Category Archives: economics

Why Warren Buffett pays 0% social security tax

Social Security is billed along with Medicare (health care for the poor) as an anti-flat tax called FICA where middle class workers pay 7.65 -15.3%, and rich people pay essentially 0%. The reason that Warren Buffet and other rich people pay 0%, on a percentage basis, far less than their secretaries, is that there is a FICA cap of $127,200 currently, and he earns far more than $127,200. Buffett’s secretaries pays 7.65%, or which 6% approximately is social-security payment, and the rest Medicare. Buffett’s company then matches the 7.65% — a situation that applies to virtually every employee in the US.

A self employed person though, a gardener say, pays both the employee and employer portion or 15.3%. The same $127,200 cap applies, but since few gardeners make more than this amount, they are likely to pay 15.3% on all earnings, with no deductions. FICA really socks the poor and middle class, and barely touches a rich man like Buffett. This is the tax-inequality that most needs addressing, in my opinion, and one I have not heard discussed.

A short history of FICA

A visual history of FICA rates (right), and of the salary cap (left). Medicare contributions were added in 1966.

As I write this, there is a debate about tax reform that mostly involves income tax, but not at all FICA. Income tax could be improved, in my opinion, and should be. We could remove some exemptions that are being abused, and we should lower the general rates, especially for foreign-earnings, but the current income tax isn’t that bad, in my opinion. Buffett likes to brag about the high rate he pays, but it’s not a bad rate compared to the rest of the world. And Buffett benefits from a lot of things we don’t. His income is taxed at a lower rate than a worker’s would be since most of it is unearned. And, like most rich folks, he has exemptions and deductions that do not apply to most. He can deduct cars, private airplanes, and interest; most folks don’t deduct these things since they don’t spend enough to exceed the “standard deduction”. I’m happy to say these issues are being addressed in the current tax re-write.

The current, House version of the GOP tax proposal includes a raise in the standard deduction and a cap on interest and other deductions. There is a general decrease in the tax rate for earnings, and a decrease for earnings made abroad and repatriated. I’d like to see tariffs, too but they do not appear in the versions I’ve seen. And I’ve very much like to see a decrease in the FICA rate coupled with a removal of the salary cap. Pick a rate, 4% say, where we collect the same amount, but spread the burden uniformly. Why should 7.65%-15.3% or the workmanship wages got to the window, the orphan, and healthcare of the poor, while 0% of Buffett’s go for this?

Some other tax ideas: I’d like to see shorter criminal sentences, especially for drugs, and I’d like to see healthcare addressed to reduce the administrative burden.

Robert E. Buxbaum, November 17, 2017. In the news today, the senate version puts back the tax exemption on private jets. The opposite of progress, they say, is congress.

The energy cost of airplanes, trains, and buses

I’ve come to conclude that airplane travel, and busses makes a lot more sense than high-speed trains. Consider the marginal energy cost of a 90kg (200 lb) person getting on a 737-800, the most commonly flown commercial jet in US service. For this plane, the ratio of lift/drag at cruise speed is 19, suggesting an average value of 15 or so for a 1 hr trip when you include take-off and landing. The energy cost of his trip is related to the cost of jet fuel, about $3.20/gallon, or about $1/kg. The heat energy content of jet fuel is 44 MJ/kg or 18,800 Btu/lb. Assuming an average engine efficiency of 21%, we calculate a motive-energy cost of 1.1 x 10-7 $/J, or 40¢/kwhr. The amount of energy per mile is just force times distance: 1 mile = 1609 m. Force is calculated from the person’s weight in (in Newtons) divided by lift/drag ratio. The energy per mile is thus 90*9.8*1609/15 = 94,600 J. Multiplying by the $-per-J we find the marginal cost of his transport is 1¢ per mile, virtually nothing.

The Wright brothers testing their gliders in 1901 (left) and 1902 (right). The angle of the tether reflects the dramatic improvement in the lift-to-drag ratio.

The Wright brothers testing their gliders in 1901 (left) and 1902 (right). The angle of the tether reflects a dramatic improvement in lift-to-drag ratio; the marginal cost per mile is inversely proportional to the lift-to-drag ratio.

The marginal cost for carrying a 200 lb person from Detroit to NY (500 miles) is 1¢/mile x 500 miles = $5: hardly anything compared to the cost of driving. No wonder airplanes offer crazy-low, fares to fill seats on empty flights. But this is just the marginal cost. The average energy cost per passenger is higher since it includes the weight of the plane. On a reasonably full 737 flight, the passengers and luggage  weigh about 1/4 as much as the plane and its fuel. Effectively, each passenger weighs 800 lbs, suggesting a 4¢/mile energy cost, or $20 of energy per passenger for the flight from Detroit to NY. Though the fuel rate of burn is high, about 5000 lbs/hr, the cost is low because of the high speed and the number of passengers. Stated another way, the 737 gets 80 passenger miles per gallon, a somewhat lower mpg than the 91 claimed for a full 747.

Passengers must pay more than $20, of course because of wages, capital, interest, profit, taxes, and landing fees. Still, one can see how discount airlines could make money if they arrange a good deal with a hub airport, one that allows them low landing fees and allows them to buy fuel at near cost.

Compare this to any proposed super-fast or Mag-lev train. Over any significant distance, the plane will be cheaper, faster, and as energy-efficient. Current US passenger trains, when fairly full, boast a fuel economy of 200 passenger miles per gallon, but they are rarely full. Currently, they take some 15 hours to go Detroit to NY, in part because they go slow, and in part because they go via longer routes, visiting Toronto and Montreal in this case, with many stops along the way. With this long route, even if the train got 200 passenger mpg, the 750 mile trip would use 3.75 gallons per passenger, compared to 6.25 for the flight above. This is a savings of 2.5 gallons, or $8, but it comes at a cost of 15 hours of a passenger’s life. Even train speeds were doubled, the trip would still take more than 7.5 hours including stops, and the energy cost would be higher. As for price, beyond the costs of wages, capital, interest, profit, taxes, and depot fees — similar to those for air-tragic – you have to add the cost of new track and track upkeep. While I’d be happy to see better train signaling to allow passenger trains to go 100 mph on current, freight-compatible lines, I can see little benefit to government-funded projects to add the parallel, dedicated track for 150+ mph trains that will still, likely be half-full.

You may now ask about cities that don’t have  good airports. Something else removing my enthusiasm for super trains is the appearance of a new generation of short take-off and landing, commercial jets, and of a new generation of comfortable buses. Some years ago, I noted that Detroit’s Coleman Young airport no longer has commercial traffic because its runway was too short, 1051m. I’m happy to report that Bombardier’s new CS100s should make small airports like this usable. A CS100 will hold 120 passengers, requires only 1463m of runway, and is quiet enough for city use. The economics are such that it’s hard to imagine Mag-lev beating this for the proposed US high-speed train routes: Dallas to Houston; LA to San José to San Francisco; or Chicago-Detroit-Toledo-Cleveland-Pittsburgh. So far US has kept out these planes because Boeing claims unfair competition, but I trust that this is just a delay. As for shorter trips, the modern busses are as fast and energy efficient as trains, and far cheaper because they share the road costs with cars and trucks.

If the US does want to spend money on transport, I’d suggest improving inner-city airports. The US could also fund development of yet-better short take off planes, perhaps made with carbon fiber, or with flexible wing structures to improve the lift-to-drag during take-offs and landings. Higher train speeds should be available with better signaling and with passenger trains that lean more into a curve, but even this does not have to be super high-tech. And for 100-200 mile intercity traffic, I suspect the best solution is to improve the highways and busses. If you want low pollution and high efficiency, how about hydrogen hybrid buses?

Robert Buxbaum, October 30, 2017. I taught engineering for 10 years at Michigan State, and my company, REB Research, makes hydrogen generators and hydrogen purifiers.

Detroit 1967 to 2017: unemployment comes down, murder rate doesn’t.

Almost 50 years ago today, July 23, 1967 white policemen raided an unlicensed, “blind pig” bar in a black neighborhood, the 12th street of Detroit, and the city responded with four days of rioting, 43 killings (33 black, 10 white), 2509 stores looted, and over 1000 fires. In 2017, at last the city is beginning to show signs of recovery. By 2015 the city’s unemployment had gone down from about 20% to 12%, and  in the first six months 2017, the firs six months of the Trump presidency, 2017 it’s gone down again to 7 1/2%. It’s not that 7 1/2% unemployment is good, but it’s better. Per-hour salaries are hardly up, but I take that as better than having a high average salary at very low employment. As a point of reference, the unemployment rate in Detroit in 1967, before the riots was 3.4%. Within weeks, 150,000 jobs were lost, and anyone who could leave the city, did.

Detroit Unemployment rates are way down, but the city still looks like a mess.

Detroit Unemployment rates are way down, but the city still looks like a mess.

Another issue for Detroit is its uncommonly high murder rate. In the mid-80s, Detroit had the highest murder rate in the US, about 55 murders per 100,000 population per year (0.055%/year). As of February 1, 2017, the murder rate was virtually unchanged: 50 per 100,000 or 0.05%/year, but two cities have higher rates yet. At present rates, you have a 3.5% of dying by homicide if you live in Detroit for 70 years — even higher if you’re male. The rate in the rest of the US is about 1/10th this, 0.005%/year, or 5 per 100,000, with a dramatic difference between rural and urban populations.

Murder rate in 50 cities with Detroit highlighted. From The Economist, February 2017.

Murder rate in 50 cities with Detroit highlighted, from The Economist.

One of the causes of the high murder rate in Detroit, and in the US generally, I suspect, is our stiff, minimum-penalties for crime. As sir Thomas Moose pointed out, when crime is punished severely, there is a tendency to murder. If you’re going to spend the next 20 years behind bars, you might as well try any means you can to escape. Another thought — the one favored by social liberals — is that it’s the presence of guns in the US encourages murder. It may, but it also seems to prevent crime by allowing the victim to defend himself or herself. And the effect on murder is not so clear, if you consider suicide as a form of murder. In countries like Canada with few guns, people kill themselves by hanging or by throwing themselves off high buildings. My hope is that Detroit’s murder rate will drop in 2017 to match its improved economic condition, but have no clear reason to think it will.

Robert Buxbaum, July 20, 2017. Here are some suggestions I’ve made over the years.

If the wall with Mexico were covered in solar cells

As a good estimate, it will take about 130,000 acres of solar cells to deliver the power of a typical nuclear facility, 26 TWhr/year. Since Donald Trump has proposed covering his wall with Mexico with solar cells, I came to wonder how much power these cells would produce, and how much this wall might cost. Here goes.

Lets assume that Trump’s building a double wall on a strip of land one chain (66 feet) wide, with a 2 lane road between. Many US roads are designed in chain widths, and a typical, 2 lane road is 1/2 chain wide, 33 feet, including its shoulders. I imagine that each wall is slanted 50° as is typical with solar cells, and that each is 15 to 18 feet high for a good mix of power and security. Since there are 10 square chains to an acre, and 80 chains to a mile we find that it would take 16,250 miles of this to produce 26 TWhr/year. The proposed wall is only about 1/10 this long, 1,600 miles or so, so the output will be only about 1/10 as much, 2.6 TWhr/year, or 600 MW per average daylight hour. That’s not insignificant power — similar to a good-size coal plant. If we aim for an attractive wall, we might come to use Elon Musk’s silica-coated solar cells. These cost $5/Watt or $3 Billion total. Other cells are cheaper, but don’t look as nice or seem as durable. Obama’s, Ivanpah solar farm, a project with durability problems, covers half this area, is rated at 370 MW, and cost $2.2 Billion. It’s thus rated to produce slightly over half the power of the wall, at a somewhat higher price, $5.95/Watt.

Elon Musk with his silica solar panels.

Elon Musk with his, silica-coated, solar wall panels. They don’t look half bad and should be durable.

It’s possible that the space devoted to the wall will be wider than 66 feet, or that the length will be less than 1600 miles, or that we will use different cells that cost more or less, but the above provides a good estimate of design, price, and electric output. I see nothing here to object to, politically or scientifically. And, if we sell Mexico the electricity at 11¢/kWhr, we’ll be repaid $286 M/year, and after 12 years or so, Republicans will be able to say that Mexico paid for the wall. And the wall is likely to look better than the Ivanpah site, or a 20-year-old wind farm.

As a few more design thoughts, I imagine an 8 foot, chain-link fence on the Mexican side of the wall, and imagine that many of the lower solar shingles will be replaced by glass so drivers will be able to see the scenery. I’ve posited that secure borders make a country. Without them, you’re a tribal hoard. I’ve also argued that there is a pollution advantage to controlling imports, and an economic advantage as well, at least for some. For comparison, recent measurement of the Great Wall of China shows it to be 13,170 miles long, 8 times the length of Trump’s wall with China.

Dr. Robert E. Buxbaum, June 14, 2017.

Solving the savings dilemma (how to have savings)

A few days ago, I wrote a post about the lack of savings in America, the social causes for it, and the damage it causes. I had some governmental suggestions, but suspect I didn’t emphasize that the main responsibility is personal: if you want savings, you’ve got to save.

Every rich person spends less than he earns. If you aspire to be rich, spend less on clothes than you can afford.

Every rich person spends less than he earns. If you aspire to be rich, spend less on clothes than you can afford.

If you want to have savings, it is up to you to spend less than you earn. If you don’t, you’ll never be rich, you’ll never have savings or net-economic worth, and you’ll always be strung-out over emergencies. Income and gifts won’t help if spending rises to match. At all incomes, the people who get richer are those who tailor spending to be less than earnings.

There is another personal honesty issue here, and a marriage issue too. If you spend more than you earn, someone will be cheated, and that person (your wife, husband, neighbor, friend) is likely to get mad. Earn $100 and spend $99.99, you can be honest and well liked. if you earn $1000 and spend $1000.01 and you will cheat someone you love sooner or later. Be an honest fellow and spend less. Clothes is a good place to start: say no to the fancy dress and the fancy wedding, and to fancy clothes in general. If you smoke, vaping can be a life and money saver. And try to avoid pot-smoking, at $400/oz that’s got to be a killer. And here are some water savers.

A good way to know if you are doing things right :Start a bank account, and check the balance and resolve to see it $10 higher at the end of the week than before. And that’s my two cents.

Robert Buxbaum, April 26, 2017.

Black folks have no savings (poor whites too)

The wealth of the mean American household has dropped significantly since 2007, a result of the general de-industrialization of America. It’s not that America has gotten poorer, but in the last 8 years we’ve increased the economic divide, enriching the richest few percent while leaving behind the working and bourgeoise classes. We are beginning to come back, but a particularly nasty legacy remains, especially among black families. Some 47% of black families have no liquid savings  — a far greater fraction than in 2007. The lack of savings also appears in white families (19%), and Hispanics (41%), but it’s most desperate among blacks.

College graduation rates have increased among black students, and along with the increase there has been an increase in salaries, but savings have declined. As of 2015, 22.5% of black students and 15.5% of Hispanic students had completed four years of college. This compares to 36.2% of white students, an inequality, but not a horrible one. By 2013, the average salary of a black college grad was somewhat over $1000/week, somewhat less than the average for whites, but enviable compared to the world as whole. The problem is that black workers manage to save very little compared to other ethnic groups, and compared to previous savings rates as shown by the graphic below. By 2013, the net worth of the median black family (savings, plus paid-off part of home and car) was a mere $11,000 (Pew Research Data, below), down from $19,200 six years earlier, and much lower than the net worth of white families (also down since 2007). Liquid savings among blacks are much lower — near zero — and this is just the mean. Half of all black families are doing worse.

Net worth disparity 2007 - 2011. Black folks are doing poorly and it's getting worse.

Net worth disparity 2007 – 2011. Black folks are doing poorly and it’s getting worse.

The combination of low savings and low net worth puts black folks at a distinct disadvantage to their condition six years earlier. Without savings, it is near-impossible to weather the loss of a job, or even to fix a car or pay a ticket, Surviving through a disease is basically a one-way ticket to the welfare office. Six years ago, when people saved more and prices were lower, problems like these were major annoyances. Now, a job loss or a major repair is a family disaster.

The growth of check-cashing services in black neighborhoods is a symptom, I suspect, of the lack of liquidity. A person without savings will not have a checking account. As such, he or she will not have a credit card or check cashing privileges.  The only way to cash a check will be via a for-fee service, and these tend to come at a steep cost (2-5%). People with savings accounts can cash checks essentially for free, and can usually borrow money by way of a credit card. People without savings can’t get approved. Black people and poor whites tend to use debit cards instead. They look and work like credit cards, but they incur fees upon use, and do not provide instant loans. When black folks and poor whites need quick cash, their options are the loan-shark or the pawn shop: high-cost options that take a giant toll on the family.

As mentioned above, black individuals and families have lower incomes than whites at all education levels. While racism, no-doubt plays a role, as best I can tell, the largest single cause seems to be family stability. Employed, college-educated blacks earn, on average, 95% as much as employed, college-educated whites — not great, but not bad. The real problem with black income is that black unemployment rates are higher, black education rates are lower, and single-parent families are significantly more common among blacks than among whites and Orientals. Roughly 40% of black families are single-mother, or mother+grandparent households compared to “only” 26% in the population generally. In both populations, the number of single parent households have increased dramatically in the last few years, a result I suspect of the government’s desire to help. The government gives more aid to a split-up couple than to one that stays together, but the aid brings with it long-term damage to net worth. A family with one parent will naturally have a lower-income and savings rate than a family with two. The lack of stability and savings that comes from having a single parent family, I suspect, has contributed to crime, births out-of-wedlock, and the tendency of blacks to drop out of college.

Black families don't benefit as much from college --in part a result of the choice of courses.

Black families don’t benefit much from college –in part a result of course choices, in part the result of borrowing. (Forbes, 2015).

One finds that do-gooders in the white communities want to eliminate check cashing businesses and pawn shops in a misguided desire to help the low-income neighborhoods, but the success of these companies tell me that they are needed. Though check services and pawn brokers take a nasty bite, urban life would be much worse without them, I suspect.

Another so-called solution of the do-gooders, is to tax savings and transfer the wealth to the poor. This form of wealth redistribution has been a cornerstone of the Democratic party for the last century. The idea of the tax is that it will transfer “idle wealth” from rich savers to poor folks who will spend it immediately. The problem is that great swathes of the nation don’t save at all currently; net worth is down all across the US — among white and black families both. Taxing savings will almost-certainly reduce the savings rate even further. Besides, savings are the stuff of self-determination and dreams — far more than spending, it is savings that allows a person to start a new business. One does not provide for the dreams of one group by taking them from another — particularly another group chosen to be immediate spenders. That is a route to community disaster, is seen by looking at Detroit.

As it is, many poor, inner city children do not see a path out via education. Detroit school attendance hovers around 50%, and business startups are lacking. As best inner city people can tell, the only ways out are sports, music, prostitution, crime, and the church. With higher savings rates and higher family stability, folks could start businesses, and/or take advantage of job opportunities that come along. People seem to think that wealth redistribution should help, but it just seems to reduce savings and family stability. Every effort to increase wealth redistribution only seems to make things worse in Detroit.  It sometimes seems that the only businesses in Detroit are check cashing, pawn brokers, churches, hair-salons, fast food, and medical marijuana — businesses that require little investment, but provide little community return too. Detroit has lost its manufacturing center, and now has more medical marijuana providers than groceries — a sad state of affairs.

The Check cashing services of south-eastern MI are concentrated in poor black and white neighborhoods.

The Check cashing services of south-eastern MI are concentrated in poor black and white neighborhoods.

In 2016, both presidential candidates touted major infrastructure projects, highways and the like, to help the inner city poor. In principle this can help, but I have my doubts. One basis of doubt: inner city youth do not have the training to build roads and bridges — they have barely the training to work at McDonald’s. For another thing, if the project itself isn’t needed, it becomes another form of income redistribution. There tends to be a lack of pride in doing it well, and the benefits are basically nothing. A major war could provide jobs, of course, but most sane people prefer peace. Trump has made the case for tariffs (closing off free trade) as a way to rebuild the industrial center of cities like Detroit. It’s an approach that I think has merit. He’s also suggested closing the border to low-wage, Mexican workers, and recently signed a bill that raised the minimum wage for foreign workers. This is expected to raise the price of California lettuce and NY hotel stays, but is likely to increase employment among low-skill Americans — blacks and poor whites. Small steps, I think, to solving a serious national problem.

Robert E. Buxbaum, April 21, 2017. I ran for water commissioner 2016 (Republican). I lost. I also have some infrastructure suggestions, including daylighting some rivers and adding weirs to improve water quality and stop flooding. If you like my ideas (or don’t) please provide comments.

The argument for free trade is half sound

In 1900, the average tariff on imported goods was 27.4% and there was no income tax. Import tariffs provided all the money to run the US government and there was no minimum wage law. The high tariffs kept wage rates from falling to match those in the 3rd world. Currently, the average tariff is near-zero: 1.3%. There is a sizable income tax and a government income deficit; minimum wage laws are used to prop up salaries. Most economists claim we are doing things right now, and that the protective tariffs of the past were a mistake. Donald Trump claimed otherwise in his 2016 campaign. Academic economists are appalled, and generally claim he’s a fool, or worse. The argument they use to support low tariffs was made originally by Adam Smith (1776): “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry.” As a family benefits from low cost products, a country must too. Why pay more?  How stupid would you have to be to think otherwise?

A cartoon from Puck 1911. Do you cut tariffs, and if so how much. High tariffs provide high wages and expensive prices for the consumer. Low tariffs lead to cheap products and low wages. Uncle Sam is confused.

A cartoon from Puck, 1911. Should tariffs be cut, and if so, how much. High tariffs provide high prices and high wages. Low tariffs lead to low prices for the consumer, but low wages. Uncle Sam is confused.

Of course, a country is not a family, and it is clear that some people will benefit more from cheap products, others less, and some folks will even suffer. Consumers and importers benefit, while employees generally do not. They are displaced from work, or find they must compete with employees in very low wage countries, and often with child labor or slave labor. The cartoon at right shows the conundrum. Uncle Sam holds a knife labeled “Tariff Revision” trying to decide where to cut. Any cut that helps consumers hurts producers just as much. Despite the cartoon, it seems to me there is likely a non-zero tariff rate that does not slow trade too much, but still provides revenue and protects American jobs.

A job-protecting tariff was part of the Republican platform from Lincoln’s time, well into the 20th century, and part of the Whig platform before that. Democrats, especially in the south, preferred low tariffs, certainly no more than needed to provide money for government operation. That led to a diminution of US tariffs, beginning in the mid- 1800s, first for US trade with developed countries, and eventually with third world as well. By the 1930s, we got almost no government income from tariffs, and almost all from an ever-larger income tax. After WWII low tariff reductions became a way to promote world stability too: our way of helping the poor abroad get on their feet again. In the 2016 campaign, candidate Donald Trump challenged this motivation and the whole low-tariff approach as anti- American (amor anti America-first). He threatened to put a 35% tariff on cars imported from Mexico as a way to keep jobs here, and likely to pay for the wall he claimed he would build as president. Blue-collar workers loved this threat, whether they believed it or not, and they voted Republican to an extent not seen in decades. Educated, white collar folks were uniformly appalled at Trump’s America-first insensitivity, and perhaps (likely) by the thought that they might have to pay more for imported goods. As president, Trump re-adjusted his threat to 20%, an interesting choice, and (I suspect) a good one.

The effect of a 20% tariff can be seen better, I think, by considering a barter-economy between two countries, one developed, one not: Mexico and the US, say with an without a 20% tax. Assume these two countries trade only in suits and food. In the poor country, the average worker can make either 4 suits per month or 200 lbs of food. In the developed country, workers produce either 10 suits or 1000 lbs of food. Because it’s a barter economy with a difference in production, we expect that, in the poor country, a suit costs 50 lbs of food; in the rich country, 100 lbs of food. There is room here to profit by trade.

The current state of tariffs world-wide. Quite a few countries have tariffs much higher than ours. Among those, Mexico.

Tariffs world-wide. While we put no tax on most imported products, while much of the world taxes our products rather heavily.

With no tariff, totally free trade, an importer will find he can make a profit bringing 100 lbs of US food to Mexico to trade for 2 suits. He can return two suits to the US having gotten his two suits at the price of one, less the cost of transport, lawyers, and middlemen (relatively low). Some US suit-makers will suffer, but the importer benefits immediately, and eventually US consumers and Mexican suit workers will benefit too. Eventually, US suit prices will go down, and Mexican wages up, We will have cheaper suits and will shift production to produce what we make best —  food.

In time, we can expect that an American suit maker will move his entire production to Mexico bringing better equipment and better management. Under his hand, lets assume his Mexican workers make 6 suits per month. The boss can now pay them better, perhaps 100 lbs of food and two suits per month. He still makes a nice profit, more than before: he ships two suits to the US to buy the 200 lbs of food, and retains now two suits as profit. Hillary Clinton believed this process was irreversible. “Those jobs are gone and they’re not coming back,” her campaign told CNN. She claimed she’d retrain the jobless “for the jobs of the future” and redistribute the wealth of the rich, a standard plank of the democratic platform since 1896. But for several reasons industrial voters didn’t trust her. Redistribution of wealth rarely works because, for example, the manufacturer can keep his profits off-shore, as many do.

While a very high tariff would stop all trade, but lets see what would happen with Trump’s 20% tariff. With a 20% tariff, when the first two suits come to the US, we extract 0.4 suits in tax revenue, but nothing on export. The importer still makes a profit, but it’s now 0.6 suits, the equivalent of 60 lbs of food. He can sell his suits for less than the American, but not quite as much less. If the manufacturer moves to Mexico he makes more money than by trade alone, but not quite as much. Tax is still collected on every suit brought to America — now 20% of the 3 suits per Mexican worker that the Boss must export. The American worker’s wages are depressed but he/she isn’t forced to compete with the Mexican dollar-for-dollar (suit for suit). In barter terms, he isn’t required to make 6 suits for every 100 lbs of food.lincoln-national-bank-internal-improvements-tariffs

Repeating the above for different tax rates, we find that, in the above fictional economy a 50% tariff in the maximum to allow any trade (or the minimum rate to stop trade completely): the first two suits might enter; but they’d be taxed at one suit, just enough to pay for the 100 lbs of food. There would be no profit for the importer, and he/she would stop importing. At 50% tariff, we would get no new goods, and we’d collect no new revenue – a bad situation. Lincoln’s “protective tariffs” of 1861 may have contributed to Southern succession and the start of the civil war. While there is a benefit to trade, it seems to me that some modest tariff (10%, 20%) is better for us — a conclusion that Trump seems to have intuited, and that many other countries seem to have come to, too (see map-chart above). As for the academic economists, I note that they also predicted that stock market crash should Trump be elected; it’s gone nearly straight up since November 8, 2016. For experts on money, I find that most economists are not rich.

Robert E. Buxbaum, March 27, 2017. I learned such economics as I have from my one course in economics, plus comic books like the classic “Once upon a dime” produced by the New York Federal Reserve. Among the lessons learned: that money is a distraction, just a more convenient way to carry around a suit, 100 lbs of food, or a month of work. If you want to understand economics, I think it helps to work things out in terms of barter. As

The game is rigged and you can always win.

A few months ago, I wrote a rather depressing essay based on Nobel Laureate, Kenneth Arrow’s work, and the paradox of de Condorcet. It is mathematically shown that you can not make a fair election, even if you wanted to, and no one in power wants to. The game is rigged.

To make up for that insight, I’d like to show from the work of John Forbes Nash (A Beautiful Mind) that you, personally, can win, basically all the time, if you can get someone, anyone to coöperate by trade. Let’s begin with an example in Nash’s first major paper, “The Bargaining Problem,” the one Nash is working on in the movie— read the whole paper here.  Consider two people, each with a few durable good items. Person A has a bat, a ball, a book, a whip, and a box. Person B has a pen, a toy, a knife, and a hat. Since each item is worth a different amount (has a different utility) to the owner and to the other person, there are almost always sets of trades that benefit both. In our world, where there are many people and everyone has many durable items, it is inconceivable that there are not many trades a person can make to benefit him/her while benefiting the trade partner.

Figure 3, from Nash’s, “The bargaining problem.” U1 and U2 are the utilities of the items to the two people, and O is the current state. You can improve by barter so long as your current state is not on the boundary. The parallel lines are places one could reach if money trades as well.

Good trades are even more likely when money is involved or non-durables. A person may trade his or her time for money, that is work, and any half-normal person will have enough skill to be of some value to someone. If one trades some money for durables, particularly tools, one can become rich (slowly). If one trades this work for items to make them happy (food, entertainment) they can become happier. There are just two key skills: knowing what something is worth to you, and being willing to trade. It’s not that easy for most folks to figure out what their old sofa means to them, but it’s gotten easier with garage sales and eBay.

Let us now move to the problem of elections, e.g. in this year 2016. There are few people who find the person of their dreams running for president this year. The system has fundamental flaws, and has delivered two thoroughly disliked individuals. But you can vote for a generally positive result by splitting your ticket. American society generally elects a mix of Democrats and Republicans. This mix either delivers the outcome we want, or we vote out some of the bums. Americans are generally happy with the result.

A Stamp act stamp. The British used these to tax every transaction, making it impossible for the ordinary person to benefit by small trade.

A Stamp act stamp,. Used to tax every transaction, the British made it impossible for ordinary people to benefit by small trades.

The mix does not have to involve different people, it can involve different periods of time. One can elect a Democrat president this year, and an Republican four years later. Or take the problem of time management for college students. If a student had to make a one time choice, they’d discover that you can’t have good grades, good friends, and sleep. Instead, most college students figure out you can have everything if you do one or two of these now, and switch when you get bored. And this may be the most important thing they learn.

This is my solution to Israel’s classic identity dilemma. David Ben-Gurion famously noted that Israel had the following three choices: they could be a nation of Jews living in the land of Israel, but not democratic. They could be a democratic nation in the land of Israel, but not Jewish; or they could be Jewish and democratic, but not (for the most part) in Israel. This sounds horrible until you realize that Israel can elect politicians to deliver different pairs of the options, and can have different cities that cater to thee options too. Because Jerusalem does not have to look like Tel Aviv, Israel can achieve a balance that’s better than any pure solution.

Robert E. Buxbaum, July 17-22, 2016. Balance is all, and pure solutions are a doom. I’m running for water commissioner.

Puerto Rico’s minimum wage and statehood

Puerto Rico is in deep trouble and it’s getting worse. Unemployment is at 12%, double the next worst state or territory (Alaska), tourism is down, and poverty is at 41%. Tourists have begun to go elsewhere in the Caribbean: Bermuda, Haiti, Jamaica and Cuba. The island is effectively bankrupt and would have filed for bankruptcy last year except that they legally can’t. But neither can they pay their bills. The territory will go into default in less than 2 weeks, on July 1, 2016 unless congress creates a new funding mechanism for them before then. Statehood would allow Puerto Rico to go bankrupt, but there is no way for statehood to be achieved by July 1.

Puerto Rico's minimum wage is vastly too high; here it is compared with other US states.

Puerto Rico’s minimum wage is vastly too high for its median wage. From Preston Cooper, Economics21.

While bankruptcy might help Puerto Rico short-term, as would a new line of credit, it is worthwhile to ask why Puerto Rico is in this bad shape. Why are they worse off than Guam, for example; Guam is far more isolated. Puerto Rico isn’t run particularly well, but it’s no worse than Guam or  Illinois. My first thought of what Puerto Rico should do differently is that they need to lower their minimum wage.

As the chart on the right shows, the wage of the average working Puerto Rican is very nearly the minimum wage. This is because, Puerto Rico’s economy is essentially tourism, and it competes for tourists with lower-wage Caribbean countries, Jamaica, Haiti, and Cuba. Neither Alaska nor Guam compete for tourist dollars with low cost alternatives. And Guam, in particular has a strong military presence; those are their main tourists. Competing for tourist dollars is a disaster for Puerto Rico that they could solve if they could lower their minimum wage. And a lower minimum would not cause people undue suffering because Puerto Rico is a place one can live cheaply. A single person may need to earn $8.50/ hour to live minimally well in Michigan, but his Puerto Rican cousin can get by on far less in Puerto Rico. With a lower minimum wage, tourism would be more attractive, and the government would not spend so much because they could pay their minimal-skill workers less. The net result is more Puerto Ricans would be able to find jobs, and the government would have a better chance to balance its books.

What prevents the territory from lowering its minimum wage is that it’s part of the US, and we set the minimum at $7.25/hour. Many people might prefer to work for less, but they can’t unless the federal government grants them an exemption. Without it, there is no obvious way for Puerto Rico to ever pay its bills.

Four years ago, in my first blog post, I suggested that Detroit should lower its $15/hour ‘living wage‘, a wage unduly burdened the city budget, and added to Detroit’s rampant unemployment and corruption. A year later, the city removed this barrier as part of bankruptcy, and saw significant improvementsI’m not alone in suggesting a lower minimum wage. The alternative is state-hood followed by immediate bankruptcy.

Robert Buxbaum, June 19, 2016.

Michigan, an emerging economy

Between 2009 and 2014, Michigan’s per-capita GDP grew at 14% per year, an amazing growth rate similar to that of an emerging, tiger economies. According tot the Bureau of Economic analysis, the only US states that grew faster were Texas and North Dakota, and these oil states were hit badly in the current year 2015-16.
GDPGROWTH

 

Unfortunately, Michigan remains relatively poor despite it’s growth. Its per-capita GDP, $20,263 (2016), lags behind even perennial backwaters like Vermont, Oklahoma, and Missouri. The wealth gap in Michigan is growing, as in an emerging economy, and the cities, e.g. Detroit and Flint, are known for high murder rates, and a large-scale bankruptcy.

Michigan population change, Detroit Free Press

Michigan population change, Detroit Free Press

Then there’s pollution and flooding. Our beaches close for e-coli after every major rain, and we recently found that the drinking water in Flint was contaminated with lead; it seems other MI cities have lead problems too. Add to this, that we’ve  had major floods, a result of mismanagement, cronyism, and rampant growth, and Michigan keeps looking more and more like Vietnam, China, and India.

Everything here isn’t third world, though. We replaced our hapless, ex-governor Granholm with a relatively competent (in my opinion) nerd, Rick Snyder. We’ve jailed the of worst crooks, e.g. Detroit’s walking-crime-wave mayor, Kwame Kilpatrick, and his father, “Pay-for-play”, and the corrupt city manager, Bobby Ferguson. Under the previous administration, the state population shrank. It is now growing slowly.

Flood of 2014; the view at 696 and Mound rd. It's just incompetence.

Flood of 2014; the view at 696 and Mound rd. It’s part incompetence and part growth.

 

We passed a needed roads bill. Taxes are high, but not as bad as Illinois, and even Detroit is beginning to look good, at least in the center city. Industry is coming back, and so is Michigan real-estate. Here are some of my ideas going forward: pay our teachers well, and don’t imprison for so long. Some ideas to keep us on the upswing.

Robert Buxbaum, February 23, 2016. I’m running to be the Oakland county water commissioner, by the way.