WSJ Letters Section

I recently blogged about some WSJ letters I liked:

http://willworkforjustice.blogspot.com/2008/07/july-25-2008-wsj-letters-to-editor.html

After praising the WSJ's recent letters section, the gods smiled upon me--my short letter was published in today's WSJ (08/11/08). I was responding to an article about teachers and investing. The WSJ profiled teachers who were literally crying over being unable to understand investing in their retirement plans. You can view the WSJ letters section here:

http://online.wsj.com/public/page/letters.html

Here is my short letter (a blurb, really, but I'll take it!):

We are entrusting our children to people who can't handle basic investing and, somehow, we wonder why we end up with financially illiterate adults.

Campbell, Calif.

____________________

Update on January 17, 2009: here is a link to my August 11, 2008 letter. I'm unsure if it's a permalink, but as of today, it works.

To Settle or Not to Settle?

A new study indicates plaintiffs are better off settling cases than demanding to litigate to trial.

http://www.nytimes.com/2008/08/08/business/08law.html

While I agree with the overall conclusion, I wish there was more available information on specific types of cases. For example, what are the numbers with respect to personal injury cases? Employment cases? IP disputes? Surely the statistics are not the same in different legal areas.

More on Taxes and Paying Your Fair Share

The WSJ published an article on taxes I somehow missed. See

http://online.wsj.com/article/SB121659695380368965.html

Here's an interesting statement from the article:

Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts.

To that I say, "Pfffff." If you bring in an extra billion but increase spending by two billion, I am not patting you on the back.

The article's failure to incorporate Pres. Bush's expenditures reduces the impact of its other cited statistics:

1. In 2006, the top 1% of Americans (making $388,806+) paid 40% of all income taxes; and

2. The top 10% (making $108,904+) paid 71%. That means 90% of all Americans only paid 29% of all income taxes, indicating their income tax burden is relatively low (compared to the affluent). (Note: the income tax is less than half of federal taxes and only one-fifth of taxes at all levels of government.)

The article states that "Americans with an income below the median paid a record low 2.9% of all income taxes" in 2006. Some argue such a relatively low tax burden creates a moral hazard, because poor and low income residents receive similar benefits as the rich--police and fire protection, schools, access to courts, FDA protection (food and drugs), FAA protection (air travel), and so on--but pay almost nothing for it. Consequently, some people have argued that the lower income brackets should pay more taxes to create a more fair understanding of the high costs of government and public services.

My opinions on this issue of "fair taxation" is evolving, but I support Obama's stated plan to raise the payroll tax threshold. While the poor don't get taxed much on their income, their income is still taxed relatively high if you factor in the the payroll tax and other taxes. The payroll tax is used to finance Social Security and other social programs, but it taxes income only up to a certain amount of wages/salary. In 2007, if you made more than $95,000, you paid the same amount in payroll taxes as the hedge fund manager who made $1 billion. And if you made $1 billion, your wages were deducted the same percentage in payroll taxes as the person who made $30,000. That scenario doesn't appear equitable when the Social Security program is underfunded.

One idea might be to increase the payroll tax threshold (thereby helping save Social Security) while also instituting a national sales tax (which would affect poor and rich alike). This way, current income tax rates would be maintained, and the poor would have an incentive to spend less, perhaps saving more of their money and moving up. I remember telling a friend who protested the sales tax because it disproportionately hurt the poor, "Get the tap water (pointing to my free glass of water), not the Coke." In other words, at least the sales tax is a tax people can avoid most of the time. I realize this makes me sound like Marie Antoinette, but I don't see too many other potential compromises, and such a national sales tax should go into a "lockbox" the government couldn't tap for anything other than benefit payments. [Update on September 18, 2012: my views on sales taxes is not fully formed, but I believe taxes in general should come from predictable and diverse revenue streams.]

Still, reading an article like the one below inspires me to try harder to think of a more equitable and effective scenario:

http://www.washingtonpost.com/wp-dyn/content/article/2008/08/02/AR2008080201672.html?referrer=emailarticle
(Thanks to creditslips.org for the tip; see http://www.creditslips.org/creditslips/2008/08/no-cushion.html#more)

It's no secret that the poor and middle class spend their money, while the rich save it and try to live off their interest and dividends, which are taxed at a lower rate (now 15%). As a result, any decent economist is going to want to try to get as much money into the hands of the poor and middle class as possible.

At the same time, as a Californian, I want more people outside the state to pay their fair share. It is not unusual in Santa Clara County to see people making 109,000 dollars or more (top 10% income bracket nationwide). It's incredible to think Californians pay so much in federal taxes, basically subsidizing Middle America, and yet are looked down upon by so many of our compatriots. For example, Texas took money from (robbed?) California through Enron. New Yorkers consider Californians soft. Dan Gable, from Iowa, reportedly refused to enroll California wrestlers because they were lazy. I dislike the status quo, which breeds resentment among the states and pits classes against one another while government spending runs amok. There has to be a better way.

More below on taxation.

McCain on Social Security (from http://www.csmonitor.com):

Americans have got to understand that we are paying present-day retirees with the taxes paid by young workers in America today. And that's a disgrace. It's an absolute disgrace, and it's got to be fixed.

An Example re: What Happens When You Tax One Group Too Much (taken from internet comment board):
Suppose that every day, ten men go out for tea and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers, he said, ‘I’m going to reduce the cost of your daily tea by $20. Drinks for the ten now cost just $80.
The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. What happens to the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’ They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his tea. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.
And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33% savings).
The seventh now pay $5 instead of $7 (28% savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.
‘I only got a dollar out of the $20,’ declared the sixth man. He pointed to the tenth man, ‘But he got $10!’
‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’
‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’
‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn’t show up for drinks, so the nine sat down and had tea without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Update on April 13, 2009: Ari Fleischer has more income tax stats in today's WSJ (A15):

A very small number of taxpayers -- the 10% of the country that makes more than $92,400 a year -- pay 72.4% of the nation's income taxes.

NYT Article on Credit Card Debt

The NYT has an outstanding series on debt ("The Debt Trap"). Today's article was about ballooning credit card debt in Turkey (Landler, "Credit Cards Tighten Grip Outside U.S."). Most European citizens, until recently, used debit cards, not credit cards, so Turkey's acceptance of credit cards is unusual. 

Here are some facts from the article:

http://www.nytimes.com/2008/08/10/business/worldbusiness/10card.html 

1. Outstanding credit card debt in Turkey ballooned to nearly 18 billion dollars in 2007. 

Before any Americans start gloating, here is a link to our consumer credit numbers--and yes, that's in billions of dollars, and percentage-wise, we're in the same boat as Turkey, a country that recently had to pay over 15% on its bonds/Treasuries to get buyers: 

http://www.federalreserve.gov/Releases/g19/current/ 

(The Federal Reserve tracks outstanding revolving consumer debt in its "G19" release. What is revolving consumer debt? It's mostly credit card debt. The G19 stats include all outstanding balances outstanding, including balances from people who pay off their debt at the end of the month, not just those who have continuous balances.) 

2. Cute Turkish proverb re: risk-taking: "Stretch your leg only as far as your blanket." 

3. South Korea at one point, prior to nationalizing some banks/issuers, had a 28% default rate. South Korea had 148 million credit cards. South Korea's population at the time was only 49 million people. 

Unrelated note about our FBI and wonderful national security people: the same 8/10/08 NYT has an article about closing the anthrax case (page 17). We now know the perpetrator/terrorist was probably an American-born Christian. The FBI, in its infinite wisdom, reflexively targeted Muslims, in this case, Pakistani-born residents, including one American citizen. (Makes sense. We all know Pakistani Muslims have a long history of using anthrax in America, right? Wait...) The FBI apparently asked these suspects, who worked for the city, "What do you think about 9/11?" (Because if you're a terrorist with half a brain, this is the question that will get a confession or relevant admission about anthrax.) Here's a chilling line about how the FBI works:

[A]n [FBI] agent pointed a gun through an open window at [the suspect's] home while others knocked down the front door as his wife was cooking in the kitchen. 

Here's where it gets really tragic. Two of the Pakistanis were non-citizens. Their visas expired, and they had to find work abroad. As for the remaining Pakistani-born citizen suspect, every time he traveled to Canada to see his brother, he was searched and interrogated for up to two hours, and his name was put on a watch list. 

Congrats, FBI. With friends like you, who needs enemies to sully the name of America? 

As for Bruce Ivins, the white American-born Christian-raised anthrax suspect who killed himself, may you burn a slow death in the lowest levels of hell. 

I am of course specifying Ivins' racial and religious background. Aren't racial and religious traits relevant in understanding why people commit evil acts? More important, has President Bush declared a War against Chemicals yet? Do we need a new security agency to handle these chemical issues? There are millions of chemical compounds just waiting to be unleashed on Americans. Should we petition the government to open a Department of Chemical Security? Something must be done. Perhaps we should spend billions of taxpayer dollars restricting chemicals from entering the hands of American-born citizens to prevent future terrorist incidents. For more information, or to register your comments, write the government at 

Attn: George Orwell 

Ministry of Peace 

1984 Ave. 

Washington, D.C. 20500 

And don't forget: War is Peace. 

For more on this topic, check out this earlier post:

http://willworkforjustice.blogspot.com/2008/06/terrorism-socialism-and-danger-of.html

Questions to Ask to Get to Know Someone

When I was younger, I thought I could gain useful personal information by asking general questions. I realize now that my inquiries were not helpful in producing any profound insights. I've written some questions that do provide insight into a person's value system and beliefs.

1. Obesity is a major problem in America. Fast food chains, such as McDonald's and Jack in the Box, provide cheap food high in calories and fat. Anecdotal evidence indicates that poor persons and single parents disproportionately rely on fast food restaurants because of a lack of money and/or preparation time. Should we add a new tax on fast food chains to make them more expensive, thereby driving traffic to healthier venues?

2. Should we raise taxes on oil/gasoline, causing the retail price of gasoline to go up? Let's assume this tax increase would result in a better environment as fewer people drove cars or switched to smaller cars with better mileage. If your answer is different than your response to question number one, explain the reason you answered differently.

3. Should we tax oil companies' profits at a higher rate than other companies' profits? If so, why? Also, how should the government spend the money received from the new taxes?

4. A employee of a minority group gets a different supervisor of a racial majority group at work. His previous supervisor left voluntarily to another company. The employee's new supervisor is a racist; however, the employee's performance is declining, and if another month passes, he would get fired because of his own incompetence. His supervisor fires him one week later because he dislikes members of the employee's ethnic/racial group. The employee is making 8 dollars an hour. How much, if anything, would you recommend he receive if he sued the company, and you were a juror?

5. You are sitting alone in a restaurant minding your own business and eating a hamburger. You are sitting at a mid-sized table with four chairs. It is a busy day, but there are other open tables available. Someone sits down next to you at your table. What do you say or do, if anything?

6. Every year, the American government takes about 13% of each employee's salary and puts it into a general fund for everyone's retirement/pension (i.e., the Social Security program). Should you have the ability to invest your contributions the way you see fit? Or should the government manage and direct everyone's contributions?  Government officials contend that many people do not know how to invest or may invest recklessly, and they want to prevent a situation where people lose their money through bad investments, which defeats the purpose of having a nationwide retirement program (i.e., to prevent poverty in old age).

7. A vegan on the city council wants to pass a local law/ordinance requiring all local restaurants to use a certain kind of cheese, made without animal products (i.e., rennet). She complains it is unfair for restaurants, especially pizza places, to effectively exclude her from their establishments. You are also on the city council. How do you vote?

8. A vegan on the city council wants to pass a local law/ordinance requiring all local restaurants to affirmatively disclose whether their ingredients are vegan, i.e. made without animal products. This would require local restaurants to change their menus and spend money replacing existing menus. He wants a penalty of 500 dollars per violation and wants the city to have random inspections of restaurants to ensure they are in compliance. You are also on the city council. How do you vote?

9. Do you believe in a God that is omnipotent but does not interfere in our daily lives?

10. [Added August 20, 2008] Your law firm's copy machine breaks down, so you are able to serve the other side with a motion, but you miss the filing deadline by one day. The other side is not affected--they were served properly, but the statute says the court must deny the motion unless it is also filed on time, or unless good cause exists for filing it late.

The legal process has strict timelines to ensure efficiency and predictability. Most deadlines require a litigant to file documents with the court and serve the other side by a certain date and time. Failure to enforce deadlines consistently results in a situation where judges seem to favor one side over another or appear inconsistent.

In this case, the court/judge would not have looked at the documents until several days later. The court itself is unaffected, as well as the other side, who was served timely. You are the judge. The law requires you to strike the documents unless you find good cause exists for a late filing. You are wary of accepting an excuse of a copy machine breakdown, and worry it might lead to others filing their motions late. The statute clearly requires you to either find good cause, or deny the motion. What do you do, and what is your rationale?

Bonus: does it make a difference if the law firm that was late represented an average employee? What if the law firm represented a corporation making $50,000 net annually? 1 million net annually? Should the judge consider these external factors, even though the statute does not mention them?

11. [Added 9/18/08] Imagine you are the president of a country. Your country has lots of natural resources, but only in the last few years has it managed to begin spreading the wealth and have a world-class stock market. In addition to the money flowing into your country's companies from other countries, your own citizens have invested a lot of their money. Due to unforeseen events and bad news, your stock market goes down 5%, then 10%, then 20% on three consecutive days. People are complaining about losing their life savings and street protests are being organized. You have the power to temporarily shut down the stock market, thereby preventing any trades from occurring, which would prevent investors from withdrawing their money from stocks and new investors from coming in. You expect to open the stock market again in a few days, when you believe things will be calmer. Do you shut down the stock market after the three consecutive down days, or do let the market stay open, thereby risking another large drop? If so, how many days do you shut down the market?

12. [Add 7/28/09] Click here for questions relating to the Cambridge PD's arrest of Henry Louis Gates, Jr.

13. I am borrowing the following hypothetical from Slawek W.:

John invents a cure for cancer. It is a pill, very easily made, in fact, one could make it with ingredients found in every household. He successfully demonstrates the effectiveness of this cure on several volunteers, after which he announces to the world that he has no intention of ever releasing any information about this cure. He further announces that the instructions to produce this cure have been implanted somewhere in his body in a soluble capsule which will completely dissolve in a week along with the instructions.

Let's suppose that a surgical search for this implant would end John's life.

Let's further suppose that there is absolutely no way that you can reason with John to change his mind, and you cannot reverse engineer the cure by studying the cured patients.

Now, the general population is asked what the best course of action is in this situation. John has the knowledge to eradicate cancer forever but he has no intention of sharing this information for whatever reason. Also, there is no way to forcefully retrieve this information without causing John's death in the process.

What would you propose to do? Would it matter if John was your 16 years old son?

14. [Added on 8/27/11] A police department participates in various community outreach programs. The department initially asks officers to visit an event at a local mosque, but when no one volunteers, mandates an officer's and his four subordinates' attendance. (We may assume at some point during the event, the mosque may hold prayers, but the officers would not be compelled to participate.) The officer refuses on the grounds that 1) he believes the mosque has ties to violent fundamentalist organizations; and 2) as a devout Christian, it is against his religious beliefs to go to a non-Christian house of worship. The officer also says that to the extent that his subordinates sincerely believe that their religion forbids them from attending and participating in Islamic religious ceremonies or that the mosque is funded by anti-American elements, he may not compel them to attend, either. What should the police department do?

15. [Added on 8/27/11] A mentally and physically disabled teenager is given an honorary spot on the high school football team. He suits up and participates in practices as an assistant and spends most of his time helping players by bringing them water and equipment. In some cases, at the end of an official game, the coaches of both teams agree to sub him in for a play or two. During these plays, the team gives the teenager the ball, and he sometimes scores a touchdown. This situation goes unnoticed for four years, until the teenager becomes 19 years old. The state athletic commission sends a letter to the team informing them that no one may join or participate in a team's practices or games after turning 19 years old. The commission says it understands the unique situation but it must enforce its rules equally. You are elected as the head of the state high school athletic commission the next day. What would you do?

Deficits Come Home to Roost

I was talking to a friend of mine today, and she, a life-long Democrat, was showing me that she paid 35% in taxes. She said she did not mind paying 35% to the government and favors maintaining existing welfare programs as well as entitlement programs. I suddenly realized how dire our spending habits are--just maintaining existing programs would cost future generations trillions of dollars more than we can afford and would bring our nation closer to defaulting on government issued debt (bonds, Treasuries) or requiring foreign capital injections (e.g., Citigroup, Merrill Lynch and MGM Grand).

I then realized something unsavory--the money would be coming from my friend and I to cover the existing entitlement/spending programs, and the only way the government could get it was by taking more money from us and our children. I told my friend her 35% rate was an inaccurate indicator of how much government spending programs cost. In reality, unless the government wants to default on our debt, her tax rate should be 50%, and sales taxes would have to increase every year to cover government spending. I tried to tell my friend her support for existing spending programs means that my children and her children would eventually be subject to an income tax rate of around 50% and a California sales tax rate of around 10% to maintain the programs she likes. That's when I realized if you're an American, and you care about this country's future, you must support cutting government spending. The only question should be where the cuts come from, not whether they should be made. Even supporting the maintenance of current spending programs is wrongheaded.

I gave my friend a link to Richard Fisher's recent speech, which I've posted elsewhere on this blog:

http://www.dallasfed.org/news/speeches/fisher/2008/fs080528.cfm

I asked her to read it, because if she, a very smart law school graduate, could not understand that even maintaining existing spending programs required higher sales taxes and her children to pay 50% in income taxes or risk Zimbabwe-type inflation, we had little hope as a country of exiting our financial morass.

I facetiously pretended to be Uncle Sam with a spending problem. I told her I had been using my credit card and spending trillions of dollars of her money and now I needed more, or I'd go bankrupt. I said I had taken loans from the Chinese, Japanese, and British, and I had to pay them interest every single month. The 35% I was taking from her wasn't enough. I couldn't take too much from the poor--it would not be enough, even if I raised their taxes to 50%. The top 25% already pay 85% of taxes (see http://willworkforjustice.blogspot.com/2008/07/top-25-of-earners-paid-85-of-all-taxes.html) to support my spending habits, and it isn't enough. My friend and her children had to pay more.

I racked up a list of expenses I had--the war in Iraq, Fannie Mae, Freddie Mac, welfare, military, payroll, Social Security, Medicare, and Medicaid. I told her I had overused my credit card for the past ten years and was spending money I didn't have, while paying only the minimum balance each month. To make matters worse, I had little actual savings--I was living paycheck to paycheck, surviving on my friend's 35% injections. Thus, any spending was going to have to come from more loans and more debt. I said I was now having a hard time meeting interest payments on my loans, and she had to pay me more money so I could take it outside of our country to pay my foreign creditors. I explained if there was any other way of getting the money, I'd avoid raising taxes. Please, I begged her, show me a way to get the money without taking it from you and your children but also maintaining my spending habits. (And no, massive inflation is not an option--as Zimbabwe shows, if everyone's rich, no one is.)

That's when it hit me. There's no other way for Uncle Sam to get the money without cutting spending, except by raising taxes. For example, California will probably raise sales taxes to balance its budget, which will hurt the poor. (The sales tax is a "regressive" tax, a fancy way of saying it falls disproportionately on the poor.) California's spending, if it results in a higher sales tax, will cause the poor to save less money, because now they have to pay higher taxes when buying food, drinks, clothing, and cars. Thus, to maintain government programs that help the poor, California is going to raise a tax that will hurt them, so the government can make the poor more reliant on their programs. Confused? You should be. Like you, I didn't study Infinite Loop Economics.

And that's the harshest lesson of all--in part because we have tried to help the poor by spending money we don't have, we've destroyed our ability to help them. The poor don't have a lot of political power, so most likely, we will have a higher sales tax before a higher income tax (which falls disproportionately on the aspiring middle class and affluent).

So here's the sad, twisted result: we've spent money we don't have, causing us to take more money from the poor so we can give it to the government. The best way to help the poor is to take some short-term suffering--like cutting government programs, foreign spending (e.g., Iraq war), and general benefits (e.g. government employee pensions), so we actually have money in the bank to help the poor in the future. We had a surplus only a few years ago. See chart, below.


For the Republicans gloating right now, our surplus occurred under Democratic President Bill Clinton, a fact that helps Sen. Obama, not Sen. McCain. For the Democrats gloating now, the surplus occurred under a Republican Congress. As we can see, the issue of out-of-control deficit spending is non-partisan. We need to go back to having a surplus before we think about helping others. Anyone who talks about maintaining spending programs or worse, increasing entitlement programs, is doing our country a disservice.

Patriotic Americans must take away Uncle Sam's credit card, cut it up, and not return it until he reforms his profligate spending. That means cutting programs that help senior citizens, the poor, teachers, the military, and other government employees. There's no way around this harsh scenario--being on a budget isn't easy for anyone. But unless you want Uncle Sam to default on his debt, rampant inflation, or 50% taxes on your children, you will support a balanced budget. If you're still not convinced we have to cut spending, all you have to do is go out there and find that money-growing tree. It's out there somewhere, probably nearby the Tree of Wishful Thinking. Hopefully you'll find it before we all go off a cliff.

http://www.youtube.com/watch?v=VYnZL0BOXDc

Signed,

Not the King of Wishful Thinking

Inflation, Revisited

Earlier, I wrote an article about how "core inflation" numbers understate real inflation. See

http://willworkforjustice.blogspot.com/2008/07/real-inflation-trimmed-mean-pce.html

T. Rowe Price just published an article in the "T Rowe Price Report" supporting my argument that "core" inflation is a fallacious statistic. See Alan Levenson, "Food, Energy Costs Spur Inflation Fears." No link available, as far as I can see right now, but here are some snippets:

Indeed, the CPI posted a year-to-year inflation rate of 4.9% in June...in contrast, inflation in the so-called "core" CPI, which excludes food and energy, was [recorded as only] 2.4%...higher inflation will become the most potent threat to growth.

In other words, "core" CPI is not accurate, as I explained earlier.

An interesting tidbit: Mr. Levenson said in 2007 he believes the Fed Reserve will keep rates steady all year; however, it sounds like the Fed needs to raise rates to combat inflation.