Redistribute GPAs? (Updated)

In chapter three of The Road to Freedom, Arthur Brooks points out that many of his students at Syracuse University believed that the government should redistribute wealth from rich to poor. Brooks proposed to the students the following idea. He would “take a quarter of the points earned by the top half of the class and pass them on to the students in the lower half of the class.” Despite their support for wealth redistribution, the students “were in unanimous agreement that this was a stupid idea.” Of course, but what’s the difference between grade-point redistribution and wealth distribution? If redistributing GPAs is wrong, doesn’t it follow that redistributing wealth is also wrong?

Turns out that Brooks is not alone in making this analogy, and many students have taken the opportunity to post amusing Youtube videos in which their fellow students struggle to explain why they support redistribution of wealth but not GPAs.

 

The GPA analogy must have hit a nerve, because “progressive” students got out their video cameras to make responses. Check out this reply by the young tax experts at something called TYT (The Young Turks) University.

 

To the best we can discern, the young people in this video make two main points.

First, the top 1% of rich people are not paying their fair share of taxes, as evinced by the fact that Mitt Romney paid only 13% of his income, while middle-class people typically have to pay a higher rate.

We agree that rich people should pay more in taxes than should middle-class or poor people. But the U.S. tax code is already very progressive. The top 1% of earners account for more than one-third of the income-tax revenue, and the top 10% account for more than one-half.

Furthermore, the 13% figure is grossly misleading. As the Young Turks themselves acknowledge, Romney’s tax rate was relatively low because the vast majority of his income was derived from investments, which are taxed at 15%, lower than the rate on “ordinary” income. What the Young Turks probably don’t realize is that there was a time, years ago, in this country when investment income was in fact taxed at a rate similar to that on ordinary income. That policy didn’t work out very well because the tax deterred investment and didn’t do much to generate revenue. As a result, something like a bipartisan consensus formed to tax investment income–dividends and capital gains–at a lower rate.

Nevertheless, it is not true that investors like Romney are taxed at only 15%, and that is because taxing investment income amounts to double taxation. The money that investors use to purchase securities comes from after-tax income. The money that Romney invested was already taxed–as ordinary income–at the time that he first earned it. If he had immediately blown the money he earned on hookers and booze, he would have owed no further tax. That’s because current consumption is taxed only once. But since Romney invested the money instead of spending it, he’s taxed again. Future consumption is taxed more than once, which creates a distortion and an inefficiency. It follows that the efficient tax rate on investment income is (approximately) ZERO, which happens to be the actual rate in Japan. The Young Turks think 15% is too low, but in fact the rate should be near zero!

Future consumption, however, is not just double taxed, it is triple taxed. That’s because, before the corporations get around to paying Romney his dividends, they must first pay the corporate income tax. At 35%, the U.S. has one of the highest corporate income tax rates of any country in the world. The tax accountants, however, usually find enough deductions so that corporations pay on average about 25%. Still, that means that Romney’s dividends were already taxed at 25% before being payed out to him, and then taxed another 15% when he received them. The combined effect of these taxes is 36.25%, and again, this falls on top of the taxes Romney already paid during the year in which he first saved the money.

Maybe the Young Turks should learn something about our tax system before they upload their thoughts about it to youtube.

The second major point the Turks try to make is that competition in the marketplace, unlike competition for school grades, is fundamentally unfair. Indeed, the female Turk argues that “the 1%” are “mostly bankers” who got rich by “cheating” or otherwise doing unspecified things “that society frowns upon,” and so they do not “deserve” the money that they have. The male Turk then uses bribery as a metaphor to describe how the rich got rich. In short, the whole system, according to the Turks, is rigged.

But can this be true? Did Henry Ford get rich by bribery, or by revolutionizing the auto industry? Did Bill Gates get rich by bribery, or by revolutionizing the computer industry? Was Steve Jobs a crooked banker? Look, nobody said life was fair, and we can always dig up examples of people trying to gain unfair advantage by engaging in various shenanigans. The fact remains, however, that our largely (for now) market-oriented system does, for the most part, reward hard work and ingenuity.

We do find it disturbing that young people in particular should argue that the system is rigged and opportunity a mirage. Young people, with the chance before them to shape their entire adult lives, should be optimistically planning and pursuing their dreams, not whining about how the deck is hopelessly stacked against them. For this failure, some of the blame must be assigned to the schools.

Furthermore, even if we accept the Young Turk argument that people are cheating, how does this justify redistribution? For instance, to pursue their own metaphor, suppose that some people were obtaining high grades by resorting to bribery. In that case, would the obvious solution be to redistribute grades by giving extra marks to those who have not earned them, and in the process perhaps also taking marks away from those who did earn them? Or would the proper response be to, you know, put a stop to the bribery?

And which is the economic system that eliminates getting ahead through ‘bribery’ of one sort or another? Would it be a socialistic system, where government officials have the power to determine who gets what, where, when and how? Or would it be a system of free-enterprise, where everyone is forced to earn their living by competing in the marketplace? If the Young Turks really want a “level playing field,” they should advocate for free markets.

The really interesting thing, however, is that the Turks felt compelled to argue that the rich did not earn their wealth legitimately. Inadvertently, they have effectively conceded the point that wealth earned legitimately should not be redistributed. Since different people have widely varying willingness and abilities to legitimately create wealth, it follows that wide disparities of wealth can exist without justifying distribution, just as wide disparities exist in GPAs. That was indeed the exact point that the GPA analogy was intended to make. As the kids say, “Game over.”

We cannot conclude this post, however, without noting Female Turk’s really jaw-dropping argument that the way the rich “give people opportunities” is by “paying taxes.” Oh, is that where opportunity comes from? Gosh, all these years we thought that rich people gave opportunities by starting and expanding businesses and thereby creating jobs.

Female Turk–another proud product of modern America’s schools.

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Video: Created Equal (Updated)

Here is the video corresponding to chapter 5 of Free to Choose, covering the topic of fairness and equality. Don’t miss in particular the concluding roundtable discussion in which the great Thomas Sowell lays the smackdown on Socialist Frances Fox Piven.

Money quote, from Milt: “In this world, the greatest source of inequality has been special privileges granted by government.”

For more on fairness and the profit motive, see the short clip below from Milton Friedman’s 1979 guest appearance on Donahue. Milt takes Dayton native Phil Donahue to school.

 

 

Should the rich give back? (Bumped)

In recent years, we have heard much rhetoric aimed at demonizing “the 1%” of richest Americans, who are supposedly guilty of somehow victimizing “the 99%.” We even saw a bumper sticker recently that proclaimed “I am the 99%” as if that were something to be proud of. Even more appalling, we have heard from students that some of this rhetoric has even found its way into classrooms at UD. And two years ago we all had to endure an election campaign during which we were told repeatedly that the rich were not “paying their fair share.”

Is that right? Do the richest 1% owe something to the other 99%? Should the rich have to “give back?”

Logically, the rich should only have to give back if they have taken something. But is that how Bill Gates and Steve Jobs got rich? By taking? No, clearly not. They got rich by innovating and producing products that people wanted and that greatly improved people’s lives. The fact is that virtually all progress in our economy and in our society comes from a tiny minority of talented, hard-working, and successful entrepreneurs, scientists, and engineers. The rest of the population reaps the benefit of the improvements brought about by this tiny minority. On this point, Harry Binswanger, writing recently in Forbes, quotes the famous novelist Ayn Rand:

When you work in a modern factory, you are paid, not only for your labor, but for all the productive genius which has made that factory possible: for the work of the industrialist who built it, for the work of the investor who saved the money to risk on the untried and the new, for the work of the engineer who designed the machines of which you are pushing the levers, for the work of the inventor who created the product which you spend your time on making . . .

Or as someone once aptly put it, no poor person can give you a job.

Similarly, in their classic treatise Free to Choose, Milton and Rose Friedman note that

economic and social progress do not depend on the attributes or behavior of the masses. In every country, a tiny minority sets the pace, determines the course of events. In the countries that have developed most rapidly and successfully, a minority of enterprising and risk-taking individuals have forged ahead, created opportunities for imitators to follow, have enabled the majority to increase their productivity.

The argument is also laid out clearly in the brief video below, produced by the Atlas Network. The video highlights the essential point that profits are moral, so long as they arise through voluntary exchange. Profits become morally dubious when they involve involuntary exchange, which usually involves government creating for someone a special privilege.

All the aforementioned suggests that the 99% owe a lot to the 1%. Harry Binswanger, in fact, runs with this idea and, in the spirit of Jonathan Swift, makes a modest proposal–that the 99% should give back to the 1%!

Anyone who earns a million dollars or more should be exempt from all income taxes. Yes, it’s too little. And the real issue is not financial, but moral. So to augment the tax-exemption, in an annual public ceremony, the year’s top earner should be awarded the Congressional Medal of Honor.

Imagine the effect on our culture, particularly on the young, if the kind of fame and adulation bathing Lady Gaga attached to the more notable achievements of say, Warren Buffett. Or if the moral praise showered on Mother Teresa went to someone like Lloyd Blankfein, who, in guiding Goldman Sachs toward billions in profits, has done infinitely more for mankind. (Since profit is the market value of the product minus the market value of factors used, profit represents the value created.)

We’re not sure that the rich should literally enjoy a zero marginal tax rate, but we do agree that a society that celebrates business success is healthier, and morally superior, to a society that denigrates it. A society that denigrates and demonizes the successful, will not end well. This point was made vividly by the great science-fiction writer Robert Heinlein.

Throughout history, poverty is the normal condition of man. Advances which permit this norm to be exceeded — here and there, now and then — are the work of an extremely small minority, frequently despised, often condemned, and almost always opposed by all right-thinking people. Whenever this tiny minority is kept from creating, or (as sometimes happens) is driven out of a society, the people then slip back into abject poverty.

This is known as “bad luck.”

Are young people today learning to celebrate success, or to resent it? Do they respect rich people for their success, or do they feel instead that the rich owe them something? Well, check out the fine product or our educational system in the clip below. If enough people adopt this guy’s perspective, we are in trouble.

When we showed this video to students, they argued that “pay my tuition” guy was not representative of their generation. Fair enough. But how can he exist at all? Back in the Day, we had our share of deluded Marxists, but the victim mentality and infantile sense of entitlement are entirely new to us.

Note, however, that even this doofus got something right. When the interviewer asks him to explain how the rich allegedly exploit the poor, the guy replies that “it has to do with the government.” Even this doofus seems to acknowledge, at least implicitly, that profit earned from voluntary exchange is moral, while it is the coercive powers of government that lead to immoral profit. On this point, pay-my-tuition guy actually agrees with the Atlas Network and Ayn Rand!

Finally, a not very sanguine view of America’s youth is expressed by Adam Carolla in the following epic rant. Language Warning: Not appropriate for children.

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The Lesson of the Pencil (Updated)

In the first chapter of Free to Choose, as well as in the accompanying video, Milton Friedman briefly discusses Leonard Read’s famous essay, I, Pencil. Friedman elaborates at greater length in the video below.

As Friedman says, no one in the world knows how to make a pencil, at least not entirely from scratch. To make a pencil from scratch would require knowing how to mine the ore to produce the steel to make the saw that cuts the tree that provides the wood, and so on and so on. No only does no single person possess this knowledge, but we daresay there is probably no collection of even 1,000 people who could together provide the required knowledge.

Once we think about it, we realize that even the humble pencil is a very complex thing. But is that the whole lesson of the pencil? Is the lesson merely that a seemingly simple thing can involve great complexity? What is it about the production of the pencil that is so remarkable?

It is that the price system can coordinate the diverse and voluntary activities of all of the many people involved in the production process without orders being given or a plan being imposed by a single, overarching authority. Indeed, no system of command and control, such as employed by the military for example, could successfully coordinate all the activities required to make a pencil. On D-Day in 1944, Allied forces managed–barely–to execute the most complex military plan in history, but Allied high command could never have managed to produce from scratch a simple pencil without the help of markets and prices.

Under a mattress, in the freezer: Why so many are hiding cash

A story about some cold hard cash:

Where to stash your cash? Some Americans are sleeping on it—literally.

While banks are still the go-to solution for most consumers, 29 percent say they’re keeping at least some savings in cash bills and coins, according to a new survey of 1,820 adults from American Express. Of those holding cash savings, 53 percent are hiding it in a secret location.

Millennials are even more apt than other generations to go the mattress or freezer route, with 67 percent of those saving cash saying that they hide it outside a bank account.

“We’ve long asked people about how they’ve planned to keep their savings, and for the past few years, we’ve seen an uptick in people saving cash,” said Kimberly Litt, public affairs manager at American Express. This is the first year the company has specifically asked Americans about tucking away cash.

The survey also found that about 1 in 4 consumers anticipates a financial emergency this year, and hiding cash at home could be one way people are preparing. “I’ve also heard of people using it as a budget technique, keeping cash in envelopes set aside,” said Litt.

AmEx didn’t ask where, exactly, that cash is stashed, but a 2012 Marist College survey of 1,080 adults found that the most popular place—with 27 percent of the vote—is the freezer. A little less than 20 percent of Americans hide cash in a sock drawer, while 11 percent put it under the mattress and 10 percent secure it in a cookie jar. Another 9 percent keep their cash somewhere else in the house.

Hmm.  In the days before ATM’s, holding cash made more sense since banks were not open 24-7.  However, if people feel a need to store some we don’t recommend keeping too much money in the house as insurance will only pay $200 maximum in case of a claim…theft, fire etc.

There are no Friedmans today, except maybe Friedman himself

Nick Rowe has a very good post which serves to remind us that the ghost of Milton Friedman is still influencing many contemporary economic debates:

I can’t think of any economist living today who has had as much influence on economics and economic policy as Milton Friedman had, and still has. Neither on the right, nor on the left.

If you had a time machine, went back to (say) 1985, picked up Milton Friedman, brought him forward to 2015, and showed him the current debate over macroeconomic policy, he could immediately join right in. Is there anything important that would be really new to him?

We are all Friedman’s children and grandchildren. The way that New Keynesians approach macroeconomics owes more to Friedman than to Keynes: the permanent income hypothesis; the expectations-augmented Phillips Curve; the idea that the central bank is responsible for inflation and should follow a transparent rule. The first two Friedman invented; the third pre-dates Friedman, but he persuaded us it was right. Using the nominal interest rate as the monetary policy instrument is non-Friedmanite, but the new-fangled “Quantitative Easing” is just a silly new name for Friedmanite base-control.

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.

 

New Seattle trash law

An interesting New Year’s policy change from the left coast:

Starting Jan. 1, it will be illegal to throw food and food waste in the trash in Seattle, when a new ban takes effect to increase recycling and composting in the city.

Currently, Seattle residents are allowed to throw food and food waste – pizza boxes, dirty napkins, soiled paper towels – in the garbage. Residents are required to have a food and yard waste collection service, but they don’t have to use it for food. (Backyard composters are exempt from that requirement.)

Similarly, multi-family building owners are required to provide a compost collection service for residents, but residents don’t have to use it.

But on Jan. 1, Seattle will ban food and food waste in trash.

Enforcement won’t start until July 1. At that time, any single-family trash container with more than 10 percent recyclables or food waste by volume will face a $1 fine on the next garbage bill.

Multi-family property owners with too much food waste in trash will get up to two warning notices, and then a $50 fine.

Not quite sure how this will be enforced.  Are people really going to be paid to dig through people’s trash and calculate food waste ratios? Are people really going to be fined for not knowing the difference between “organics” and “recyclables”? Are landlords really going to be fined if their tenants fail to follow the new rules?  Living in Ohio is actually looking pretty good.

Countless crows, droppings rankle Ohio residents

Here is an odd story from A.P. reporter Lisa Cornwell:

Thousands of crows roosting at night in a western Ohio city’s downtown have some residents comparing the landscape with the Alfred Hitchcock movie “The Birds” as they work to drive them away.

The crows troubling Springfield aren’t aggressive, as birds in Hitchcock’s 1963 thriller were portrayed. But their overwhelming presence on trees and buildings causes concern over damage and potential health hazards from droppings, said Roger Sherrock, CEO of the Clark County Historical Society.

The society operates the Heritage Center of Clark County, one of the buildings favored by the federally protected crows.

“It can be unnerving to walk outside and see thousands of crows on trees, buildings and everywhere, especially if you’re familiar with Hitchcock’s movie,” Sherrock said.

He estimates as many as 50,000 crows gather downtown after scavenging for food by day in fields surrounding the city of around 60,000, some 80 miles northeast of Cincinnati. State wildlife officials say there has been a roost in the area for decades, but Sherrock says crows began roosting downtown in huge numbers about three years ago

 

Springfield is, of course, about thirty miles northeast of Dayton as the crow flies.

 

Law Lets I.R.S. Seize Accounts on Suspicion, No Crime Required

No, we are not making this up.  Here is a New York Times story showing that the I.R.S., although seemingly hapless in retrieving computer files, is really good at extortion:

ARNOLDS PARK, Iowa — For almost 40 years, Carole Hinders has dished out Mexican specialties at her modest cash-only restaurant. For just as long, she deposited the earnings at a small bank branch a block away — until last year, when two tax agents knocked on her door and informed her that they had seized her checking account, almost $33,000.

The Internal Revenue Service agents did not accuse Ms. Hinders of money laundering or cheating on her taxes — in fact, she has not been charged with any crime. Instead, the money was seized solely because she had deposited less than $10,000 at a time, which they viewed as an attempt to avoid triggering a required government report.

“How can this happen?” Ms. Hinders said in a recent interview. “Who takes your money before they prove that you’ve done anything wrong with it?”

The federal government does.

Using a law designed to catch drug traffickers, racketeers and terrorists by tracking their cash, the government has gone after run-of-the-mill business owners and wage earners without so much as an allegation that they have committed serious crimes. The government can take the money without ever filing a criminal complaint, and the owners are left to prove they are innocent. Many give up.

Clear the Bases

Here is a meaningless fun fact via USA Today:

San Francisco Giants starter Madison Bumgarner came to the plate with the bases loaded in the bottom of the second inning in Monday night’s NLDS Game 3 against the Washington Nationals, so the MLB Network broadcast pointed out an eye-opening fact:

Madison Bumgarner hit more grand slams this season than Derek Jeter did in his entire 20-year career.

The right-handed hitting lefty pitcher hit four home runs in 2014, including grand slams on April 11 and July 13. Jeter hit his lone career grand slam on June 18, 2005 against the Chicago Cubs.

Bumgarner is one of the league’s best hitting pitchers, of course, and Jeter was a contact hitter who usually batted near the top of the Yankees’ batting order. Still, plenty of Jeter’s teams had deep lineups, and it’s surprising to learn that only one of his 260 career homers came with the bases loaded — especially given the Jeter mystique.

It is somewhat surprising since there has not been a player with 200+ homers without at least one grand slam.  So I would have placed higher odds on at least a few more of Jeter’s 260 coming with the bases loaded.  Of course, the Bumgarner grand slam ratio is the real outlier.