Risk takers are gamblers. They are people that don't want to spend a lot of time thinking about all the possible problems, they want to just do it and rely upon luck and confidence in their own ability to succeed. They therefore fail far more often than they succeed.
On the other hand academic literature that has been around for decades documents that successful investors are the opposite of risk takers. They are cautious, conservative, thoughtful and careful. They avoid risk. The "risks" with their money they take are when they have checked every possible outcome repeatedly and are pretty convinced that in fact there isn't much risk involved.
These are generalizations of course, as any attempt to understand human economic behavior must be. But politicians, and economic theorists often think of risk takers and investors as interchangable. We need to keep their fundamentally different nature in mind if we want to make successful prognostications about how to keep our personal and public finances in order.
Tuesday, July 12, 2011
Wednesday, July 6, 2011
Dumbest Act of Congress - Contestant #1 - 1997 Capital Gains - housing
In 1991 Republicans began introducing bills to make major changes in the Capital Gains tax. They argued it would stimulate the economy. In 1994 changes in the Capital Gains tax became part of their "contract with America". In 1997, after years of battling they pushed the notion through Congress.
Before 1997 if you sold your house you could take all the proceeds and buy another house and not be subject to any Capital gains tax. Then once in your life, after you were age 55, you could sell your house and buy a smaller, cheaper house and keep a specified amount of the extra money you made on the sale without paying any capital gains taxes.
The old scheme was economically brilliant. It allowed flexibility to workers to change jobs, even if it meant moving across the country, so helped maintain a mobile work force. And the one time exception after age 55 allowed people to use their homes as a nest egg, downsizing as they got older and pulling out a tax free nest egg for retirement.
Congress threw out this law that had worked wonderfully for decades, and provided all sales of houses would be subject to Capital Gains taxes, but provided an exemption so a big part of the proceeds would always be tax free. The door was opened to the speculators.
House prices immediately started rising and for the next 9 years speculation on houses was rampant. Numerous TV shows became very popular teaching people how to buy a house, fix it up a bit, then "flip" it for big profits. House prices blew up to extraordinary levels. Banks could make so much money trading, or packaging mortgages they lost touch with reality and rubber stamped purchases by people without the income or resources to pay for the house. The bubble burst 10 years after the 1997 law and took down the rest of the economy with it.
Congress dumped a law that had served for decades to encourage stability, provide homeowners with the ability to be mobile, and have a nest egg when they retire and replaced it with a law that turned the housing market into a speculators casino.
Before 1997 if you sold your house you could take all the proceeds and buy another house and not be subject to any Capital gains tax. Then once in your life, after you were age 55, you could sell your house and buy a smaller, cheaper house and keep a specified amount of the extra money you made on the sale without paying any capital gains taxes.
The old scheme was economically brilliant. It allowed flexibility to workers to change jobs, even if it meant moving across the country, so helped maintain a mobile work force. And the one time exception after age 55 allowed people to use their homes as a nest egg, downsizing as they got older and pulling out a tax free nest egg for retirement.
Congress threw out this law that had worked wonderfully for decades, and provided all sales of houses would be subject to Capital Gains taxes, but provided an exemption so a big part of the proceeds would always be tax free. The door was opened to the speculators.
House prices immediately started rising and for the next 9 years speculation on houses was rampant. Numerous TV shows became very popular teaching people how to buy a house, fix it up a bit, then "flip" it for big profits. House prices blew up to extraordinary levels. Banks could make so much money trading, or packaging mortgages they lost touch with reality and rubber stamped purchases by people without the income or resources to pay for the house. The bubble burst 10 years after the 1997 law and took down the rest of the economy with it.
Congress dumped a law that had served for decades to encourage stability, provide homeowners with the ability to be mobile, and have a nest egg when they retire and replaced it with a law that turned the housing market into a speculators casino.
Sunday, July 3, 2011
Musing on the battle of the 20th Century - Adam Smith v. Karl Marx
The twentieth century has lately been characterized as a battle between the free market capitalists who cite Adam Smith as their philosophical guru, and the socialist/communist devotee's who cite Karl Marx as their philosophical source.
The problem with both schools of thought is that neither is always the right approach or the wrong approach, both views represent tools in the toolbox of human nature, and both have their strengths and weaknesses.
In 1990 the capitalist's declared victory when the Soviet Union collapsed. They believed the collectivist views of Marx were shown to be false by the economic weakness of communist regimes that caused many to implode and others to limp along while they gradually adopted a more free market approach. They saw a future of permanent prosperity driven solely by the self interest of individuals striving to improve their lot, and in Britain and the United States, the flag bearers for western capitalism, collectivist notions that regulated the untrammeled freedom of the capitalist's to pursue their objectives were rejected.
Twenty years later that triumphalism is gone. The United States and Great Britain, the two most dedicated western capitalists nations, and the rest of the western world that followed their lead on the road toward more unfettered Capitalism, limp along with huge debts after a pretty predictable selfish and delusional boom led to a massive financial crash. They now look with some fear at collectivist states like Vietnam or China who are grafting free market capitalism onto their collectivist state and experiencing the boom associated with the unfettered early stages of free market capitalism.
So now China is experiencing a bit of the triumphalism. But Russia in the 1950's through 1970's was perceived to be a rising power, much as China is now. Sooner or later China's form of grafted free market capitalism will stumble and their government will either have to crush all freedoms, or relinquish their ultimate control to democracy.
In truth the great clash of the 20th century was always simply the newest incarnation of the struggle that has existed throughout human history between selfish interests and collectivist instincts. Some of us are inclined by personality and/or upbringing to be more selfish, building our lives with little thought to its impact on others. Others among us are by personality and/or upbringing prone to lean toward team building, to joint cooperative effort, to seeking paths that work for everyone.
Capitalists sometimes speak of capitalism and democracy as one is the same. Democracy is not a capitalist notion, it is a mechanism to allow all people to live the life they are comfortable with. The Arab spring is not seeking to turn the middle east into a capitalist state, it is simply reacting to decades of selfish and ruthless people being allowed to dictate law to their own personal benefit.
Perhaps the Arab spring is a harbinger of a 21st century where the self-interested finally lose control all over the world, and the self interested and the collectivists negotiate an accommodation that allows all people to follow their instincts and live the life they are comfortable with without doing so at the expense of others.
Sunday, June 26, 2011
The role of Unions in our economy
There is a very thought provoking opinion piece by Robert Reich in the San Francisco Chronicle today. His thesis is that Unions have been central to the strength of our economy and the Republican efforts to undermine the power of unions are not good economic policy.
He notes that from 1945 to 1975 (roughly) America had strong unions and a strong economy in which middle class working folks saw the same increases in wealth (percentage wise) as the wealthiest persons (thereby funding the middle class ability to consume). From 1975 forward the growth of wealth by middle class workers began to slip as Unions lost favor and power. The middle class managed to maintain its overall standard of living first as mom started joining the workforce, then we started working longer hours, and finally we went into debt using our homes as collateral to finance our lifestyle. But in terms of the actual benefits of increased productivity that occurred during that period, it went to the wealthiest workers. He says "...now all these coping mechanisms are exhausted - and we are living with the consequences"
He anticipates that some will say you can't compare the post WW II era with today's global economy which is much more competitive. His response is to cite Germany. Germany has had strong labor unions for decades, currently has strong labor unions, and continues to experience strong growth and relatively low unemployment. In Germany the top 1% of German households earns about 11% of all income, and has for 4 decades. In the US by contrast the top 1% took home 9% in 1970, but today take home more than 20%.
My first thought after reading Mr Reich's piece is why did the US turn against Labor unions? I immediately remembered Jimmy Hoffa, and the other union bosses of that time period that basically ran their unions a lot like Ghadafi runs Libya. I remember hearing sensational stories of businesses being put out of business by excessive labor contracts. Unions were poorly regulated, glorified gangs in many cases, it was easy to think they were bad and turn away from them. But it appears they also contributed mightily to the strength of our economy, and it appears Germany has found a way to regulate unions and minimize the bad conduct.
I understand why a lot of business people don't like unions, and support Republican efforts to undermine union power. Life is always easier and less stressful when you have unrestrained control over your business. But that is exactly the thinking of most of the dictators in the world. It is an illusion to think that depriving people of power to exert some control over their work circumstances will be beneficial in the long run.
Instead of undercutting unions Republicans should either look at countries like Germany to see what formula they have devised that has allowed strong unions to work in partnership with business for decades, or find some other way to make business share the wealth they generate with workers to a greater extent, like linking the level of corporate taxation to the degree the corporation spreads its gains throughout the corporation.
Here is a link to the online version of Robert Reich piece: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/06/26/INRJ1K0LIL.DTL
He notes that from 1945 to 1975 (roughly) America had strong unions and a strong economy in which middle class working folks saw the same increases in wealth (percentage wise) as the wealthiest persons (thereby funding the middle class ability to consume). From 1975 forward the growth of wealth by middle class workers began to slip as Unions lost favor and power. The middle class managed to maintain its overall standard of living first as mom started joining the workforce, then we started working longer hours, and finally we went into debt using our homes as collateral to finance our lifestyle. But in terms of the actual benefits of increased productivity that occurred during that period, it went to the wealthiest workers. He says "...now all these coping mechanisms are exhausted - and we are living with the consequences"
He anticipates that some will say you can't compare the post WW II era with today's global economy which is much more competitive. His response is to cite Germany. Germany has had strong labor unions for decades, currently has strong labor unions, and continues to experience strong growth and relatively low unemployment. In Germany the top 1% of German households earns about 11% of all income, and has for 4 decades. In the US by contrast the top 1% took home 9% in 1970, but today take home more than 20%.
My first thought after reading Mr Reich's piece is why did the US turn against Labor unions? I immediately remembered Jimmy Hoffa, and the other union bosses of that time period that basically ran their unions a lot like Ghadafi runs Libya. I remember hearing sensational stories of businesses being put out of business by excessive labor contracts. Unions were poorly regulated, glorified gangs in many cases, it was easy to think they were bad and turn away from them. But it appears they also contributed mightily to the strength of our economy, and it appears Germany has found a way to regulate unions and minimize the bad conduct.
I understand why a lot of business people don't like unions, and support Republican efforts to undermine union power. Life is always easier and less stressful when you have unrestrained control over your business. But that is exactly the thinking of most of the dictators in the world. It is an illusion to think that depriving people of power to exert some control over their work circumstances will be beneficial in the long run.
Instead of undercutting unions Republicans should either look at countries like Germany to see what formula they have devised that has allowed strong unions to work in partnership with business for decades, or find some other way to make business share the wealth they generate with workers to a greater extent, like linking the level of corporate taxation to the degree the corporation spreads its gains throughout the corporation.
Here is a link to the online version of Robert Reich piece: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/06/26/INRJ1K0LIL.DTL
Friday, June 24, 2011
Problems with Government unemployment insurance programs
The Federal and State governments created unemployment insurance programs as the nation lingered along in the Great Depression in the 1930's. The enormous job losses in the Great Depression were devastating to the workers who lost their jobs and their families, but also to the effort to restart the economy. When a huge part of your workforce is unemployed and completely without income, your consumer base is decimated. Unemployment insurance would make job loss less devastating for workers and also allow unemployed workers to continue to contribute something to the economy as consumers.
Now, 75 or so years later Democrats and Republicans in Congress still fight over the unemployment insurance program, mostly over extending benefits to the long term unemployed. Democrats tend to assume they are all innocent victims of the economy, Republicans have a suspicion many are shirkers who like getting money for free.
Both are extreme positions not reflective of the total reality. For various reasons some people who lose their job may work really hard at finding another position but still go long periods of time without getting reemployed through no fault of their own. Their job may have disappeared under a wave of new technology so they need retraining. The job market may be really dead where they live and they can't afford to move because they are tied to a house they cannot sell. They may be physically limited in the types of jobs they can perform.
Other people either because they are feeling a little depressed and helpless, or they are feeling angry and entitled, or they are just too laid back for their own good, may ride unemployment for long periods of time making little or no effort to seek new work.
It seems to me there is a middle ground between the Democrat view that everyone on unemployment is a victim working hard to get another job, and the Republican view that they must all be slackers if they haven't got a job yet. Here is what I suggest.
People who go on unemployment should be entitled to benefits in much the same way as the current system for a period of time. At a certain point, however, they should be required to do a certain number of hours a week of volunteer work for Government or non-profit organizations to continue to receive unemployment benefits (and continue to be required to document their search for work). The longer they are on unemployment, the more hours per week they will be required to work to retain the benefits. The organizations employing them must be required to keep records on their job performance and some form of publicly available evaluation of the individuals performance, accessible to potential private employers.
I have known a few people in my life in jobs that allowed them to use regular periods of unemployment as periods of paid vacation. I suspect they take far more out of the system than they ever contribute in unemployment insurance taxes. So we should also adjust the law to take into account people who are repeatedly on unemployment over their working career by making the initial period where no work is required become shorter each time they go back on unemployment.
It suits the political needs of Congress to deal in extremes, they have no motivation to fine tune the unemployment insurance system. The system won't be improved unless we the voters demand it.
Now, 75 or so years later Democrats and Republicans in Congress still fight over the unemployment insurance program, mostly over extending benefits to the long term unemployed. Democrats tend to assume they are all innocent victims of the economy, Republicans have a suspicion many are shirkers who like getting money for free.
Both are extreme positions not reflective of the total reality. For various reasons some people who lose their job may work really hard at finding another position but still go long periods of time without getting reemployed through no fault of their own. Their job may have disappeared under a wave of new technology so they need retraining. The job market may be really dead where they live and they can't afford to move because they are tied to a house they cannot sell. They may be physically limited in the types of jobs they can perform.
Other people either because they are feeling a little depressed and helpless, or they are feeling angry and entitled, or they are just too laid back for their own good, may ride unemployment for long periods of time making little or no effort to seek new work.
It seems to me there is a middle ground between the Democrat view that everyone on unemployment is a victim working hard to get another job, and the Republican view that they must all be slackers if they haven't got a job yet. Here is what I suggest.
People who go on unemployment should be entitled to benefits in much the same way as the current system for a period of time. At a certain point, however, they should be required to do a certain number of hours a week of volunteer work for Government or non-profit organizations to continue to receive unemployment benefits (and continue to be required to document their search for work). The longer they are on unemployment, the more hours per week they will be required to work to retain the benefits. The organizations employing them must be required to keep records on their job performance and some form of publicly available evaluation of the individuals performance, accessible to potential private employers.
I have known a few people in my life in jobs that allowed them to use regular periods of unemployment as periods of paid vacation. I suspect they take far more out of the system than they ever contribute in unemployment insurance taxes. So we should also adjust the law to take into account people who are repeatedly on unemployment over their working career by making the initial period where no work is required become shorter each time they go back on unemployment.
It suits the political needs of Congress to deal in extremes, they have no motivation to fine tune the unemployment insurance system. The system won't be improved unless we the voters demand it.
Thursday, June 23, 2011
A startling new look at the impact of immigrant workers
A new book about migration stands many of the canards of the current immigration debate on their head. It comprehensively makes the point immigration is unpopular in rich countries because people overestimate the costs of immigration and underestimate the benefits.
Most startling to me is the authors computation that if rich countries allowed a 3% increase in migration to expand their work force the world as a whole would be richer by $356 billion dollars. Completely opening borders so labor could flow freely from poor countries to rich countries would add $39 Trillion to the world economy over 25 years. That is more than 500 times what the rich world currently spends on foreign aid in a year.
This multiplying effect is a result of the fact wages in the rich world are a fortune by poor country standards, and since migratory workers tend to send large chunks of their earnings home to families, those remittances boost the poor country economy increasing their ability to become consumers of rich world products. (Unlike foreign aide, those remittances go to the people of the country instead of getting poured into the pockets of the government elite, or wasted in huge nonsense government projects)
Regarding highly skilled workers migrating to rich countries the authors note while "brain drain" hurts poor countries to some extent, it also motivates people to increase skills, and then some stay at home. Highly skilled immigrants also may start businesses in destination countries that increase the rich country employment base, so in the end brain drain can be a boost to local economies at both ends of the migration.
The authors review studies about how much immigrants displace native low skill workers and find the studies show the fear greatly exceeds the reality, the effect is relatively negligible (not to say the effect is not very real for some native workers). Migrant workers in fact sometimes create opportunities for native workers by starting businesses, or freeing up one spouse so both spouses can work.
One point in the book that particularly caught my attention was the authors point that migrant workers usually prefer to come when their services are wanted and go home when they are not.
That point brought to my mind the Bracero program we used to have in California where large numbers of people were allowed to come to the country each year to work legally in low-skilled jobs. They returned home when they were not working. As I recall that program was killed in a burst of anti-immigrant fervor some years ago. I wonder if a large part of our immigration problem now is because eliminating that option to come, work legally, then go home and come back again as work becomes available means people are more likely to try to smuggle in their family and put down roots so they don't have to deal with the enormous risks and dangers of border crossings.
The book is "Exceptional People: How Migration Shaped our World and Will Define Our Future" reviewed by the Economist (May 28, 2011, p.87)
Most startling to me is the authors computation that if rich countries allowed a 3% increase in migration to expand their work force the world as a whole would be richer by $356 billion dollars. Completely opening borders so labor could flow freely from poor countries to rich countries would add $39 Trillion to the world economy over 25 years. That is more than 500 times what the rich world currently spends on foreign aid in a year.
This multiplying effect is a result of the fact wages in the rich world are a fortune by poor country standards, and since migratory workers tend to send large chunks of their earnings home to families, those remittances boost the poor country economy increasing their ability to become consumers of rich world products. (Unlike foreign aide, those remittances go to the people of the country instead of getting poured into the pockets of the government elite, or wasted in huge nonsense government projects)
Regarding highly skilled workers migrating to rich countries the authors note while "brain drain" hurts poor countries to some extent, it also motivates people to increase skills, and then some stay at home. Highly skilled immigrants also may start businesses in destination countries that increase the rich country employment base, so in the end brain drain can be a boost to local economies at both ends of the migration.
The authors review studies about how much immigrants displace native low skill workers and find the studies show the fear greatly exceeds the reality, the effect is relatively negligible (not to say the effect is not very real for some native workers). Migrant workers in fact sometimes create opportunities for native workers by starting businesses, or freeing up one spouse so both spouses can work.
One point in the book that particularly caught my attention was the authors point that migrant workers usually prefer to come when their services are wanted and go home when they are not.
That point brought to my mind the Bracero program we used to have in California where large numbers of people were allowed to come to the country each year to work legally in low-skilled jobs. They returned home when they were not working. As I recall that program was killed in a burst of anti-immigrant fervor some years ago. I wonder if a large part of our immigration problem now is because eliminating that option to come, work legally, then go home and come back again as work becomes available means people are more likely to try to smuggle in their family and put down roots so they don't have to deal with the enormous risks and dangers of border crossings.
The book is "Exceptional People: How Migration Shaped our World and Will Define Our Future" reviewed by the Economist (May 28, 2011, p.87)
Monday, June 20, 2011
I want to sign a petition to demand better Presidential debates
I wish I had the tech skills to set one up, maybe linked to facebook.
The existing Presidential debate format is like a pillow fight. We might as well tune in to watch alternating candidate TV commercials. The candidates handlers insure that the format shields their candidates from questions that might actually reveal the vacuity of their rhetoric. If they do get a potentially difficult question they just talk about something else and the media moderator's let them get away with it.
The process produces no information beyond the carefully scripted sound bites from each campaign. The partisans at both ends of the political spectrum get reassured, the voters in the middle get nothing - we end up judging candidates on how they look, or act, not the cogency of their ideas. Nixon was judged to have "lost" the 1960 debate with Kennedy because he had a bad make-up job. George Bush Jr. was judged to have won in 2000 because Al Gore was stiff and boring, and Mr Bush exceeded (silly) media expectations by not being completely incompetent at stringing together sentences.
We should set up ground rules about questions (no trick questions, no questions assuming unproven facts) and then let each candidate's campaign question the other candidate(s), with the right to follow up questions where the answer is evasive. Have an independent panel of fact checkers to keep them honest. Then we might actually learn something useful as candidates will have to answers about unpalatable truths instead of just telling us what they think we want to hear.
Candidates won't want to use this format, but if voters won't vote for a candidate who doesn't participate, they'll have to do it.
If there is some tech person out there who knows how to set up a petition and start it circulating I would sign it in an instant and send it to everyone I know.
The existing Presidential debate format is like a pillow fight. We might as well tune in to watch alternating candidate TV commercials. The candidates handlers insure that the format shields their candidates from questions that might actually reveal the vacuity of their rhetoric. If they do get a potentially difficult question they just talk about something else and the media moderator's let them get away with it.
The process produces no information beyond the carefully scripted sound bites from each campaign. The partisans at both ends of the political spectrum get reassured, the voters in the middle get nothing - we end up judging candidates on how they look, or act, not the cogency of their ideas. Nixon was judged to have "lost" the 1960 debate with Kennedy because he had a bad make-up job. George Bush Jr. was judged to have won in 2000 because Al Gore was stiff and boring, and Mr Bush exceeded (silly) media expectations by not being completely incompetent at stringing together sentences.
We should set up ground rules about questions (no trick questions, no questions assuming unproven facts) and then let each candidate's campaign question the other candidate(s), with the right to follow up questions where the answer is evasive. Have an independent panel of fact checkers to keep them honest. Then we might actually learn something useful as candidates will have to answers about unpalatable truths instead of just telling us what they think we want to hear.
Candidates won't want to use this format, but if voters won't vote for a candidate who doesn't participate, they'll have to do it.
If there is some tech person out there who knows how to set up a petition and start it circulating I would sign it in an instant and send it to everyone I know.
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