In this article, Prof Todd Zywicki makes this brilliant observation of Hayek:
Hayek says that given this it is not tenable to argue that central planning can simply control the means of production–it must eventually control the ends too, meaning that the central planner will have to decide whose ends are satisfied in and whose are disappointed. This means, in turn, that the central planner must choose among the moral worth of individual’s competing ends. The central planner must have the authority to decide how many resources to spend on books and how much on movies, how much on breast cancer research vs. prostate cancer research, and how much on bikes v. cars. Those choices are inescapable.
So this is why it is a slippery slope for Hayek–once the central planner (as under the NRA) allows private cartels to fix the price for steel, then you must also fix the wages of steelworkers. And then you have to fix the price of substitute products for steel (aluminum) so that the market doesn’t adjust to the new steel price, which then requires to fix the wages of aluminum workers, and so on. It also requires the central planner to decide who is allowed to become a steelworker, since now the fixed price is above the market price, so this means some people who want to become steelworkers cannot. Which means they have to do something else. So the central planner has to decide who “deserves” to become a steelworker and who doesn’t and so now people cannot freely choose their profession and choose whether to change professions. The government, not the market, has to decide which businesses live and which fail–so, for example, should computers be allowed to exist if they are going to displace typewriter manufacturers, and if so, which typewriter manufacturers live and which die?
We've almost all heard that old saw about the supposed definition of insanity: the repetition of something while expecting it to produce a different outcome. While we stipulate this as time-honored wisdom, why do we not insist upon heeding this wisdom in our governance?
We have seen several economic disasters of limited scale play out within our borders. The city of Detroit. The State of Illinois. The State of California. City of San Bernardino.
We know that lavish pay and benefits schemes for public employees have bankrupted many well-populated US cities. Time and again we (read: those tiny few of us who bother to be informed) read about state and local politicians bringing about the financial ruin of their districts. California continues to seek ever higher pay and benefits for public employees, with prison guards in the state system now making six figure incomes. This, with a public debt teetering on the edge of ruin already. There was the city administrator in CA that found a way to get himself paid $400k and change. This list is endless.
There is a common thread that runs through so many of these cases. That thread is the Blue State model of governance:
So while anyone with even a modicum of desire to be aware of our national situation can easily find overwhelming evidence of the failure of the Blue State model, we have seen the model pulled up to the national level. This is beyond incomprehensible.
Instead of cutting back on our national indebtedness, we increase it time and again. Over $2.5T just since Obama has been king President. We can barely stomach even minor reductions in the GROWTH RATE of government spending! Never mind actual spending cuts. The "austerity" of the budget cliff deal was laughably insignificant in addressing the financial ruin towards which we are headed.
We borrow more and more money each day—about $400,000,000 in a single day. And what do we borrow it for? Studying rat farts and bear breeding. Giving handouts to large corporate agribusinesses. Creating and maintaining a dependent class whose votes can be banked upon. Writing checks to corrupt regimes in the name of "foreign aid". Buying tons of military gear the military doesn't ask for. We borrow it to subsidize the medical care of seniors that can afford to pay their own way. We borrow it to send checks to millionaire retirees at the Villages who own $20,000 golf carts.
You know—all the REALLY important functions of government.
What will it take for America to awaken? When will we realize that we have in our levels of government a festering cancer that has metastasized and is already in the lymph nodes?
Perhaps the best thing that could happen to us would be another Depression. Of course, the last one brought about the first major wave of "Just Do Something" collectivism, so that would likely just see us fall into totalitarianism completely.
At least it would be faster than our current decent towards that destination. At least we could arrive their sooner and begin the restoration process sooner.
These are times for which there is no reason in the physical realm for optimism. There is hope in God, or there is none at all.
For awhile now, I've been mulling around the idea that mathematics can illustrate a better way of thinking about problems and about change. It's revealed in physics as well as economics.
In math, we have a "derivative" as the rate of change of a function. In Physics, we can see how this concept becomes more concrete; the derivative of position is velocity (rate at which position is changing). We can further take another derivative and find the rate at which velocity is changing, and we call that acceleration. What causes acceleration to change? In Newtonian mechanics, it's the application of a force. (F=MA).
Now I'm not running you through your first day of freshman Physics to be pedantic, but to establish a framework of analysis. The insight that matters is that if you know a force (magnitude and direction, please) and a mass, you can determine the acceleration. Accelerating over time and you know velocity. Do it long enough and you'll know the position. Force, then is a predictor of position—but at a much earlier stage. But in order to do so, we must assume that things are changing and make some other reasonable assumptions.
We all know that things are constantly changing, so this isn't a particularly novel insight. We all agree that people are moving—trying to better themselves, trying to have a better life, or sometimes just trying to survive.
But how many times do we see this assumption thrown away in the realm of public policy? ALL THE TIME.
For example, I may read an article about how raising the minimum wage (MW) would affect those who currently earn the minimum wage. Most of the articles will say this is helpful—people making minimum wage would certainly benefit from more income.
But did you see it? Did you see how we took a snapshot in time and enshrined some person as a making the minimum wage and crafted a policy around the snapshot? This is *precisely* what we should avoid.
Derivative thinking wouldn't focus on the snapshot. (motionless "position"). Instead, it would focus on "velocity" (rate of wage growth), or even more appropriately—"acceleration." (the rate at which new skills are acquired, perhaps).
If we adopted a more powerful way of thinking about this, the public discussion about the minimum wage would look very different. Perhaps we'd ask questions like these:
If we asked these kinds of questions, we'd see that in increase in the MW is likely to be helpful only the short term, but actually detrimental in the longer term. I saw a firsthand case of this when I was in the Air Force.
There was a time in the early 2000s when the Air Force was having some difficulty retaining enlistees. The economy was taking off after the recessions of 2001 and 2003, and the personnel structure was getting a little unbalanced. In the past, the Air Force had utilized cash re-enlistment bonuses to retain people, because these bonuses could be narrowly tailored to particular ranges of seniority and skill specialties. Unfortunately, the bonuses are expensive and a tough sell to Congress.
The Air Force elected to try a more nuanced approach. Instead of just giving lots of E-4s a cash incentive, they decided to provide them a career incentive. The bar for promotion was lowered, and suddenly the Air Force was awash with newly minted E-5 Staff Sergeants.
While this promotion had the foreseeable short term effects of improving retention, it also had the foreseeable—yet unforeseen—consequence of disrupting the rank structure. With so many E-5s now in the force, there were no longer enough supervisory roles to accommodate all of them. As a result, many E-5s had no supervisory responsibility at all. They were, practically speaking, performing the exact same job, but at higher rank.
Most significantly, the large number of E-5s did not correspondingly increase the number of available E-6 positions. By making it much easier to be promoted to E-5, the Air Force had made it much more difficult to be promoted to E-6. For most who were promoted in this wave, the result was often a net negative. In return for having one or two year's additional pay and benefits for the higher grade of E-5, the were forced to remain E-6s for an additional three or four years and forfeit the benefits of promotion to E-7.
Generally speaking, skill and wage can extend downward but not upward. You can work fast food with an MBA, but you can't do teach at business school with only food service experience. This seems obvious, but it has important ramifications for the minimum wage.
If a person wishes to find employment at a wage of $8/hr, he will be competing primarily against with those whose wage rates are lower. If someone can work for $10/hr, they are not likely to be looking for a job at the lower wage. So let us consider first the pool of labor available in an unregulated market that will work for $8/hr or less.
What happens if by decree that minimum wage is enacted and raises the wage to $12/hr? There are two effects: upon the quantity of labor supplied, and the kind of labor available in the market. By raising the wage, a much larger section of the labor market is brought to bear at the level. Instead of competing against those whose skill commands up to his wage of $8, our poor laborer now must compete with those whose skill can command a wage of up to $12. Since the employer must pay the $12 regardless who is hired, whom will he hire? Will he hire the $12 laborer and pay him $12, or will he hire the $8 laborer and pay him $12?
We can see how a higher MW will increase unemployment among unskilled laborers. It's worse than that, though.
Unskilled labor becomes semi-skilled or skilled by two means: formal education, and labor experience. The latter of these two is by far the larger contributor towards actual job skills of all kind. It is "practical" knowledge that delivers value; theoretical knowledge is often of very little economic value. When fewer people are working, fewer people are acquiring job experience and progressing in skill development. Overall productivity growth for the economy is stagnated. This is our present situation, with labor participation at a 30-year low.
There is an apparently separate, yet related issue in that of welfare assistance, of which unemployment benefits are one kind. Unemployment benefits have a similar effect as the minimum wage-but in an opposite direction. We can see this when we approach the analysis with a focus on the margin—the intersection where things are changing.
Unemployment benefits have a value to a potential laborer. But because that laborer cannot both work for income and collect benefits, he must choose between them. The presence of welfare or unemployment benefits distorts this value in favor of not working.
Consider if the choice was between working for $400/week or collecting benefits of $100 per week. The former is working just above the minimum wage, the latter not working at all. What is the value of the job? $400 a week? NO. It is the marginal value—the difference between working and not working. The job is now only worth $300 a week, because the laborer would have to forfeit $100 a week to collect the $400 pay of the job.
By now it should be clear how raising the minimum wage and unemployment insurance work against each other. The MW increase attempts to increase the marginal value of labor, but offsetting that is the nonzero pay for not working at all. Worse yet, the elevated MW increases the number of people not working and collecting some kind of public assistance.
These policies of minimum wage and unemployment insurance offer short term benefits to a small number of people, but are net negatives through the larger economy.
Laborers in the market for the most part to do not remain unskilled. They acquire skills and advance in wage as they gain experience and knowledge. Thus it is important to have as many people remain in the workforce as possible. For most people, working an unskilled labor job is a brief moment in time as they are transitioning into the workforce. Our present policies create disincentive to progress beyond being unskilled, or to even work at all.
Moreover, they create a punishment for those who do attempt to increase their skills beyond a given point. We return to our laborer choosing between working for $400 a week and not working for $100 per week. It turns out that if he should increase is income to $600 per week, he would actually forfeit some additional assistance that would result in a net reduction in income. The passage of these so called "cliff events" on ascension of wage and income is a well-documented phenomenon. Indeed, several US states have welfare benefits that are greater than work! The more generous are the welfare benefits, the greater is the economic punishment for attempting to leave their income bounds. Those in poverty are meant to be kept there. Those who are dependent are not to be allowed independence.
Derivative thinking would foresee these kinds of problems. Derivative thinking would seek to reduce the "cliff events" that undermine skill growth and labor productivity. It would prevent the perverse incentives to foreswear work and remain an idle burden on the economy.
While the motives of those who advocate for welfare state policies are sincere, sincerity is a much-overrated quality. What matter is whether or not the policies are actually helpful to 1)the individuals in the long run or 2) the nation as a whole. These policies fail by both measures.
There are smarter ways to help people who need some kind of public assistance. Stay tuned.
You've perhaps seen or heard the ads. But is this a good idea? Is this really something that is "completely different" than the Whole Life insurance that Dave Ramsey and Suze Orman disparage as a bad deal?
No, it's not completely different. Unfortunately, the way that it's similar also is what makes it a bad deal. Consider this chart showing how "Policy 3" is such a wonderful thing according to author of the book that advocates this technique:
The policy shows someone in good health purchasing it at age 35. Like all policies other than Term Insurance, this plan combines the insurance with an investment aspect. It is this investment that builds "cash value."
I will copy some of the sales spiel here for rebuttal:
Getting back to Policy 3, you'll notice several interesting items. First, look at the circled amounts on the line for Policy Year 1. At the end of the very first year, Policy 3 has almost eight times more cash value than in Policy 1 (the policy with no riders at all). A properly applied Paid-Up Additions Rider and term rider provide that powerful super-charging effect.
Now check out the circled amount on the line for Year 4. The PUAR and the term riders have caused Martin's annual cash value increase to exceed his annual premium beginning in the fourth year – one year earlier than Policy 2, and three years earlier than Policy 1. (His $12,337 cash value increase is greater than his $12,000 premium.) Go, Martin!
It's true that Policy 3 builds much more cash value than Policy 1. But this is like pointing out how a broken arm is so much better than terminal cancer. This is one of the many fallacies you'll encounter with this—the idea that something being better than something else means that is "good." Losing 4% instead of 10% is better, but it's still a loss, and not good when the idea is gain.
Look again at the cash value in Year 4. The total cash value is $43,608. Now, "Martin" has paid $48,000 in premiums over that four year period. Now, depending on the cost of the "insurance" aspect of these policies, the return of the "investment" portion can vary a lot. This is where they deceive you. The return on the "investment" goes up as the cost of the "insurance" aspect goes up. The more you overpay for the insurance, the better the "return" on the investment part.
Let's demonstrate this by exploring two extreme cases. Let's say that "Martin" is paying $100 a month for the "insurance" part, so his "investment" part is paying in $900/month or $10,800 per year. After four years, Martin has paid in a total of $43,200. His total cash value from the non-insurance part is $43,608. This calculates to a yearly rate of return of 0.48%. $100 a month buys a LOT of term insurance for a healthy 35 year old, so this is still somewhat overpriced insurance.
Let's crank up the cost of the "insurance" part. Instead of paying $100 a month for insurance, let's make it $300/mo, with the other $700/mo going to his "investment' in building cash value. After four years, he's now paid in $9600 for insurance and $33,600 for "investment" to get the same cash value of $43,608. This equates to an excellent 12.83% annual return.
But that return is bogus, because you had to get ripped off on your insurance to get it! For a healthy 35 year old, $300 a month is several million dollars worth of coverage in term insurance (about $4million). Whole life? About $400,000. TEN TIMES less insurance coverage.
In order to get the 12% annual return in the "Bank on Yourself" scenario at year 4, we had to pay 10x more than we needed to for life insurance. If we return to the less-crazy premium of only $100/mo, we can see how investing in term insurance is superior. Had "Martin" invested $900/month for four years in something getting a modest 5% yearly return, he'd have $47,713 instead of $43,608.
We return to the sales pitch:
Your reward for patience in the early years of your policy is a growth curve that gets steeper every year you keep the policy. Even the supercharged policies used for the Bank on Yourself concept grow more slowly in the early years. It takes a while for your cash value to equal the premiums you paid, though from day one, your premiums are immediately providing you with the full death benefit of your policy and the peace of mind this brings.
Go back to the chart and look at the line for Year 20 in Policy 3. Beginning this year, Martin's cash value increases by more than twice the amount of premium he pays ($26,077 cash value increase, compared to $12,000 premium paid). And beginning in year 30, his cash value increases by more than three times his premium ($37,994 cash value increase, compared to $12,000 premium paid.) Martin's doing his happy dance now!
The bold is in the original. Because of compounding interest, *any* investment should have a growth curve that gets steeper with each year. The question is how fast does it get steeper, and from where does it start?
Let's indeed go back and look at Year 20. The total cash value at the end of 20 years of payments is $349,956. To get this amount, Martin has "invested" no less than $900 a month for 20 years. His annual return on this investment is 4.52%. This is not too bad, but it's barely beating inflation. He'd could instead invest with very low risk and achieve 6% or better. And even a small percentage change matters a lot. Going to 6% would give Martin $415,837. At 8%, he'd have $530,118. At the historical stock market average of about 10%, he'd have $683,432.
It's bogus to compare the "cash value increases" because the annual gain in a long-term investment is overwhelmingly a product of the previous years' contributions and gains. Who cares if the "gain" after 20 years goes up $26k—Martin has already invested $216,000! A "gain" of $26k in cash value isn't necessarily impressive in year 20. After all, if Martin had invested in something else that returned 8% his gain in year 20 would be about $50k—almost DOUBLE what the "BoY" program would give him.
Finally, there's the 40 year point. At this point, Martin has accumulated $1,139,545 in cash value inside the policy. He's paid in $432,000 over 40 years. He return per year remains at about 4.27%-- even worse that it was at year 20.
I've illustrated thus far that the "cash value" even a souped-up Bank on Yourself insurance scheme is a poor return relative to other investment options. But here's the final nail in the coffin. You cannot compare cash value to cash.
Accessing the cash in the life insurance policy requires me to either 1) surrender it and forfeit all coverage for death benefit, and 2) borrow against the cash value. When you surrender it, you will have to pay fees, repay any loans, and pay any unpaid premium. So you're not going to get all the "cash value" out of the policy. Then, we you DO get the money from it, all money over and above what you actually paid in is considered taxable income, so you'll pay your income tax rate on top of that. This is all *after* you've earned a pretty meager return on investment.
If you borrow against the policy, you will have to pay it back (with interest). Yes, after paying you only 4% or so for the right to use your money, the insurance company will loan you back your own money and charge you for it! What's worse is that if you die with any loans outstanding, the death benefit goes to repay the loan first. So if you have $100k in outstanding loans, the balance would be repaid from the death benefit.
A quick note on insurance: a lot of people don't know how insurance companies work, but it's really rather simple. Insurance companies collect a lot of money, invest that money in relative safe investments to make money. Insurance companies pay actuaries big money to use advanced math to manage the flow of money in and out, which is the key to insurance. Since insurance companies can't make riskier investments, then can't achieve more than 4%-6% return on all their invested capital over the long term. Which means that the only way they can offer a client more than that return on investment is for them to lose money!
There are ways to use probabilities to game this out. I can offer you a 20% return on "investment" in building cash value, but if there's only a 10% chance of you getting all that cash value out, then the real actual risk to the company is 2%. (10% of the 20%). Insurance companies pay very close attention to these probabilities, carrying them out to 6 or 7 decimal places, because when you are talking about very large numbers, even tiny changes in probability matter a lot.
Large numbers and small probabilities—those are the essence of insurance. Keep in mind that Wal-Mart generates billions in profit every year with less than 3% actual profit margin. Over a long term, an insurance company may make only 3% on its investments, and pay out 1% in claims. That modest 2% residual can become billions in profit when applied to a large pool of money over a long period of time.
If you truly wish to "bank on yourself" then don't do it with overpriced insurance schemes that shortchange you multiples of thousands of dollars. Instead, be your OWN investment advisor and only let insurance be insurance.
In yet another illustration of how foolhardy are so many government policies, we learn now that there is a vicious wage cap in Obamacare so severe that earning even $1 more than the cutoff could cause a theoretical increase in insurance cost of up to $20,000.
I will direct your attention to the excellent commentary here on the recently release CBO report. It is devastating to the Obama admin to have the non-partisan CBO report such strongly negative findings as the likely future effects of Obamacare upon our economy.
Try to contain your utter befuddlement that the not-very-witty gentleman in the video below is Chairman(!) of the Council of Economic Advisers in the White House.
Suddenly, the terrible economic policies of this admin start to make more sense.
If you are a DIY kind of guy like me, you probably own a reasonable collection of power and hand tools. Some are great, some not so great. You probably have tools you regret cheaping out on and some you probably overspent on. I have.
Whether you already have a good amount of tools (and will end up buying more eventually), or own very few and are looking to expand, here are some points to consider. This is the good judgment that comes from "experience"-- which of course comes from bad judgment.
Disclaimer: this may not apply if you use your tools professionally, where time is money.
So without further delay, here's a list of general principles for tool acquisitions:
Here's an example of where I went cheap; I have an air compressor that is "oilfree" and whose motor directly drives the actual compressing cylinder. It is loud and obnoxious. It will probably only last about 500 hours or so before it burns out. But it costs half of what a nice oil-lubed, belt-drive compressor would cost, and my infrequent usage will take decades to hit 500 hours of compressor usage. I can replace the compressor and start the clock all over again and STILL not have spent more money than buying the nicer compressor the first time.
On the other hand, I learned the hard way to buy the nicest wire cutters you can find. Cheap ones will be made of softer steel and have blades that don't align properly. The soft still gets nicked and even if the edges align properly, you'll end up with a gap that prevents clean cutting.
Generally speaking, buying something middle of the road will cause you to end up skimping when you should have splurged, or overpaying for a high-end piece when a cheap junker would have worked just fine.
Listening to Dave Ramsey on the radio, I heard a woman call in and ask how she might divide up an inheritance among the college funds for her three kids. Dave gave her a good, principled answer, but there is a way that you can go beyond principles and actually calculate what share of the money each kid will need.
Let's say that you inherit $100,000 and you have three kids-- one aged 16, another 14, and another 11. How can you divide up the $100k so that when each of the kids is 18 that they would have about the same amount of money saved for college?
For purposes of illustration, we'll assume that each of the kids' college savings is invested in the same thing and will earn the same rate of return over time. Though if you follow the example below, you'll be able to account for different rates of return for each kid's account.
What we have here is a basic time value of money problem, albeit with some complexity in that there are three interrelated problems.
The first thing we want to do is think in terms of factors, or percentages. That way, it doesn't matter exactly what the lump sump turns out to be, we will now how to divide it proportionally to get what we want.
Then we need to introduce the element of time. We need to figure out how much INequality we need to do to account for the different amounts of time. How do we allocate a total based on the different times available for the kids' college funds to grow? How much do we discount the pre-growth values so the values end up being the same?
We can use a basic time value equation to solve for the discounted factor for each. Let's take the 16 years old as an example. His savings will only have two years to grow. If we assume 8% per year (a reasonable assumption over the long term, less so in the short term), we can solve. N is the number of periods (years before they go to college):
PV= FV * 0.8573, or 85.7%
The 16 year old kid needs about 85.7% of what his 18 year-old self will need to go to college. That makes sense.
We repeat for the 14 year old Kid:
The 14 year old will need to have 73.5% of what is 18 year-old self will need to go to college.
Finally, the 11-year old:
The 11-year old kid needs to have 58.35% of his total college expenses in savings to he'll have 100% at age 18.
So we now know the relative weightings for the three kids: 85.7%, 73.5%, and 58.35%
How do we translate that into a proportion for allocation of a lump sum?
To weight them, we can first just add them all together in decimal versions to get a total of 2.18. Then we take each kid's factor divided by the total to normalize it
16YO: 0.857/2.18= 0.391, or 39.1%
14YO: 0.735/2.18= 0.337 or 33.7%
11 YO: 0.5835/2.18= 0.268 or 26.8%
To make sure each kid has roughly 33% of all the windfall, we need to allocate the percentages as above.
Let's check out work to see if this makes sense for a windfall of $100k.
The allocation says we should allocate to the 11 year old $26,800 in a college fund. Left to grow at 8% for 7 years, this amount becomes $45,931 at age 18.
What do we get if we allocate $33,700 to the 14 year old and let it grow for four years? $45,848
The 16 year old will have $45,606 saved for college in two years.
Now there's some rounding error (magnified by repeated rounding) that produces a couple hundred dollars variance between the three kids, but this should suffice to illustrate how you can account for the different ages of children in allocating a windfall towards college savings.
Hope this helps!