What is an economy for?

The graph below describes what we call the normal distribution. When we measure systems that are intended to perform within certain tolerances, there is variability around the target measurement. Systems that need to perform to specifications try to establish controls that produce results as near the goal as possible and control outliers to the maximum extent.

What is more, most organic measurements you could think of will follow a similar shape. If you took all of the apples on your orchard and weighed them, the distribution of weights would look very much like this curve. Human intelligence, height, weight, the length of a given bone. This is why they call it a normal distribution. Things just naturally concentrate around the average.

If systems are bounded on one side but not the other, you can get a different type of curve. The graph below describes the thickness of zinc plating.

Other models that don’t follow normal distribution are things that involve human activity (as opposed to human characteristics). They also may be influenced by random events. These would include statistics like The number of days between the date an invoice is sent and the payment date.

In case you were wondering, According to the US Census Bureau, the distribution of incomes in the United States is concentrated at the low end of the scale. In the chart below, the last segment on the right is a single entry for all households with over $200,000 in income. In actuality, that segment is something of a throwaway because it would taper down to smaller and smaller numbers along a fairly smooth curve up to millions of dollars in income. The shape of this graph resembles the thickness of zinc plating more so than the average weight of an apple.


Obviously, half of all households earn less than the median, which is about $53,000 per year and the other half earn above that amount. One problem that jumps out from the chart above is that incomes are clustered at the $10,000 – $20,000 range.  With the poverty line hovering at around $16,000 per year for a family size of two, that creates economic pressure.

The tendency for incomes to cluster near the poverty line as opposed to being around the median income seems likely to create risks in terms of the management of resources in times of scarcity. The burden on the half above the median grows as incomes skew downward.

Do we take for granted that it is so much harder to increase your income from $15,000 per year to $20,000 per year than it is to increase it from $185,000 to $190,000? Even if we accept that as a fact, it doesn’t mean we shouldn’t look for ways to lower barriers for breaking out of those lower incomes. Does the economy, as a mechanism, have any role in flattening the curve or creating better conditions for pushing incomes upward?

The shape of this graph has been changing for some time and its tendency for incomes to cluster around the poverty line is getting stronger and not weaker. Depending on the company you keep, this trend is the result of either too much or too little government influence. Either the government is trying to do too much and thus creating a dependency mind-set, or it is doing too little by not ensuring that low income and families without skills or education can create opportunities for themselves and their children.

People can readily produce anecdotal evidence for either case. Tax cuts are seen by some as a positive move where the government steps back and lets private industry spend its windfall, hopefully on new business opportunities and new jobs. These, unfortunately, haven’t produced many jobs in the middle class or much growth in incomes so far. Tremendous growth in personal wealth at the top of the economic ladder has not translated into prosperity for increasing numbers of people at the bottom of the economy.

Meanwhile incidents of fraud, waste, and otherwise gaming the system are not fictitious. Addiction, abuse, health problems and even natural disasters will create other, difficult to manage challenges as well. Having said that, it’s also clear that food stamps, Medicaid and other programs can create relief. This is especially true for children who have not failed anyone, and for whom we want to make room on the road to a good life, a good job and opportunities for their own children.

A decline in opportunities for good paying, non-skilled labor has had an impact. Globalization creates both opportunities and hardships. Some skilled labor is now giving ground to increased automation. This creates real economic tension. There are immediate problems for those who would have otherwise worked in factories or mills and there are longer term problems on the horizon for increasing numbers of people.

If it is a goal to move the household income clusters to the right and bring more people out of poverty. We have to examine the barriers to upward mobility and identify ways that we can take them away. There aren’t simple answers, but it isn’t unreasonable to examine specific reasons why our economic system is not creating as many successful citizens as it once did. This should be of some concern to all of us.

Bearing in mind the fact that the national and global economy is not the same as it was in 1960, or 2007 even, we should be looking for as many ways to create prosperity for the people who need the most help.

One Day Later

So I got my hopes up and didn’t prepare for what happened in this election. In retrospect, I can see much more clearly why I should have been concerned. I don’t have friends that think Donald Trump would make a good president. Fortunately, you choose your friends, but from a statistical point of view, people you like to hang out with don’t make for good sampling.

I’m looking at my family now, and I can see that things are not as rosy. My Mother, at least one of my three brothers, at least one of my two sisters and her voting-age daughter are either Trump supporters or at least anti-hillary enough to cast a vote for him. My wife’s brother, his wife, her father and stepmother are vigorous supporters of Donald Trump as well. That’s not a small number of relatives and these are only the ones who had a discernable preference before the election.

I know these people, and I’m not really surprised by their political opinions. It’s also a valid point that in my state, their preferences in the presidential race had limited consequences, as did mine. The family members who live out of state contributed more. Such is the nature of the electoral system. Meanwhile, winning or losing a political argument with a family member isn’t a simple matter and can come at some cost. This is not to be trivialized.

This race will be remembered for a lot of things. One is the involvement of James Comey at several points along the way creating openings for Trump to attack Hillary. The leaks of HRC staff emails from John Podesta from Wikileaks. These leaks chronicled a good number of criticisms of Clinton and some dirty pool, but nothing illegal per se. The unforgivable sin of having your dirty laundry in the open is what happened there. Nobody should have any doubt that the Trump campaign had absolute brutal and unfair strategies throughout the primaries. A similar leak would likely have revealed similar embarrassments, but what came out was all on one side and it created problems for HRC during debates and during her campaign.

The Russians were directly involved in degrading Clinton and they had an accomplice in Wikileaks. This wasn’t a good thing, but where the mails came from was never the story. No, the only offset to the stream of bad news from that source would have been a counter-attack. I would love to see the emails between Kellyanne Conway and the rest of the campaign, but it wasn’t to be.

I’ve decided that I’ll be fine. I don’t suspect that much will change for me in the near future. If anyone should be concerned, the people who voted Trump into office probably have the most to lose. If they voted because they have a crappy job and want to go back to work at a factory building stuff, I still can’t see any mechanism by which those empty promises of making dreams come true will be kept. We can scrap treaties, but even if some factories are built or moved here, people don’t hire folks to weld stuff together anymore; robots do that now. The factories may come back, but with only a small fraction of the jobs.

Big River Steel in Arkansas is a 1.3 billion dollar plant that will eventually employ a workforce of 545 people to pour 1.6 million tons of steel per year. That’s an investment of almost 2.4 million dollars per job. Those people will make about 70K or so a year, so those are great jobs. Alabama’s new ThyssenKrupp mill will cost around 5 Billion dollars and employ 2,700 people. That’s a much better economy of scale though at only 1.85 million dollars per job. Putting tariffs on imports could cause steel mills to start rolling again with greater vigor, the downside is a trade war that could cost jobs in other areas.

It’s not simple.

Not What I Expected

Wow, I was really wrong.

We have just elected a reality show star to the highest office in the land.

It sort of feels like my country is a stranger to me. It might be closer to the feeling of finding out that you’ve been hated all along by people you cared about.

The working class people who voted for Donald Trump will be expecting to be materially elevated by this guy. I don’t know how much time they are going to give him to drain the swamp, or what mechanism will be used to do the draining, or who, exactly, are the mosquitos?

I don’t know how much time they will give him to change their lots, but he doesn’t actually seem to be any more aware than I am about exactly what it is that will fix the issues behind their pain.

Here we go

I’ve just watched the closing arguments presented by Trump and Clinton. They’ve been flying around the country in a mad dash to collect each possible vote. I feel much the way I felt before the first debate between the two candidates.

In a nut shell, my feeling is that preparation and experience must count for something. I don’t even know if most voters are thinking in these terms, but when I hear Donald Trump try to explain what he intends to do as president, it seems to be a strange melange of imagery. It is a pep talk couched in an extremely dark and dystopian perception of the current and future situation in the US economy and our place in the world.

Hillary Clinton has had numerous punches land on her during this campaign. She has demonstrated a strong jaw, to push this metaphor. I don’t think all of the attacks against her have been particularly fair, but some of them have merit and some really don’t. For example there are still a number of people who seem to believe that Hillary somehow directly caused people to die in Benghazi. Considerable time and effort has also been spent advancing conspiracies about the Clinton Global Initiative – an organization that has had a pretty solid record of doing good work and helping a lot of people around the world.

Why countries with questionable human rights records would donate *that much cash to CGI? It’s a legit question. On the other hand, what we are talking about here isn’t illegal unless there are some specific instances where US policy was changed as a direct response to these donations; access doesn’t count as illegal. As a side note, a donation to CGI would be the most indirect type of bribe possible. Bill and Hillary don’t draw salaries and they don’t spend the money on themselves. It’s as if we are accusing CGI of accepting bribes in the form of millions of doses of HIV medications for children. This would apparently be done in exchange for US foreign policy influence. That is just a weird assertion.

Then there are the emails. What I find most interesting about the accusations about her email server is that they do not serve to explain exactly what was done. There was a serious mistake made in deleting a large number of e-mails after a subpoena was issued. The explanation for this is actually pretty believable. It is also clear that the emails in question didn’t occur during the time of the Benghazi incident – which was what the original investigation was about.

We often forget that this was a server for personal use and not for classified information. There was indeed sensitive information found on the server, which is serious, but not surprising that a small amount of sensitive information goes over the wrong channels occasionally. Furthermore, a large percentage of this sensitive information was classified after the fact. Clinton has challenged the classification of these documents and would generally prefer that they were published.

Back to the “illegal server” though. Alternatives to this server would be gmail, yahoo, hotmail, etc. Any of these choices would have been perfectly acceptable. There is some irony in the fact that Podesta’s gmail account was hacked by (apparently) Russian operatives and no such breech of Hillary’s personal email has turned up in any leaks since then. It seems to me that we would certainly have read them by now.

In this election, the lies you are willing to believe determine who your candidate is, but I’d say a few things about the Donald that go beyond conspiracies and unproven allegations. My opinion of Trump is based in large part on his record of self-aggrandizing and looking out for his own best interests.

The Trump foundation is much smaller than CGI, but it clearly has been used inappropriately. It is also true that Trump has no intention of putting his business operations into a blind trust. The reason that this is important to me is that I don’t trust him to make decisions on public policy that would hurt his own financial concerns or those of his children. If you are Donald Trump, this doesn’t feel like a conflict of interest. He is a supply-side politician and therefore, what is good for him, is also good for the country. His international concerns could very easily create a conflict of interest though. Do you play hardball with a foreign leader, if it could tank an important deal, or to you tread more softly? It’s just not a good situation.

Most important to me though are the vacuous promises he is making. It is difficult to take him seriously when he starts literally promising his supporters everything they have ever dreamed for this country and for their futures. He’s extremely vague about his Isis strategy except that he wouldn’t have warned civilians that an attack on Mosul was imminent. He doesn’t share details on how slashing taxes will reduce the national debt. How do you replace the ACA with something that covers everyone, but is wonderful instead of a disaster. Virtually everything he has weighed in on can be reduced to an arbitrary promise to fix something whether it’s broken or not. Nobody really believes that he has a deep understanding of these issues, but it is always easy enough to vote for a tax cut.

I worry a bit about the state of our divided country after this election. Part of me would rest easier with a Trump victory simply because I think that Democrats are better sports. However, I don’t think that my fear of Trump supporters causing civil unrest is a valid excuse to cast a vote for the guy – quite the opposite.

My prediction for today’s election is that Clinton will win a narrow victory, and that Trump will not quietly end his campaign. I think he has fed on the adoration of his fans and now he craves it. To concede the election graciously would be incongruous with the way he has burned everything down over the past 500 days or so. Especially most recently, he has been shouting about the rigged nature of the election itself. I’m not sure how you walk this rhetoric back. I don’t know how he would go about defusing the political explosives he has set over the past weeks and months.

The Death Tax

I had an interesting conversation recently with a conservative figure who took aim at the estate tax. I try not to be too dismissive of folks I’m not normally inclined to agree with. Occasionally, I encounter a point of view that I hadn’t considered before and my position becomes a little less entrenched, or perhaps more nuanced as a result. This really wasn’t one of those times.

The goal of the estate tax is not even veiled in fake rationale. The idea is to break up the trend of accumulated wealth from generation to generation. As we have seen, the amassed fortunes over time are trending toward a concentration of wealth. This is not really consistent with what we assume to be an economy that is effective at broadly distributing economic opportunities and rewards for hard work and success.

The kind of opposition we usually see to the estate tax stems from a few key arguments. There is a strong feeling among opponents that taxes have already been paid on the money that is in the estate and that taxing them again would be immoral regardless of how much wealth we are talking about. This “already taxed” concept is reinforced by the fact that the estate is responsible for paying the tax and not the heirs. The net effect is that there is less to distribute after taxes of about 40% are paid on the value over the $5.34 million threshold. This happens regardless of how many heirs there are.

Another common argument is about family farms. The story goes that if a farm that is worth more than the threshold, it will more likely go under because the heirs can’t afford to pay off the tax bill on the farm.

The reality is that there are some modulating controls in place. When you die, up to $5.34 million of net value of your estate after exemptions is protected from the tax. Family farms are also eligible for value reductions in order to make it less likely that the estate tax would be a problem. Married couples are usually able to protect twice the net value from the tax man by allowing the surviving husband or wife to bring forward the exemption of their deceased spouse.

As for the money having already been taxed. The simple fact is that there are very few ways that significant amounts of cash may be transferred from one person to another that don’t involve some of that money going to the government as taxes. If someone buys a carton of milk, they are buying it with money that’s already been taxed.

The economy is a system. It’s a system that has been modulated over the years for various reasons. Some of the changes have had negative effects and some have made things work better. What is the purpose of the economy? Should the system create economic prosperity for the broadest number of people? Should it allow wealth go grow and concentrate in order to sustain enormous private investments in technology and automation? I won’t attempt to answer that here. Rather than stop writing though, let’s say that however we choose to optimize things, the result should ensure that prosperity is at least an option for every person.

Traditional video games provide a useful model of how prestige and success are acquired in a gamified world. Things get harder as you work your way through levels and more powerful bosses. Forward progress is hampered by greater challenges

The baseline package for middle-class to upper-middle-class life is similar to this gaming model. You have to hustle to make a living. Success is fostered by a good education, a stable home environment, some aptitude at interpersonal skill, and it doesn’t hurt to be attractive or a bit taller than your peers. Generally though, you rise up through the ranks, competing with everyone else to get noticed. You obtain credentials, experience and, if you stay out of trouble, you can earn a comfortable living and even retire at a fairly young age. It can get much worse than that, but it can also get much, much better.

Some individuals truly excel at earning a living, even with modest beginnings. The self-made story is the example we turn to when we visualize the ultimate success in our economy. These people epitomize the righteous intersection of opportunity and preparation and the result can be impressive financial rewards. Artists, business leaders, inventors, surgeons, lawyers, models, actors, comedians and writers can all excel at their craft in countless ways, rising to the top of their field and making a fortune. Reaching this potential may require significant personal sacrifice and discipline.

An interesting thing happens with money though. There is an inflection point at which your savings can earn enough dividends and interest to support you more-or-less in perpetuity. Finding that point is a personal journey because expenses can go as high as you want, and so it is also possible to live a life burning through more cash every month than most people earn in a year.

In the 1990’s Donald Trump famously had to dig himself out of near financial ruin. His creditors allowed him a $65 million line of credit but under the agreement his personal expenses were limited to $450,000 per month. This burn rate is from more than 20 years ago and is more than 100 times the income of the average household today.

We do have a name for a financial status called “independently wealthy” even though we don’t have a number to assign to it.  What it means, is that you have enough money to live comfortably without working. Let’s try to put a stake in the ground and define that term using some common ideas that may be flawed an arbitrary, but perhaps useful.

The average household income in 2013 was $51,939. Having a million dollars in securities that track the S&P 500 should be able to generate that kind of income passively from dividends and interest with no personal labor required. This comes with the added benefit of having a lower tax rate than a typical worker would incur from their paychecks. This passive income is based on a conservative return on investment as opposed to the average return which has been higher in recent years.

The point is that if you can scrape together a million dollars, the money, with a few caveats, can be expected to produce as much income every year as the average family earns and will allow for a modest rise in inflation. If you don’t retire, but remain at work, you can reinvest all that income and it will grow quite rapidly. All you need to do, is leave it alone. Better yet, you can keep saving.

One million dollars is in securities is not an easy thing to get hold of. For most people, it would be a lifelong pursuit. In fact, According to the Wall Street Journal, the combined value of all household assets in the US isn’t more than about $85 trillion – and that isn’t all cash. For every family to have a million-dollar nest egg working for them, it would have a total value of 50% more than all of the personal assets that exist in the US today.

The estate tax is an example of our system attempting to make a correction. If you accumulate enough wealth in your lifetime, that is great, but you can’t take it with you, and you can’t shuffle your heirs to the front of the line without sacrificing a significant chunk of your estate to pay for services like education, infrastructure, the military and the other obligations of the federal government.

Even where the estate tax comes into play, the heirs of the very wealthy may well sit down at a game that has already been won on their behalf. They can, more or less, play with the credits earned by their parents. And, while nothing is perfectly fair in life, this is pretty clearly weighted in favor of the rich. Would the world be a better place if every single one of us had to start life doing the hardest, most backbreaking jobs, earning promotions and working our own way to economic independence? Maybe so, but we will never know.

Having said that, in a system that makes the accumulation of wealth easier, not harder as you acquire more, some controls should probably be established. If for no other reason, then let’s at least consider that we don’t want to face the consequences of a society that appears to be permanently and hopelessly bifurcated by wealth inequality. This would be a recipe for a revolution.