President Obama spoke recently about the “breathtaking greed” of Wall Street with the implication that it was this deadly sin that led to the financial crisis and recession. I find myself wishing he had been more specific.
“Greed” is one of those things that is very easy to accuse someone else of but hard to recognize in oneself. Almost always, the people we’re accusing of being greedy are making more money than we are. But what does it really mean to be greedy? (Continued)
I wrote earlier about how the universe is conspiring to keep children indoors and plugged into video games. Then, I was talking about how regulations and lawsuits and their effect on toys and playgrounds. Well, it isn’t only cool playgrounds that are falling victim to the War Against Fun. Halloween, that venerable staple of childhood, is next on the list.
There are little clues all around us. The Springfield, NJ Board of Education is banning Halloween costumes. Their official reason is that it doesn’t add any educational value, which may be true but is probably not really the reason. A similar phenomenon is happening in the DoD Elementary School here in Korea, but here it’s even lamer. Kids can wear costumes, but they have to be dressed as a historical figure, and they have to create a report to go along with whomever they’ve decided to dress up as. Adding homework to a Halloween costume sucks the fun right out of it. Teachers at the school are instructed not to call it “Halloween:” it is the “Storybook Parade” that just so happens to be celebrated on Oct. 31st. (Continued)
It's a good thing they didn't choose 95%
Everywhere you look nowadays, someone’s talking about the problem with income distribution in the U.S. There’s a sense that the “rich are getting richer and the poor are getting poorer.” The rally cry of the protesters on Wall St. is “We are the 99%!”
Nowhere is anyone really challenging the assumptions behind those statistics.
I got all of the following numbers from Emmanuel Saez’s compilation of income statistics up to 2007, found here. I suspect that a lot of people are getting their talking points from these data, but I can’t be sure because hardly anyone cites sources.
Facts: the richest 0.5 percent of Americans (with incomes of more than $632,000 per year) earned 19.3 percent of all income in 2007. The richest 0.1 percent (earning more than $2 million per year) earned 12.3 percent of all income in 2007.
Facts behind the facts:
1) Income statistics invariably aggregate people each year based on tax returns, but they don’t follow the same individuals. For example, it makes no difference to these statistics if the top 0.1 percent of income earners were the same people in 2007 as they were in 2006, 2005, etc.
2) The statistics go back to 1913 in this case. Now, we can rightfully assume that the top 0.1 percent of earners in 1913 are not the same as the top earners in 2007. Those 1913 earners are almost definitely dead. The completely human act of getting old and dying causes a problem for these types of statistics. We can assume that people earn more as they get older, and that someone just beginning their career will probably graduate in percentile as they gain more experience. The mere fact that people are traveling among the percentiles from year to year doesn’t bode well for the idea that there is a “class” of rich people that are getting more rich.
3) The statistics most often cited include wages, bonuses, exercised stock options and capital gains. In the fine print of Mr. Saez’s compilation of statistics, he says “because capital gains are such a volatile component and tend to be realized in a lumpy way, we focus primarily on series excluding capital gains. Series including capital gains are useful to assess the sensitivity of the results to including capital gains.” That hasn’t stopped people from using the capital gains data- more on this below.
4) For the purposes of those statistics, income is defined as market income before government transfers. That means before taxes and before any redistribution already on the books. Welfare, unemployment, Social Security- don’t get counted. Payroll, income, capital gains, property, estate taxes- don’t get counted.
What are the implications of the facts behind the facts?
First, that people earn more as they get older accounts for a great portion of the income distribution curve. The following example comes from Thomas Sowell’s The Vision of the Anointed:
Imagine a perfectly evenly distributed income system, where each person earned $10,000 a year from age 20 to age 30, and then got a $10,000 a year raise when they turned 30, and so on every 10 years until age 70, when he retires and makes no income. Each year this person spends $5,000 a year on subsistence and saves 10% of the remaining income for the future. When such a person turns 30, they will be making $20,000 a year and saving $1,500 a year. Their lifetime savings will be $5,000. When he turns 50, he will make $40,000 and have saved $45,000 over his lifetime. At age 70 he makes no income but has saved $125,000 over his lifetime.
This system seems to be perfectly fair. Every single person is on the same pay scale, they only get paid more for being more experienced. And yet, at any given moment, the following is true in this hypothetical society:
1) The top 17 percent of income earners earn five times more than the bottom 17 percent
2) The total savings of the top 17 percent of savers is 25 times that of the savings of the bottom 17%.
3) 17% percent of people control 45% of the wealth.
Each of those statistics is technically true, but together they are misleading. The top 17 percent I reference in each statistic aren’t necessarily the same people mentioned in the previous statistic- it matters if I’m saying income, savings or wealth. It’s also misleading that I’m talking about a specific moment in time. It doesn’t account for the fact that the bottom 17% of earners are not being treated unfairly, because they can expect to earn more as they get older.
Second important implication that might change your assumptions:
Counting capital gains, as Mr. Saez admits in the fine print, is tricky business. Capital gains that register on a large scale tend to be infrequent, like exercising stock options upon retirement, or selling an investment property. For wealthy people that make large sums of money this way, the vast majority can only expect to have a really large payout once in their lifetime. Another hypothetical situation: Imagine someone who has worked his whole life for a small business, accruing stock options and getting raises the whole time until he is an executive vice president. When he retires he makes around $100,000 a year. He also sells his stock options- his nest egg- and rakes in a bonanza of $2.2 million. For that year, he is in the 0.1 percentile of wealthiest Americans. It makes no difference to the statistics that he only earned that much income one time, and that for clarity of analysis it would probably be better to spread the stock option income over his entire working career and then adjust for inflation. The next year, he makes nothing except some income off of investments that he purchased with his $2.2 million. His neighbor down the street, however, is retiring this year and sells his restaurant for $2.2 million.
To the statistics, the man and his neighbor might as well be the same person. They are the 0.1 percentile of the richest people in the country, the richest of the rich.
Final important implication:
Income is counted before any government transfers. The curve would flatten somewhat once you factor in the already very progressive tax scheme and the benefits received by people in the lower percentiles, but of course it would still be a top heavy graph (it’s inevitable because people earn more as they get older).
More importantly, any further redistribution of income would have absolutely no effect on the curve, unless it simply discouraged rich people from exercising capital gains and making money. The stated purpose of those that favor “taxing the rich” is to make the distribution less top heavy, but more taxes wouldn’t even be counted. In fact, more redistribution would provide an incentive for lower income brackets not to make more money, which would have the opposite effect on the distribution.
To put it bluntly, the only way to fix the curve is to make everyone earn less money. Fair’s fair!
Some other stats that you aren’t likely to see on a cardboard sign in lower Manhattan:
1) If you use estate tax returns and the estate multiplier method, the wealth share of the top 0.1% of Americans controlled approximately 9% of the nation’s wealth in the year 2000. Sound like a lot? It was 12% in 1965, and 23% in 1930.
2) Once you exclude capital gains, the total share of the top 0.5% in capital income and dividends has been decreasing steadily since 1916. In 1931, the top 0.5% received 60% of the nation’s capital income, and 40% of the nation’s dividend income. In 2001 it was 12% and 5%, respectively. It 2006 it went back up a bit to 20% and 10%. Excluding capital gains is appropriate, by the way, as explained above.
3) In 2000, the top 0.1% by income excluding capital gains earned 60% of their income in wages, 25% in entrepreneurial income, and 12% in capital income. In 2007, the top 0.1% earned 40% in wages, 35% in capital income, and 28% in entrepreneurial income. Over the past decade, the richest of the rich have tended to be more and more people who earned their money off of capital income and entrepreneurial income. In 2007, our richest people were more likely than not to be people who got rich off of risking their own capital in job creating activities. In 2000 they were more likely to be people with big paychecks. That trend seems like a step in the right direction.
4) When looking at “wage income,” which is salaries including bonuses and exercised stock options, the 90-95 percentile earned about 10.5% of the nation’s total. That percentage has stayed between 9 and 11 percent for 80 years, with the high being 10.9% in 1938. These people are the most likely to bear the brunt of any additional redistribution taxes, because they probably don’t make enough to take advantage of capital flight.
5) Excluding capital gains, the bottom 99% of earners earned on average $8,000 a year in 1933, $30,000 a year in 1963, and $45,000 a year in 2007. Yes, that’s adjusted for inflation. There isn’t a percentile where real incomes haven’t increased over the past century.
6) When you add up the income, payroll, corporate income, gasoline, alcoholic beverage, tobacco, diesel fuel, air transport, excise, customs, duties, estate and gift taxes, the top 20% of earners paid 70.20% of their income in federal taxes in 2007. The bottom 20% paid 38.9%. Source: The Tax Foundation.
7) In 2007, the top 10% by income paid 70% of all income taxes. The top 50% paid 97.3% of all income taxes. The bottom 50% paid 2.70% of income taxes. If you say “we are the 99%,” than at least you paid the majority of income taxes: 62%. Good thing the rallying cry isn’t “We are the 95%,” because they only paid 41% of all income taxes. Source: The Tax Foundation.
The point isn’t that rich people aren’t really rich. The point is that statistics should be taken with a grain of salt. If you’re looking through the numbers for something to confirm what you’ve already concluded, it isn’t hard to find that perfect stat that will look good on your cardboard sign.
Herman Cain is starting to look like a contender, for better or worse. While I think he’ll fizzle out pretty soon, that’s what people said about Obama around this time in the last cycle. If he does end up winning the nomination, a huge “if,” the resulting election season will force America to reevaluate the tired doctrine of where black people fit into the political spectrum.
I don’t think it’s particularly helpful for conservatives to claim that black people have been “brainwashed” by the Democratic Party. There are some very real reasons why people of color have been wary of a platform promising states’ rights, unregulated markets and entitlement reform. Many people haven’t forgotten that the states’ rights argument was the primary defense of Jim Crow laws and slavery. To say that the black community is brainwashed recalls racist arguments about how some voters can’t really be trusted to know what’s good for them. It’s an excuse for why you haven’t won their support instead of a pitch for their votes.
If the “brainwashed” argument has hints of racism, so does the “Uncle Tom” attack, which is increasing in volume as Herman Cain gets more and more attention. What’s particularly offensive is when white people drag it out- as if it’s appropriate to accuse someone of being a traitor to their race on behalf of that race. When a white television host like Joy Behar has someone like Harry Belafonte as a guest for the sole purpose of bashing Herman Cain by proxy, it’s a calculated decision to attack someone based on racial identity. Liberals seem to be personally offended that there’s a successful black man out there that isn’t acting the way he’s supposed to, and he’s the racist one.
The law under slavery and Jim Crow defined black people as anyone with any black ancestors, and ever since Americans have been struggling with a really silly definition of what it means to be black. With relatively low instances of intermarrying and very little post-slavery African immigration, the ludicrous definition worked for a while. Now, it doesn’t. President Obama is half-white, and he doesn’t have any ancestors that were slaves in America. Those facts shouldn’t define him, but we also shouldn’t assign him an imagined cultural heritage. He grew up in Indonesia with a white mother and Indonesian step-father and in Hawaii with his white grandparents. By his own account in his autobiography, he didn’t identify with the black community until college in Los Angeles and Manhattan- hardly the South under Jim Crow. Herman Cain grew up in Georgia, the son of a chauffeur and a chamber-maid. He can almost certainly trace his lineage back to slavery (maybe it’s wrong for me to assume). Both men found success in America through talent, hard work, and luck. They have remarkably different political ideas. Why is it at all relevant which man is more “black?”
The counterargument is that all black people, regardless of their ancestry, are forced to go through life with black skin, therefore they inherit the cultural identity of “being black in America.” I don’t buy that argument, because it’s basically an argument that all people of color are predestined to a life of discrimination, which assumes as a corollary that the bulk of white people are still trying to oppress people of color. The president’s life is evidence to the contrary. I’ve never heard an anecdote from him where he missed an opportunity because of white oppression. It’s discouraging that this argument is very much in favor, as it sends a message to young people that they should expect to be victims. As the great orator George W. Bush once said, it is “the soft bigotry of low expectations.”
The good news is that for most people the color of Herman Cain’s skin, or Barack Obama’s skin for that matter, is turning into a footnote. They are evidence that we really are approaching a post-racial society. As the nation gets further away from the ugliness of our racist past, the importance of racial identity starts to fade. The last generation of black politicians were defined by what they had done in the Civil-Rights Movement. The Reverends Sharpton and Jackson have both made careers off of their history with Martin Luther King Jr. Fifty years ago the black community needed champions to finish the war against racism, but now those aging gladiators are dependent on convincing us that there are still battles to fight.
Of course, there’s still racism out there, I’m just questioning it’s relevance to mainstream politics. White racists still exist, but they don’t deserve legitimacy in political discourse. The existence of Neo-Nazis doesn’t mean that we haven’t made progress against fascism.
A hundred years ago, politics in America were dominated by the battle between WASPs and newly arrived Catholics and Jews. Politicians in all groups appealed to ethnic identities. Eventually, generations of intermarriage blurred the racial lines. I’m a product of that intermarriage- Irish Catholic on one side, WASP on the other, and a little bit of Jew from one great-grandparent. Never identifying with either group, I consider myself an American.
I should acknowledge that in the previous example, the only thing the Protestants, Catholics and Jews agreed on is that blacks should be left out altogether. The division between white and black is obviously a harder wound to heal. As we intermarry, and as the addition of other races dissolve the basic definitions of both of those words, future generations will have a hard time identifying with either category. My Irish great-grandfather could never have imagined that his descendent, with less than half Irish blood, would marry someone who was half German-Protestant and half Russian Orthodox (as is my wife). It would be even more astounding to a black man from the same time that there would be a black president, and he would be half Irish-American and half Kenyan.
This is truly an American success story. Where else in the world could such divisive wounds heal so quickly? I don’t think there’s another country where a member of a historically oppressed ethnic minority has become the head of state, except in places like South Africa where the oppressed group is actually the majority. The Settlement Act of 1701 is still the law of the land in the U.K., which means that a member of the royal family loses their claim to the throne if they marry a Catholic.
We are now two full generations from the Civil-Rights Era that saw the end of institutionalized racism in America, as in racism legitimized by law. That history still dominates the way black people participate in politics. I don’t imagine it will change overnight, but I do believe that in two more generations my grandchildren will find it odd that there used to be a division. That’s reason to be hopeful.
It’s time to acknowledge that the “Occupy Wall St.” protests are something. To write them off as silly hippies with too much free time is to underestimate their anger and passion. It isn’t easy to stay out on the streets for weeks in support of your cause.
Then again, let’s keep in in perspective. This is not Tahrir Square, or Tienanmen Square, or any other popular uprising that the protestors in Manhattan love to invoke. There are very simple differences: in both of those instances, and any others you can think of, the protests represented the political opposition in systems where the political opposition had no other outlet. We live in a society where the opposition is afforded plenty of power, and when a mainstream party is out of sync with popular opinion, elections have a way of changing the mainstream party (remember the “wackjob” Tea Party protests in 2009?).
The bottom line is that the protestors are not going to take over City Hall and shut down administration of NYC until they get a regime change, so let’s not draw too many parallels with Egypt. If anything, the protestors are politically aligned with the Democratic Party, which is the majority party even if they don’t want to admit it.
The most effective outcome of the protests would be for them to represent the beginning of a movement that would bring the Democratic Party further left- a sort of liberal Tea Party, if you will. That would mean working within the system, which at the moment doesn’t seem to be where they want to go with it, but it is a possibility on the horizon if they get organized. Getting organized would mean finally deciding on a political platform, not demands (they need to stop talking about “demands,” because they’re setting the bar too high. Can you imagine them actually getting a “demand” met? The government’s not going to make any substantive changes, no matter how long they stay there. I don’t think that President Obama is going to wake up one morning in February and say “we gotta get these people off the streets. I can’t believe I’m doing this- make the call. Free Bradley Manning.”).
So let’s think through some of the stated political positions of the protestors, and see which ones can stick:
1. “Undue influence of corporations is perverting the political process.”
This is probably the dominant theme, but it’s still not a coherent political message. Sure, they’re angry at corporations, but what do they propose should happen in the future? The best they could hope for is to create a national movement aimed at electing officials who are philosophically opposed to the Citizens United ruling with the hopes that future Supreme Court nominees are subject to that litmus test.
Instead, the protestors are simply shouting “corporations aren’t people.” I’ve written before about how this simply isn’t a defensible position, even though it has so much populist appeal. They’re basically saying that “a large group of people who pool their resources towards a common enterprise shouldn’t be able to use those resources in the political arena. The problem with corporations is they have diffused individual responsibility, their interests don’t necessarily align with the public’s, and their numbers make them too powerful. I’ve got an idea! We’ll affect change by spontaneously forming a large group of people. We’ll take care of each other by pooling our resources, and by maintaining solidarity we’ll diffuse responsibility. We’ll pool our resources and take care of each other. There’s power in numbers, they have to listen to us!”
Not to mention the other glaring inconsistency- the recent involvement of the IAW and Teacher’s Unions. The protestors were more than happy to accept their support, but the campaign finance laws that Citizens United overturned affected labor’s political involvement as well. If you argue that corporations pervert the political process but labor unions don’t, you’re not being fair.
2. “Wall St. needs to be held responsible for the recession.”
This is one that people can get behind. But once again, what do they want? More regulation? They already paid back the TARP money, so they can’t be mad about that. Do they want executives to be held legally responsible for poor decisions? That’s a possible position, but the way ahead would be to donate to legal funds that would attempt class action lawsuits, or something along those lines. You need to get smart about which CEOs deserve to be punished, because most will claim that they, too, were victims- they may have made poor decisions about creating/investing in/insuring mortgage backed securities, but when the crash happened many lost their companies and a good deal of personal wealth. There’s already an disincentive for being a bad CEO.
I think the more likely situation is that they’ve been reading about the small number of investors like John Paulson who made money off the real estate crash and they think there’s some sort of conspiracy going on. They imagine that it must be criminal to get rich off this type of thing, so they think someone needs to pay. There’s no use in explaining that short sales add stability and liquidity to the market.
Either way, short of a guillotine outside of Goldman (which Roseanne Barr seems to advocate), I’m not sure what they’re proposing. This one probably isn’t going anywhere.
3. “There’s something wrong with the income inequality- rich people need to be taxed more.”
They’re definitely right that income inequality is off the charts compared with the past fifty years. If they’re looking to tax the rich more, then they should stop protesting because some very senior politicians already agree with them. They should just take that energy and start campaigning for Obama’s reelection, it would work better.
It’s interesting to think about the motivation behind this cause, though. Let’s say we taxed all income and capital gains above a million dollars at 90% (kind of a fifties model) and, surprise, it turns out that Milton Friedman was wrong all along and the tax actually works and we get a bunch of revenue from it. What do the protestors think we should do with the money? I doubt they’re going to say “pay down the debt” even though it’s the only sensible answer. They probably want more unemployment benefits along with universal health care and probably some environmental initiatives thrown in. You know, make it easier not to work. Because that’s going to help the economy.
An economist in the WSJ put it nicely, and I’m paraphrasing: “I have two teenage sons, who both had the summer off from school. One got a summer job, and he spent a good deal of his time working pretty hard. He is going back to school with some money in his pocket. The other son decided he didn’t want to work this summer, and he mostly played video games. If I made my one son give half of his summer money to his lazier brother, it’s hard to imagine that there would be more work going on in my house.”
The unemployment level in North Dakota is below 3%, and oil companies there say that they’re having trouble finding applicants for jobs that pay more than $60,000 a year. If this were the Great Depression, New Yorkers would walk to North Dakota if they had to. But it’s not, because moving for work is impossible, but it’s somehow manageable economically to devote months to camping out in Wall Street.
4. “Look how cool social media is, we can organize big parties, this is so much more interesting than what I was doing, which was absolutely nothing. I’ll keep coming down here and selling my glassware until it gets too cold to be fun anymore.”
This is probably the thinking of the majority. There are some true believers in the group- the real commies that are going without showering and sleeping in their filth- but I bet most of them are chilling out for a couple of hours a day, or until their buzz wears off. It’s the same social media phenomenon that has groups of teenagers in inner-cities organizing “flash robs,” where they converge on a convenience store and shoplift in unison. When you’re idly passing time on the internet most of the day, the opportunity to be a part of something that makes the leap from internet to reality is attractive.
Before the days of social media, we had AIM. I remember I would often come straight home from school and instant message with the same kids I just left. We liked AIM because we were braver on it- talking to girls was easier with the internet in the middle. Joe and I discovered the adrenaline rush of anonymity when we started the “secret society of trivial chaos,” which we imagined would be a network of people on AIM that would anonymously meet in person to pull a prank. It never got off the ground, because we were afraid of getting in trouble, but I bet that in an alternate universe where we had less parental supervision and a better social network at our fingertips we would have probably gotten something going.
We were probably 13 or 14 years old then. Now we are 26, and technology has caught up with our vision, but sadly the timing is off. We have jobs and families. We can’t afford to wear masks in a park. With 10% unemployment, I guess some people can.
Today I was able to meet, for the first time up close, Garrison Keillor. I have long been an admirer of not only Prairie Home Companion, but the Writer’s Almanac and Garrison Keillor’s books on poetry and America.
I think that Mr. Keillor’s perspective might be longer and more grand than my own.
We waited two hours in line for something that was only scheduled to last one hour. Garrison opted to extend his signing up until the moment that he absolutely had to leave in order to begin his speech at the nearby Poetry tent.
I was in khakis and a collared shirt, my wife in a sweater-dress. We were both sweltering and sticky from the humidity. Garrison Keillor wore a suit. (Albeit, he wore this suit with a pair of his trademark retro red Adidas sneakers) He neither sat nor separated himself from his guests with a table. He stood in front of his table and walked the line until one of the volunteers kindly asked him to return to the table area. Given the chance he would have done all of the work.
After two hours my wife, son, and I arrived at the front of the line. He asked my son’s name and my wife told him.
I said, “Mr. Keillor, my grandfather used to send me a cassette tape every spring which contained a recording of your annual joke show. This joke show turned me on to your show, which in turn has turned me into a listener or public radio as well as made me more interested in poetry.”
“Well, I do hope that the joke show is still able to make people laugh. There is a lot which we cannot say as it is radio.”
“It does. Thank you so much.”
He asked a second time the name of my son and we told him once again. He signed our book and our poster and we took a photo with him.
His speech at the tent contained beauty. It began with a surprisingly graphic sonnet about the human sperm.
I suppose that the most surprising takeaway from the short introduction was how alike he was to the character he played on the radio. And how strange the effect of that was. He ends his sentences and begins another in the same breath, the only time his measured pace is quickened.
He sung this sonnet at his speech:
Here I am O Lord and here is my prayer:
Please be there.
Don’t want to ask too much, miracles and such.
Just whisper in the air: please be there.
When I die like other folks,
I don’t want to find out You’re a hoax.
Not down on my knees asking for world peace
Or that the polar icecap freeze
And save the polar bear
Or even that the poor be fed
Or angels hover o’er my bed
But I will sure be pissed
If I should have been an atheist.
Dear God: please exist.
I didn’t say it was an interesting story.
They will live again in freedom
In the garden of the Lord.
They will walk behind the ploughshare,
They will put away the sword.
The chain will be broken
And all men will have their reward.
— Les Misérables
One year ago I left the USS GERMANTOWN after a grueling inspection for which we had been preparing since my arrival. I checked in to an administrative command which processed me forward towards deployment training in first South then North Carolina. Shortly afterwards I landed in Afghanistan where I spent six months assisting with some administration. My son was born and soon afterwards I returned to America and out-processed from the US Navy’s Active Component shortly thereafter.
The world did not change when I left the Navy. The sun did not shine brighter nor did the colors become more vivid. They just seemed that way.
Today I work for a startup company, Troopswap.com, along with a few dozen other veterans and military spouses. I will write much more about this amazing company in the future. I wake up every day with the knowledge that if I do not complete my work then the company will be acutely and negatively affected. I am certainly my own harshest critic and greatest motivator.
The Navy taught me a great deal about life. It taught me about management and leadership, about priorities and personalities, about integrity and lack thereof.
Can you spot the running trail? Life is good.
My time in the military also taught me about the value of my time. It engrained in me a need not to take for granted my jurisdiction over my schedule. It taught me to appreciate FREEDOM.
Thanks to all the people who helped me grow over the past five years. Had it not been for your constant support through my highs and lows, my outlook today might not be so optimistic, nor my appreciation for my current gifts so pervasive and certain.
The Chinese are in the news the past couple of days for talking smack about the dollar and calling for a new global standard. Media coverage has focused on how the insult is only adding to Americans’ sense of self-pity. China’s love-hate relationship with the dollar is actually more complicated- in a really simple way.
China pegs the remnimbi to the dollar. China needs to peg the remnimbi for similar reasons to why the Europeans needed to agree to the Bretton-Woods system: a growing economy needs a stable currency to maintain growth, and for an economy like China’s that is wading into new territory the “fiat” system of currency, where nothing backs the currency but the faith of the government, is risky and unsustainable, especially when that government isn’t big on transparency. People may not consider the full faith of the government all that reassuring, and a crisis of confidence would be a real possibility.
So, in order to maintain an aggressive fiscal policy that encourages rapid growth, China needs to back it’s remnimbi with something, and as in Bretton-Woods, the dollar is the obvious choice. Any choice for currency-backing must essentially meet two criteria. First, the asset you pick must be stable. This is the original reason for the gold standard: you can be pretty sure that an ounce of gold now will weigh the same as an ounce of gold a year from now, and the relative scarcity of the metal means that the supply of gold isn’t going to suddenly explode. Second, the asset must be liquid. This is why the gold standard was abandoned: once monetary systems got big enough, it became clear that the amount of gold being mined each year wasn’t enough to keep up with the growth of the money supply. If you can’t print a remnimbi because you can’t secure the gold, you have a real problem with growth. Simply changing the remnimbi to gold ratio at will makes the gold standard meaningless.
So what asset in the world is both stable and liquid enough to back one’s currency? The dollar, of course. Stable because the largest economy in the world, along with a democratic and transparent government, backs each note. Liquid because, well, you can always count on the U.S. government to sell you Treasuries.
There lies the rub- instead of buying gold to keep in reserve, China needs to buy enough Treasuries to keep printing the money necessary for their booming economy. So far, liquidity hasn’t been a problem. Running a deficit nearly every year, the U.S. Government has had more than enough Treasuries to sell. The strength of the U.S. economy, and the stability of our political system, meant that no matter how much debt we took on, those Treasuries were still considered stable- sterling, even, and warranting the best ratings. So, China had it’s two criteria locked up- the dollar was both liquid and stable.
So far, China’s rhetoric focuses on the stability aspect. If China is to maintain its monetary policy, it must be convinced that the Treasuries they’re counting on are near-zero risk. That is, they have to be assured that each one really represents the dollars it’s supposed to represent. Even if we drop from AAA to AA+, it doesn’t seem likely that we’re going to miss a payment on our debt to China. Many, many things would happen before that- as in slashed defense spending, default on intragovernmental lending (Social Security, Medicare), etc. So what is China really worried about? Let’s look at the liquidity issue-
For arguments sake, let’s say that tomorrow the U.S. passed a balanced budget amendment and immediately cut enough spending to maintain surpluses each and every year. We take those surpluses and make payments towards the national debt. Moody’s and S&P are so thrilled with our fiscal discipline that they make up the AAAA rating just for us. China should be thrilled, right? The Treasuries in their portfolio just became zero risk.
But what happens when their domestic economy continues to require more remnimbi? Where do they get the dollars to back their own money? If we aren’t borrowing money anymore, then we aren’t issuing Treasuries. I’m not supposing that the concept of a Treasury will cease to exist, but the supply of long term Treasuries will decline drastically. China’s not the only economy that keeps them in reserve, and demand worldwide for Treasuries will continue to rise, especially with the AAAA rating. Interest rates will be literally zero, until demand for the stability of the dollar makes them… negative? The U.S. would be in a situation where we could literally loan dollars to other economies so that they could back their own currencies, but we probably wouldn’t. We’d likely just give it to them at 0% yield and maintain an equal amount of cash at home to meet the requirement of the balanced budget amendment. We would do this to maintain dollar supremacy in the world economic system at a level that we haven’t seen since post WWII and Bretton-Woods.
The facts beg the question- what’s worse for a competitor like China, a U.S. default or U.S. fiscal discipline? It is, after all, in China’s best interest that we maintain the Keynesian model of deficit spending. So, when China calls for an end to the dollar’s reign, remember to ask yourself: what are they really worried about?
The debt ceiling bill that is likely to be signed by the president in the next couple of hours is so muddied by negotiation that it seems no one is really happy about it. Which makes it perfect.
That is not to say that it’s the best possible outcome imaginable — we need real entitltement reform if we’re ever going to really take a stab at deficit reduction — but the fact is that it’s hard to imagine our federal government reacting any better to the will of the people than they did. I’ll explain-
In 2010 Republicans took the House with the Tea Party mandate. Even though the media routinely characterize the Tea Party as “right wing extremists,” it’s of course absolute nonsense. The Tea Party is the creation of voters who reacted negatively to the bailouts, stimulus, healthcare reform and quantitative easing that were the policies of the current administration and its appointees. They were informed by partisan commentators on cable shows and talk radio. To paint the Tea Party and their representatives in the legislature as “radicals” and “terrorists,” as New York Times columnist Paul Krugman loves to do, is to forget some simple facts about democracy. A political idea gained traction and in the course of an election manifested itself in the governance of our country. Independent media played a crucial role in spreading the idea. None of this is dysfunctional.
In fact, it is the most functional the government has been in a long time, considering that there is a tangible connection between what legislators campaigned on and what they did once elected. This is all too often not the case, for simple political reasons. The old calculus towards a long career in Congress was to get elected on principles and then quickly abandon them in favor of falling in line with your party’s leadership. In return for votes, you would be rewarded with pork to spend towards your reelection. It was an atmosphere that made both spending reform and tax increases nearly impossible, because both are inherently unpopular in the short term, and there’s always an election in the short term.
So what changed? Voters did- and in this case, it was voters on the right wing in the form of the Tea Party. Voters in 2010 voted with the long term in mind and replaced the old-style legislators with legislators mandated to behave fiscally responsible. The votes that used to be assured by support from the party establishment and a steady stream of pork were just not there anymore in key parts of the country. Access to media, especially in the form of cable TV and the internet, made people more informed voters. If media display a political bias, it’s because the marketplace demands it. Progressive media will whine about the result, and if anyone’s listening they should- but let’s not forget that they, too, have the power to elect politicians.
So why should we be happy about a deal that compromises on many of the core values that voters demanded in 2010? Two reasons- one, not all of the voters demanded it, just a sizeable population in a large swath of the country. Two, our government is designed not to change radically after any given election, with the mechanism for stability being primarily the Senate. This is a constraint if you want instant change, but it would be hard to argue that it’s not a good system. When was the last coup?
This wasn’t a compromise. To call it a compromise implies magnamity and gestures of good will in order to maintain a relationship. If legislators care at all about whether they like one another, we’ve got problems. Negotiations are about opposing parties seeking an end that neither has the power to reach alone, and each negotiator must decide which principles they are willing to concede before they must accept not reaching the goal at all. The negotiated settlement includes a good chunk of the Tea Party’s original demands, which is pretty good considering they only control a faction of a party that only controls one chamber. So why were they so influential? They decided that to alternative to the negotiated agreement — a default — was better than abandoning their principles. The counterparties — Democrats and moderate Republicans alike — actually believed them. The mere threat of a principled stand forced a result that is by all analysis a massive defeat for progressives — and Democrats control both the Senate and White House.
Tea Partiers would have liked massive entitlement reform and a balanced budget amendment. Progressives would have liked to give the President debt-level increases with no strings attached and to have paid for it by raising taxes. No matter where you stand on the issue, we should all be grateful that we are governed by a system where the two are forced to negotiate with each other, and we should all be reassured by the fact that some politicians stand by their stated principles.
In contrast, the President demonstrated that the only principle that was truly non-negotiable was a reprieve from revisiting the debt-ceiling debate during his reelection campaign. He accepted a deal with no tax increases, a huge departure from his earlier stated principles, in hopes that he could change the subject in the next 15 months. He abandoned his base in a bid for the center, supposing that by never publishing a plan of his own and doing nothing but scolding lawmakers to negotiate faster he’d avoid the stink of specifics and come out looking like the great compromiser. Instead, he came out looking ineffective as Boehner and Reid came to a separate peace and then dared him not to sign. He’s got a lot of work to do in 15 months.
I grew up playing games. In almost every one of these games I earned points. In soccer there were a lot fewer points to earn than in, say, baseball, where we could assess our performance in not only runs but hits, walks, stolen bases, and (the one I was good at) getting beaned.
There were way more points to be earned in Pac-Man, and even more in Street Fighter II.
Points helped us rate our performance against our peers in activities which were not necessarily competitive, such as Super Mario Bros. Everyone knew who on the block had the high scores for each video game that we all had.
It is no surprise, then, that I have been attracted to Quantified Self before I (or anyone) really knew what Quantified Self (QS) was.
In college I would weigh myself at the same exact time every day and record my weight on a piece of paper. Every month I would enter my monthly weights into an excel spreadsheet. That sheet can be viewed below:
Okay, so I was not perfect. There are over 200 datapoints so on average I took my weight every 5 days for over four years. There were fits and starts.
I also recorded my sleep every night. I would wake up and put my information into my palmpilot (my electronic brain, I called it).
In Sophomore year of college I took probably the most fun class I took all four years: Human Physiology. At the beginning of the class we were all handed pedometers and told to record our steps for the duration of two weeks. Over the next three years I went through probably 30 pedometers. I would often lose or wash them.
This information I also put in to my palm-pilot every day, along with my weight, fat percentage (once I got a Tanita scale), and hours of sleep and exercise.
Unfortunately I never quantified most of this information on an excel spreadsheet and now all my troves of data in Palm-Calendar format are, as far as I have been able to tell, irretrievable.
I recently read an excellent article in Forbes Magazine which brought to my attention the existence of the “Quantified Self” movement. I was floored. I had been a member of this movement before I even knew of its existence!
My first move was to purchase a Withings Scale. Not only did this measure my weight and fat percentage, but it synced both automatically through my home’s Wi-Fi system. The below graph is from the website, Withings, but I can access the same information from my iPhone as well.
This is cool. I like being able to trend my data and see how my weight composition is changing. But it isn’t revolutionary in any way, merely evolutionary.
The revolutionary part kicks in when you add more metrics. Check back on Wednesday for more ways I score points in my life and where I see the “Quantified Self” movement going in the next three years.
