Buy gold?

As I was waiting at the barber shop, I had two choices.  Look at Fox News or keep my eyes closed.  The visual noise of the multiple banners of modern news broadcasts is bad enough, but the hype of the advertisements is even worse.

One of the ads that caught my attention was a company selling gold.  They offered it at one percent over dealer cost and with free shipping.

First, what do they mean by "dealer cost"?  Is that the cost to buy it in the first place?  Or is it the cost to buy it and sell it together?  After all, the sales people, the management, and the advertising are all costs for the sale.  And isn't the "free shipping" a cost?

Second, if owning gold is such a good deal, why aren't they holding it as an investment?  Won't they make more money by holding it than selling it?  Maybe they are trying to dump it before the price drops even further.

Magree's law of market timing:  When others are excited about buying, keep what you already have.  When others are excited about selling, sell what you already have.

Low taxes can mean low profits

The Boeing 737 Dreamliner has been grounded by the FAA until several of the recent problems can be fixed.

First question: if private business can do so much right, why is there so much wrong with the 737?
At least, nobody's been seriously injured or killed yet.

The answer is that it is a complex endeavor.  Thousands must work together to get everything just right.  What was missed because certain tests or calculations weren't checked one more time?  One commentator wrote that the FAA inspectors were overwhelmed by the innovations.

This last gets me to taxes and profits.

To have skilled up-to-date inspectors, we need to train them continuously.  If we don't budget for continuous training, the inspectors won't be able to keep up with changes.  If the inspectors can't keep up with changes, then the inspected companies might miss something.  If the inspected companies miss something, then the new products might fail in some way that reduces those companies' profits.  Sort of "for want of a nail…"

Also think of government inspectors as independent auditors.  They are a second set of eyes that sees things that the people directly involved might miss.  Large companies don't blink at paying millions for audits but they seem to balk at paying taxes for government "auditors"; auditors that might save them millions.

But to have skilled designers and skilled inspectors, we have to have a robust education system, going all the way back to pre-school.  If we don't pay enough taxes to have such a robust education system that produces a very large number of skilled adults, then we can't create the innovations that lead to larger profits.

All things are connected - "Home", movie script by Ted Perry.  See "All Things Are Connected".

Disconnect on subsidies

Why is it bad to subsidize an industry such as wind or solar but it is all right to subsidize a company for locating in a particular spot?

There are many who call for an end to subsidies for alternative energy, but do they complain about subsidies for fossil fuel companies?  For example, Sasol is getting a $2 billion subsidy from Louisiana to build a gas-to-liquid plant.  See "Sasol Betting Big on Gas-to-Liquid Technology",  John M. Broder and Clifford Krauss, New York Times, 2012-12-17.

I wonder if any economist has ever done a long-term study on the value of subsidies.  I know there have been subsidies to get companies to locate in a particular city or state, and many companies abandon that city or state before the locality has even recouped its investment.  I also know that government subsidies have transformed the economy mostly for the benefit of many.  Lincoln called for subsidies to the transcontinental railroad which greatly improved the U.S. economy.  Would we have computers and the Internet without many other government subsidies?

What we really need are some metrics that show whether a government subsidy will provide a huge social benefit or will only be a drain that lines the pockets of a few.

"Government-made" billionaire

Hamdi Ulukaya, a Turkish immigrant, started making Chobani yogurt with the help of a Small Business Administration loan.  He bought a Kraft Foods factory in 2005 with the help of that loan, and he began shipping Chobani Greek yogurt two years later.  It is now the best selling yogurt brand in the U.S.  He is now estimated to be worth 1.1 billion dollars.

Of course, the government didn't make him a billionaire.  He and many other people had to do a lot of work to produce and sell all that yogurt.  But could he have started without the SBA loan?  Maybe if there had been a friendly banker who believed in him.  So, the government didn't make him a billionaire, but it certainly gave him a rung or two to start the climb to success.

See "The billionaire behind Chobani", Devon Pendelton, Bloomberg News, Updated 2012-09-25, via Star Tribune.

Something else to consider: was the SBA loan government spending or government investment?  Consider all the jobs that Chobani created and the taxes the employees pay.  Consider how much more taxes Ulukaya paid than if he hadn't been so successful.  Consider how those taxes in turn can be reinvested in education, roads, and loans to other fledgling companies.

Quote of the day: Education - shooting ourselves in both feet

"When we shrink investments in higher education and research, 'we shoot ourselves in both feet,' remarked K.R. Sridhar, founder of Bloom Energy, the Silicon Valley fuel-cell company. 'Our people become less skilled, so you are shooting yourself in one foot. And the smartest people from around the world have less reason to come here for the quality education, so you are shooting yourself in the other foot.'”

"As I've said, nations that don’t invest in the future tend not to do well there."

Both from "Do You Want the Good News First?", Thomas Friedman, New York Times, 2012-05-19.

Friedman didn't write it explicitly, but I find it ironic that some businesses complain they can't find enough qualified employees and complain about taxes.  Duh, do they think that hundreds of thousands are going to be able to afford to pay for all their training, especially when so many companies want narrowly defined "skills"?

Comment on taxable income

I posted the following comment to "CommonWealth:Assets vs. Income" by Will Rice on the Facebook page of the Coffee Party. It and the comments are various positions about taxing interest and capital gains.

If John and Mary start a company and sell stock in it to you, you have made an investment. If later I buy that stock from you at more than you paid John and Mary, I'm not making an investment in John and Mary's company; I'm providing you with liquidity for your investment. John and Mary have gained nothing from my purchase of your stock. Well, not quite, the liquidity I have provided to you makes it easier for them to sell new stock if they need to expand.

If purchase of stock on the open market is truly an investment, then why are you taxed at the full rate on the whole amount that you withdraw from your IRA or 401k? You are not taxed on the sale price minus the cost basis as you would be if you had bought stock for a regular account.

In either case, we have not done much work for our gains, unless you count biting nails when the stock goes down as work. The people who have done the actual work are John, Mary, and their employees. They have sweated and worried as we watched on the sidelines. And for this, we tax them at a higher rate. That does not sound like an incentive to get people to work.

Worse, we expect them to pay for all the infra-structure that makes their company successful: education, streets and sewers, police and fire, courts, and many other public goods. Those who pay a smaller portion of their income for public goods are free riders; without public goods they would have much smaller incomes. If you don't think public goods matter, consider that more large corporations tend to have their headquarters in "high-tax" states than in "low-tax" states. The public goods in the "high-tax" states made the corporations possible and the CEOs like the quality of life in these states. See "The fallacy of ranking states by 'tax burden'".

Short-sighted politicians or visionaries

The Duluth News Tribune editorial board asked for questions to ask candidates. I was fortunate to have two of mine be selected. For city councilors it was, "Is it more important to attract businesses or people to Duluth?" For school board members it was, "Is it more important to have students pass reading tests or read and discuss?

I didn't see all the responses because I didn't read much about candidates whom I could not vote for. What I did see is competing school board candidates answer, "Read and discuss." Hurray! Long term thinking. I was really disappointed to see competing council candidates answer "Business". How short sighted?

Don't they remember all the fiascos of businesses that were attracted with big fanfare and they were going to provide jobs? Far too many of these businesses never provided all they promised, and too many left town or folded.

The "correct" answer is people because people create businesses but businesses don't create people.

I saw some vindication of this in "That used to be us" by Thomas Friedman and Michael Mandelbaum.

Attracting a big plant is harder because there are fewer and fewer because of robotics. "What a town needs to thrive today is a hundred people starting companies that employ twenty-five people each, and twenty people starting companies that employ fifty each, and five people starting companies that employ three hundred people each."

Taking a different tack, how are you even going to attract businesses or people to Minnesota when many people don't want to move here because they think it is too cold? On the other hand, many people in Minnesota don't want to live anywhere else.

Many people forget that Minnesota once was a hot bed of creativity and still has many large corporations that are designing and manufacturing a wide range of innovative products. But given the political dominance of "no new taxes" and "cut spending" people, we have cut way back on our investment in creating and educating people who will carry on this tradition.

And if Minnesota regains its image as an innovative place to be, it will attract both people and businesses. The computer business in Minnesota and canoeing in the Boundary Waters attracted me forty-eight years ago.

"The people" want town meetings?

"Duluth gets its wish…a meeting with [Rep.] Cravaack" - headline in today's Duluth News Tribune

Wait a minute!  I'm in Duluth and I didn't really want a meeting with Rep. Chip Cravaack.  OK! OK!  I might have gone to yesterday's "Town Meeting" at the Duluth Airport if I hadn't had other things I wanted to do and other places I wanted to be.  But even then, would I have gotten one of the 200 seats or would I have been one of the 12 speakers selected?  In retrospect, why bother?

I don't understand this mania for having "Town Meetings" with constituents when such a small minority would be interested and be able to attend.  Duluth has over 80,000 residents and only 200 attended the meeting yesterday.  Granted, it was arranged on short notice after many complaints of Cravaack meeting with business groups but not the general citizenry. See Rep. Cravaack is in touch with his constituents?
http://magree.blogspot.com/2011/08/rep-cravaack-is-in-touch-with-his.html Even then, what would it been like if over 1,000 had showed up?  How much true conversation will be going on between each attendee and the Representative.

Given all the communication means available to reach a politician, many better ways exist to express a view.  The postal service is still working for those who want to write letters.  Phone calls are cheap for those who want to leave a message or speak to a staffer.  And every politician can be reached on the internet, either by email or by a web form.

What is missing?  In a town meeting, those who do get to speak get an instant audience and may even get their question printed in the newspaper.  They also get the politician to address their question in front of many other people.

I think the best way for a politician to communicate is through a newsletter to every household.  The best of these I've seen is from Bill Frenzel, R., 3rd District, Minnesota in the 70s and 80s.  He didn't tout what he voted for or what groups he had appeared before; he told what Congress was doing, sometimes in a straight-forward manner, sometimes in a bit of befuddlement as in "What were they thinking?"  Bill Frenzel is one of a kind threatened with extinction, an independently-minded Republican.

OK, Mel, you really wanted to be one of the speakers, right?  What would you have said that was so important?

Did Abraham Lincoln tax and spend to build the transcontinental railroad?  Or did he tax and borrow to invest in transforming the country?  Good paying jobs were created and fortunes were made in the new economic environment.

Did Franklin Roosevelt and Harry Truman tax and spend for the G.I Bill of Rights?   Or did they tax and borrow to invest in increasing opportunities for veterans who got higher paying jobs and paid more taxes.

Did Dwight Eisenhower tax and spend for the interstate highway system?  Or did he tax and borrow to invest in transforming the country?  Good paying jobs were created and fortunes were made in the new economic environment.

Did John Kennedy, Lyndon Johnson, and Richard Nixon tax and spend to put man on the moon?  Or did they tax and borrow to invest in transforming the country? New technologies were created, good paying jobs were created, and fortunes were made.

Now it seems we have a hard-nosed political culture that wants to cut taxes, eliminate regulations, and let Ponzi schemes destroy the investments of President Lincoln, Presidents Roosevelt and Truman,  President Eisenhower, and Presidents Kennedy, Johnson, and Nixon.

The rich create jobs, but rich in what?

As a response to "tax the rich", many say that the "rich create jobs".  Hm!  How many jobs has Paris Hilton created?  Certainly lots of jobs for paparazzi and tabloid writers.  How many real jobs have the Wall St. manipulators created?

Today's Star Tribune had an interesting article on how graduate students are being affected the jiggling of grants.  See "Debt deal nicks grad students, not others", Jenna Ross.

Given the cuts in Pell Grants, Congress in its great wisdom cut grants for graduate and professional students.  Some will say that students shouldn't get "charity".  But if we limited education only to those who could afford it, would we have enough educated people to do the innovation that we need to sustain our economy.

Abou Amara is president of the Graduate and Professional Student Assembly at the University of Minnesota.  He was quoted as saying, "There's a disconnect here.  The narrative now is about jobs and innovation.  Well, people in graduate and professional school are the people who are going to be creating jobs.  We're the people who are going to grow the economy."  See "If you want to grow, you have to spend money for seeds."

In the rush to avoid "taxing the rich" and "cutting spending", many ignored that they cut jobs with government shutdowns.  The rich hardly noticed, but many small businesses noticed.  For example, highway projects were shut down, the contractors laid off workers, and the contractors had shut-down costs that they may never get paid for.  The laid-off workers had be be paid unemployment benefits and some had to pay more for their health insurance.  Isn't this increased spending and taxing the middle class?

I've seen several articles recently about immigrants starting businesses, especially in the cities.  I don't know what portion of new, local businesses are created by immigrants, but I sense it is out of proportion to their numbers.  If so, why might this be?

Some of them took risks to be here, and so the risk of starting a business is just one more.  They are not accustomed to having health insurance and other benefits, and so they don't consider lack thereof as an impediment to starting a business.  Finally, they often have large networks of friends and relatives from whom to draw financial support.

I have two ideas that could encourage more people to start businesses.

The first is universal healthcare.  Too many consider this a cost rather than an investment.  If more people were freed of the need for a job with "benefits", wouldn't more people risk starting a business?  If more people started businesses, wouldn't there be more jobs?  If there were more jobs, wouldn't there be more taxes and less costs?

The second is more neighborhood banks.  Not only neighborhood in the sense of being located closer to the customers, but neighborhood in being staffed by people from the neighborhood.  With the larger banks, one can never be sure who will be in the locally-sited bank from one month to the next.  If the staff were more permanent, they would develop closer relations with their customers.

I know this certainly helped me in keeping a business growing.  I ran around the track at a YMCA with the president of a local bank.  Never mind that it was owned by Carl Pohlad, a Twin Cities billionaire, as part of a small empire of banks; the people were the same month after month and year after year.  Because the president got to know me and feel he could trust me, he extended a line of credit to me.  I drew on it, I paid it back, I drew on it, I paid it back.  I never really succeeded in the business, but how many others who had similar, local treatment succeeded.

Then Pohlad consolidated his banks under one brand, and the personality went out of the local bank.  He probably got even richer, but the community was poorer for it.

In summary, it's not the rich in dollars who create jobs; it's the rich in experience and education who create jobs.

If you want to grow, you have to spend money for seeds

After I wrote the blog entry "We have met the enemy, and he is us", I reread a bit of David Weidner's article.  One thing that struck me was that Google was founded with the help of a federal grant!

I thought I would check a bit further, and found "National Science Foundation (NSF) Discoveries - On the Origins of Google".  The article was written long after the fact and I didn't try to dig out the original grant.  I do wonder if Page and Brin would have even been in graduate school without the grant.

I don't know the size of the grant, but think of the huge amount of income taxes paid each year by the 16,000 employees of Google.  Think of the productivity increases of many researchers in companies large and small thanks to Google.  I wouldn't be surprised if that one grant paid many times over for all the similar grants made at the same time.

Governance quote of the day

"People need quality services from government.  And the way to provide them is industrial development.  Industrial development is built around education and investment, not tax cuts.  Desirable industries need a fine work force of well-educate, healthy people who are attracted to a place because of its culture and amenities, not its cheapness."

- Former Minnesota Gov. Elmer L. Anderson, Republican, quoted in a letter from John Bray to the Duluth News Tribune, 2011-07-24

Of course our children and grandchildren will pay for…

…investments we make in their future.  Just like we paid off the debt for some of the investments our parents and grandparents made in our future.

One of the big grumbles about government debt is that our children and grandchildren will have to pay.  However, what many of these people are grumbling about assumes that all debt is wasteful.

In many cases this can be true, especially if it is borrowing for today's operating expenses.  On the other hand, many things we need to borrow for to have in the future.  All that paid cash for every house they ever owned, please raise your hand.  Same for every car.

We as a society need to borrow for school buildings, government buildings, streets, sewers, and other infra-structure.  Do you think our great-grandparents had a bake sale to build the sewers we take for granted?

My persistent cold is making me thankful for all that has been made possible by past generations.

I don't have to go out in the cold to get wood to keep warm.  The gas keeps coming and the furnace ignites automatically as needed to keep our house at the temperature we selected.

I don't have to go out in the cold to well to get water.  Whenever I wash or want to make coffee, I just turn on the faucet.  I think on our street those waterlines were laid in the 40s or even before.

I don't have to go out in the cold to the outhouse.  I just go to the bathroom, push the little handle when I'm done, and all that stuff goes out of sight and out of mind.

We are all better off for these investments made by generations gone by.

We are also healthier and longer-lived because of those investments.  Even as ambulatory as I am with this cold that will probably be gone in another week, what would it be like if I had to go outside frequently for wood, for water, and for the toilet?  What would be the chances of my developing pneumonia and not being able to get help because there was no telephone?

It is true that we should pause now and then and be thankful for our blessings, especially those given to us by people long-gone.

Would today's Republicans support Abraham Lincoln?

When I read Wired's "Republican Congressman Crowdsource Attack on Science", I thought of all the projects they oppose without even weighing costs and benefits.  The crowdsourcing is an attempt to get the general public to expose "waste" in federal spending, starting with the National Science Foundation.  They essentially take an apparently frivolous aspect of a project without looking any deeper into what benefits might be gained.  They have started YouCut Citizen Review.  Maybe the first cut in the federal budget should be to disband YouCut?

Would today's Republicans support Abraham Lincoln's push for a transcontinental railroad?  Especially with the huge outlay of bonds to fund it?  That would not lead to a balanced budget.

Would today's Republicans support Abraham Lincoln's handling of the Civil War?  Although today's Republicans are big on spending on the military (without any meaningful analysis of the benefits), they are also big on states' rights, the major argument leading to the Civil War.

Fair share or share fairly

Many say "the rich" should pay their "fair share" of taxes, but what really is a "fair share"?  I think often the argument is that since the rich have more money, they can afford to pay more taxes, and that they should pay at a higher marginal rate without a lot of gimmicks that allow some to pay even less taxes than some earning less.

I think that this is the wrong approach. What one should add up the "benefits" that the rich get for their taxes.

How often do we consider that those involved in commerce benefit from a good transportation network?  Every part of the network is paid for in full or part by taxes.  Almost all roads are paid for by taxes, local property taxes, state and federal taxes, and probably some by income taxes.  Airports are built and operated partly from landing fees and partly from taxes from all levels.

How often do we consider that those in business depend on a trained work force?  Without taxes we would have far fewer schools and a far smaller trained work force.  Kids could only go to school if their parents could afford it.  We have examples of this imbalance all over the world and even in our own country's past.

How often do we consider that business depends on a court system to settle disputes?  Some say we need "tort reform", meaning reduce the ability of individuals to sue corporations.  But does anybody consider how much corporations sue each other, sometimes resulting in settlements in billions of dollars.

How often do we consider that business depends on public safety, sanitary systems, and many other aspects of tax-supported infrastructure?  Would every business want its own fire department and security department.  If they are going to have their own security department, are they going to have their own courts and detention centers to do something with those who harm people or things on company property?

If businesses need all these government services, shouldn't they pay the taxes for them, either directly or through the income of those profiting from the business?

Many argue that "taxing the rich" limits their ability to invest and create jobs.  But how many of them are putting money into new ventures or expansion?  Or are many of them just moving money around?  The answer is both but I would say more of the latter than the former.

For those of you who have what you consider a good amount of savings, how much of it have you put into helping somebody start or expand a business?  More than likely you have put it into mutual funds, stocks, and bonds.  What happens when you invest.  Directly or indirectly you buy stocks and bonds from somebody who already owns them.  Does that money go into creating jobs?  Probably not, except for the transaction fees pay the salaries and bonuses of those working for mutual funds or brokerages.

The only real benefit of your buying stock and bonds is providing liquidity to the market.  This is necessary but it really doesn't really do that much for creating businesses and jobs.  Liquidity has many advantages but let us look at only one.  You put $1,000 into some investment.  It may go up or down, but let's assume not by much in either direction.  Now something happens to your car or house that you need about $1,000 to pay for.  Assuming you have no other savings, you want to quickly get your $1,000 back.  If there was no liquidity, you would have as much chance of getting your $1,000 back as you would have of quickly selling a film camera on eBay.

I could go on with many more "yes, but" considerations about taxing and investment.  I do hope that this little bit of text does help you consider almost all the arguments in print and on the blogs are over-simplifications of something that needs more than just taking a position.  And taking a position may be a way to invest, but it is not the way to run a country.

Investment or tax

Clive Thompson argues that we should have more public transit to reduce the incidents of texting while driving: "Clive Thompson to Texters: Park the Car, Take the Bus". He decries the fact that in the U.S. we are so car-dependent that we increase the number of textures driving; in other countries young people don't even consider getting a car as soon as they are eligible because public transit is so convenient.

Can't you just hear the "no-taxers" screaming about the cost of better public transit? Of course, most of them drive on tax-supported roads. They never stop to think that more public transit might reduce their travel time. Of course, fewer cars on the road also means fewer accidents, which are a cost in themselves. Fewer texters on the road means even fewer accidents. And fewer accidents means fewer court cases, which means less taxes to pay for courts. And fewer accidents means more money in all of our pockets to spend elsewhere.

Many cities even find that it pays to have free bus service: Bozeman MT, Steamboat Springs CO, and Park City UT. Park City really wins the prize with every 10-minute service on its mainline from early in the morning until late at night. Park City parking is very limited; I wonder how much acreage and dollars would have been used if there had been no free bus service.

Borrowing from our grandchildren or ...

Many seem to have a misconception of borrowing, especially government borrowing, calling it borrowing from our grandchildren. The latest was "Road to ruin could be a high-speed rail track" (Star Tribune, Jan. 24). "Borrowing from our grandchildren" could be a good thing or a bad thing, depending on circumstances.

There are two kinds of borrowing - short term and long term. Short term is to help smooth bumps in income or is for convenience. Long term is to pay for something that you need now but will not have sufficient cash for a long time. We all use both kinds: individuals, businesses, and governments. Each can be abused, but credit is something that makes modern society work more smoothly.

We put purchases on credit cards rather than walk around with a pile of cash. Many hotels and car rental agencies will only accept credit cards. Businesses take inventory loans to have sufficient stock. Why do you think there are sales? To raise the money to pay off the inventory loans. Governments borrow to smooth the cash flow for payrolls and other day-to-day costs because tax payments come in spurts.

We buy our cars and houses with loans. Some think we should save sufficient money rather than borrow, but where is our money going? To a bank who will lend it to somebody else. Meanwhile we're paying rent for housing. Businesses take out loans to buy new equipment or build new facilities. If they waited until they had sufficient cash, they may lose many business opportunities. Likewise, governments borrow to purchase equipment and build roads and bridges. If they waited until they had saved enough cash, people would complain about the cash hoard and the lack of roads and other infrastructure.

The abuse of borrowing comes when short-term borrowing becomes long-term borrowing. If we spend more on credit this month than we can pay next month, we are pushing our borrowing to long-term. Sometime this is unavoidable. We may be laid off unexpectedly. Businesses might not have the expected sales. Tax revenue could be less than predictions. But if spending more for short-term goals gets out of control, interest alone can make matters even worse. In the case of government, this truly becomes taxing our grandchildren for our own benefit.

But we aren't necessarily taxing our grandchildren for our own benefit to build and maintain infrastructure. The infrastructure may well last long past the lifetime of many current taxpayers and be available to their grandchildren. Are any of us today paying the taxes for all the county courthouses, fire and police stations, the sewers, schools, and many other government facilities? Shouldn't we pay for them? We are benefiting from them.

We are if they have been built recently and were built with borrowed money, money that may have been borrowed before we even started paying taxes. Similarly, by borrowing today for infrastructure that our children and grandchildren will benefit from, we are asking them to foot some of the bill. If we don't, neither we nor they will have a modern society.