Coyote Blog

A few weeks ago I got my annual "Your Social Security Statement" from the government.  This is a statement carefully crafted to look like it's telling you a lot while at the same time covering up Social Security's dirty little secret.  But with a spreadsheet and 5 minutes of work, one can figure out what is really going on.

The statement shows the total of my social security taxes paid into the system, including the employer share.  It also shows my taxed earnings per year, and my "benefits."  The main benefit is the monthly annuity payment Social Security will make to me after I retire.  My statement shows that $140,139 total taxes have been paid into the system on my behalf over the last 25 years.  Based on these taxes and (this is important) the assumption I and my employer will continue to pay in at least $7440 per year until I retire, I can expect an annuity at retirement age of 67 (under current law, which the statement makes clear can be changed at any time) of $1,985 per month.

So I built a spreadsheet (click to download excel file), going back to my first year of employment.  Each year, I added the social security taxes to savings, and grew the accumulated balance by some interest rate.  For past years I used actuals from the report, for future years I used the $7440 tax number the report uses to calculate the social security payout. 

This allowed me to answer a question:  If I had been able to take these social security taxes and instead put them in a savings plan, and then took the accumulated balance out at age 67 and bought an annuity (at current rates), what would be my monthly payment?  Well, assuming a very conservative after-tax rate of return of 5%, I would have $1,077,790 at age 67 to buy an annuity, which at current rates quoted on the Vanguard site, would give me $7,789 a month until I die.  This return is just about four times the amount I get from having the Social Security Administration manage the money for me instead. Ugh.  Also note that I did not assume "risky" equity investments or whatever straw man anti-reformers are using nowadays.    If I assume a higher return of 8%  (the stock market in the 90's returned something like 18%) then my annuity will be $17,860 per month, or 9 times the Social Security payout.  Double ugh.

In fact, this all opens up the obvious question, what actual rate of return is Social Security paying out on your "premiums?"  Well, in fact we can calculate this with the same spreadsheet.  I plugged in 2% for the interest rate.  No go -- resulting annuity is to high.  Then I plugged in 1%.  Still too high.  Could the government be paying you 0% on your money?  I plugged that in.  Still too high.  In fact, the implied rate of return on my money in the Social Security system is -0.8% a year.  In other words, not only is the government not paying me any interest, they are charging me to hold my money.

Social Security defenders insist that it is not a welfare program.  For example, Kevin Drum quotes this with approval:

The men in my family of my father's generation returned home after serving
their country and got jobs in the local steel mills, as had their fathers and
their grandfathers. In exchange for their brawn, sweat, and expertise, the steel
mills promised these men certain benefits. In exchange for Social Security taxes
withheld from their already modest paychecks, the government promised these men
certain benefits as well.

....These were church-attending, flag-waving, football-loving, honest family
men. They are rightfully proud of providing homes and educations for their
children and instilling the sorts of values and manners that serve them well as
adults. And if I have to move heaven and earth, now that they've retired, the
Republican party is NOT going to redefine them as welfare
recipients.

Fine, let's call it a retirement program.  Well, as a retirement program, it is a really, really big RIPOFF.  Ever worker in this country is being raped by this retirement plan.  In fact, it is the worst retirement program in the whole country:

• As we see above, it pays a negative rate of return
• It is not optional - you go to prison if you choose not to participate
• Unlike a private annuity contract, the government can rewrite your benefits level any time, and you have to take it.  In fact, my statement says "Your estimated benefits are based on current law.  Congress has made changes to the law in the past and can do so at any time.  The law governing benefit amounts may change because, by 2040, the payroll taxes collected will be enough to pay only about 74 percent of scheduled benefits."
• There are no assets backing this annuity!!  An insurance company that wrote annuities without any invested assets backing them would be thrown in jail faster than Jeff Skilling.  The government has been doing it for decades.

A couple of months ago, news-hog Eliot Spitzer had a well-publicized (what else?) suit against H&R Block for not providing high enough returns in its low-income retirement savings accounts.

New York Attorney General Elliot Spitzer [official website] Wednesday launched a $250 million lawsuit [complaint, PDF] against H&R Block
[corporate website], the largest tax preparation service in the US, for
fraudulently coaxing its customers into a retirement account plan that
lost them money. Spitzer said that money in the retirement accounts
decreased over time because the low interest rate did not cover the
fees associated with the account.

Doesn't this exactly match the situation in my social security spreadsheet?  At least H&R Block's customers had a choice whether or not to sign up.

Postscript: As is usual with retirement issues, tax is a messy topic, so I mostly left it out.  My spreadsheet is correct if you call it an "after-tax" rate of return.  This may mean the nominal rate is higher, but it got taxed, or it could posit some tax-free savings alternative to social security.  Note also that we pay income taxes on the amount that gets taxed by Social Security (at least our employee portion).  This means an IRA type replacement for social security would actually have higher returns and dollars at retirement than those in my spreadsheet, because it would eliminate or at least defer income taxes on the premium.

Also note that the analysis is all in nominal dollars, because that is the way the dollars are on my SS statement - there are not inflation escalators in the program.

Postscript #2:  When last social security was a national topic, opponents of reform got a lot of mileage out of the 2001-2002 bear market in stocks.  They would ask, what if people had invested in stocks, they would have lost their money.  Well, as of today, if you had invested every dollar of your retirement savings on the worst possible day, the 2000 peak in the Dow, you would still be up 5% today.  This is a disappointing  return of less than 1% annually, but is STILL higher than the negative return in social security.  And remember, we are using nearly the worst five year before and after dates in this generation.  A real-world steady investment in stocks over the last 20 years, with equal amounts each year, would be way up  (anyone with an exact number is welcome to post it in the comments).

Postscript #3:  In an earlier post, I took on Social Security as intellectual welfare:

Advocates for keeping forced savings programs like Social Security in
place as-is by necesity argue that the average American is too stupid,
too short-sighted, and/or too lazy to save for retirement without the
government forcing them.  Basically the argument is that we
are smarter than you, and we are going to take control of aspects of
your life that we think we can manage better than you can.  You are
too stupid to save for retirement, too stupid to stop eating fatty
foods, too stupid to wear a seat belt, and/or too stupid to accept
employment on the right terms -- so we will take control of these
decisions for you, whether you like it or not.  For lack of a better
word, I call this intellectual welfare.

Update #1:  In response to some comments, the spreadsheet does work right, it is just labeled wrong.  The column that is labeled "investment income" is actually the saved balance to date plus the investment income.  The "End of Year" column is the correct balance at the end of year after investment income and new contributions.

Update #2:  A commenter reasonably points out that investment at the top of the market in the Nasdaq would still be way underwater.  However, I took this point investment on the worst day as an extreme example.  Even in the Nasdaq, which is still off 50% from its peaks, a steady monthly investment from 1997 or 1998 to date would be above water in total.  Leftists do a lot of bad things for the country, but trying to scare average workers away from equity investments for the long-term is certainly on of the most hypocritical.  I guarantee that every liberal politician has a big fat chunk of their savings in equities, because they know that is the way to create wealth over the long haul.

Update #3:  In a follow-up post, using this same spreadsheet, I conclude that only 17% of my Social Security taxes are going to my retirement while 83% are welfare for someone else.

One of the excuses statists often use to promote government over private enterprise is that businesses are "short-term focused".  They are only after "profit in the next quarter."  They don't "invest for the long-term" like a government can.  Really?

Iran's oil exports are plummeting at 10pc a year on lack of
investment and could be exhausted within a decade, depriving the world
economy of its second-biggest source of crude supplies.

A report by the US National Academy of Sciences said rickety
infrastructure dating back to the era of the Shah had crippled output,
while local fuel use was rising at 6pc a year.

"Their domestic demand is growing at the highest rate of any country
in the world," said Prof Roger Stern, an Iran expert at Johns Hopkins
University, Baltimore.

"They need to invest $2.5bn (£1.28bn) a year just to stand still
and they're not doing it because it's politically easier to spend the
money on social welfare and the army than to wait four to six years for
a return on investment," he said.

"They've been running down the industry like this for 20 years."

You never hear this problem in the privately run oil industry.  And I can say with complete confidence that this is a government problem, not just an Iran problem. 

Take one area in this country I know about, public recreation.   The BLM, the Forest Service, the National Park Service, the Corps of Engineers (not to mention state, county and local authorities) all run thousands of recreation facilities across the country.  And I can tell you that no public entity I know of budgets or spends adequate money on preventative and routine maintenance.  The nature of the process is that Congressmen love to get their name attached to building a new government recreation facility - that's sexy.  But then they never appropriate enough money to keep it maintained.  In their calculus, politicians can get a lot more political mileage from spending money in year 2 on another flashy announcement of a new facility than they can from spending that money to maintain the facilities they funded in year 1.

Can you imagine someone like Disney doing this?  Of course not.  The Magic Kingdom at DisneyWorld, the oldest of the them parks there, looks as fresh and new and well-kept when you visit it as does the newer MGM and Animal Kingdom parks.

And don't even get me started on government pensions and Social Security.  Oops, too late, I am started.  Yes, a few private companies in steel and airlines have under-funded pensions (though the government is partially to blame there) but by the definition of "under-funded" that private companies use, nearly every single public pension fund in the country is under-funded.  That is because most public pensions do not actually put away any money (zero, zip) for future liabilities -- they simply pay this year's required payments out of this year's funds.  States and municipalities have a huge balloon pension burden coming -- just wait twenty years and we will all be talking about it.  And Social Security, for all the smoke and mirrors, effectively works the same way, since current premiums in excess of current obligations are spent on the feds general obligations (if you still think there is some trust fund out there, wake up.)

Under both state and federal law, it is illegal for me to hire anyone without documenting that they are in fact a legal US resident and have the right to work in the US.  Those of you who read this blog know that this irritates me, given my support for open immigration, but I do it.  It is also illegal for me not to make all the relevant state and federal social security and income tax withholdings for each employee, as well as pay premiums into state and federal unemployment funds, all of which require that I have an accurate social security number from each employee.  No valid social security number, no job.

All this mess is hard enough to comply with, and it takes a lot of my managers time, a full-time HR person, and thousands of dollars sent to ADP to stay legal.

And then I see this:

A Mississippi Democrat in line to become chairman of the House Homeland
Security Committee has warned the nation's largest uniform supplier it
faces criminal charges if it follows a White House proposal to recheck
workers with mismatched Social Security numbers and fire those who
cannot resolve the discrepancy in 60 days.

Rep. Bennie Thompson said in a letter to Cintas Corp. it could be
charged with "illegal activities in violation of state and federal law"
if any of its 32,000 employees are terminated because they gave
incorrect Social Security numbers to be hired.

Great.  Now I can go to jail both for employing folks without a valid social security number and for not employing folks without a valid social security number.

From Marginal Revolution:

The FASAB has asked
that the United States government start including future Medicare and
Social Security liabilities in current budget deficit figures:

Monday,
the Federal Accounting Standards Advisory Board released a proposal in
which the government would have to account for the cost of future
Social Security payments year by year as people build up entitlements.

Seen in advance of its release by the Financial Times, the switch in
accounting practices would be an international accounting anomaly, as
most other governments treat social insurance as a political commitment
to pay future benefits rather than a financial liability, the newspaper
said.

The FASAB is made up of six independent members who support the
proposal and three opposing members from the U.S. Treasury, the White
House Office of Management and Budget and the Government Accountability
Office.

I support this change despite the fact it may result in what I consider bad outcomes (e.g. big tax increases) as the magnitude of future liabilities become clear.  Tyler Cowen also argues it may make these programs harder to scale back, since it shifts the future payments from a political promise to a financial commitment.  But just like free speech, one has to be consistent in one's support for transparency.

If this all seems arcane to you, let me give you some perspective.  Today, Jeff Skilling was given over 30 years in jail for various accounting-related frauds, supposedly hiding losses and liabilities from shareholders's view.  But what Skilling was convicted of doing were minor, subtle accounting tricks involving penny-ante sums of money compared to the egregious games Congress plays with accounting for the federal government's future liabilities.  Skilling was accused, for example, of booking future liabilities in certain joint ventures where they were hard to find; the feds, in contrast, do not book future liabilities at all.

This is one of the oddest false dichotomies I have seen in a long time:

Since 1992, the National Election Study
has asked respondents four questions that collectively make up an
"authoritarian index." The four questions ask you to specify which of
two attributes you value more in children:

1. Independence vs respect for elders

2. Self-reliance vs. obedience

3. Curiosity vs. good manners

4. Being considerate vs. being well behaved

The first item in each pair marks you as less
authoritarian and the second item marks you as more authoritarian.
After you've answered all four, the scores are added up and normalized
on a scale from 0 to 1, with 1 being the most authoritarian.

It will come as no surprise that authoritarians tend to vote
Republican. What may surprise you, though, is that this has only become
true in recent years.

I am sure this does not "surprise" Kevin Drum's leftish readers, since they so want to think of themselves as freedom- and individual-rights-loving vs. the mean old Republicans, whom I certainly have no desire to defend on this score.

But are these weird false dichotomies or what? 

Why is independence the opposite of respect for elders?  Isn't this like saying Kleenex is the opposite of pudding?  Isn't the opposite of "independence" actually "the desire to mooch off other people"?  Why isn't the opposite of "self reliance" in fact the "desire to have the government run your life for you?"  I mean, I personally have strived (striven??) to have my kids simultaneouly be both curious and have good-manners. 

And is Drum really trying to argue that Democrats are all about the stuff on the left side while Republicans are for all the stuff on the right?  Who in the world is going to believe that the folks who, for example, support Social Security because they think individuals can't be trusted to manage their own retirement savings, are the spokesmen for "independence" and "self-reliance."  As I said in my comments to the post:

As a libertarian, I am thrilled to see you championing the cause of anti-authoritarianism and self-reliance.  I am sure that this means
that we will soon see your opposition to telling people what wages are
acceptable, what features their car must have, where they can and can't
smoke, who they can or can't hire and fire, where they can get their
health care, what schools they are forced to fund, how much fat can be
in their diet, what drug risk trade-offs are acceptable, how steep
their wheelchair ramps have to be, how energy efficient their
appliances have to be, what minimum percentages of minorites must be at
their school in their workforce, why they shouldn't be allowed to shop
at Walmart or buy from Chinese manufacturers, what lisence they need to
braid hair or to sell caskets, etc.

I guess it's inevitable come election time, but a cottage industry has arisen of late to spread the word that the US economy is broken and that conditions for all but the rich are actually eroding.  This historically has been a winning strategy -- Remember, in late 1992 Bill Clinton campaigned with the absurd (but generally unchallenged in the media) contention that it was the worst economy since the Great Depression.  Most of the lamentations about the current condition of the poor and middle class are presented with the standard populist baggage that the economy is zero-sum, and these groups ills are somehow related to and the result of the income growth of the very rich.

Jacob Hacker of Yale now adds to the chorus, arguing that in addition to worse material fortunes, the middle class faces more risk.  As someone who gave up a good, high-paying job in corporate America for the risk roller coaster of running by own business, I have little sympathy -- after all, I am part of his trend and I happily chose my path.  And its astonishing to me in this day and age anyone can argue that we have too much of a culture of personal responsibility.  Please.

However, rather than fisking this in depth, I will leave the task to my much more capable ex-roommate from Princeton, who also happens to be a senior something-or-other at Cato, Brink Lindsey:

But if we're talking about
security from material deprivation, that's a different story. Let's
start with the biggest risk of all: that of premature death. Back in
1970, during Mr. Hacker's golden age of economic stability and
risk-sharing, the age-adjusted death rate stood at 12.2 deaths per
1,000 people. By 2002, it had fallen more than 30%, to 8.5 per 1,000.
In particular, infant mortality plummeted to 7.0 from 20.0, while the
number of Americans killed on the job dropped to three per 100,000
workers from 18.

Next, look at the two main
indicators of middle-class status: a home of one's own and a college
degree. Between 1970 and 2004, the homeownership rate climbed to 69%
from 63%, even as the physical size of the median new home grew by
nearly 60%. Back in 1970, 11% of Americans 25 years of age or older had
a college or higher degree. By 2004, the figure had risen to 28%.

As to consumer possessions, the
following comparison should suffice to make the point. In 1971, 45% of
American households had clothes dryers, 19% had dishwashers, 83% had
refrigerators, 32% had air conditioning, and 43% had color televisions.
By the mid-1990s all of these ownership rates were exceeded even by
Americans below the poverty line.

No matter how the
doom-and-gloomers torture the data, the fact is that Americans have
made huge strides in material welfare over the past generation. And
with greater wealth, as well as improved access to consumer credit and
home equity loans, they are much better prepared to deal with the
downside of increased economic dynamism.

Mr. Hacker leans heavily on his
findings that fluctuations in family income are much greater now than
in the 1970s. But research by economists Dirk Krueger and Fabrizio
Perri has shown that big increases in the dispersion of income have not
translated into equivalent increases in consumption inequality. In
other words, most Americans are able to use savings and borrowing to
maintain stable living standards even in the face of economic ups and
downs. And those standards are much higher than those of the
all-in-the-same-boat era.

Mr. Hacker, however, shows little
interest in providing such context or balance. Fully committed to what
could be called a "free market bad, big government good" narrative, he
simply ignores data that point in the other direction. Thus he
lambastes reforms such as Health Savings Accounts and Social Security
privatization for shifting risks onto individuals while failing to
mention that the policy status quo imposes massive risks of its own.

I know Brink has been finishing up his new book.  I would love to see him start blogging again.

More Thoughts:  I have a couple of thoughts of my own on the risk issue:

• Risk, I guess defined as income volatility, may be higher for the average person today that it was in 1970.  However, in a broader context, it is still drastically lower than any time in history or than in most places in the world.  Certainly pre-WWII people had substantially more risk in their income, particularly in the agricultural sector, which dominated the economy of this and other countries through most of history.  In subsistence agricultural economies, every year even the most productive and competent people face not just the risk of income loss but starvation and extinction through factors wholly beyond their control.
• The vast majority of the risk reduction people experienced in this country after WWII came from the operation of the private market economy, and not from government programs.  It was the incredible productivity growth, export growth, and technology growth of American industry that provided whatever security people might be nostalgic for.
• Further, the author worries about a risk-shift.  But in the 50's and 60's, there was very little risk in the system.  Corporations faces little risk in world markets, executives at corporations faced little risk to their jobs, and most workers faced little risk.  There has not been a risk shift -- this implies there was once some Atlas that bore the burden of all this risk and has now shrugged.  One might argue that there is more risk in the whole system - corporations are not guaranteed their market share so workers are not guaranteed their jobs.  The author tries to make it a populist argument, as if rich folks are shrugging off risk onto the poor.  The fact is that everyone faces more income volatility today, from largest corporation to lowest paid worker.  The good news, as Mr. Lindsey points out, is that this volatility is around a much higher mean.
• The costs of income security programs were always funded by workers
  themselves.  There was never a time when this security was provided by a mythical "someone else".  General revenue programs like welfare and defense over
  the last 30 years have been effectively funded by "the rich", since by
  any definition, that is who pays the income taxes.  However, programs
  like social security, Medicare, and unemployment are all based on
  payroll taxes with caps that mean that most of the tax is paid for by
  the poor and middle class themselves  (some of these are technically
  paid as a percentage of wages by the employer, but trust me that they
  have the same effect on take-home pay as if they had been deducted
  directly from the employee's check).  To the extent workers have
  security, it is only because they have been forced to buy and pay for
  an insurance policy.  So again, there can be no shift, because the workers bore the cost of the insurance themseleves.  Are they getting good value for this insurance?  I don't know --
  nobody knows.  Many reform proposals the author worries will further
  increase risk in fact are structured to put this insurance premium back
  in the hands of the worker, to let him or her decide if and how they
  want to spend it to insure themselves.
• The current obsession with this topic of risk strikes me as a case of white collar bias.  I am not sure anyone but the highest seniority workers ever had this mythological income security in the blue collar sector.  Layoffs and technology-based job obsolescence that created turmoil for blue-collar workers never seemed to touch white collar workers in the same way.  My sense is that what's new today is that middle class white collar workers are now facing these same forces of change, in many industries for the first time.  In fact, a skilled machinist is probably more secure in his job today than an account paybables clerk.  For years, the left has joined unions in criticizing companies like GM for continually cutting blue collar jobs without touching bloated white collar payrolls.  It's odd to see them jump suddenly to the other side of the issue.
• I hate to point out the obvious, but what government income-risk-management program has gone away since 1970, other than welfare reform?  Social Security, unemployment insurance, food stamps -- they all exist, most at levels higher than 1970.  Government-funded health care programs cover far more people for far more stuff.
• Certainly some private practices have changed that may affect employee risk.  It is interesting that the author mentioned 401K's.  To Hacker, shifting from defined benefits pensions to 401K's is an increased risk.  I am sure he would point in part to plans like Enron's where 401K holders took a bath because they were encouraged to funnel a lot of their savings into Enron stock.  But most 401K plans don't work that way, and it does not matter since defined benefit plans are even worse.  Defined benefit plans presuppose that the company you work for will remain financially solvent for decades, and they assume workers will never switch jobs, since they are not very portable.  Defined benefit plans are horrible for workers  -- it reduces their flexibility and increases their risk.  401K's are a fabulous, worker-empowering invention and are bad only for a few union leaders and large pension fund managers (e.g. Calpers) who gain political power by virtue of the money they control.
• Yes, many jobs are less stable, but there is no evidence that there are long-term unemployed people out there.  The nature of the people losing work and the job market today has changed, such that there are much better tools to find new work, and there is more work out there for their skills.  White collar workers today probably find new work easier than blue collar workers in West Virginia ever did in the 1950's and 1960's when the mines closed.  My guess is that most everyone from Enron has found a new job (or jail cell).  There are people in Appalachia who still haven't found a job 40 years after the mine closed.

Kevin Drum takes the following statistic:

As a result, wages and salaries no longer make up the smallest share of
the gross domestic product since World War II. They accounted for 46.1
percent of all economic output in the second quarter, down from a high
of 53.6 percent in 1970 but up from 45.4 percent in the spring of 2005.

And declares it to be a bad thing.  He doesn't really explain, but as a frequent reader of his site I can guess his issue is that he interprets this statement as a sign of the weakening fortunes of the American wage earner.

Isn't it really dangerous to leap to such a conclusion?  I can think of a number of perfectly innocuous, even positive trends that would cause such a shift:

• Aging of population means more people retirement age who take their income in form of dividends, investment returns, pensions, social security, etc., none of which are included in "wages"
• Ownership of investment assets, and thus income from these assets, has spread from just the rich to the middle class, meaning most people get more of a share of their personal income from investments and asset (e.g. house) appreciation
• Entrepreneurship rates are way up since 1970.  This means many more people, particularly in the middle class, have given up working for someone else for a wage and now work for themselves for a business profit.

I know Drum wants to interpret it as a "the poor are poor because the rich take all the money" zero sum game.  Anyone know what is really going on behind these numbers?

It frustrates me some when the government's Katrina response is cited as an example of government failure.  This implies that the government should perform better, but just didn't in this particular case because of some process or personnel problem.  But the government's Katrina response was not the government failing, but the government doing exactly what it always does.  Governments of all types are hard-wired to produce the mess we saw.  And it was a mess, as Ralph Reiland summarizes a recent NY Times article:

• An estimated 1,100 prison inmates across the Gulf Coast collected in excess
  of $10 million in rental assistance and disaster-relief money. Crime pays! FEMA,
  in addition, distributed millions of tax dollars to people who used names and
  Social Security numbers belonging to state and federal prisoners.
• A hotel owner in Sugar Land, Texas, has been charged with submitting
  $232,000 in invoices for evacuees who allegedly never stayed at his hotel,
  billing FEMA for purportedly empty rooms or rooms occupied by paying guests or
  hotel employees.
• An Illinois woman who was living in Illinois at the time of the storm sought
  relief benefits by claiming she had watched her two daughters drown in the flood
  waters of New Orleans. The children never existed.
• A Department of Labor employee in Louisiana, appropriately named Wayne
  Lawless, has been charged with handing out nearly 100 falsified disaster
  unemployment benefit cards in exchange for kickbacks of up to $300 per card.
  
• In New Orleans, two FEMA officials have pleaded guilty to pocketing $20,000
  in bribes in exchange for inflating the count on the number of meals a
  contractor was serving to relief workers.
• With the $2,000 debit cards distributed by FEMA for disaster relief, an
  estimated 5,000 people have double dipped, receiving both the $2,000 plastic
  card and a second $2,000 by check or electronically.
• Two men, one a representative of the Army Corps of Engineers, have pleaded
  guilty to taking kickbacks in exchange for approving payments for removal of
  nonexistent loads of hurricane debris. In contrast, with loads of debris that
  were not nonexistent, a councilman in St. Tammany Parish, Louisiana, has been
  charged with attempting to extort $100,000 from a debris-removal contractor.
  
• One creative scam artist is charged with collecting 26 federal disaster
  relief checks totaling $139,000 by using 13 Social Security numbers and fake
  claims of damage at bogus addresses. Others collected and pocketed hurricane
  relief donations by posing as Red Cross workers.
  All told, what the above
  represents is "one of the most extraordinary displays of scams, schemes and
  stupefying bureaucratic bungles in modern history," reports the Times, "costing
  taxpayers up to $2 billion."

Note that this isn't a unique failure - this story can be written about any government handout program.  And this wasn't a case of FEMA moving too fast without restraints when everyone around it was signaling caution - in fact just the opposite.  Everyone on the sidelines at the time was criticizing FEMA for being too slow in handing out money willy-nilly.

One of the problems never discussed very often is that increasingly, the government has insisted on an exclusive monopoly position for itself in providing disaster assistance.  In effect, past disaster assistance was provided by people you never see or hear about, private people taking private action.  In Katrina, the government worked hard to shut most of these people out.  So, in this sense, Katrina was probably a worse response than in other disasters because the bottom-up, thousands-of-people-helping-out response was not allowed.  FEMA, under pressure from both sides of the aisle, increasingly take the Al Haig "I'm in charge here" approach, much to everyone's detriment. 
Unfortunately, most analyses of Katrina are saying the government did not do enough.  I think it did too much.

More than any subject on Coyote Blog, my immigration posts have engendered more disapproving comments than anything else I have written.  I won't repeat my position except to say that I don't care if immigration is currently illegal, because my point is that it should be legal.  In short, my stance has been that our rights do not flow from the government but from our basic humanity, and therefore activities like association, employment decision-making, and property purchase should not be contingent on citizenship.  Its one of those arguments where I wish many on my side of the argument would shut up -- If the best argument you can muster for immigration is 'who will pick the lettuce', you are not helping very much. 

For the first 150 years of this country's history, our country was basically wide-open to immigration.  Sure, there were those opposed (the riots in NYC in the 19th century come to mind) but the opposition was confined mainly to xenophobes and those whose job skills were so minimal that unskilled immigrants who could not speak English were perceived as a threat.   It was only the redistributionist socialism-lite of the New Deal and later the Great Society that began to make unfettered immigration unpopular with a majority of Americans, who rightly did not wish to see the world's poor migrate to the US seeking an indolent life of living off of government handouts.

But, as Congress debates a series of immigration plans that make not sense and don't seem internally consistent, I will propose my own.  I hope that this plan will appeal to those who to date have opposed immigration because of the government handout problem.  I am sure it will continue to be unappealing to those who fear competition in the job market or who don't like to be near people who don't speak English very well.  This is an elaboration of the plan from this post:

1. Anyone may enter or reside in the US. The government may prevent entry of a very short list of terrorists and criminals at the border, but everyone else is welcome to come and stay as long as they want for whatever reason.  Anyone may buy property in the US, regardless or citizenship or residency.  Anyone in the US may trade with anyone in the world on the same terms they trade with their next door neighbor.
2. The US government is obligated to protect the individual rights, particularly those in the Bill of Rights, of all people physically present in our borders, citizen or not.  Anyone, regardless of citizenship status, may buy property, own a business, or seek employment in the United States without any legal distinction vs. US "citizens"
3. Certain government functions, including voting and holding office, may require formal "citizenship".  Citizenship should be easier to achieve, based mainly on some minimum residency period, and can be denied after this residency only for a few limited reasons (e.g. convicted of a felony).  The government may set no quotas or numerical limits on new citizenships.
4. All people present in the US pay the same taxes in the same way.  A non-citizen or even a short term visitor pays sales taxes on purchases and income taxes on income earned while present in the US just like anyone else.  Immigrants will pay property taxes just like long-term residents, either directly or via their rent payments.
5. Pure government handouts, like Welfare, food stamps, the EITC, farm subsidies, and public housing, will only be available to those with full US citizenship.  Vagrancy and squatting on public or private lands without permission will not be tolerated.
6. Most government services and fee-based activities, including emergency services, public education, transportation, access to public recreation, etc. will be open to all people within the US borders, regardless of citizenship status, assuming relevant fees are paid.
7. Social Security is a tough beast to classify - I would put it in the "Citizen" category as currently structured (but would gladly put it in the "available to everyone" category if SS could be restructured to better match contributions with benefits, as in a private account system).  But, as currently configured, I would propose that only citizens can accrue and receive SS benefits.  To equalize the system, the nearly 8% employee and 8% employer social security contributions will still be paid by non-citizens working in the US, but these funds can be distributed differently.  I would suggest the funds be split 50/50 between state and local governments to offset any disproportionate use of services by new immigrants.  The federal portion could go towards social security solvency, while the state and local portion to things like schools and medical programs.

With this plan, we return to the America of our founding fathers, welcoming all immigrants who are willing to take the risk of coming here.  We would end the failed experiment of turning citizenship from a voting right into a comprehensive license that is required to work, own property, or even associate and be present within the US border.  Since immigrants today who are "illegal" pay no income or social security taxes into the system today (they do pay sales and, via rent, property tax), this plan would increase tax revenues while reducing some welfare state burdens.

I think if you asked many prospective immigrants, they would agree to this deal - no handouts, just a fair chance to make a living and a life.  However, immigrant advocacy organizations are hugely unlikely to accept this plan, as most seem today to have been co-opted by various Marxist organizations who are opposed to anyone opting out of the welfare state (it is no coincidence that the recent immigration policy protests all occurred on May Day, the traditional Soviet-Marxist holiday).

Finally, I would like to offer one thought to all those who worry about "absorbing" ten or fifteen million new immigrants.  First, I would argue that we have adopted many more immigrants than this successfully in this country's history, including my grandparents and probably yours.  Second, I would observe that as recently as the last several decades, we managed to absorb 40 million new workers quite successfully, as I wrote here:

Check this data out, from the BLS:

• In 1968, the unemployment rate was 3.8%.  22.9 million women were employed in non-farm jobs, accounting for 34% of the work force.
• In 2000, the unemployment rate was 4.0%.  62.7 million women were employed in the work force, accounting for 48% of the total
• In these years, the number of women employed increased every single year.  Even in the recession years of 1981-1983 when employment of men dropped by 2.5 million, women gained 400,000 jobs

This is phenomenal.  After years of being stay-at-home moms or whatever, women in America decided it was time to go to work.  This was roughly the equivalent of having 40,000,000 immigrants show up on our shores one day looking for work.  And you know what? The American economy found jobs for all of them, despite oil embargos and stagflation and wars and "outsourcing".

The separation of powers concept, so fundamental in our Constitution to checking government power grabs, seems to be on life support.  The reason I say this is that for separation of powers to work, each branch of the government has to, you know, actually monitor and try to check power grabs in other branches.   What I see today are three branches that have kind of reached some sort of peace treaty, agreeing to let the others run amok as long as it is allowed to do so itself.  To support this hypothesis, I make the following observations:

• The executive branch continues to try to accumulate power, adding "indefinite detentions without trial" and "warrantless searches" to its arsenal, justifying nearly anything with the blanket argument that "the world is different post 9/11."  The Supreme Court has generally proved itself unwilling to do anything about it, which should be all the more the case in the future since both Bush appointees seem very comfortable with accretions of executive power.  Even the opposition party, though willing to make verbal assaults, seems unwilling to take any real measures.

• Congress seems perfectly willing to spend their time wallowing in pork and dreaming up new earmarks to satisfy prominent donors.  The current budgeting process is a fiasco, and the executive branch seems unwilling to exercise any adult supervision, including an incredible record of zero vetos is nearly 6 years.  Congress has shied away from working on any issues of any seriousness (e.g. Social Security) which is perhaps good for us, since their only attempt to fix runaway spending in Medicare resulted in them adding an expensive and ridiculously complex drug benefit.  Congress and the President conspired to pass the egregious McCain-Feingold speech limit bill, which effectively helps protect the job of Congressional incumbents and protects them from 3rd party criticism when approaching an election.

• With Congress unwilling to address any legislative issues of substance, the judiciary seems perfectly happy to take their place, creating new law in hundreds of areas.  And Congress seems willing to let them.  It can only be dangerous for a Congressperson to deal with hot-button issues like gay marriage and abortion - its much better to let the judiciary do it for you.  Often Congressman can get the outcomes they want, without actually having to create a legislative record on the issue that might come up in a campaign.

The whole situation depresses me just writing about it.

I have an experiment I would love to run.  I would love to compare the actual winners of Olympic events with the pre-event favorites, in two categories:  Those events with objective standards (time, distance, etc) and those that are judged (e.g. skating).  My hypothesis is that in judged events, barring a disaster (e.g. falling in a skating jump) judges tend to give high marks to those who they come in expecting to win.  I would expect that for people deeply tied into a sport (which Olympic judges are) it is impossible to totally separate the contestant's past body of work from their current performance.  I therefore would guess that favorites fail to win at objectively measured events more often than in judged events (again barring Michelle-Kwan-like falls).

Update: In another great moment in Coyote's reinventing the wheel, a reader emails to say that this phenomenon is called "anchoring":

Anchoring or focalism is a term used in psychology
to describe the common human tendency to rely too heavily, or "anchor,"
on one trait or piece of information when making decisions.

During normal decision making, individuals anchor, or overly rely,
on specific information or a specific value and then adjust to that
value to account for other elements of the circumstance. Usually once
the anchor is set, there is a bias toward that value.

This apparently occurs even when the number has nothing to do with the decision:

according to Daniel Kahneman if an audience is asked firstly to memorise the last 4 digits of their social security number and then to estimate the number of physicians in New York the correlation between the two numbers is around 0.4"”far
beyond what would be expected by chance. The simple act of thinking of
the first number strongly influences the second, even though there is
no logical connection between them.

I would presume that a number that was more related, like a figure skating pairs couple's world ranking upon entering the competition, would have an even greater impact on the decision.

Senator Coburn, now with John McCain in partnership, are going to challenge every single earmark in the Senate:

In short, Senators McCain and Coburn announced their
commitment to challenge each and every earmark on the floor of the
Senate. In addition to challenging each and every pork project,
Senators Coburn and McCain will also oppose the inclusion in conference
reports of any earmarks that did not pass either the House or Senate.

As
stated in the letter, the practice of inserting earmarks into
conference reports at the last minute "stifles debate and empowers
well-heeled lobbyists at the expense of those who cannot afford access
to power. Decisions about how taxpayer dollars are spent should not be
made in the dark, behind closed doors."

Good.  And with McCain's backing, it may work.  I say this because, for a variety of reasons, McCain has somehow become the "instant moral authority" of the Senate, bringing instant legitimacy and media attention to any issue he jumps on.  I am not sure, for example, that the egregious Campaign Finance Reform Act would have passed without his imprimatur.

Apparently, the defense de jour by pork-loving Senators is to make the claim that "well, earmarks are trivial compared to non-discretionary spending so let's focus on those larger buckets of cost." 

A couple of thoughts.  First, if the Senate can't control spending on bridges serving 50 people, they are never going to do it on Social Security.  Second, this is very disingenuous, since Congress has had years to address these other issues, and all they have done is increase (via the disastrous drug benefit) the costs of these programmed expenses rather than reduce them.  They gave up mid-stream, for example, on doing anything with Social Security.  Third, now is the time to strike while public attention is focused on these practices.  In particular, the current lobbying scandals put special focus on earmarking, since discretionary spending is order of magnitudes more susceptible to political corruption than are the programmed expenses.

On several occasions, I have warned that government funded health care is becoming a Trojan horse for increasing government micro-management of your life.  The logic is that by paying for your health care, the government can argue it has a financial interest in your not eating fatty foods, not smoking, wearing a bike helmet, exercising, etc, decisions that would otherwise only affect the individual themself.*

For those who often accuse me of exaggerated paranoia when it comes to government intervention, check out this from the UK:

People who are grossly overweight, who smoke heavily
or drink excessively could be denied surgery or drugs following a
decision by a Government agency yesterday.  The National Institute for Health and Clinical Excellence (Nice) which
advises on the clinical and cost effectiveness of treatments for the
NHS, said that in some cases the "self-inflicted" nature of an illness
should be taken into account.

Sorry, but I told you so.  What's next?  Is an unwanted pregnancy "self-inflicted"?  How about an STD from unprotected sex?  The rulers of this process in England might argue that "Oh, we would never include those things" but technocrats in the US have seen parallel things happen as they have lost political control of their similar institutions in the US.

It gets me to wondering whether the Solomon Amendment may be the new template for government control of individual lives.  In both Universities and state governments, the Feds use the threat of withdrawal of federal funds to coerce actions (think 55 mile speed limit, title IX, military recruiting on campus) that the Constitution nominally does not see to give them authority over.  Now, there is the distinct possibility that federal funds to individuals (Social Security, Medicare, unemployment) could be used to increase federal authority and coercive micro-management at the individual level.

*Update: Yes, I do know that "themself" is probably not correct grammar.  I sometimes use they, them, themself as a grammatically frowned-upon but I think less awkward substitute for he/she, his/her, and his-or-herself when trying to be gender-neutral.  Sometimes I just use the traditional male pronoun, sometimes I use the female pronoun generically since women will complain about "he" used generically but men will not complain about "she", and sometimes I mix them up.  There is still some consensus building to do in coming up with gender neutral pronouns, though this person defends the singular "they".

I won't repeat all that I wrote in my defense of open immigration, but I will summarize by saying that the right to associate with whom you want, to own and live on the property you choose, to negotiate with whomever you please to sell your labor, are all rights that we have as humans, not via the state.  These rights in effect pre-date, rather than flow from, the state, and as such should not be subject to citizenship test.

Anyway, Prawflawblog has a nice defense of immigration up as well:

Apparently both parties, with Republicans in the
lead, have embarked on an anti-immigrant frenzy. The hysteria has been
fueled for some time now by daily broadcasts in all major networks and
gravely sounding members of Congress discussing the "crisis on our
borders", "our bankrupt immigration system", etc. The virulence of this
sentiment makes Le Pen in France seem like a cosmopolitan liberal.

Yet liberal principles require a drastic reduction
of immigration controls. Foreigners flock to our shores because there
is demand for their labor. The same principle that supports free trade
of goods and services -- the law of comparative advantages -- applies
with equal force to freedom of movement. Freer immigration would
alleviate world poverty and allow people in our country to redirect
resources toward more efficient activities. Every single argument for
strict immigration controls is flawed

By the way, I know that "Social Security Reform" has been dropped from the media radar screen, even if the demographic problem hasn't gone away.  If one is not willing to privatize it (as it should be) the next best alternative to the Social Security's demographic bomb is... allow free immigration.  Nothing would do more to help the long-term Social Security picture like a few million new young immigrants hungry to work and perhaps to share in the American entrepreneurial spirit, paying their taxes to support the rest of us in our old age.

The NY Times has somehow decided that one of America's real problems is widening income distribution, or more specifically, the exponentially increasing wealth of the top tenth of one percent of US earners.  The series seems to be running to about 47 episodes (actually 10), but a key article is here, entitled "Richest Are Leaving Even the Rich Far Behind,"  There are a number of ways to attack this article.  One is to fisk their really abused and misused numbers, which George Reisman does here on the Mises Economics Blog. 

Lets accept that the very very rich are getting richer.  So lets move from there to the question of...

"so what?"

The Times is a little weak on the "so what".  I presume that in their intellectual-statist readership,  it is an axiom that rich people suck and rich people getting richer sucks more.  However, it is possible to pull out four things the Times extended editorial-masquerading-as-a-news-story finds bad about increasing income inequality:

• As the rich get richer, there is less money left for the rest of us
• The process of the rich getting richer reduces opportunities for the rest of us
• Having very rich people around make the rest of us feel bad
• The rich are only getting richer because the rest of us are subsidizing them through tax policy

It has been a while since I have really gotten carried away writing about a topic (at least three or four days) so I will now proceed to address each of these in turn and in some detail.

As the rich get richer, there is less money left for the rest of us.  At the end of the day - this is what is in most people's minds when they decry aggregations of wealth.  There are many, many people in the world, even in this country, who think of wealth as a fixed pie, as a zero sum game where one person's victory requires another persons loss.

If we were living in 17th century France, where the rich nobility got that way by taxing the crap out of the working peasantry, this would probably be an adequate view of reality.  Wealth came from the land and its products, whose supply, given no technology improvements for decades, were both relatively fixed.  This zero sum view of commerce led to a mercantilist view of the world economy, where it was thought that wealth was fixed, and that the only thing that could be done to it was to move it around, or tax it, or steal it, or loot it.

But we don't live in 17th century France.  We live in a modern, dynamic capitalist society where wealth is created.  One proof of this is so obvious that it amazes me anyone clings to the implicit zero sum economy assumption:  Compare the US in 2000 to the US in 1900.  We are so much wealthier top to bottom in our society than in 1900 its not even worth spending much time on the proof.  This is not just in real dollar terms, but in things that affect ones life, from average life span to leisure time to entertainment to technology.  People who live in the poorest 20 percentile today have things -- such as a lifespan over 70, access to cancer cures, cars, computers, VCRs -- that not even the richest one half of one percent had in 1900.  The poorest 20 percentile in this country would be the upper middle class or even the rich in many countries of the world today.

Michael Dell and Bill Gates are both in that evil 1/10 of 1% of richest people.  But how did they get that way?  They made their fortunes by providing me with this incredible tool on my desk that was unimaginable when I was born 40+ years ago, but now is pedestrian.  Right now I am typing on a Dell computer using Microsoft Windows, which I bought from the suppliers for a mutually agreeable price in a totally uncoerced manner.  My computer provides me with thousands of dollars of value - in productivity, in entertainment, in the ability to do new things that could never be done before (e.g. blog).  Most of this value I keep for myself; some, about $1200 in this case, went to the suppliers of labor and materials to build and program this thing.  And a small portion, less than $100, went towards the fortunes of Mr. Dell and Mr. Gates who had the vision to build the businesses they did.  The PC I have creates new value all around:  Thousands of dollars of new value for me the user and  hundreds of dollars in the form of jobs and new markets for suppliers.  Mr. Dell and Mr. Gates keep just a small portion of all that value created.  At some level, they are working cheap. And any one of us, had we had the vision, could have piggy-backed on Mr Gate's or Mr. Dell's wealth creation by buying stock in their firms.

The process of the rich getting richer reduces opportunities for the rest of us.  Since the "zero sum" argument is so easy to disprove, proponents of rich=bad have morphed their argument to this one.  This accusation comes up several times in the NY Times series, but is hard to refute mainly because the authors never explain the mechanism that they think is at work here or show any shred of proof.  The articles cite folks such as Warren Buffett, George Soros, and Ted Turner.  But how has their fortune-making reduced my personal opportunities one iota? 

Do I have less opportunity because Warren Buffet has made good investing decisions?  Heck, one can argue that any American has always had the opportunity to gain wealth in direct proportion to Buffet at any time, merely by buying Berkshire Hathaway stock.

How about Ted Turner.  Do I have less opportunities to improve myself because Ted Turner got rich creating CNN?  I guess I could facetiosly argue that by his creating CNN, others can no longer create a 24-hour cable news service because he has locked up the market, but Fox has disproved even this narrow argument.

What about George Soros?  I guess you could argue that from time to time my Sony Walkman was a buck or two more or less expensive because of some currency game he was playing in the markets, but I don't see how my opportunity has been reduced.  A better argument is that Soros's being wealthy might really threaten my opportunity if only because he funds so many statist-socialist causes with his billions.

In fact, this is one of those black-is-white arguments.  The reality is exactly the opposite.  When most rich people get rich (with the exception maybe of Peter Angelos and other tort lawyers) they do so by creating new value and thereby opportunity.  While all these folks may be really wealthy, in reality the wealth they have amassed is but a small percentage of the wealth and value that they created.  Where did the rest go?  To all of us, of course, in the form of jobs, and tools, and longer lifespans, and better entertainment.

Having very rich people around make the rest of us feel bad.  OK, this sounds like a problem for group therapy, but you see it in print all the time.  The disparity of incomes is "troubling" and could lead to "resentment".  If one were living in Venezuela or Nigeria or some country where, like 17th century France, wealth came from looting rather than the free exchange of goods, then I would agree that the income disparity would be troubling.  Shoot, if people were much wealthier than I because they were using the legal system to loot the rest of us, I would be pissed off (ironically, this is the case with the billionaire tort lawyers, but this is the last group that the Times will ever challenge). 

However, in this country, where most of the very rich got that way through hard work and better ideas, the result of free and uncoerced commerce, why be resentful?  Sure, I would love to have a G-V aircraft and hot Swedish wife [ed note:  oops, my wife might read this] like Tiger Woods, but lacking these, I have zero desire to deny them to Tiger.  I don't even begrudge super-tramp Paris Hilton her millions (but she did inspire me to change my will so my kids don't inherit from me until they are well past their majority).  Heck, I have spent whole vacations touring the discarded toys of the super-rich (e.g. mansions in Newport, RI).  What fun would there be without a moving target to aspire to?

So why do the Times and some many intellectualls legitimize this envy?  This type of envy has driven anti-semitism and in fact all sorts of racism through the ages.

The rich are only getting richer because the rest of us are subsidizing them through tax policy.  Around my house, I joke that everything, at least in my family's opinion, turns out to be my fault.  The equivilent at the NY Times is that everything is Bush's fault, and in particular, the fault of Bush's tax cuts.  The Mises article cited above does a pretty good job of fisking the argument that the tax system post-cuts favors the rich.  I took on took this notion here and here.  The Times "analysis" makes two major mistakes:

• Social Security Tax hide and seek:  The NY Times article shows the very wealthy paying lower marginal rates than lower level earners.  As I pointed out here, this is entirely because they are including social security taxes in their analysis and that the taxes are capped at $90,000.  If you look at only income taxes, then marginal rates do not drop at higher incomes.

The left's argument here is highly contradictory.  When wanting to make the "rich are not paying enough" argument, they include Social Security taxes, knowing that since those taxes are regressive, they make it look like the rich are somehow getting off easy.  However, when discussing Social Security, the don't want to think of them as taxes - because they want Social Security to be insurance with premiums rather than a transfer program with taxes. 

• Bracket Creep: The TImes points out that the income tax rate for the super rich is no higher than the rate for the merely rich or even $100,000 earners.  The implication is that the super rich are somehow getting a better deal.  But in fact, the problem is that the definition of rich, vis a vis taxes, has been lowered through the years.  The whole history of the income tax is to sell a tax as applying only to the very very rich, and then broadening the applicability over time.  The federal income tax followed this path, as has the AMT.  More recently, the top rate on California income taxes is seeing the same creep.  The statist trick is to apply a rate to the super rich, then creep it down so eventually it applies to everyone.  Then, they cry that - hey, the super rich aren't paying more than the middle class, so they institute a new higher super rich rate.  Rinse and repeat.

Conclusion.  I will leave you with the lyrics from Rush's The Trees:

There is unrest in the forest
There is trouble with the trees
For the maples want more sunlight
And the oaks ignore their pleas

The trouble with the maples
(and they're quite convinced they're right)
They say the oaks are just too lofty
And they grab up all the light
But the oaks can't help their feelings
If they like the way they're made
And they wonder why the maples
Can't be happy in their shade?

There is trouble in the forest
And the creatures all have fled
As the maples scream `oppression!`
And the oaks, just shake their heads

So the maples formed a union
And demanded equal rights
'the oaks are just too greedy
We will make them give us light'
Now there's no more oak oppression
For they passed a noble law
And the trees are all kept equal
By hatchet,
Axe,
And saw ...

Update:  Several people said I missed the point about mobility, rather than just the rich getting richer.  I respond to this here.

If you thought the idiots who ran Orange County's finances into the ground were bad, wait until you meet these jokers:

Two months ago, reports emerged that $300,000 in rare coins was missing from a
collection in which the state Bureau of Workers' Compensation (BWC) began
investing in 1998 as a peculiar form of stock hedge. That was bad enough. But
last week, word came that between $10 million and $12 million in coins had
disappeared. That caused BWC director Jim Conrad to announce his resignation,
and launched a flurry of accusations and calls for legal action.

As if my workers comp. rates weren't already too high.  There goes my idea to invest Social Security funds in beanie babies and 60's lunch boxes.  Apparently most of the major lawmakers in the state got large campaign donations from several large coin dealers, and they returned the favor by investing public funds in coins through these dealers.  I often make the argument not to let the government have control of large equity investment funds -- I did not even occur to me to include coins.  One of the things about coins - you have to hold them for a long, long time to make money, in part because commissions markups are so high vis a vis other investments (which explains why coin dealers so readily donated large sums of money for government business).

Reason has a good roundup.  Unfortunately, I am sure this will all lead to more restrictions on spending and speech in campaigns, though it appears the system is working fine - full disclosure of funding sources certainly has everyone running for their lives.

The real solution is to make elected officials take a real fiduciary interest in the state's investment funds (pensions probably being the largest).  What they would prefer to do is to legislate a set of rules and then leave managers to follow these rules, giving them plausible deniability.  What they should do is sit down once a quarter and review portfolio investment performance and asset allocations.

In my post on "Respecting Individual Decision-Making",  which to-date I consider my favorite post, I wrote:

As a capitalist and believer in individual rights, one of the things
I notice a lot today is just how many people do not trust individual
decision-making.  Now, I do not mean that they criticize other people's
decisions or disagree with them -- in a free society, you can disagree
with anybody about anything.  I mean that they distrust other people's
free, private decision-making so much that they want the government to
intervene.

Interestingly, most people don't think of themselves as advocating
government interference with people's private decisions.  However, if
you ask them the right questions, you will find that they tend to fall
into one of several categories that all want the government to
intervene in individual decision-making in some way:  nannies,
moralists, technocrats, and progressive/socialists.  Though the
categories tend to overlap, they are useful in thinking about some of
the reasons people want to call in the government to take over parts of
people's lives.

I then spent a lot of time with examples from each category.  On Sunday, Keith Thompson in the San Francisco Chronicle (of all places) wrote an article about his disaffection with the left, which said in part:

A certain
misplaced loyalty kept me from grasping that a view of individuals as morally
capable of and responsible for making the principle decisions that shape their
lives is decisively at odds with the contemporary left's entrance-level view
of people as passive and helpless victims of powerful external forces, hence
political wards who require the continuous shepherding of caretaker elites.

I'm not sure that he and I are in exactly the same place, but we are both looking for allies who are consistent in their defense of classical liberal values and individual rights.

In a related post, Mickey Kaus, who I seldom read because he spends more time than I care on inside-the-beltway political tactics and media stuff, has an interesting related post about the left and trusting people to do right by their own lives.  Kaus resists permalinks, but the gist is:

Two good critiques of the ubiquitous, left-pleasing menace, George Lakoff--by Marc Cooper and Noam Scheiber. Oddly, neither attacks Lakoff at what would seem to be his central weak point, namely his conflation of politics and parenting--identifying "conservative" values with "the strict father" and "liberal" values with the "nurturant parent."

Is a country really like a family? Isn't that an idea with a ... checkered
history? A family is a relationship between inherently unequal,
not-completely-free people--parents and children. A country, at least
in one American conception, is the relationship of equal, autonomous
people. Using the family as the template for politics stacks the deck against social equality (the value I'd suggest as the liberal touchstone). For one thing, it lends itself all too easily to the condescending liberal notion of compassion,
an anti-populist idea if there ever was one. It's also horribly
misleading as a guide to practical policies--no wonder that when
Scheiber asks Lakoff about President Clinton's welfare reform, Lakoff
responds "Why did he have to do that? ... I still don't understand it
fully." In Lakoff's mind, Clinton wasn't changing the welfare system,
he was beating his family's children! Aren't there values that aren't
family values?

A good example of that in recent debate has been social security.  As I argued before:

Advocates for keeping forced savings programs like Social Security in
place as-is by necessity argue that the average American is too stupid,
too short-sighted, and/or too lazy to save for retirement without the
government forcing them.  Basically the argument is that we
are smarter than you, and we are going to take control of aspects of
your life that we think we can manage better than you can.  You are
too stupid to save for retirement, too stupid to stop eating fatty
foods, too stupid to wear a seat belt, and/or too stupid to accept
employment on the right terms -- so we will take control of these
decisions for you, whether you like it or not.  For lack of a better
word, I call this intellectual welfare.

Given these fairly accurate descriptions of the state of liberalism in America, it is ironic that several weeks ago, Kevin Drum made the following observation:

Whenever I talk about the underlying principles that should guide liberals, as
I did a couple of days ago, one of the ideas that always pops up is privacy
rights. In fact, it comes up so often that it strikes me that we're missing a
bet by not making a bigger deal out of it.

The reason, Mr. Drum, is that a true privacy right defined as you are considering it (in particular, one defined broadly enough to give women an absolute right to abortion) would undermine much of the left's statist agenda.   A true privacy right would force the government to respect individual free decision-making, and require that the government allow individuals to make what elites might consider are bad decisions for themselves. 

Does the Left really want broad privacy rights, or just a constitutional justification for abortion?  If they really want a general primacy of a woman's decision-making over their bodies, why do they support abortion yet oppose letting women choose breast augmentation or the use of Vioxx?  Why do the same leftist politicians that oppose parental approval or even notification for teenage abortion simultaneously support requiring parental permissions for teenagers to use tanning salons?  Why do they resist random searches for terrorists but support such searches to enforce seat belt laws?

As I wrote here,

A true privacy right would allow us complete freedom over who we sleep
with, what we do with our bodies, where we work, and what we pay for
goods.  And, not incidentally, how we choose to invest for our
retirement.  Both parties want the government to control parts of our
lives, so don't expect either Conservatives or liberals to be pushing
the privacy issue very hard.

The government is not our parent, not our boss, not our priest, and not our partner.  It is our servant.  Unfortunately, a large element behind creeping statism in this country is a desire by both left and right to "correct" individual decision-making, even when those decisions affect no one but the actor himself.

According to the WSJ($), you and I are going to take on the pension obligations of UAL:

A bankruptcy judge approved a
proposal from United Airlines parent UAL Corp. to transfer four
underfunded employee pension plans to the federal government, paving
the way for the largest pension default in U.S. corporate history.

The plans, which have a shortfall of $9.8 billion,
cover more than 120,000 United workers and retirees. United, the
nation's second-largest carrier in terms of traffic, wants to transfer
them to the federal Pension Benefit Guaranty Corp., or PBGC, which
would add to the already heavy strain on the agency from a spate of
pension defaults in recent years. Since accounting for United's
obligations last year, in anticipation it would assume them, the agency
has taken on obligations exceeding its assets by $23.3 billion  [ed note- the agency takes in only about $1 billion a year in premiums, so $23.3 billion in the hole is a very big number]....

The court's decision could have wide
repercussions in the airline industry, which is struggling with high
fuel costs, intense fare competition and overcapacity. Sidestepping its
pension liabilities will help UAL attract additional funding, while
giving it a huge cost advantage over many of its rivals, which are
saddled with underfunded defined-benefit retirement plans of their own.
That will put further pressure on those airlines to slash their costs
or in some cases seek bankruptcy protection in hopes of terminating
their own pension plans.

It is difficult for me to even start on how much this pisses me off.  These pensions are real obligations that UAL took on, and represent value provided in exchange for work that has already been done.  As outlined below, I am not big on the defined benefit pension model, but that does not change the fact that these companies are defaulting on a solemn obligation.  The temptation I guess is always great when finances get tight to defer obligations that are the farthest in the future, and so pension underfunding is one of the first things to occur.  There is no way management should get a pass for this, and I am flabbergasted that equity holders expect to retain anything out of the bankruptcy when employees have not been fully paid.

This being said, there is plenty of blame to go around, including for the union and the government.  The UAL unions should have been dropping the hammer on the company in the form of strikes or whatever at the first sign of under-funding.  Instead, they were more concerned about jacking up their salaries to the highest levels in the industry, ignoring the reality that airline finances by the late 90's were basically a balloon that if you pushed on it in one place, it popped out in another.  Unions allowed the underfunding to continue in large part lulled by the promise of the PBGC and taxpayers to make the pension funds whole if they continued to be underfunded.  This is the moral hazard that occurs in any kind of financial insurance like this, and the unions apparently were both right and wrong - we taxpayers will take on the obligations but their benefits will also get a haircut.

One of the lessons I thought was learned from the S&L bailouts of the 90's was that you can't provide such financial insurance without a parallel regulatory structure to make sure some kind of minimum fiduciary responsibility exists.  But, not learning a thing, the government has this pension guarantee program in place and exercises virtually no oversight over the funding or management of the insured pensions.

It is astounding to me that a large number of people still support defined benefit plans over defined contribution plans. What I don't honestly understand is why the rank and file still buy into this.  Defined contribution plans are much easier to monitor and audit and keep companies honest.  Once the money is in a vehicle such as a 401K, the money can't be taken away by the company or lost in a bankruptcy (unless the 401K is invested in the company's stock, which any adviser will tell you to never, ever do (see "Enron").  Now, I understand that there can be some tricky migration issues from one system to another, and companies use the transition as an excuse to cut back on their net contributions, but these are workable and negotiable issues .  My guess is that the support for defined benefit plans comes mainly from union leadership, since these plans give
them control of huge amounts of funds and thereby gives them extra
power (see Teamsters for the classic example, or more recently, the situation at Calpers).  I wrote more on this topic here.

The issues here are surprisingly similar to the Social Security debate, as discussed here.  Would you rather have the money in your own account, despite the fact you will then have to bear market risks, or would you rather the money remain in the hands of your company or your Congress.  In entirely parallel situations, money entrusted to UAL management and to Social Security has all been spent, with nothing now left to pay retirees. 

Update:  It just occured to me to ask - why don't frequent flyer mile holders ever have to take a haircut in an airline bankruptcy?  We frequent flyers are creditors too, holding a claim on the company in the form of our miles.  In fact, I would think my claim as a holder of miles is much much worse than other creditors.  For example, why should employees have their pensions cut before I get my miles account cut?  Heck, employees seem to have a much better claim than I do, especially since many of my miles were earned, like everyone else's, as marginally ethical kickbacks directly to me for influencing my employer's spending on air travel.  Despite this, it appears that pensions will be cut, and salaries will be cut, and bondholders will lose value, and stockholders will be diluted, but my miles will all still be good.

Update #2: Assymetrical information has a nice post along the same lines, pointing out an issue with corporate defined benefit pensions that I forgot to mention:  If you are 20 years old with a company, are you really willing to make a bet that your company will even exist in 60 years to pay off your pension?  Not to mention the portability issues, since few people remain with the same company to retirement.  I think I actually have a couple of defined benefit pension plans I am vested in from early in my career - one from Exxon, when I was about to quit to go back to school and was offered, due to poorly structured plan rules, the chance at early retirement instead.  I think I qualify for like $1.23 a month for life from that plan.

More also from Will Collier:

I don't mean to tread on Martini Boy's turf here, but the pensions
crisis among all of these old-line companies illustrates a great no-no
of long-term investing: lack of diversification. In the end, even
though they presumably didn't have much choice in the matter, all those
UAL employees who've been promised a defined-benefit pension are in the
same boat as the Enron and WorldCom employees who voluntarily put all
of their 401(k) money in their own company's stock. They bet the house
on one horse, and by they time old age caught up with the grizzled nag,
there was barely enough left of it to cart off to the glue factory

Kevin Drum also points out that these defined-benefit funds are easy to manipulate, since managers can play with the "expected returns" variable to change the necesary annual contribution. 

Frequent readers will know that I have little patience with the argument against private Social Security accounts that goes something like "Americans are too dumb to be trusted with their own retirement funds".  Today, however, I am going to put that aside for perhaps a better question:

Can the government be trusted with our retirement funds?

This is the argument made by Brad DeLong and quoted in Marginal Revolution:

We need to raise our national savings rate. But if we just raise Social Security
taxes, Congress will treat these taxes as general revenue and spend them. Only
by funneling Social Security contributions into some vehicle that Congressional
representatives cannot interpret as a resource available to fund current
spending can we raise the national savings rate. And private accounts are the
best vehicle we can find to (a) accumulate contributions without (b) allowing
Congressional representatives to seize them as resources available to fund
current federal spending.

Congress has taken all the savings surpluses built up by Social Security over the past decades and it has spent them.  Republicans have spent the money.  Democrats have spent the money.  It is gone, spent on cruise missiles and welfare moms and ethanol subsidies and PBS broadcasts and snail darter studies.  No matter what verbal acrobatics people try to engage in to argue that there is a real "trust fund", the fact of the matter is that all that is in the Social Security till are IOU's that can only be redeemed by raising taxes. 

The situation with Social Security is entirely equivalent to having invested your money in a mutual fund and only later finding the directors of the fund spent your money on themeselves rather than investing it in redeemable securities.  The only differences are that:

• The proprietors of that bogus mutual fund may go to jail, but Congress won't
• Congress can raise taxes to get the money to bail themselves out of their malfeasance

Think of it this way: 

• There were more real assets of value remaining in Enron in its bankruptcy to divide up among investors and creditors than remain in the Social Security "trust fund" to divide up among program contributors.
• There were more real assets of value remaining in the Teamsters retirement fund after years of being raped by organized crime than remain in the Social Security "trust fund"

Stop handing over our savings to such unsavory racketeers (ie. Congress).  We certainly can't do a worse job for ourselves.

Today, Kevin Drum quotes Obsidian Wings as saying:

The men in my family of my father's generation returned home after serving
their country and got jobs in the local steel mills, as had their fathers and
their grandfathers. In exchange for their brawn, sweat, and expertise, the steel
mills promised these men certain benefits. In exchange for Social Security taxes
withheld from their already modest paychecks, the government promised these men
certain benefits as well.

....These were church-attending, flag-waving, football-loving, honest family
men. They are rightfully proud of providing homes and educations for their
children and instilling the sorts of values and manners that serve them well as
adults. And if I have to move heaven and earth, now that they've retired, the
Republican party is NOT going to redefine them as welfare
recipients.

First, I agree, whether I like the program or not, that people who contributed for years and were promised certain benefits should receive them.  The benefits the average retiree gets today were certainly paid for - in fact, over-paid-for given the implied rate of return they got for their forced "savings".  So I won't argue that these retirees are getting financial welfare.

BUT, I would argue that they are getting intellectual welfare.  Advocates for keeping forced savings programs like Social Security in place as-is by necesity argue that the average American is too stupid, too short-sighted, and/or too lazy to save for retirement without the government forcing them.  Basically the argument is that we are smarter than you, and we are going to take control of aspects of your life that we think we can manage better than you can.  You are too stupid to save for retirement, too stupid to stop eating fatty foods, too stupid to wear a seat belt, and/or too stupid to accept employment on the right terms -- so we will take control of these decisions for you, whether you like it or not.  For lack of a better word, I call this intellectual welfare. 

By the way, this is as good an answer as any to Mr. Drum's earlier question why liberals don't push the privacy issue harder.  He opines:

Whenever I talk about the underlying principles that should guide liberals, as
I did a couple of days ago, one of the ideas that always pops up is privacy
rights. In fact, it comes up so often that it strikes me that we're missing a
bet by not making a bigger deal out of it.

I am all for a general and strong privacy right.  I would love to see it Constitutionally enshrined.  But liberals (like conservatives, but I am answering Drum's question) don't want it.  They want to allow women to choose abortions, but not choose breast implants.  They want the government to allow marijuana use but squelch fatty foods.  They don't want police checking for terrorists but do want them checking for people not wearing their seat belts.  They want freedom of speech, until it criticizes groups to whom they are sympathetic.  They want to allow topless dancers but regulate the hell out of how much they make.  Liberals, in sum, are at least as bad about wanting to control private, non-coerced individual decision-making as conservatives -- they just want to control other aspects of our lives than do conservatives. 

A true privacy right would allow us complete freedom over who we sleep with, what we do with our bodies, where we work, and what we pay for goods.  And, not incidentally, how we choose to invest for our retirement.  Both parties want the government to control parts of our lives, so don't expect either conservatices or liberals to be pushing the privacy issue very hard.

Update:  William Mellor of the Institute of Justice has some thoughts related to this topic in The American Lawyer:

Without realizing it, liberals and conservatives are
working from opposite ends of the political spectrum, under opposing
rationales, to reach the same end: expanded government power...

The Framers envisioned a system in which individuals enjoyed
rights equally, and the rights they enjoyed were treated with equal
respect under the Constitution. But in 1938 the U.S. Supreme Court's
ruling in United States v. Carolene Products Co. (upholding a
Congressional ban on interstate shipment of milk that contained added
fat or oil) created an artificial dichotomy under the Constitution.
Some rights, notably free speech, were elevated to a preferred tier and
now rightly receive vigorous constitutional protection. Rights demoted
to the second tier, specifically economic liberty and property rights,
wrongly receive far less protection....

Liberals, however, tend to reject the notion that the courts
have any role in seriously protecting economic liberty or property
rights. This is remarkable in light of the fact that many liberals
strongly advocate court protection for various rights-such as welfare
or abortion-whose constitutional pedigree is far more questionable than
rights to private property and economic liberties.

Earlier this week I posted my thoughts on taxation, which included thoughts on taxation and class warfare and linked this recent WSJ editorial on tax shares paid by the rich.

Today, Kevin Drum rebuts the WSJ editorial with a post of his own.  Though I find Mr. Drum's consistent socialism and the-rich-will-be-first-against-the-wall rhetoric tedious, he is a smart guy and does have a point.  There is, as usual, a mixed message in the data.  However, this also means, as I will point out in a second, that Drum is guilty of picking and choosing his data points just as much as does the WSJ.

Drum points out, rightly, that while the share of taxes paid by the "super rich" (his term for the top .5% of income earners) has increased, their share of income has increased faster, such that their rates have gone down (god forbid that anyone violate the left's rule of the tax ratchet that says that tax rates may always go up but can never ever come down).  Using the same study as the WSJ, he rebuts this table of share of tax burden...

...with this chart , including Drum's subtle annotations in red:

His point is that the Super Rich actually pay lower rates now and the middle class pays higher rates, or as he puts it:

So shed no tears for the super rich in America. Their incomes have tripled in
the past couple of decades and at the same time their tax rates have decreased
by 9 percentage points. That's a pretty sweet deal in anybody's book.

Here are some thoughts on Drum's rebuttal:

Drum cherry-picked data too:  I will get back to the folks in the top 1 percentile in a minute.  Leaving them aside for a minute, note that Drum's storyline breaks down for everyone else.  If you compare the merely rich in the 1-20th percentiles, they got a smaller reduction in the Bush tax cuts than anyone in the middle and lower quintiles.  For example (comparing the 1999 before tax cut and 1999 after tax cut lines) the 1-5% richest got a rate reduction of 0.21%, while Kevin's favored group at 40-60% got a 1.45% rate reduction.

Don't blame this administration for previous tax increases:  Drum is correct in saying that the tax rate has risen for the middle class over 20 years, but incredibly disingenuous not to explain why.   Note that the 1 point rise (which presumably Drum wants to hang on the current administration) actually consists of a 2.5 point rise from past tax increases, AMT creep, and payroll tax changes (passed by Democratic Congresses and generally supported by Drum) offset by a 1.5 point cut courtesy of the current administration.  Drum is in fact using data that clearly disproves his ongoing "tax cuts for the rich" mantra.  By the way, it is also interesting to see a good "progressive" ignoring progress on the lower two quintiles to decry higher taxes on the upper middle class -- seems like an interesting shift in focus.

Payroll taxes skew the picture:  Including payroll taxes (social security and Medicare) in these numbers causes funny things to happen.  Why?  Because social security tax is straight-out regressive since it is flat up to about $90,000 in income and then zero after that.  This means that the total tax rate shown for the lower quintiles will include nearly 8% for payroll taxes (if this looks funny to you because it seems to imply that the lowest quintile must be paying negative income taxes, you are right, they are paying negative income taxes via the EITC).  However, as incomes rise above $90,000, taxpayers get an effective total rate reduction.  For an income of $180,000, a taxpayer only is effectively paying 3.1% to Social Security.  At $1 million, they are only paying 0.56%.  So, even if income tax rates were perfectly flat with no deductions for anything, those in the 1% category of richest people would have a total rate including payroll taxes over 5.5% points lower than the middle class.  If you recast the numbers above leaving out payroll taxes, you would not see the decrease in rates into the 1% group, the numbers would continue to increase, as can be seen here (from government data):

So, for income tax rates, there is still progressivity all the way to the top.  If you want to argue Social Security taxes, fine, but don't use Social Security tax effects to make a point about income taxes

By the way, in terms of the regresivity of Social Security, the defenders of that program need to stick with a story - is it a transfer payment or is it a government run insurance program?  If it is a government run insurance program (as defenders want to argue, since that seem more palatable to the public) then the $90,000 income cutoff makes sense:  Since the program does not pay benefits based on any incomes higher than this, "premiums" shouldn't be based on higher incomes.  Update: Kevin Drum says in this post that Social Security is

a modestly progressive social insurance program that's paid for by everyone and
that benefits everyone. If it ever stops being that, if it ever stops being
universal, it will eventually cease to exist.

OK, but stop lumping the "premiums" of this program in with income taxes to try to prove a point about the income tax system.

All that being said, there may be something funny going on in the top 1%:  As pointed out above, a portion of the apparent rate reduction for the top taxpayers is in fact due to the odd math surrounding Social Security taxes.  Any income tax cut, even if it is progressive, can make total taxes more regressive by shifting the mix to the very regressive social security tax. All that being said, the taxes of the very very rich are odd, because their income streams are so very different than those of you and I.   In particular, that weird mess of targeted tax reductions that I have decried on any number of occasions come much more into play in the very rich's tax returns, with results that are almost impossible to understand or forecast.  If Drum wants to use this data to argue for flat taxes and an elimination of deductions, I am all ears.

Generally, in any discussion of taxes, I focus on the foundations of
property rights, to argue that taxation is no different than
stealing.    Most of us agree that grabbing someone else's money at
gunpoint is immoral.  I do not hold to a theory of government that says
that this immoral action is suddenly moral if 51% of my neighbors
sanction it.

Anyway, I am going to leave behind the moral basis (or lack thereof)
for taxes and focus instead on five practical problems that a
well-crafted tax system should be able to avoid.

1.  Complexity and Preparation Time

I probably don't need to go into great depth on this one to convince you that taxes and tax returns are ridiculously complex.  We all know how complicated even the individual 1040 has become, so much so that using tax preparation software is nearly de riguer for most middle class taxpayers.  Last year, our federal and state income tax returns for the company were over 400 pages long.

For a small business, the tax preparation burden goes much further.  For example, the burden of payroll tax preparation, not to mention staying on top of compliance issues, is so high that no sane business person does payroll in house any more.  Quarterly state and federal unemployment and withholding tax returns must be filed, with salary detail to the last penny for every single employee.   As a result, everyone uses a service like ADP, and though this solves the workload problem, it still costs money - about $12,000 a year in our case.  That's not the tax bill, just the cost to keep up with the government paperwork. 

But with payroll taken care of, businesses still must file sales tax returns, excise tax returns, detailed property tax returns, census data requests, labor and commerce department surveys, and of course income tax returns.  Each of these typically have to be done at the state level and in many cases separately for every single county and city where we do business.  Each in and of itself is horribly time consuming - see this example for property taxes, this one for sales taxes, and this one for government surveys. 

In Kentucky, for example, we have to file quarterly state withholding tax returns, quarterly payroll withholding returns in each county we operate in, a quarterly state unemployment return, an annual property tax return in each county, and annual income tax return at the state level, an annual income tax return in each county, a monthly sales tax return, a monthly survey for the US Department of Labor about Kentucky headcount levels, an annual foreign corporation renewal, a new hire report whenever we hire a new employee, and a monthly report to the workers comp state fund

2.  Disguising the Tax Load

Quick, how much total do you pay in taxes?  Perhaps the greatest innovation of statists in the 20th century was the tax load shell game - the clever balkanization of the tax load that makes it nearly impossible for the average person to truly know how much they pay in taxes to the government.

Start with income taxes.  OK, April 15 has just passed, but even so, how many people know how much they paid in income taxes last year?  For many people, this is the single largest expense they have, but the total amount is disguised by the fact that most income taxes are taken out as direct payroll deduction.  Statists and leftists everywhere in the US should get up in the morning and give thanks for direct payroll deduction -- without it, if every American had to write a single check once a year for the sum total of their annual income taxes, there would have long since been a revolution.

OK, so you don't know how much you paid in federal, state and local income taxes.  But in addition to that, how much did you pay in social security and medicare (typically about 8% of salary)?  Property taxes (typically 1-2% of your home value)?  How about sales taxes (typically 6-9% of your purchases)?  What about vehicle licensing fees and special taxes on hotels and airfare and rent cars?  If you add all these up, the average American pays about 30% of his/her salary in taxes.  The Tax Foundation has a great chart summarizing this shell game, with relative burdens expressed as days of work each year required to pay the tax.  Note that on average, your federal income tax is only 1/3 of the total of what you are paying:

 
So those are the direct ones, but how much are you also paying in higher prices due to government import duties?  What about the 8% FICA and medicare that employers pay on your behalf - how much higher might your salary be if they did not have to pay these?  What about corporate taxes - you may not pay them directly, but they certainly get passed on to you in the form of higher prices and lower dividends.  What else? - try this list on for size.

3.  Taxes on Wealth and Savings

Most taxes are on income or sales, and so they are at least marginally calibrated with an individual's cash flows.  The exceptions to this are property taxes and inheritance taxes.  These two taxes both go after an individual's savings -- property taxes mainly on the home, the primary savings vehicle for most Americans, and inheritance taxes on everything you've saved when you die.

Lets take property taxes first.  Many people complain that modern life has become a treadmill, forcing families to work harder and harder to keep up their lifestyle.  To a large extent, I think this is a myth - people may be working harder but their effective standard of living is way, way higher than say 30 years ago.  But one of the things that definitely creates a treadmill are property taxes. 

Many people have worked hard to pay off their mortgage, thinking they could settle down into their retirement in a paid off house.  Unfortunately, they may find that their home has increased in value so much that their property taxes at retirement are actually much higher than their original payment on the house.  Take the case of a couple who bought their house in an urban area for $25,000 and find its now worth $375,000 forty years later (this is an average urban price increase over the last 40 years).  For simplicity, we will assume the effective tax rate has stayed at $1.50 per $100 for these forty years (though its more likely to have gone up).  In 1965, they paid $375 a year in taxes.  Today, they have to pay $5,625.  In other words, their property taxes today are over 22.5% a year of the original price they paid for the house.  Now, this is all fine if the couple strove to work up the corporate ladder and get promotions and grow their income proportionately.  But what if they didn't want to?  What if they just wanted to buy that house, pay it off, and live modestly selling driftwood sculptures at farmers markets, or whatever.  The answer is, because of property taxes, they can't.  Likely they will have to sell this house, give up the urban life they wanted, and either move to an urban dump they can afford the property taxes on, or they move out to the country.  Here is an example, via Reason, of this process of property taxes forcing out urban residents living small in favor of yuppies living the dream.  It is ironic that a tax initially invented for populist reasons to cut back on wealth accumulation hurts the lower income brackets and those trying to step off of the capitalist treadmill the most.  In fact, it was the poor in the Great Depression who typically lobbied for laws to put moratoriums on property tax collections.

The estate tax has many of the same origins and issues.  The biggest downside of the estate tax is that it tends to force premature sales of productive business assets to pay the tax.  Rather than leaving small businesses in the family, who have the experience and passion to make them work, they typically must be sold to third parties outside the family to pay the estate taxes.  Again, the law of unintended consequences crops up - estate taxes and the sales they force have done more to contribute to merger and acquisition activity, which in turn drives consolidation of economic assets into fewer and fewer corporations.  The tax meant to stifle wealth accumulation among individuals has in fact spurred wealth accumulation among corporations.  While used for many purposes today, LBO's, that bogeyman of the left, were invented to manage this estate tax forced sale problem.

Asymmetrical Information has a thoughtful series of posts going on estate taxes.

4.  Picking Favorites for Special Treatment

One of the defining characteristics of statist politicians of both the left and the right is that they think they are smarter and more moral than the average American, and certainly than the average American businessman.  Statists and technocrats distrust markets and assume that they can succeed in managing the economy in general and individual decision-making in particular where markets have "failed" to reach whatever end-state politicians would prefer.

Therefore politicians insist on using tax policy to reinforce (or discourage) certain behaviors or to influence certain outcomes or to frankly enrich some favored group.  Examples are all around us, but include:

• Subsidizing farmers and propping up farm commodity prices for no apparent reason than because farmers somehow have a moral halo around them that other businessmen do not.  This is not a big-small issue, since much of these subsidies go to huge conglomerates and millionaires.
• Subsidizing corporations in many industries
• Subsidizing local relocation of favored industries
• Subsidizing billionaire sports team owners  and the local lodging industry
• Subsidizing billionaire movie producers
• Taxing certain non-politically-correct products (and more)
• Subsidizing home buyers vs. home renters
• Subsidizing corporate debt vs. corporate equity

5.  Class Warfare and Punishing Success

Many of the taxes we pay - income, property, estate - have strong class warfare origins.  Heck, the income tax and the Constitutional Amendment that made it possible because Americans were told that only the richest 1% or so would ever have to pay it.  Today, tax debate is littered with class warfare arguments. 

Today, the richest 1% of Americans pay about a third of the total individual taxes, and the richest 10% pay two-thirds.  The richest 50% of Americans pay 100% of the taxes (in the other half, some pay a bit, and some get a bit back in EITC, but the net is zero).  So, a small percentage of Americans pay for the services and government
cash subsidies enjoyed by the majority.  So how do we treat these
people?  As heroes, or benefactors, or as the most productive?  No we treat them as evil parasites who are not
doing their fair share.

By the way, These shares paid by the rich actually went up after the Bush tax cuts (yes, that's not a typo).  The very fact that this statement might seem unbelievable points to how much ridiculous class warfare demagoguery permeated the last election.  By the way, these numbers are for income taxes.   The numbers for total taxes, including the regressive payroll taxes, yields slightly different numbers but the same results, as outlined in TaxProfBlog today.

The fact is that most "progressive" taxes are in fact punishing the successful and most productive.  The Left loves to wave Paris Hilton around as an example of the useless and unproductive rich who presumably should be taxed into poverty.  They want to obscure the fact that 99% of the rich got to be rich honestly, through hard work, and via the uncoerced interaction with others.  Because saying that your government rewards success with its highest tax rates and confiscates the vast majority of its operating funds from the people who would employ this money the most productively, um, doesn't sound very good.

UPDATE:  I have more here, including a rebuttal of Kevin Drum.

OK, I will begin this post with what I guess is, for some, a damning admision:  My company pays many of its employees minimum wage. 

I believe that I have a very honorable relationship with my employees, but for many, particularly on the left, the fact that I pay minimum wage puts me at the approximate moral level of a forced labor camp gaurd.  For those of you that feel that way, you might as well move on now because this post will just irritate you further.

I want to present four case studies from my own business as to what happens to workers and consumers when minimum wages go up.  For the purpose of this post, I will leave out the philosophical argument of why voters or politicians should even have the right to interfere in the free decision-making between employer and employee, but I certainly addressed it here, in this post.  Unfortunately, a large number of voters accept the argument that there is a power imbalance between employer and employee that needs to be moderated by measures like the minimum wage  (folks who believe this obviously never have tried to attract and retain quality wokers). Many politicians support minimum wage measures, mainly because it is one of those measures, like protectionism, where the benefits (e.g. Joe got a raise) are much easier to identify than the costs (e.g. Mary lost her job).

Before I get into the case studies, it may be helpful to describe my workers, because in some ways their situation is unique.  To run our campgrounds, we mainly employ retired people.  Of my 500 workers, well over half are over 60 years old, more than 150 are over 70, some 25 or so are over 80 and a few are even over 90!  Most are on social security and medicaire, and many have pensions and retirement health plans.  A good number are disabled and have some sort of disability support.  While they work slower, they make up for their low productivity in part by their friendliness with customers and their life experience.

Most of  my employees travel the country in their RV.  They take most of the year off, but many like to work over the summer to make a little money and to pay for their camping site.  I give many of them a free or subsidized campsite, worth about $500+ a month, plus all their utilities and then pay them minimum wage for the hours they work.  Many are thrilled with these terms - so many that I have a waiting list now of over 300 names of people who are looking for this type work.  This list is currently growing by about 10 names a day.

There may be employers somewhere who have a power imbalance over their employees.  Some days, I envy them.  My employees most all have independent means of support.  Further, they all have wheels on their houses, so they can and do pick up and leave if they aren't enjoying their job.  And, if they don't like our company, there are thousands of other campground operators who are looking for help.

So why are so many people lining up for minimum wage jobs when lefties and progressives are telling them that they should not want those jobs?  Here are some reasons:

• They value the amenities that come with the job, including living for free in a beautiful outdoor setting, something it is impossible to value under minimum wage laws
• They have other means of support, so the money is incidental.  In fact, I get more inquiries from employees asking me to reduce their hours so as not to mess up their social security or diabiloity payments as I do people asking for more pay
• They get to work with their spouse as a team.  There are not many employers out there that let a husband and wife split up work between them any way they want or even work together - can you imagine such a situation on a GM assembly plant?
• They would have a hard time getting hired by anyone else.  Very few employers will hire new workers in their sixities, and certainly not older than that.  Older workers can be slower and less productive.  For $12 an hour, I would have to hire younger workers too, but at minimum wage, I can afford the lower productivity of older workers and gain the benefit of their experience and trustworthiness.

This last point help set the stage for our cases.  I love hiring older workers at $5.15 an hour, and they love the job and line up for it.  But what happens when I have to pay these less productive workers $6.00 an hour?  What about $7.50?  What about at $12.00 an hour?  Here are some examples of what happens:

Case 1:  The jobs just go away

Washington State has one of the higher minimum wages in the country, at $7.35 an hour.  What makes the Washington minimum particularly hard to manage is the fact that it has a built-in escalator, such that it rises each year based on an inflation index (as you might imagine, since labor is a major component of most goods and services, this creates a positive feedback loop). 

We run a number of campgrounds in Washington under concession contract from the US Forest Service.  Most of these campgrounds are both small and very isolated, and are therefore labor intensive.  Given local market conditions, it is increasingly difficult to raise fees fast enough to keep up with rising labor rates (as well as labor-linked costs such as workers comp and unemployment) since we are competing against larger private campgrounds that are designed more efficiently and may be closer to local labor.  We have effectively given up trying to make money in this area, and will very likely not rebid the contract when it expires.  Given USFS experience on other similar contracts in the area, there is a good chance that no private company will bid for the contract, and the campgrounds will revert to USFS operation.  In this case, many will likely be closed, and instead of having minimum wage jobs, there will be no jobs left at all.

Case 2:  The jobs get outsourced to contractors

In a number of locations, we have been forced by rising minimum wages and associated costs (particulalry workers comp.) to switch some of our cleaning and landscaping duties from our live on-site employees to local contractors.  These contractors may pay their workers more than minimum wage, but the workers are often twice as productive as ours, yielding a cost savings for us.  When minimum wages are $5.15 an hour, these contractors can't compete with our own workers, but when minimum wages rise over $7.00, as they are across the west coast, this option starts to become attractive.

Case 3:  The jobs get automated away

One of the more frustrating situations we have is one government concesion contract where the government has continued to insist that the Service Contract Act (SCA) applies.  Like the Davis-Bacon act, the SCA sets minimum wages that contractors have to pay to employees when serving the government (for example, on a contract to clean the bathrooms in a goverment office building).  These rates, while ostensibly the market prevailing wages, are in almost every case FAR higher than what a private company would have to pay in the market to get good employees.  By specific Labor Department regulation, the SCA typically does not apply to concession contracts (I won't bore you with the details, but more in this series here or email me if you need help in a similar situation, I have been forced to become an expert).

Anyway, on this particular concession we have to pay our living-on-site workers based on the SCA.  This means, for example, that someone who sits in a parking lot booth collecting parking fees must be paid something like $12.50 an hour, which translates to a bit over $15.60 when you factor in FICA, SUI and workers comp.  Over 2000 hours a year that is $31,200 a year. 

A fully automated fee collection machine (which actually does more than the attendent, since it takes credit and debit cards as well as makes change for cash) costs $23,000.  Plus, the machine never will sue over wrongful termination, never will discriminate against or sexually harass a customer, never will steal, and never will fail to show up for work. 

What would you do?  I would prefer to have the person there, and if we put the machine in I will still  probably staff the booth on busy summer weekends to help customers out, but over 5 years the machine may save us over $100,000.

Case 4:  Prices go up to customers

Last election, Floridians voted themselves a minimum wage increase of $1.00, and worse, voted that the wage will increase each year by a cost of living factor.  As a result, on the May 2 effective date, our costs will go up by about 15% in managing the swim areas and campgrounds in that area.  Since this is well over our profit margin, prices will also go up by the same amount on the same day.  This is unfortunate, because it tends to be lower income people who most enjoy the recreation opportunities we offer, since historically we have been able to keep our costs, and therefore the pricing, so much lower than outrageously expensive attractions like Disney and Universal Studios.

Final Thoughts

I'm not going to cry that my business is doomed by minimum wage increases, because it is not.  As you can see above, we have many options for dealing with these changes.  What I fear may be doomed, though, is the special relationship our company has always had with older, retired workers. For now, the business model is OK, but there is a point, somewhere between about $7.00 and hour and $10.00 an hour, where rising minimum wages will push us to look for other ways to staff our parks rather other than our traditional use of live-on-site retirees.  And that would be sad for everyone.

For more on the topic, Powerline has a nice article today on minimum wage increase proposals in Minnesota.  It is astounding to me that people still want to believe the notion that minimum wages don't affect employment.  Just look at France and Germany for living proof.  Or, consider any other commodity in the market.  If the government set a price floor for gasolene, say at $3.00 a gallon, would anyone out there argue that people wouldn't use less gas?  But when we try to raise the price floor on labor, the media and politicians with a straight face try to argue that businesses won't use less labor.  Or, for the reverse, look at the experience with natural gas and airline travel - the government removed price floors on these commodities in the lates 70s / early 80s and look at how demand has skyrocketed.  (update: Powerline has a second post on the topic here)

For even more good reading, Cafe Hayek is always a good source for defense of free market economics, including this good post on French work week laws.  More on minimum wage here.

FactCheck.Org, which did a lot of good work during the election, is back up and running with several new posts related to Social Security claims and counter-claims. 

This is pretty funny, as highlighted in Reason's Hit and Run:

Under the plan, any person seeking a new job would be required to obtain an updated "counterfeit-proof" Social Security card, equipped with a digitized photo and an electronic identification strip containing the person's legal status. To offset fears of government intrusion, the card would be clearly marked, "This is not a national ID card," [California Republican congressman David] Dreier said.

Gosh, what a great solution.  Think of the applications.  All Phillip Morris has to do is write "this is not a cigarette" on each Marlboro and poof: all that nasty regulation and litigation goes away.  I guess I would not need a liquor license to sell Budweiser's labeled "this is not beer".  Or maybe Pamela Anderson can get a T-shirt that says "these are real".  LOL.

By the way, for business owners, don't miss this gem later in the article:

Employers would have to check a prospective employee's legal status against a new employment eligibility database either by swiping the card or calling a hot line. Those who fail to do so, or knowingly hire an undocumented worker, would face fines of up to $50,000 and five years in prison for each occurrence.

Nothing like spending 5 years in the slam for having one of your managers forget to check the ID of someone they hired.