John graduated high school.  Being of good character but not being a great student ,  he got a job in contracting starting at $30,000 a year.  He was dependable and was promoted to supervisor. Over thirty years his income grew an average of 3% per year. Thirty years later he made over  $60,000 a year.  Over that period his income grew 105%. He was solidly middle class.

John’s  friend  Paul went to college and got a degree in accounting. He started at $50,000 and over the years was promoted until he finally decided to start his own accounting firm. Over the same thirty years his income grew to over $200,000 a year or about 5% a year.  His income grew 312%.

When their careers started Paul made just 67% more than John, but thirty years later Paul made over 200% more than John. With a 3% annual growth John’s income doubled.  With a 5% growth Paul’s income quadrupled.

Should we be upset that Paul’s income grew so much more than John’s?  Does this mean that we have experienced a surge in inequality that hampers  the middle class?

Should we be happy that John’s income has grown over 100% or should we be critical of a society where the growth in the upper income is so much more than the growth in the middle class income?

A slight difference in the growth of these incomes, 2% a year, accumulates to widen the difference over time.  Is this bad?  Does this make us a bad country?

At a 30% tax bill Paul probably pays more in taxes than John makes.  Is that wrong? Should we contend that Paul is not paying his fair share?

John built Paul’s new office.  Paul does John’s taxes.

Neither John nor Paul is complaining about their station in life.  Why should anyone else?

The capital of Pennsylvania is bankrupt and it is not difficult to see why: excess borrowing for ridiculous unproductive or mismanaged projects.

Steven Malanga writes in the Wall Street Journal, How Harrisburg Borrowed Itself Into Bankruptcy 10/28/11:

Excerpts:

Under seven-term Mayor Stephen Reed, who governed from 1982 to 2010, Harrisburg had a long love affair with borrowed money, using it to spur projects of dubious value. The city invested millions of dollars in a stadium in the late 1980s to attract a minor league baseball team. When the Harrisburg Senators threatened to leave in 1995, the city bought the team with borrowed money. In 2009, even as the fiscal clouds darkened, it sank another $45 million, including $18 million in new debt, into upgrading the stadium. The team was attracting 2,488 fans per game.

Then there are those historical artifacts. Mr. Reed, once described by a local newspaper as a man who “never met a municipal bond he didn’t like,” wanted to borrow to open a network of museums. He spent some $39 million on a National Civil War Museum that opened in 2001. It has struggled for years to attract crowds. Undeterred, the mayor borrowed some $8 million to buy artifacts—including a Gatling gun, a Wells Fargo coach and a document signed by Wyatt Earp—for a proposed Wild West museum, though most of the purchases were made without the knowledge and consent of the city council. Plans for a Wild West museum and a National Sports Hall of Fame, financed by a $30 million bond offering, mercifully fell through.

Spending taxpayer money on ball parks and museums are the road to ruin.  These rarely fulfill the rosy revenue projection offered and are the first to be sacrificed during financial downturns. Yet the obligations remain when the cities can afford them the least.

Cities do not prosper because of ball parks and museums.  They prosper because of low crime, good schools and good roads.  People VISIT cities with museums and ball parks; they choose to LIVE in cities with  low crime, good schools and good roads. When you can focus on these three items you will not have to bribe companies to bring new jobs with tax abatements that the existing residents have long been denied.

Gasoline prices are  falling.  On behalf of all of those who blamed the evil oil companies for the high prices I would like to thank them for lowering prices.

The oil business is booming in North Dakota.  Unemployment there is at 3%. They are paying $15 an hour for waitresses,  and strippers from Vegas are going there because they can make much more money- as much as $2,000 to $3,000 a night.  Even better,  the oil available there is reducing our dependence on foreign oil.  If this is new to you, you should ask why so little of this development is covered in the news.

More and more companies are moving manufacturing operations back to the United States, a movement called reshoring,  from China and other overseas locations.

Technology and innovation is erratic.  Technology that changes our lives goes through phases from discovery to growth to consolidation.  The growth in the 1920’s was followed by the lost decade of the 1930’s.  The strong growth of the 1950’s and 1960’s was followed by the lost decade of the 1970’s.  The strong growth of the 1980’s and 90’s was followed by the lost decade of 2000- 2010. We may be in position for a very strong growth and innovation spurt.  Recent legislation has caused businesses and individuals to sit on their cash.  There is plenty of liquidity in the market. The legislative and regulatory disincentive to deploy it is creating a huge pent up demand.

How much of the lost decades were due to normal consolidation of previous gains and how much of it was due to restrictive government and economic policies?  It is debatable.  Perhaps the success of the growth decades made us feel rich enough to support expensive government programs that proved too much to bear during normal periods of consolidation.  Attitudes toward wealth and growth bear a remarkable similarity in the 1930’s, the 1970’s and the first decade of the new millennia.

The lost decades led to major changes in policy that heralded new periods  of growth.  We will look back of the lost decade of Bush and Obama as a gateway to new growth and innovation.  Perhaps the elements of new growth are all around us just waiting to be unleashed.

That is the message for the next election.

Phillip Levy praises the new Nobel Laureates in economics, Tom Sargent and Chris Sims in The End of Comfortable Keynesianism, published in  The American – The Journal of the American Enterprise Institute. (now included in the Rebel Yid Links)

Excerpts.

That behavioral assumption was the point of attack for Sargent and other proponents of the “rational expectations” school. This assumption that people behaved in reliable, predictable ways was often equivalent to assuming that people in the economy were stupid and could be repeatedly fooled. If you wanted to spur the economy, just apply a burst of stimulus spending or pump up the money supply. When the economic agents in the economy—say, gullible store owners—saw customers coming through the door, flush with the new cash, they would conclude that happy days were here again and ask their suppliers to ramp up production; the economy would then spring to life. Those store owners wouldn’t stop to ask whether the stimulus would be paid for by higher future taxes, or whether the newly printed money would cause inflation, thereby undercutting its value. They would just suffer the rude surprises later on.

In rational expectations models, the people are smarter; they know what’s going on. If you offer them goodies today, paid for by taxes tomorrow, they look at both sides of the ledger, not just one. To the dismay of graduate students, this makes the math much harder. It also undercuts some of the old verities. At a dinner with Sims, when I was just coming out of graduate school, I made some mention of aggregate demand. He asserted that there was no such thing. This was deeply unsettling, even after my exposure to teachers like Sargent and John Taylor. More importantly, the rational expectations approach implies that the challenges are much greater for the economic policy maker, who now needs to worry about savvy economic counterparties who understand the game.

HKO comments

Modern economics has become more of a mathematical discipline but the heart of economics is human behavior.  Human behavior is complex in a way that is hard for mathematical models to predict when markets go to extremes. Models by definition rely on assumptions, and when the assumptions stop being true, the model folds.

If $400 a ton scrap generated 1,000 tons of purchased five years ago  it does not mean that same price will do the same even if inflation and competition is held constant.  If the price one year before was $100 a ton and the market quickly rose to  $400 a ton then such a price would have created a sharp incentive to sell scrap.  If the market a year before was $800 a ton then $400 a ton may have been deemed low and suppliers may hoard waiting for a higher price.  If the price slowly rose or fell the same price would have had a less dramatic effect.

I use scrap as an example because of my experience and its volatility, but the same is true for the housing market and mortgages.  Even though interests rates and housing prices are at record lows, the cycle of credit unwinding and recent fears from market shocks has more than countered the impact of lower prices.

We are all economists now.  The stimulus failed because we are not behavioral pawns. Wall Street relied on models that now look downright silly, but Washington has relied on models that have repeatedly been proven false.

The best Washington and the elites can do is to practice prudent financial stewardship and stop trying to control the actions of the great unwashed like the gods on Mount Olympus.

One of the rules of the Dodd Frank Financial Reform bill was the cutting of the bank fees charged for debit cards.  I have read much about the financial collapse of 2008 and I do not recall any analyst who thought that high debit card fees had a significant role to play.

I did find many that found that imprudent lending practices initiated by Fannie Mae had a role, but that agency was left untouched in Dodd Frank.

The debit card fee cut was supposed to reduce the fees businesses were charged and thus put more money in the pockets of businesses and consumers. Of course the reduction in fees the bank collected would have a negative effect on bank earnings, which would more than offset the stimulative effect of lower fees.  Shortly after the passage of Dodd Frank Bank of America laid off 30,000 employees.

In order to recoup the lost revenue banks are raising other fees.  Free checking for small accounts is becoming a thing of the past and fees are now being charged to debit card users to make up for the lower transaction fees they are allowed to charge merchants.

But at least the businesses will benefit from the lower fees, right?

Wrong.

Many of the consumers who resist the new monthly fees will switch to credit cards which charge higher transaction  fees to the merchants (but lower or no fees to the consumers) and are not subject to Dodd Frank restrictions.   How will this affect my company?

Let’s assume a transaction of $100, a common size transaction at my company.  If a customer used a debit card they used to charge a flat fee of forty four cents to the merchant. Under Dodd Frank the bank can now only charge me twenty one cents.  But since the consumers can now avoid the new monthly fees by using credit cards instead of debit cards I now pay a fee of 2% or two dollars on that same transaction. (Merchants with smaller average transactions will pay a higher percentage for credit cards.)  Instead of cutting my transaction fees in half they have quadrupled my transaction costs.

Thank you Dodd Frank, you damn idiots.

What this rule has done is to give credit cards a competitive edge.  Visa and Mastercard will make more money, consumers will not.  Since the fees for credit cards are higher this may actually increase income for financial institutions that move more business away from debit cards to credit cards.  To the extent that consumers will just use cash more,  the merchants will save money and the financial company will lose fee income.  Banks will modify their products to make credit cards more like debit cards by using prepaid features.  Your spending on the credit card can be limited to the amount you have deposited in another account.

Businesses and consumers will adapt to the new law, but for the relative few that will reap some benefit many more will experience higher fees and greater inconvenience.