violent crimes, and twice as likely to be convicted of drug offences, as those whose family incomes were in the top fifth.

What did surprise him was that when he looked at families which had started poor and got richer, the younger children—those born into relative affluence—were just as likely to misbehave when they were teenagers as their elder siblings had been. Family income was not, per se, the determining factor.

That suggests two, not mutually exclusive, possibilities. One is that a family’s culture, once established, is “sticky”—that you can, to put it crudely, take the kid out of the neighbourhood, but not the neighbourhood out of the kid. Given, for example, children’s propensity to emulate elder siblings whom they admire, that sounds perfectly plausible. The other possibility is that genes which predispose to criminal behaviour (several studies suggest such genes exist) are more common at the bottom of society than at the top, perhaps because the lack of impulse-control they engender also tends to reduce someone’s earning capacity.

The original research, by Amir Sariaslan, Henrik Larsson, Brian D’Onofrio, Niklas Långström and Paul Lichtenstein is here, here is how the authors report the conclusion:

There were no associations between childhood family income and subsequent violent criminality and substance misuse once we had adjusted for unobserved familial risk factors.

– See more at: http://marginalrevolution.com/marginalrevolution/2014/08/how-much-does-poverty-drive-crime.html#sthash.v6zQ8kNY.dpuf

Weed World

Posted on by

One of the central arguments in favor of legalizing drugs is that it eliminates the black market for drugs. At first blush, it sounds reasonable. If you can buy your fix at a legitimate store, there’s no need to go to the street dealer. That drives out the street dealer, the street crime, gang wars and so on and so on. It all makes sense, which is why everyone and his brother is carefully watching what is going on in Colorado. All of these arguments are being put to the test.

This story from the Guardian is interesting.

In these, the curious, infant days of Colorado’s legalisation of recreational marijuana, of shiny dispensaries and touch-screen ordering and suburban parties where joints are passed like appetisers over granite countertops, no one would notice the duplex. Plain brick, patchy grass behind chain link, it appears weary, resigned to what the tenant calls “the ‘hood” and others might call left-behind Denver, untouched by the frenzy of investment that has returned to downtown.

The front door of the duplex stays closed. Sheer white curtains cover the living room window. A basement filtering system vents air scrubbed of the sweet funky smell of the pot growing in the basement. The tenant keeps his grow operation here small. It’s his home. That’s his grandson upstairs watching TV with strict instructions not to open the door if someone knocks. Should the cops inquire, they’d find a frail-looking, middle-age Latino with diabetes and heart problems, talking about his pension and his Medicaid and waving his medical marijuana registry card.

The red card – part of the state’s legal landscape since 2000 when voters approved the sale of marijuana for medical use – allows the grower to cultivate a doctor-prescribed 16 plants. It does not allow him to sell what he does not consume to the underground market. It does not allow him a second grow operation in another rented house where he and a partner grew 55 plants until the landlord grew suspicious. It does not allow him to run his own little corner of a black market that still exists in the state with America’s most permissive legal pot sales.

The grower says he recently sold more than 9kg of his weed – Blue Dream for the mellow, Green Crack for the perk – to middlemen who flipped it for almost double the price.

“I try to keep it legal,” he says, “but sometimes it’s illegal.”

Camouflaged amid the legal medicinal and recreational marijuana market, the underground market thrives. Some in law enforcement and on the street say it may be as strong as it’s ever been, so great is the unmet local and visitor demand.

That the black market bustles in the emerging days of legalisation is not unexpected. By some reckonings, it will continue as long as residents of other states look to Colorado – and now Washington state – as the nation’s giant cannabis cookie jar. And, they add, as long as its legal retail competition keeps prices high and is taxed by state and local government at rates surpassing 30%.

I’m inclined to support these experiments in marijuana legalization. I don’t know the right answer, but discovery through trial and error is the way we have sorted these things out for 15,000 years. That said, I find it hilarious that people thought it would eliminate the black market. A highly regulated and taxed legal product will always be more expensive than an unregulated and un-taxed product. Unlike cigarettes or booze, there already exists an efficient and sophisticated black market.

“I don’t know who is buying for recreational use at dispensaries unless it’s white, middle-class people and out-of-towners,” said Rudy Reddog Balles, a longtime community activist and mediator. “Everyone I know still has the guy on the street that they hook up with.”

Obviously, legalizing weed was an upper middle-class novelty cause. It was the pseudo-libertarians from SWPL-ville who pushed it through in Colorado. Even a “longtime community activist and mediator” should get that.

This black market boom, the state argues, is a temporary situation. As more legal recreational dispensaries and growers enter the market, the market will adjust. Prices will fall. The illegal market will shrink.

Actually, it will probably grow. Quasi-legalization makes it nearly impossible to police the black market. If you can’t bust a guy for holding, you can’t squeeze him for his dealer, which means you can’t squeeze small dealers for the bigger dealers. Then you have the race angle. Busting the black guys in the hood for smoking reefer is not going to go over well when Kendall and Dylan are buying it at the mall with mom’s credit card.

In any case, these first curious months of the legal recreational market have laid bare a socioeconomic faultline. Resentment bubbles in the neighbourhoods where marijuana has always been easy to get.

The resentment goes something like: we Latinos and African Americans from the ‘hood were stigmatised for marijuana use, disdained and disproportionately prosecuted in the war on drugs. We grew up in the culture of marijuana, with grandmothers who made oil from the plants and rubbed it on arthritic hands. We sold it as medicine. We sold it for profit and pleasure.

Now pot is legalised and who benefits? Rich people with their money to invest and their clean criminal records. And here we are again: on the outskirts of opportunity. A legion of entrepreneurs with big plans and rewired basements chafes with every monthly state tax revenue report.

Sing it brotha! Sing it!

Ask someone who buys and sells in the underground market how it has responded to legalisation and the question is likely to be tossed back with defiance. “You mean, ‘Who’s been shut out of the legal market?’” asks Miguel Lopez, chief community organiser of the state’s 420 Rally, which calls for legalisation of marijuana nationally.

“It’s kind of like we made all the sacrifices and they packed it up and are making all the money,” says Cisco Gallardo, a well-known gang outreach worker who once sold drugs as a gang member. For the record, he does not partake. It rattles him a little, he says, to see the young people with whom he works shed their NFL and rapper dreams for the next big thing: their own marijuana dispensary.

In this light, taxation is seen as a blunt instrument of exclusion, driving precisely the groups most prosecuted in the war on drug further into the arms of the black market. In one Denver dispensary, a $30 purchase of one-eighth of the Trinity strain of cannabis includes $7.38 in state and local taxes – a near 33% rate. As Larisa Bolivar, one of the city’s most well-known proponents of decriminalising marijuana, puts it: that $7 buys someone lunch.

“It’s simple,” she says. “A high tax rate drives black market growth. It’s an incentive for risky behaviour.”

It’s not hard to see where the logic is going. The thing is, legalization does nothing for Red Team or Blue Team. Red Team is going to be the tax collectors for the weed industry. The Blue Team will go the social justice route demanding free weed and subsidies for the poor. Two decades ago, the ruler passed welfare reform which was supposed to start kicking loafers off the dole. Today, one third of the population is collecting. How long before they are giving away free weed in the ghetto?

Shit Ain’t Free

Posted on by

Stop if you heard this one before.  Stupid woman is shocked to learn there is no free ride – even from the government.

Ending insurance discrimination against the sick was a central goal of the nation’s health care overhaul, but leading patient groups say that promise is being undermined by new barriers from insurers.

First off, you cannot insure the sick. Insurance is a gamble. The customer buys a policy believing they will use more health services than they will pay in health insurance premiums. The other side of the insurance bet is the insurance company. They are betting they will charge you more than you cost them over the life of the policy. The insurance company is almost always right about that bet. Otherwise, they lose money and go out of business.

When you force them to insure people with known illnesses, they bake those known costs into the premium. If they cannot, then they find other ways to mitigate the costs, like not selling you a policy or jacking up the rates on the healthy. Like all gambling propositions, the losers pay the winners, while the house takes a piece.

The insurance industry responds that critics are confusing legitimate cost-control with bias. Some state regulators, however, say there’s reason to be concerned about policies that shift costs to patients and narrow their choices of hospitals and doctors.

With open enrollment for 2015 three months away, the Obama administration is being pressed to enforce the Affordable Care Act’s anti-discrimination provisions. Some regulations have been issued; others are pending after more than four years.

More than 300 patient advocacy groups recently wrote Health and Human Services Secretary Sylvia Mathews Burwell to complain about some insurer tactics that “are highly discriminatory against patients with chronic health conditions and may … violate the (law’s) nondiscrimination provisions.”

Among the groups were the AIDS Institute, the American Lung Association, Easter Seals, the Epilepsy Foundation, the Leukemia & Lymphoma Society, the National Alliance on Mental Illness, the National Kidney Foundation and United Cerebral Palsy. All supported the law.

Coverage of expensive drugs tops their concerns.

Sure it is. People like free stuff. Men who spend their weekends in bathroom stalls with strange men, contracting an incurable disease, would love it if the rest of us had to pay for their treatments. People who engage in risky behavior are more expensive to insure than people who play it safe. In a sane world, the risky pay more while the prudent pay less, but that’s not America. At the end of the piece we have this gem.

“People who have high cost health conditions are still having a problem accessing care,” said law professor Timothy Jost of Washington and Lee University in Virginia. “We are in the early stages of trying to figure out what the problems are, and to what extent they are based on insurance company discrimination, or inherent in the structure of the program.”

No, they have plenty of access to care. They are having trouble getting someone else to pay for it.  When you believe you can defy the laws of nature, deny the realities of the physical world and force everyone to pretend your fantasies are reality, you are a probably insane. Many of these people are insane or just stupid, but many are liars, who make money getting us to pretend that fantasy is real.

Many of these people truly believe their is an unlimited, inexhaustible supply of health care in the world. The only reason everyone is not dipping their cup into the well of health care is the mean old health insurance companies are guarding it. Like the hero who slays the dragon, these people imagine themselves slaying the reality of health care so everyone gets free medicine.

Where Are The Criminal Charges?

Posted on by

I’ve been following this case for a while and I keep wondering why no one is in jail, even though I know the answer. There’s little doubt that major figures in tech were engaged in illegal activity. It is also clear, by the way, that their lust for H1B1 visas is just an attempt to suppress wages. This is the sort of thing they make movies about, with the hot shot lawyer and the whistle blower finally beating the bad guys.

There is “ample evidence” that Silicon Valley was engaged in “an overarching conspiracy” against its own employees, a federal judge said on Friday, and it should either pay dearly or have its secrets exposed at trial.

Judge Lucy H. Koh of the United States District Court in San Jose rejected as insufficient a proposed $324 million settlement in a class-action antitrust case that accused leading tech companies of agreeing not to poach one another’s engineers.

In addition, her decision immediately resuscitated a public relations nightmare for Google, Apple and other top tech companies while vindicating a range of observers — including one of the plaintiffs in the suit — who said Silicon Valley was escaping justice.

With the case once again heading to trial, it threatens to expose to further scrutiny the business practices of Steve Jobs of Apple. The blunt emails of Mr. Jobs, an unquestioned genius, could prove to be his company’s undoing.

Steve Jobs was a horrible human being. If the Christians are right, Steve Jobs is being sodomized by Hitler and Stalin in Hell right now. He screwed his employees, treated everyone including his family like garbage and he was a pathological liar and confidence man. Maybe that finally gets a full airing in a courtroom. Too bad the cocksucker is dead.

Watching Old People Work

Posted on by

The other day I was watching bunch of guys tear up some concrete in the courtyard of my office building. One guy was running a jackhammer, the sort that is attached to a bobcat. Others were cutting re-bar, while others moved the rubble around for no apparent reason. They were not screwing around or loafingThey were just ridiculously disorganized. It was an amusing show.

Watching it, I noticed that there was not a single immigrant on the crew. It was all white guys and one black guy. Construction has been down around here since the crash so maybe the Mexican trade guys moved on and what’s left is the old white guys who used to work in sales or something. I’m just guessing. Maybe the government cracked down on the illegals in the trades. Stop laughing.

The other thing was the age. Every one of the crew was over forty. One guy was in his sixties. He was busting his hump, outworking everyone else. The old guy was in great shape. He even smoked, which is pretty funny. I’m going to say the bulk of the crew was between 45 and 55. There was one guy that could have been under 40, but that’s it. Pretty old for manual labor.

Out of curiosity, I looked up the average age of construction workers and found this from the Bureau of Labor Statistics. There’s a lot of data there and it does not look like construction is an old business. Manufacturing is older. Government is really old with a median age pushing 50 for most sectors. Searching around for more granular data I found this story that claims the average age of welders is 55.

For some reason we have had a welder shortage for years now. I have a distant relative who is a career criminal and welder. He gets out of jail and goes back to welding, often being bailed out by his employer. Presumably he is very good at his trade and does not commit his crimes on the job, but it says a lot about the quality of people in that trade.

There’s not a lot of great data for the trades. Plumbers in Texas, for example, are 50 years old, on average. The median age of carpenters is supposedly 48 across the country. If you look closely at the BLS data, retail is the youngest sector and government is the oldest. Manufacturing is the next oldest and then you get into the trades. Young people seem to be in services, technology and retail.

When you start looking at the data, it is not hard to see why upper middle class whites favor open borders. They don’t work in the trades. Their kids will not even work summers in the trades. Heck, middle class kids no longer work. That’s for the poor people now. On the other hand, upper middle class people need their toilets fixed and their houses repaired.

At the same time, it is easy to see why the public is turning on immigration. Despite what the people on TV believe, America is not 30-something beautiful people living in swank urban enclaves. Most people are related to one of those guys busting up the sidewalks outside my office.

Still, demographics does not explain why the trades are getting gray. It is not easy to be a carpenter or a steamfitter. Welding is a lot more involved than working in a government office. To be a competent carpenter you need math skills, problem solving skills, in addition to physical skills. The young people with something on the ball are discouraged from going into the trades, while they are encouraged to head off to college. At some point, that has to change.

Documented Nonsense

Posted on by

Every once in a while you see something that you think has to be a spoof, but turns out to be serious. In the process it confirms a lot of what you suspect of the people waving the thing around. Here’s one of those examples.

Some government programs have gained hundreds of billions of dollars paid by undocumented immigrants, who have been shown to draw a smaller amount from the same services.

Stephen Goss, chief actuary of the Social Security Administration, told Vice News that undocumented immigrants pay about $12 billion a year into the Social Security Trust Fund. Over the last decade, the agency estimates undocumented immigrants have contributed $100 billion to the program.

An estimated 11 million undocumented immigrants live in the U.S. and the agency guesses 7 million are actively working. Of these, 3.1 million use fake or expired social security numbers and still pay automatic payroll taxes.

Let’s just peel back this onion a little bit. For starters, we have been repeatedly told for decades that figuring out who is using fake Social Security numbers is impossibly expensive. To notify employers that the number they are using to submit taxes for their employee would be impossible and the cost to employers would be onerous. Yet, the actuary of the Social Security Administration seems to have this data at his fingertips.

Now, let’s take a look at the math. $13 Billion sounds like a lot of money until your divide it by the 3.1 million. The result of that bit of math is $4193.55. Let’s call it $4195 just to keep it simple. That does not sound like a lot of money all of a sudden. Of course, Abdul from Yemen and Kwame from Ghana are not bringing this cash with them from the old country. Their employer, the guy taking the bogus social security number and fake ID, is taking the money from the wages he is paying them. Currently the employee pays 6.2% and the employer pays the same.

That bit of math means the illegals are theoretically making over $33,800 per year. Keep that number in mind. Meanwhile, let’s take a look at the rest of this piece.

Goss said undocumented workers contribute about $13 billion a year in total and collect about $1 billion, leaving a net contribution of $12 billion a year. Considering their questionable legal status, it’s unlikely undocumented immigrants will benefit from their Social Security contributions.

A study published in the journal Health Affairs in May 2013 found that, in 2009 alone, immigrants paid $13.8 billion more to Medicare’s hospital account balance than they used. The U.S.-born population left the fund with a $30.9 billion deficit that same year.

Whether immigrants contribute to or use up federal services is a key issue in the immigration reform debate. The May 2013 study did not differentiate between documented and undocumented immigrants.

Experts say Medicare’s $115 billion surplus by immigrants from 2002-2009 was largely because their average age — 34 — is lower than the U.S.-born population, so most cannot benefit from the retirement service for many years. At the same time, however, many baby boomers have gone into retirement.

First of, why are illegal immigrants collecting anything from Social Security? How would anyone know, given that they say it is impossible to police the use of fake identification.

Anyway, let’s get back to the math. The second study that coincidentally claims illegals pay over $13 Billion in Medicare taxes is even more interesting. If we do the same math as we did before, we take $13.8 Billion divided by the magical 3.1 illegals paying the taxes Americans won’t pay. That gives us $4451.61 so let’s say $4450.00 just to keep it simple. Pretty much the same math as with the Social Security claim.

The difference is the tax rate for Medicare is 1.45% for employer and employee. That means either there are many more illegals paying Medicare taxes or the Health Affairs Journal thinks these illegals are making over $150K per year. That’s a lot of tomatoes to pick.

To make their numbers match those of the actuary, you have to assume over 14 million illegals are working and paying taxes. You also have to assume they are making $16/hour. How likely is that?

Sarcasm aside, the math simply does not add up. The math and simple observations says there are a lot more than 3.1 million working with fake papers. Ask anyone who is familiar with payroll software or payroll services and they will tell you there are a lot of bogus numbers in the system.

There’s also loads of these guys working for cash. I know of a dozen places around the Imperial Capital where you can get day labor for cash. Painters, landscapers, drywall guys, roofers. If you need guys to do low-skilled work and you don’t need the hassle of doing it legal, there’s a solution.

None of this really matters, of course. Immigration, legal or otherwise, is not about propping up collapsing welfare systems. If that were the case, then we should bring back slavery. After all, if bulldozing the laws and customs of a country is justified in an effort to pay welfare debts, then what is the objection to bringing back chattel labor?

The fact is these people paying the alleged taxes are doing so in lieu of Americans doing the same jobs. Open borders fanatics carry on like these people coming over the border are creating jobs that don’t exist.  The reality is something else. Employers want cheap, dependable labor. If the government says it is OK to hire foreign guys for cash or with fake papers, then they will do it if it makes sense.

Gutting the wage base with illegal labor, however, has costs. No one ever bothers to examine those costs when celebrating diversity. The millions of unemployed men collecting relief checks has a cost to society. It’s not just the taxes and welfare payments. It is the cost to the culture. Then you have the direct costs to state and local infrastructure of adding tens of millions to the system. Go into any emergency room and you see what I mean.

The Pension Bomb

Posted on by

Some smart guy supposedly said that democracy works great until the people learn how to give themselves a raise from the public treasury. It is one of those quotes attributed to famous people, even though it is clear they never said it. Reagan used to use the line a lot, but he is certainly not the source. Wiki blames urban legend and maybe some obscure guy from the 1940’s.

The source is not important as the sentiment is obvious. Once you start taking money from one person or group and give it to another citizen or group, you open the door to institutional robbery. Or, as some other unknown smart guys said, “A government that promises to rob Peter to pay Paul will always get Paul’s vote.” Another formulation of this is the tragedy of the commons.

That’s been the dynamic of America’s experiment with social democracy since the end of World War II. One party promises to rob one group of Americans and give some of the proceeds to another group of Americans. The game is to either fashion a majority of Peters on the promise of defending them from the Pauls, or, fashion a majority of Pauls promising to rob the Peters. When in the 1970’s it became clear that Thatcher was right and you do eventually run out of Peters to rob, we started robbing the unborn Peters through debt and money creation.

Now, it looks like we are running out of unborn Peters. The public pension time bomb is about to blow apart the present arrangements, but no one has any idea what to do about it. It is a straight forward math problem. The possible outcomes are known and few are good. Maybe if there is a miraculous change in demographics and asset values, everything will work out just fine. More likely, Detroit is the rosy scenario. As this story in City Journal explains, restructuring pensions plans is just about impossible.

When unions agreed to a deal last month with Detroit city government to freeze the city’s underfunded pension system and create a new, less expensive one, some experts hailed it as a model that other troubled cities might adopt. News reports prominently mentioned governments with deep retirement debt, including Chicago and Philadelphia, as candidates for similar reforms. But the agreement came about under a Michigan emergency law that applies to struggling cities like Detroit, which is in bankruptcy. In many states, by contrast, local laws and state court rulings have made it virtually impossible to cut back retirement benefits for current government employees, even for work that they have yet to perform. These state protections, which go far beyond any safeguards that federal law provides to private-sector workers, are one reason why so many states and localities are struggling to dig themselves out of pension-system debt, amid sharp increases in costs. It will take significant reforms to state laws—or bigger and more painful bankruptcy cases—to make a real dent in the pension crisis.

This may be a good thing. The problems created by the people of Philadelphia should be shouldered by the people of Philadelphia. The state or federal government riding to the rescue just encourages more of this stuff. Plus, the people of these localities will feel the effects of their political choices. Maybe they make better choices going forward.

The Detroit plan, negotiated by unions with the city’s emergency manager, Kevyn Orr, freezes the city’s current underfunded retirement plan so that workers will receive benefits for new work at a reduced rate. Under the old plan, an employee who worked for the city for 35 years and retired at 62 with a final salary of $60,000 could qualify for a pension of nearly $40,000. By contrast, if that same employee works the final ten years of his career under the new plan, his annual pension would be about $35,000. In addition, if the new plan becomes underfunded, the employee will have to contribute more of his own money to help cover the costs.

Detroit’s reforms aren’t unusual by the standards of the private sector, where a federal law, the Employee Retirement Income Security Act (ERISA), governs pensions. That legislation protects the benefits that a worker has already earned but allows employers to amend a pension plan for work that’s not yet been done, a move that can immediately reduce costs. Workers have the option of seeking employment elsewhere, of course, if they don’t like the new terms.

But federal law doesn’t apply to municipal retirement systems created by state legislation. In about two dozen states, courts have declared that laws creating pensions represent a contract between an employee and government whose benefits can never be reduced once a worker enters the retirement system. Many state courts—including those in Pennsylvania, Arizona, and Colorado—have been influenced by a series of California legal decisions (often referred to, collectively, as the “California Rule” on pensions) which hold that the pension contract begins immediately upon employment, and that the terms of a government worker’s pension can only change if the alterations are “accompanied by comparable new advantages,” or benefits. The California Rule, University of Chicago legal scholar Richard Epstein has written, “Neuters the power of local governments to alter and amend, by wiping out all government flexibility to correct prior errors in pension program design or funding.” One result, he observes, “is a financial death spiral” in many municipalities.

The proper term for this is “suicide pact.” That’s what these states have created. A city that cannot raise taxes to pay its bills has to cut spending. If they are prohibited from cutting these pension deals, then they must cut other stuff. Fewer cops and fewer bureaucrats probably sounds good to libertarians, but they have never been to places like Philly or Baltimore. Fewer cops and fewer locals on the city payroll means my neighbors are coming to your neighborhood.

We see that spiral in California, where a number of municipalities entered bankruptcy in recent years, thanks in part to their inability to alter their unaffordable pensions. Courts, meanwhile, have short-circuited reform attempts. Voters in the city of San Jose, where pension costs have risen to $245 million, from $73 million in 2002, passed a ballot initiative in 2012 installing a new, less expensive pension system. But in December, a California judge invalidated the key changes, based on her interpretation of state court precedents.

The decision leaves California municipalities facing a bleak future. From 2006 through 2013, local governments that participate in the giant California Public Employees’ Retirement System saw their annual pension costs double, on average. Last year, the CalPERS board voted to require an additional contribution increase of 50 percent, phased in over five years. “While there is time to plan for the increase, the most fiscally stressed municipalities could find the increases unmanageable,” Moody’s wrote. Meanwhile, California governor Jerry Brown has signed off on another plan to rescue the state’s struggling teachers’ pension fund by requiring school districts to increase their annual contributions from $2 billion this year to $6 billion over the next seven years.

At some point, the money runs out and there’s no way to hide it. The outflow of tax payers from California is going to accelerate. Eventually, the pols will have no choice but to turn on the rich of San Francisco and Los Angeles. That will be fun to watch, but rich people only respond to force, so they will not pay up no matter how much the politicians complain. It will have to get very ugly first.

Legislators in Illinois have taken a different approach. Their state constitution bans changes to pensions, and costs have soared for both the state and its municipalities. Last year, legislators passed changes in defiance of constitutional protections, arguing in court that the state faces a “severe financial crisis” that makes reform “a valid exercise of the state’s reserved sovereign powers.” Unions are now challenging the reform law, and if they succeed, Illinois faces a $187 billion pension tab—equal to more than four times its revenues—with no plan to reduce the debt.

Illinois has lots of company. Without some way to amend the terms of retirement plans, states and municipalities groaning under the so-called California Rule face years of increasing costs and pressure on budgets that inevitably mean higher taxes and fewer services—in other words, the worst of both worlds.

Illinois will never pay those debts. In fact, none of these states with swollen pension obligations will pay those debts. Then we will learn that economists were wrong about public debt. For decades they have been arguing that debt has no negative impact of economic growth. In fact, they have consistently argued that debt boosts growth. That’s true until the point when the debtor cannot pay his debts. Then the whole thing collapses into an Argentine crisis.

That’s always been the big lie within modern economics. Debt and money creation are nothing more than the pulling forward of revenue. If you imagine a nation’s economy as a balance sheet, raising debt to fund current consumption is a zero sum game. It is just an accrual. You artificially increase revenues today, but that entry is reversed out down the line, when the debt is repaid. Our decreasingly robust recoveries from recessions are due to the metastasizing debt.

What happens when the retirees learn they will not be getting paid is not entirely unknown. They will default on their debts. The people holding those debts will follow suit. If a state like California does default on its debts, things will get very ugly in America. There are simply too many people depending on those debt payments for there to be no serious consequences to the economy at large.

I’ve often thought that the next constitution will have a few provisions in response to the inevitable debt crisis that is coming our way. One is there will be serious limits on government borrowing. Frankly, outside of war, the Federal government should never be borrowing. At the state level, debt should be limited to asset backed lending. The state pledges a bridge or road as collateral. Otherwise, government is prohibited from issuing debt.

The other change is that citizens vote where they are born. The people of California who voted for lunatics are the real problem. They should not be allowed to move to a neighboring state and begin ruining their new home by voting for lunatics. Look at the states ruined by Californians moving away from their mess. Oregon, Washington, Colorado, New Mexico used to be sensibly run states. New Hampshire was ruined by lunatics from Massachusetts. Vermont was ruined by New York lunatics.

The Parasite Economy

Posted on by

I read a lot of econ stuff, mostly for entertainment purposes. That habit started back in the go-go 90’s when the new economy was belching forth one new dot-com firm after another. Most of these new companies made nothing, fixed nothing and provided no service anyone would want. The dot-com boom was, in many respects, a big waste of time and money. But, I got a lot of laughs listening to lectures about how things were different in the new economy.

After the crash and the dust settled, we were left with a parasite economy. By that I mean the only people making money were doing so by leeching off of someone doing real work. Google is a case in point. A search engine is not much use without the infrastructure of the Internet and the billions of content providers. Google provides nothing, other than a convenient way to find some of the sites. Mostly what they do is operate as a protection racket.

It used to be that if you built a better mouse trap, the world would beat a path to your door. Today, building a better mouse trap means a whole bunch of freeloaders and highwaymen litter that path to your door, robbing all those folks trying get your better mousetrap. Television is a good example of this. It used to come over the air free. Now, you pay the cable guy and then you pay the tax man for the abatement the cable company needs. You have to rent a special box and maybe sign up for other services like telephone and Internet to get television.

Maybe it has always been thus and I’m just catching on now that I’m in my old age, but that’s what came to mind with the news the court was busting up Aereo. Conceptually, I love the idea of local channels over the Internet. I’ve moved around a lot and getting the home town news, for example, would be worth a  few bucks a month. Getting the local football games or hockey games, even though you’re not local, would be great. The technology to do it is in place and mature, but the local broadcasters don’t do it. That’s where Aereo thought they could make some money.

That’s also where the problem starts. They don’t own the internet and they don’t own the content. They were borrowing it and renting it out to their customers without getting permission from the owner. That’s generally called theft, but in the new new new economy, it is called “disruptive.” The court called it illegal and our nine robbed masters are the final say in the matter.

That may or may not be the right answer, but there’s no doubt that Aereo is (was) a parasite company trying to make money from other parasite companies. The local broadcasters get special rights not available to everyone. They strike deals with the cable companies who have struck special deals with state and local government. Between you and the guy making your favorite show is a long line of rentiers. I spend more in a month on telecom than my father spent in his lifetime.

Now, that’s not to say no one is doing real work. It’s just that the big money seems to be in coming up with a way to transfer your cost of doing business onto others and charging rents for access to the work of others. Facebook is a great example. They don’t pay a dime to the ISP’s and telcos. You pay for the mobile access and you pay for the Internet. They harvest your personal data and sell it to others. Their big contribution is to provide a crude interface for you to see pictures of the grandkids.

It’s all perfectly legal and maybe even moral. I don’t know. I do know you can’t have an economy based on it. Someone has to be making stuff and fixing stuff. Someone has to actually be making better mousetraps. Instead we have our best minds working on new ways to charge you for television. At some point, the system has to be overloaded with middle-men, rentiers and scammers.

The Vice Economy

Posted on by

Casino gambling is going to make for a good book one day. I’m sure lots of books have been written on the subject from all angles, but the one containing the epitaph is still unwritten. Way back in the olden thymes, Las Vegas was the one place to legally gamble. That meant that most people did their gambling illegally.

Now we are up to our eyeballs in legal casinos, often run by the state. The argument being that it raises money from a bad thing to be used for a good thing and it cuts down on crime. Whether any of that is true is debatable, but what is certainly true is the casino business is in trouble. This story from Atlantic City is a pretty good example.

The Revel Casino Hotel warned its staff Thursday that it will shut down this summer if a buyer can’t be found in bankruptcy court.

In warning letters given to employees and obtained by the Associated Press, Revel said it is seeking a buyer for the struggling $2.4 billion casino, but can’t guarantee one will be found. If not, employees could be terminated as soon as Aug. 18, Revel said in the letter.

“If Revel is unable to complete such a sale promptly, Revel expects to close its entire facility,” the letters read. The company also said it plans to stay open while it searches for a buyer.

Shortly after distributing the letters, Revel filed a Chapter 11 petition in federal bankruptcy court, its second in as many years. Revel said it hopes to find a buyer quickly.

“We will work to reach an agreement with a new owner who will help ensure Revel’s long-term financial stability and who shares our commitment to providing Revel’s guests and players an exceptional experience,” said Scott Kreeger, Revel’s president and chief operating officer.

He said the casino has obtained a $125 million loan from one of its existing financiers so it can operate during its stay in bankruptcy court.

If you have never been to Atlantic City, here’s a quick primer. Imagine a bombed out ghetto city like Detroit or Newark. Place it next to a decent beach with a boardwalk and then plop some tacky casinos and you have Atlantic City. This particular casino was built far from the massive ghettos that bound the boardwalk area. In theory, it should be thriving, but it is not. In fact, all of the casinos in AC struggle.

One reason is the surrounding area. The big mistake was not pushing out the locals when they built the casinos in the 1970’s. But, that was before liberals figured out how to use gays and Mexicans to clear out a neighborhood and gentrify it. Back then they still thought they could fix the ghetto. The other reason for the failure of AC is the casino boom. In fact, we may be reaching peak casino.

Racetrack casinos used to contribute as much as $240 million a year to Delaware’s tax coffers. But as the Northeast becomes saturated with gambling venues, the state’s casino revenue has tumbled, prompting a new industry request—for a tax break.

“It’s a different world for the Delaware casinos,” said Democratic Gov. Jack Markell, who supports reducing the tax burden on casinos by $20 million a year to help them compete.

More casinos have opened in the Northeast over the past decade than in any other part of the country, and the expansion is causing upheaval in the region. States that adopted gambling earlier than their neighbors, such as Delaware, New Jersey and West Virginia, are watching dollars drain away, and new projects have some wondering how many facilities the area can support.

Twenty-six casinos have opened since 2004, fueling a 39% increase in total annual gambling revenue in the mid-Atlantic and New England, according to a study by the University of Nevada, Las Vegas. Within 100 miles of Philadelphia, there now are 24 casinos, a big shift from the early 1990s, when Atlantic City, N.J., enjoyed an East Coast monopoly. At least a dozen more gambling spots are in the pipeline from Massachusetts to Maryland, raising fears in states such as Rhode Island that their casino tax windfall is at risk.

This is a familiar pattern. A truly new product pops up creating a new industry. Once it is clearly a winner, others rush in to get a bite of the apple. Supply shoots up, prices collapse and the product becomes a commodity. That’s followed by a culling of the supply herd. Cheap money fuels consolidation so eventually you end up with a handful of suppliers of the product, who can make low margin businesses work on volume.

The question is what comes next. In every other business a few operators emerge as the apex predators to gobble up the rest. That can’t happen with state run gambling parlors. Some will go this route where private operators run the casinos and pay a special tax to the state. That either means the state takes a smaller cut or they find a way to turn the operator into a utility, which seems unlikely.

There are two other models that could be the end game. One is the nationalized business model. In the old days it was popular in Europe for the state to take control of whole industries like steel and energy. By the 1970’s these industries were money losing disasters threatening to bankrupt the state. They were privatized and in many cases sent overseas. Decades from now states will probably be unloading these white elephants for pennies on a dollar.

The other model is pornography, which has followed an interesting path. The Internet gave new life to an industry largely run by degenerates and gangsters. It suddenly got cool and it got rich. But, the same tools that opened it up to professional business people opened it up to global competition. Revenues collapsed as amateurs started giving away their porn on the Internet. The “adult bookstore” followed Blockbuster Video into the great abyss.

Gambling can be done on-line. Not all of it, but poker, sports books and other, as yet uninvented, games can be done effectively on-line. Prohibitions against on-line gambling will work for a while, but getting around these limits is getting easier. I know poker players who belong to private on-like clubs, using gaming consoles. It will not be long before a clever guy figures out how to “monetize” this.

Gambling has been a part of human societies since at least settlement. The thing is, there’s little value added opportunities in it. You can build a four-star hotel on a beach and make big money. Other than offering drinks, safety and volume, a casino is not offering a lot to the gambler. They are not there for the shows or the atmosphere. They are there for the action. That means these state gambling parlors will see their margins drop to the absolute minimum, with many going bust in the next decade.

There’s always been something dodgy about government running the vice rackets. In America, the Federal government runs the alcohol business. They make more from it than the private players. Alcohol is taxed at over $20 per gallon. The states run the cigarettes business and are now getting into the drug rackets. They own the gambling rackets in most places. The only thing left is prostitution and porn. Making money from vice makes you a pimp, no matter what you do with the money. Seeing the state fail at it is pleasing at some level.

More important, it underscores a criticism from the old right that has long been dismissed. That is, you cannot have an economy based on doing each others laundry. You have to make thinks and you have to invent things. That creates real jobs directly through employment in factories. It does so indirectly for all of the support services. It also props up the tertiary economy, like gambling and entertainment, as people use their surplus on leisure. You can’t have a real economy very long when it is based on selling off your assets to pay for leisure.

 

It’s Always Something

Posted on by

People in the stock trading business always have a reason to buy stocks. If the market is falling, it is a great time to bargain hunt. If the market is soaring, you have to get in while the getting is good. A nuclear strike incinerating NYC would not be enough to discourage these guys. That’s the business. It’s a form of gambling and they are addicted to it. They love the action in the same way a base jumper loves the thrill of the activity. It’s not rational, but emotional.

CNBC exists to gaslight these types. No matter what, they can see the bright side of what is happening in the markets. Today’s revised Q1 GDP is a good example.

The U.S. economy contracted in the first quarter for the first time in three years as it buckled under the weight of a severe winter, but there are signs activity has since rebounded.

Yeah, suddenly we’re all hot house flowers incapable of handling a little snow.

The decline in output, which also reflected a plunge in business spending on nonresidential structures, was sharper than Wall Street’s expectations. Economists had expected the revision to show GDP contracting at a 0.5 percent rate.

The economy grew at a 2.6 percent pace in the fourth quarter. U.S. financial markets are likely to shrug off the report, given the temporary factors that weighed down on growth and the fact that economic activity is rebounding.

Data ranging from employment to manufacturing suggests growth will accelerate sharply in the second quarter.

Economists estimate severe weather could have chopped off as much as 1.5 percentage points from GDP growth. The government, however, gave no details on the impact of the weather.

Weather could have been a cause. Magic evil leprechauns could be the cause too. We don’t know, but let’s go with weather because we don’t think it was leprechauns.

Businesses accumulated $49.0 billion worth of inventories, far less than the $87.4 billion estimated last month.

It was the smallest amount in a year and left inventories subtracting 1.62 percentage points from first-quarter growth. But inventories should be a boost to second-quarter growth.

While the decline in exports was not as severe as initially thought, import growth was stronger. That resulted in a trade deficit that sliced off 0.95 percentage point from GDP growth.

A measure of domestic demand that strips out exports and inventories expanded at a 1.6 percent rate, rather than a 1.5 percent rate, indicating underlying strength in the economy.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 3.1 percent rate. It was previously reported to have advanced at a 3.0 percent pace.

Spending was boosted by the Affordable Healthcare Act, which expanded healthcare coverage to many Americans. Consumer spending had increased at a brisk 3.3 percent pace in the fourth quarter.

Business spending on nonresidential structures, such as gas drilling, contracted at a 7.5 percent rate. It had previously been reported to have increased at a 0.2 percent pace. The report showed corporate profits after tax plunged at a 13.7 percent rate, the biggest drop since the fourth quarter of 2008.

Let’s see. Demand was higher, but profits were smaller. Business, for some reason, reduced inventories. But wait. Consumer spending was not higher on things people want like new TV’s and cars. It was higher for stuff they don’t want like health care. My goodness. Does anyone even bother to read the copy before it goes to press?