Tuesday, June 29, 2010

Supply side economics anyone?

Despite our presently anemic economy, conservatives still want to make the Bush tax cuts for the wealthy "permanent."  The idea is that these tax cuts performed so well that they are necessary for our country's well being. A great analysis of the data that proves this idea wrong can be found at


You can go to the Bureau of Labor Statistics and download data for yourself and do your own analysis

Saturday, June 26, 2010

Is it time to become a Luddite?

Fish. Today I'm thinking about fish and becoming a Luddite.

See if you might join me...



Genetically engineered farm-raised salmon. The engineer in me says "so what?" But the scientist in me is bothered by what they have engineered, rather than the mere fact of engineering itself.

They're making the salmon grow faster by switching a gene that normally slows down a salmon's feeding rate in cold water. We know that some fraction of these fish will escape from fish farms and some fraction of that fraction will survive to mate with wild salmon. Even if they "sterilize" the salmon, there will be some small fraction where the sterilization fails (failure is a statistically predictable occurrence in any industrial process). We know it's not a matter of "if" but "when" such engineered fish will mate with wild salmon

What we don't know is the effect on wild salmon populations.

I will be the first to admit that it is likely that this mutation would not survive in the long run; otherwise evolution would not have already selected for fish with a gene that reduces growth in cold water. But the evolutionary long run is measured in thousands or tens of thousands of generations. Since a salmon lives between 1 to 8 years from birth to spawning death, we don't know what evolution will do before the long run.

Here's a possible scenario: a few fish escape and breed with wild salmon, providing a new generation of which some fraction have the switched gene. These fish grow faster than the wild salmon and outcompete the wild salmon for mating, increasing their presence in the gene pool. This continues for some time with no noticeable effect on salmon populations. Eventually, the majority of the wild population carries the new gene and grow faster. Then the next environmental crisis arises and the salmon food sources are reduced. The wild salmon with the switch gene cannot get enough food because their hunger doesn't go dormant. The wild salmon population crashes. The only salmon surviving the crisis are those with the original gene; but they are a depleted population and may take centuries to come back. Or they may simply go extinct.

I wish they'd stick to genetically engineering cows, pigs and chickens. We've been genetically engineering these through selective breeding for the last 7000 or 8000 years, so all we're doing is switching our engineering tools. There's not much worry about cows, pigs and chickens escaping and causing problems in wild populations. And if they screw up cows, pigs and chickens, we can simply choose not to eat them.

This whole effort is another case of privatization of profit and socialization of loss. Do you think that the salmon farms will carry enough insurance to compensate the fisherman if the wild population crashes? It will be another, "Oops, sorry about that. I'm sure you don't mind picking up the tab Mr. and Ms. Taxpayer."

Friday, June 25, 2010

The 1078 little pigs

Once upon a time, two little pigs each won $10,000 in a lottery. The first little pig said "I'm going to do the safe thing and buy gold." He put the gold in a safety deposit box in the piggy bank and would occasionally go look at its brightness and enjoy its smooth cool weight. The second little pig said "I'm going to do the safe thing and put the money in a long-term certificate of deposit at the piggy bank."

The gold was indeed safe. It sat safely and quietly in the safety deposit box. No one knew it was there except the first little pig.

The second little pig's money in the piggy bank stayed there for a month, then a third little pig, the piggy bank manager, loaned $8000 to a fourth little pig to buy a brick house. He was a very careful manager and would not approve a mortgage on a straw house (unlike some pigs). It took another month for the loan to close, after which $6000 went to piggy bank #2 that had the old mortgage on the house, which was controlled by a fifth little pig. The remaining $2000 went to a sixth little pig who had sold the house.

The sixth little pig let his money sit in his checking account at the piggy bank for a month, and then decided buy stock in a piggy company. He bought stock from a seventh little pig through a broker (pig #8). A month later, the seventh little pig used the $1980 from the stock sale as downpayment on a new car from the piggy auto dealer (pig #9). The broker who arranged the stock sale (pig #8) used his $20 commission to buy beer from the piggy bar (pig #10). Piggy auto dealer paid his employees (piggies #11, through #15) and the auto manufacturer and his employees (piggies #16 through #1015)

Meanwhile, piggy #5 (the manager of piggy bank #2 that got the $6000 when the house sale closed) used $4500 of that money to help finance a little piggy #1016 who was starting a new company. This entrepreneur piggy used the money to pay piggies #1017 through #1029 who were building piggy widgets to sell. These piggies used their pay to buy groceries, drink beer, and go to football games - contributing to the paycheck of piggies #1030 through #1054.

And then the economy started to look bad. The second little pig decided that his $10,000 wasn't safe in the bank, so he paid the penalty for early withdrawal and bought gold, just like the first little pig. The sixth pig sold his stock at a loss and also put the remaining money into gold (broker piggy again went to the bar with his $20 commission). Piggy #3, who managed the piggy bank, was worried about declining deposits and the collapsing stock market so he decided to cut back on loans.

Entrepreneur piggy's company was hit hard by the downturn, and he needed a bridge loan to keep needed money to buy materials for his company, but the piggy bank turned him down. Entrepreneur piggy had to fire his workers (piggies #1017 through #1029) and close the company.

Piggy #7 defaulted on his car loan and piggy #9 repossessed the car. Because of losses on the repossessed car and reduced car sales, piggy #9 laid off piggies #14 and #15. The auto manufacturer put piggies #20 through #1015 on reduced hours (but made sure that executive piggies #16 through #19 still got their year-end bonus).

Then little piggy #1055 (an economist) said, "Since banks aren't loaning money and companies are laying off workers, the government should stimulate the economy. We need to get the economy moving so that piggies sitting on gold are comfortable investing, piggy workers are working, and piggy companies are hiring. This will bring more useful money into the economy in the long run." This sounded like a good idea to the piggies who were out of work.

Then piggy #1 (who owned gold) said,"But if the government borrows money to stimulate the economy, we'll have to pay it back someday out of higher taxes." This sounded like sage wisdom to the other piggies that owned gold (piggies #2 and #1056 through #1078).

Economist piggy #1055 tried to explain how the money supply works and how the speed of money as it moves through the hands of many piggies has more economic power than the same money locked up as gold in a bank safety deposit box. He had charts and tables, powerpoint graphs, and elegant mathematical models. He very carefully explained that when a dollar passes through the hands of 10 or 12 piggies in a year, then the piggy government gets more in taxes than if the dollar is gold in a vault. He warned that if everyone stops loaning and spending money the economy contracts, which becomes even more reason to stop loaning and spending money in a viscous feedback cycle. He argued that "You have to spend money to make money" is also sage wisdom.

The golden piggies were unconvinced. They were bored by economist piggy's wonkish talk and his mathematical models of the economy. They were sure that government finances work exactly like a piggy's personal budget - just because that is the way it should be and it made sense to them. If a piggy has to tighten his belt, then so should all piggy companies, piggy banks, and the piggy government. The golden piggies could not explain how the economy recovers from a depression cycle, but they were absolutely sure they were right. They knew there couldn't be anything in the world that was more complicated than their budgeting wisdom. Indeed, they were so sure that they were willing to bet the future of all the unemployed piggies.

Wednesday, June 23, 2010

Who judges the judges?

Here's a link to the financial disclosure form of U.S. District Court Judge Martin Feldman, who made the recent decision on the offshore oil and gas drilling moratorium


The form was filed in 2009 for the the calendar year 2008.  As yet, his 2009 disclosures don't appear to be posted online.

Perusing the list, I noted there are 141 line-items of transactions and holdings reported for about 120 companies/instruments (depending on how you count multiple investments in GNMA etc.).  Of the reported investments, there are 21 energy companies (all oil and gas except for a single coal company) accounting for 31 transactions.  The disclosure doesn't allow you to find out what fraction of his total wealth is in energy, but it is clear that somewhere between 15-17% of his investment transactions have involved companies involved in the energy sector.

At what point should a judge recuse himself from a case?

Extracted Data
Numbers are the line-items in the disclosure form

Energy stocks held by Judge Feldman at the end of 2008 

16. Ocean Energy Notes (offshore oil/gas exploration)
19. Transocean (offshore drilling)
55. Peabody Energy (coal)
92.  Atlas Energy (gas production)
106. EV energy partners (oil/gas operating company)
117. BPZ resources (oil/gas exploration & production)
118 El Paso Corp (natural gas)

Energy stocks bought by Judge Feldman prior to 2008 and sold during 2008

35. Quicksilver Resources (oil/gas exploration and production)
50, 54.  Prospect Energy (financing for energy industry)
53. Provident Energy (oil/gas holding)
70.  Haliburton (oil/gas services)
84.  RPC Inc.  (oil/gas services)
80.  Pengrowth energy trust (Canadian energy producer)

Energy stocks bought/sold by Judge Feldman in 2008

86,87. Hercules Offshore (offshore drill rig operator in Gulf of Mexico) - bought/sold
95,96.  Parker Drilling Company (contract drilling and services) - bought/sold
102,103,104. TXCO Resources (oil/gas exploration and production) - bought/sold
113, 114. Rowan Companies (Drilling Services) - bought/sold
124 El Paso Pipeline Partners LP (natural gas pipeline) - sold
129, 130. KBR (energy engineering) - bought/sold
131, 132, 133. Chesapeake Energy (natural gas) - bought/sold
134, 135 ATP Oil & Gas - bought/sold

Sunday, June 20, 2010

Will a real Libertarian please stand up?

The Libertarian credo is that the government should be minimized to the "essential" functions, typically listed as: national defense, local police and fire departments, immigration enforcement, judiciary, and prisons. This idea has an inherent appeal as it provides a clear framework that says "this" is good and "that" is bad.  No judgement required. No compromise allowed. No haggling. No lobbying. No earmarks. No handouts. Just good old American self-reliance and devil take the hindmost. This credo of rugged individualism provides a pedestal from which the Libertarian looks down on the squabbling parties of a democratic government and says "You're all wrong; you're arguing over things that none of you should be doing. I earned my money and property and its immoral for you to take any of it or limit my use of it."

The next time you meet a Libertarian, ask them what they would do if the guy who owns the house next door decided to bulldoze his house and build a 24-hour skateboard park with stadium lighting and loudspeakers with the latest music for entertaining his customers. If you've got a real Libertarian on your hands, he'll say "Well, I wouldn't like it, but it's his property after all, so I guess I'd have to sell my house and move." Any other answer is inconsistent with the Libertarian philosophy of property rights (if he says he'd threaten the neighbor with a gun, then he's simply an anarchist). Of course, for all of us who live in typical urban/suburban city and small town neighborhoods, this scenario is absurd. We all live with zoning ordinances that are established and enforced by our elected government. These laws specifically limit private property rights by balancing the rights of the greater community against the liberty of the individual. Zoning ordinances should be anathema to the true Libertarian.

Once Libertarians admit government interference through zoning ordinances, their logical philosophy of absolutes is broken. Pandora's box springs open and spews and infinity of arguments. If you need one kind of regulation on liberty for the good of the community, then why not others? Why should zoning ordinances be allowed and not environmental protection regulations? Why should environmental regulations be allowed and not banking regulations? Why should banking regulations be allowed and not workplace safety regulations? Why should workplace safety regulations be allowed and not worker's compensation insurance? The list goes on. The critical question is "Who gets to decide what government interference is necessary?" Reasonable people can differ on where to draw the line, but there is always an open question as to what forms of government interference are necessary and appropriate. Deciding provides the fundamental push/pull of democracy. You either stand on the pedestal and argue that all government interference in private property is bad, or you have to argue why your preferred forms of interference are good and theirs are bad. You can only stand on the absolute Libertarian pedestal if you can honestly say zoning ordinances are immoral restrictions on property rights. Logic is a tough taskmaster.

Balancing the rights of individuals against the rights of the community is not an easy task and has no provably correct answer. Individuals owning property would like to get the greatest monetary benefit, whether or not they infringe on rights of others. In a democratic society, we argue out these issues in our elections and with our government. Sometimes the side that leans more towards the individuals wins. Sometimes its the side that leans more towards the community. Recently, it has been a side (made up by members of both parties) that leans toward the needs of corporations, with individual and community rights ignored. Nevertheless if we can all agree on using the electoral/democratic processes our nation will muddle its way forwards between the extremes and find the path that works. However, when one side decides that if it doesn't get its way the system is broken and needs to be fixed at the point of a gun, then we are looking at the beginning of our decline.

Anyone who has the answer doesn't understand the question.

Thursday, June 17, 2010

From the Oracle of Omaha

"My luck was accentuated by my living in a market system that sometimes produces distorted results, though it overall serves our country well.  I've worked in an economy that rewards someone who saves the lives of others on a battlefield with a medal, rewards a great teacher with thank-you notes from parents, but rewards those who can detect the mispricing of securities with sums reaching into the billions.  In short, fate's distribution of long straws is wildly capricious."

- Warren Buffett,
in a letter to other billionaires as quoted in a Bloomberg News article on June 17, 2010.

Tuesday, June 15, 2010

Justice or Luck?

"Thus, when a state habeas petitioner's appeal is filed too late because of attorney error, the petitioner is out of luck." 
     - Antonin Scalia, Associate Justice(?) of the U.S. Supreme Court

There are two logical explanations for the above quote:
    1) He believes only guilty people are on death row, so that luck doesn't lead to execution of an innocent person.
    2) He believes that the justice is a game whose outcome depends on luck, and if an innocent person is executed, that's too bad but is not his problem.

The first explanation is delusional, the second is evil.

Thursday, June 10, 2010

If you don't turn the other cheek...

I'm finding myself quite fed-up with the "Christian Nation" zealots. These are the people who claim that because most of our founding fathers were Christian and believed in Christian principals, we are therefore a "Christian Nation." I've never been able to follow the logical leap required for their argument, but let us accept it as true and see how our supposedly Christian Nation was set up to follow Christ.  If we are a Christian Nation (rather than a nation founded by and of mostly Christians) then there should be some evidence that we, as a nation, follow the teachings of Christ.

Lets look at one of Christ's key teachings:
You have heard that it was said, 'An eye for an eye, and a tooth for a tooth.' But I tell you, do not resist an evil person. If someone strikes you on the right cheek, turn to him the other also. And if someone wants to sue you and take your tunic, let him have your cloak as well. If someone forces you to go one mile, go with him two miles. Give to the one who asks you, and do not turn away from the one who wants to borrow from you.
That is pretty strong stuff. And it's not just a one-liner allowing you interpretive license to say he really meant something else. Christ uses multiple examples of how his followers are supposed to behave peaceably toward aggression and give to anyone who asks - there isn't any ambiguity. If we are a "Christian Nation," then shouldn't this central idea of non-aggression be reflected in our laws? I can't find anything remotely like it. Indeed, I'm not sure that many gun-toting, lawyer-hating Americans would want to live in a country whose laws require turning the other cheek to an assailant and giving double to someone who sues you. So strike one - if we are a Christian Nation, there is no evidence in our laws.

As we are not explicitly (or legally) a Christian Nation, perhaps we are implicitly a Christian Nation because of our founders beliefs and behaviors. That is, perhaps it is "tradition" that makes us a Christian Nation. If so, then Christ's teachings should be identifiable in our nation's behavior over the last couple centuries. Let's see, we've been struck on the right cheek a number of times: Barbary pirates in the 1800s, the British invasion in 1812, Fort Sumter in 1861, Pearl Harbor in 1941, and the World Trade Center in 2001. I don't seem to recall us turning the other cheek. Indeed, there are other times where we only imagined being struck on the right cheek (most notably the Mexican-American war and the Spanish-American war) and behaved in a distinctly un-Christian manner. To get to the nub of the problem, I'm not sure how to reconcile Christ's teaching of non-aggression with our Declaration of Independence and our Revolution. Why didn't the founders turn the other cheek to the British wrongs? Wouldn't that be the Christian thing to do? I doubt there are many Christians out there that want a government actually acting on Christian principals. Indeed, the only example of unabashed governmental "Christian" behavior appears to the Bush administration's bank bailouts: "...give to the one who asks you, and do not turn away from the one who wants to borrow from you." He definitely followed Christ on that one. So strike two - as a nation, we have not consistently followed Christian principals.

I wish we could put this whole thing to rest. I wish we had some clear legal statement from our early days that we are not a Christian Nation. Then we could get on with being the mixed-up nation that we are and dispense with this nonsense. Oh, wait a minute, there's this treaty with the Bey of Tripoli that was ratified by the U.S. Senate on June 7, 1797, only 10 years after the U.S. Constitution was signed.  The treaty was signed into law by our second president and founding father, John Adams. Article 11 of the treaty reads
As the government of the United States of America is not in any sense founded on the Christian Religion, - as it has in itself no character of enmity against the laws, religion or tranquility of Mussulmen, - and as the said States never have entered into any war or act of hostility against any Mohametan nation, it is declared by the parties that no pretext arising from religious opinions shall ever produce an interruption of the harmony existing between the two countries.
Strike three. Now if only facts could shut up the wanna-be Christian Ayatollahs.

Religion in government is about power, not grace.

Monday, June 7, 2010

Capital Subsidies

Consider Joe Worker: born to a humble family he works at after-school jobs during high school, saves his money, takes on debt only when necessary, and works his way through college to be the first in his family to get a degree. He gets a good job and diligently works his way up in the corporate hierarchy. At age 40, he makes $130,000 per year and, after deductions, has a taxable income of $100,000. Joe is the quintessential American success story - our accepted theme that anyone can make it through hard work and thrift. Unfortunately, Joe has worked so hard that he hasn't had time to get married, so filing "single" he pays $21,709 in Federal Income Taxes. In addition, he pays social security and medicare taxes of  $8,170, for a total of $29,879 to the Federal Government.

Now consider Dylan Loafer, who never learned how to work despite the example of successful parents. Like Joe, Dylan's not married - but in Dylan's case it's not because of lack of time, it's because he's such an obvious loser. After a 20-year series of dead-end jobs where he's been paid minimum wage and paid almost nothing in taxes, at age 40 he inherits $2 million (after inheritance taxes) when his parents die of a combination of frustration and boredom in watching their child float through life. Dylan realizes that Mummy and Daddy aren't there to back him up, so he finally develops a work ethic. He studies hard and learns to manage his money. It takes a lot of attention to the markets and his investments, but he is able to make a consistent $130,000 per year in capital gains (about 6.5% return). He has the same adjustments to income as Joe, so his taxable income is $100,000. Dylan goes to pay his taxes, and finds that he owes the Federal government $15,000 - just about half of what Joe Worker has paid.

So here we have Joe Worker, a person who has spent his life building up skills, contributing to society through his work, and sacrificing to get into a position where he can send the government $30K per year. Joe pulls his own weight and takes handouts from no one. To work your way up to a job with an earned income of $130K is no small matter, and Joe is proud of his achievement and what he has contributed to our economy. But the "system" couldn't care less about what it takes to get to an earned income of $130K. No, the "system" rewards Dylan Loafer with a 50% tax reduction because he was lucky enough to be born to successful parents and figured out how to make a modest return on their capital. Dylan hasn't contributed to society in any significant way through his life, but the mere possession of capital makes him a favored person in the eyes of tax law. With his inheritance, his only future contribution to society is trying to figure out the best place to invest his money. Is it good when people pay attention to their investments? - of course it is. But is it worth a 50% tax subsidy? - I think not. We have set up a system that says the effort spent investing your own money is so important that it receives a lower tax rate than teaching children, curing disease, building bridges, roofing houses, fixing cars, or cleaning sewers.

So the next time someone tells you that the U.S. favors hard work - just say BULLSHIT. The U.S. system is skewed toward those who already have capital, giving them favorable tax treatment so that they can gain more capital. It doesn't take much math to figure out that the long term consequence is an ever-increasing divide between the rich, the middle class, and the poor. In this are the seeds of our own destruction. No society can long survive a "let them eat cake" attitude of those born lucky.  

Capitalism and free-markets are not synonymous. Indeed, capitalists routinely try to undermine free markets - not just by outright monopolies but also by lobbying for special legal treatment and making decisions based on government bailouts (i.e. the wage-earner assumes the risk through taxpayer bailouts, but the profit goes to capital). Be wary of people who try to equate capitalism and free-markets - they are usually looking to shift taxes, risks, or clean-up costs to the wage-earning public.

I believe in regulated free markets and regulated capitalism. But capital shouldn't be more valuable than the sweat, creativity, or the the indispensable everyday efforts of those who are the heroic unrecognized gears making the wheels go around on the machine.

Solution: Capital gains should not be subsidized. They should be taxed at the rate of earned income plus the Social Security and Medicare contributions of both worker and employer. If capital does not receive favored treatment the overall tax rates can be reduced, which reduces the cost of hiring American workers. Will this raise the cost of capital? - of course. But the entire economic bubble we just experienced was only possible because capital costs were unrealistically low and did not reflect the actual costs of creating the capital. When hourly wage-earners and salaried professionals are subsidizing the cost of capital, they are getting screwed.