What Good Are The 99%?

Yeah, that includes me.

Two disruptive technologies have changed the world forever. The one that most people think of is the Internet, but that is not the most disruptive, nor the first. Container Shipping has done more to shrink the world than any technology since the steam engine. Even a massive spike in fuel prices would have little effect. Boats are really efficient and they have huge numbers of power options. The Internet doesn't use that much electricity and while India and China invest in 21st century infrastructure, the US is fighting 100 year old monkey trials and 50 years of keeping the government out of the bedroom.

So I ask the question "If India can do the programming and China can do the manufacturing, and a dozen guys in California can do the design funded by a handful of guys in New York, what use are the rest of us?"

A new way to bank

What if you could get direct deposit to your local post office? It's not so crazy and has huge benefits.

Instead of guaranteeing deposits in an institution the government has no control over and then regulating that institution as a way of saying "please don't make me cover all your crap!" Let's just have a national bank modeled on Credit Unions. We expand the Post Office to act as branches for the federal bank, but leave the banking to a revised FED. One that the depositors own, not the banks. There are many benefits to this model and few, if any, problems.

Deposits would give much more direct monetary control to the FED. If consumers are driving inflation, increase the interest paid to savings accounts. In a slump, lower the rate. The same can be done with loans. The FED can then create a balanced portfolio of mortgages, treasuries, business loans, and other assets as the needs of the economy require. Since no group of executives or investors will excessively profit from this, it will be as stable as the credit unions were through this crises.

During times of real economic collapse, these banks can be the means of direct consumer injection of stimulus. This provides for interesting opportunities. If all accounts are limited to $250k, then all account holders could be treated the same. While Warren Buffet may have an account and get some stimulus money he doesn't need, so will a person who pays no taxes because they are too poor. And there are far more of the former than the later.

Finally, imagine how much easier it becomes to distribute social security, unemployment, tax returns. The accounts can be limited to one per US citizen and thus be a great help to enforce immigration law.

The large banks would still function much as they do now. It is a fallacy that banks lend depositors money so others can buy a house. They create the debt out of thin air. If the bank is leveraged at 10:1, and require 10% down, it simply invents the other 90%. The down payment now becomes the banks reserve rather than depositors accounts.

We will never get such a system, but the idea does encourage new ways to think about things that we think we know. Maybe the biggest question this asks is who owns our economy? Is it the banks, or the government? Shouldn't means and responsibility reside with one group rather than risk goes to one while reward goes to the other?

A Tunisian Fruit Vendor - Another Perspective

The story of a Tunisian fruit vendor lighting himself on fire and starting the Arab spring is tragic and inspiring. We all know the story. Police corruption as an arm of a brutal dictator pushed a man too far. But that corruption is no different than here in Hyderabad. The fruit vendor is no different. The loan shark is no different. The fruit itself was no different. So why there and not here?

OWS, Arab Spring, a fruit vendor, what are they all protesting? The creeping leverage of rent in every aspect of our lives making us poorer, weaker, and more afraid. Were the police wrong? Of course, but why did that man have to borrow money to sell his fruit? If he had saved his money he could have kept both the profit and the rent. But how can he get that money in the first place? The loan shark knows to lend enough to get through a day, but at a rate to ensure the vendor has nothing left to save. The corruption is just enough to take any savings the man may have had and ensure he must always come to the loan shark. The police work in the interest of the loan sharks. If they take too much, there is no fruit to buy and nobody to shake down. This leaves all the profit in the hands, not of the entrepreneurs, but the rentiers in the guise of the loan shark and the police.

And what is lost? A man who knows his neighborhood. Who knows the seasons. Who knows how much of what kinds of fruit to stock up on. Where to be when kids get out of school. In short we lose the knowledge that makes a market efficient.

And yes I am making the connection that the banks are the loan sharks and our government is the corrupt policemen.

Government is not the problem. Government protects the problem.

Truthy Economics

The presidents speech was an envy driven socialist rant against the job creators and wealth generators of Wall Street. Steve Jobs created more jobs (in China) than the failed stimulus program, which didn't create a single (Chinese) job. We know this stimulus stuff doesn't work because highly paid opinion columnists tell us so every Sunday in very stern and serious voices.

Look. The stimulus program works like this. You dip a bucket into a lake on one end and then on the other, in front of a bunch of cameras you pour it back in. Of course this has no effect because the water at the opposite end of the lake rises instantly. Anyone who took physics in High School knows this and is the reason swimming is impossible. Any effort to displace water in one place only gets replaced immediately from the rest because, just like markets, fluids are perfect. Any comparison now between so called "viscosity" and "price stickiness" would imply that the world, created by God, is not perfect and, by extension, God is not perfect. Since God is perfect, so are his markets. Irrefutable!

We also know that all this stimulus, which we just proved has no effect on the market, will cause bond markets to raise inflation rates through the roof due to all the government borrowing. See it works like this. In order to take the water out of the south end of the lake to dump into the north end, the government had to "borrow" water from the east side of the lake and put it into the west side of the lake. Now the west side of the lake has the water displaced by taking the south end of the lake's water. But this water must be paid back with extra water. If this goes on too long, the east side water will see there is a giant hole and a tsunami will destroy the entire lake. If you don't think this is possible just ask Thailand if tsunamis exist. If tsunamis didn't exist then Zimbabwe could have kept printing money just like the FEDs. If you don't understand why water going east to west makes a difference, but water going north to south doesn't, pray more. Seriously, cause I don't understand it but it is clearly his will.

Finally, we are going to end up like Greece. For whatever reason at the time, Obama borrowed all the stimulus money in Drachmas. I guess he figured since the Greeks weren't using them anymore he could get a bargain. But here's the real problem. We owe more Drachmas than exist! Greece refuses to print more and we can't print more Drachmas that would be counterfeiting! What are we going to do? If we can't get more Drachmas we'll end up defaulting on our debt and humanity will come to an end.

There! Humanity will end from a tsunami caused by a hole in the lake formed by pouring water into the lake and the Greeks refusing to print water proof Drachmas. See? It makes perfect sense!

Externalities (or how to create a better tax structure)

Market Externalities are very likely the key to solving all our national problems. But, what are externalities? Externalities are costs or benefits to a person or to people who are not part of the market transaction. Pollution is a common example. In fact, in many ways, you can think of all of our problems as externalities. Problems that aren't externalities are often due to poor or non-existent incentives. Incentives that are often effected by externalities themselves.

People often say that unregulated markets are the most efficient system we can create for distributing goods and services. That is largely true, except in a few key areas. The first I'll be writing about here is externalities. I'll write about the inefficiencies of efficiency later.

Two farmers live next to a lake. One farmer loves to fish in his spare time, the other loves to sacrifice woodland creatures to Cthulhu. The second farmer realizes that if he plows his land right to the very edge of the lake he gets the best soil and the best yield. This also puts excess silt in the water killing the plants the fish feed on and the first farmer gets pretty upset by this. Not only that, the extra food the second farmer is growing has lowered the price for food and now the first farmer can't pay his mortgage. In desperation he also plants next to the lake. His farm is saved and he takes up mud wrestling as a hobby as there are no more fish.

Normally the solution is to pass a law that says you can't plow near the lake, but this has several problems. First, what if the first farmer figures out how to farm near the lake without any mud getting in the lake. The town is deprived of food that could be grown because the law did not anticipate this. Second, the second farmer discovers a part of his property that has all the same benefits of growing near the lake, and it is far enough away by law to plant. Unfortunately this land still washes mud into the lake even though it is farther away. Finally, the two farmers start working together to modify the law so that no new farms can be built unless they can prove that they will not put mud in the lake. Now the two farmers can raise the price of food knowing no third farmer will come in because they made it too tough to get past regulation.

Many economic libertarians believe there should be no public land. If the lake were owned, the owner would demand compensation for the mud in the lake and there would be no need for regulation. This is correct except it means that the local kids can't swim unless they pay this guy and since he is the only one with a lake, he can gouge people.

Can we get the same benefits from the libertarian idea and still keep the lake public?

Sure. We demand the same compensation as any private owner would want. How much do we want food versus how much do we want to swim? How much do we want fish? These all determine how much we charge the farmers.

Borrowing another bad idea often put into practice, why don't we impose a lake front tax? For however much lake front you have you pay X amount. That money will be used to filter the lake. This suffers from many of the same regulation problems. It doesn't encourage anything other than weaseling around the law.

So what is the solution that has near universal economist support? Tax the externality. Imagine if instead of the other solutions we charge the farmers based on the quantity of mud they individually put in the lake. The first farmer discovers how to avoid the tax by using new technologies to not get mud in the lake in the first place. The second farmer decides it's worth the extra cost to plow that area that puts mud in the lake. The first farmer realizes he could license his technology to the first farmer for a price just less than the externality tax. Clean lake, new technology, plenty of food.

The system uses the market forces in a positive way rather than a negative. The desire to save money encourages technology. The lack of regulation means the farmers can respond to market demands with well understood trade offs.

What can go wrong?

What if the tax isn't the right amount? This is easy. Just nudge the numbers around a bit to get to the desired outcome. If food is scarce and the people think the lake doesn't have to be that clean, lower the tax. If the lake is still too muddy, raise the tax. Determining a start point to the tax is not very difficult. It's simply a matter of calculating all the positive and negative externalities and adding that as a modifier into the market. What if one farmer tries to cheat the system? The other farmer has an economic incentive to catch him. If there is no other source of mud, it must be the two farmers. If one farm jiggers the numbers, the cost is borne by the other. The two farmers are in the best position to watch each other. What if they claim X amount comes from nature? This will be quickly absorbed in the pricing of the tax as will the lakes natural ability to absorb some silt. If the number is too high, it will be reflected in the outcome, the lake.

These externality taxes give us a simple way to determine what is more valuable to us. When food is scarce, we give up a cleaner lake. When food is plentiful we want a clean lake. The clean lake gives us better fish at a cheaper price. Our kids get healthier through exercise. We may feel this is worth the extra cost on food.

This is already pretty long so I'll write another post on the many ways both positive and negative externalities can be used to create desired outcomes. 

The Destructive Power Of Rent

There are three basic kinds of income in economics. These are rent, profit, and wages. Of these three, the most destructive is rent. First thing to understand is that in economics words don't mean what you think they mean. Rent is more than what is commonly known as rent, for example, and wealth means less than is what is commonly thought of.

Rent is income derived in such a way no wealth is created. To understand wealth, it's best to use some examples. If I print $1 million, I have not created very much wealth. Other than the cost of printing and the paper and my lovely art skills, I did not make anything that adds to the value of the country. If I build a free game engine that is then used to make free games and everybody loves playing these free games, I have created a lot of wealth, but it is difficult to identify how much.

In the first case, money is made with no creation of wealth, and in the second wealth is created without the use of money. It's important to know that money is not wealth. Nor is it capital as is so often claimed. If that were the case then we could create more wealth with the flip of a switch, but that is not what the FED does.

Why is rent destructive?

A Tale Of Two Coffee Shops
It was the best of grinds, it was the worst of grinds....

One of these coffee shops is right in front of a subway station and the other is on the other side of a busy highway. The one in front of the coffee shop can charge much more because who wants to cross a highway to save a buck? You would think that that coffee shop earns more in profits than the other and you'd be wrong. It earns more in rent.

Let's consider the two shops renting the space they are in. Each has a landlord. Do the landlords charge the same rent to each shop? Of course not. So how much do they charge? Exactly the value difference of the location. If, due to location, one shop earns $1000 more per month, the rent will be $1000 a month more. So who gets the extra value for the location? The landlord.

Why does this make rent destructive?

If the extra money went to wages because baristas were in tight supply, more people would want to become baristas and wages would come down and more coffee could be produced at a lower cost to the customer. The wealth of the country would be increased by having more coffee produced by more baristas. If profits were high, somebody would open a new shop next door and profits would go down. Again this would cause more coffee to be produced at a lower price. This would also require hiring more baristas so wages would go up, but of course that would be temporary since more people would become baristas. If the landlord has a lock on the location, there is no encouragement to adjust the marketplace for a more beneficial distribution of effort. People just pay more and no market forces can alleviate the imbalance.

Now, the guy across the street thinks that if he can lick this highway problem then he could make bank! So he creates an elaborate crane to deliver coffee across the highway. His profits start to rise. So do you think the guy with the shop at the subway is going to get a lower rent? No. The guy with the crane is going to have his rent raised to the same level as the first shop minus the operational cost of the crane. Once again the landlord wins and the entrepreneur loses.

This is what is so destructive. The cost goes up and squeezes the consumer, so they buy less coffee. Since some of those people are employees of the coffee industry, some lose their job. This then makes them not buy coffee, so more are laid off.

"The layoffs will continue until demand improves" to paraphrase an equally ludicrous observation.

Here is where it turns from a problem to a crisis.

What happens when those landlords need people to count all that money for them? They hire them. So the financial industry gets bigger and creates new ways for landlords to make even more money without creating corresponding wealth. And more people get hired away from factories and into financial services. Finally you end up with the only things being made are products designed to suck all the money out of the economy and leave the country broke, derelict, and ignorant.

Economics is supposed to match limited resources to unlimited demand as efficiently as possible. One way to do that is by introducing money. When money is the dominant product of a society, it is effectively producing effluvium. There is no difference between the wasted resources of a gold rush or the wasted resources of a housing bubble. Desired products are not being created so that the ephemeral can be.

Thoughts On A Digital Economy

We are living in a world on the brink of massive change. The powerful institutions will fight with everything they have to prevent that change and perhaps they will succeed. Here is my world if they fail.

The cafe was more crowded than normal, but Jayden had a regular booth. The flame wars had begun again. Such a waste of time. He ordered a beer.

"Hey, you exchanging reps tonight?"

"I got plenty," replied the bartender.

"Then make it a cheep beer, " replied Jayden.

Reputation was the only thing of value in a digital world. Jayden worked alone and avoided most flame wars. He earned less, but lost less as well. In front GlobalHell launched an attack. Most do it for rep but Jayden knew this was cover for a "log run." A digital attack on the analog world. Jayden waited and sipped his beer. He watched his favorite tube and chated with some friends about the show. Ella broadcast her latest episode. Jayden's rep gets him into the live chat.

A ping came from his sniffer. The log run had finished. Jayden walked over to Caleb.

"I'm lookin to sell a few reps," confides Jayden.

"Sorry, man I need the cheese."

Caleb saw Jayden's disappointment.

"Hey look. You've always been solid with me. I gotta cheese head lookin to score some rep. I'll put you in."

Cheese heads are the analog businessmen and financiers. They make their money in the digits, but they make analog money. A cheese head needing to impress will pay good money for rep. It would destroy the value of rep if it weren't for the fact they are largely spoiled rich guys used to getting whatever they want. They don't understand the new world and lose reputation faster than they can buy it. When someone is suspected of paying for rep someone will ask aren't you Aubrey or some other cheese derived name.

"Yeah that would be great." replied Jayden.

"Saw your tut on back end UIKit. That was fresh. You know I could always use more digits."

"Thanks, " Jayden beamed.

Rep is more than a way to keep score, it is its own reward. The beards in the lecture halls don't understand it so they pretend it doesn't exist.

"but I'm OK alone," he continued.

"You're never alone. Just remember that."

Caleb turned to his gang and Jayden went back to his booth to wait for the suit. Jayden prefered making his cash picking up gigs on the net, but his latest vid took more time than expected. Jayden hoped this suit wasn't 5-0. Nobody has yet figured out what the crime is, but the government and the corporations can't get a piece of it so it must be illegal. They trump up charges and try to flake a digizen. Luckily Digizens United is very good at making evidence disappear.

$200 haircut and a Movado on his wrist. The cheese head wasn't fooling anybody.

"Time to make some cash." thought Jayden.