Posts tagged ‘rich’

Adding Solar to Our House -- Here Is Why

Our house has always been a good candidate for solar.  It has a large flat roof, good sightlines to the south, and we live in just about the best solar location in the country (Phoenix).  The problem has been two-fold:

  • Even with large tax rebates and other subsidies (e.g. ability to sell power into the grid at retail rather than wholesale rates), the payback periods are long.
  • Given that we are working in 10+ year paybacks, it has never been clear to me that most panels have the life needed.  All solar panels degrade with time and sometimes fail and I am not sure most economics include those factors.

What finally changed our minds was a question my wife asked me a few months back.  She would really be distressed at losing the A/C during a Phoenix summer, and asked if we should get a backup generator.  I told her such generators were large and expensive, but that if we really wanted some grid backup in Phoenix, solar seems to make sense.  Sure, it only backs up in the day, but that is when we really need it here.  The backup aspect was the cherry on top of the economics that put us over the top.

We knew we did not want some sort of leasing or pay-for-power arrangement that would encumber our home if we ever had to sell it so that meant we could shop for about any sort of panel we wanted.  In shopping for things nowadays, there is seldom consensus on the best, but right now there seems to be a near consensus in solar panels.  The SunPower panels have the best efficiency, the lowest efficiency reduction from high temperatures, the least efficiency drop off with time, and the longest warranty.  You pay for all that of course and they are pricey, but I decided to go with the pricier panels where I could be more sure of the economics in the out years.  We have made other investments in our home that have essentially represented a decision to stay for the long-term, so we invested for the long-term here.  I will say that it is possible we could have gotten better economics with another panel that was cheaper, even considering a shorter life, but I did not do the math for every panel.***  The panels we are buying are a huge step ahead of the old ones, as they have built -in inverters in each panel and so they produce AC directly.  This greatly reduces the wiring and installation costs.

Interestingly, the efficiency did not buy us much (at least today) because our total installation was limited by our service panel limits, which total to 400 amps.  This means that the efficiency really only saved us roof space which we had more than enough of.  However, while I chose not to do a battery system this time around (too expensive and too many safety questions), I may do one in the future so I wanted space for more panels to charge a future battery system.

The total payback comes to just about 10 years for our system.  At historic cost of capital numbers this probably does not pencil out but today with ZIRP it makes sense, especially with the extra benefit of some immunity from outages.  Even to get to these numbers you folks had to chip in to help my economics, in the form of the 30% tax rebate you are giving me and the above-wholesale price you are paying me for power I put into the grid.  This payback is mainly from getting rid of a LOT of our on-peak power usage, which costs us way more per KwH than off-peak.  A second project to add more solar charging batteries for evening use will have more challenging economics and will likely have to be justified purely on grid independence.  On the other hand, your economics in another location may be better, since our off-peak power costs of around 10-12 cents is pretty cheap.  On the gripping hand, you may not have as good of a solar insolation factor where you live.  My summary is that if you live in certain parts of SoCal with high electricity rates, this is a no brainer; if you live where I do it is marginal but works if you value some grid independence; and most everywhere else it is a real stretch and maybe closer to a rich man's toy than a sensible investment**.  However, those of you who have had good economics doing this elsewhere are welcome to comment below.

I will give more reports in the future as we go through this.

**  I would argue that experience from some place like SolarCity does not necessarily count as they never have and (as part of Tesla) likely never will make money, so there is an added subsidy in the equation there from well-meaning but naive stockholders.

*** It is hard also to do the full installation math on every panel as most installers have a limited range they work with and we only had the energy and time to engage a few installers for quotes.

What Socialists (and Most Other People) Don't Understand About The Oil Industry

This same failure has happened over and over, at one time or another in Russia and Mexico and now in Venezuela.  Some tried to make it happen in the 1970's in the US, and Elizabeth Warren would still like to try, I bet.  Socialists take over the oil industry and revel in the first months about all they money they are able to divert to "social" expenditures.  Then, in a few year, it all comes crashing down.  This tweet from Michael Moore five years ago gives you a good idea of the thinking.

Socialists have always seen production and wealth creation as some sort of magic, a fountain in the desert where piggy rich people push to the front and take more than their fair share.  Oil looks to them as the ultimate example of this -- wealth just flows out of the ground and evil rich people at Exxon grab it all for themselves.

But in fact, oil is just the opposite of the magic fountain.  It takes a huge quantity of money and brains to get even one drop of it in usable form to your car.  Imagine trying to figure out where even to look for oil when it is hiding far under ground.  Or having to poke holes a mile into the ground from structures standing in 1000 foot deep water in the Gulf of Mexico.  And then transporting the oil hundreds or thousands of miles by pipeline and ship and train and truck.  And then carefully refining the oil almost molecule by molecule in multi-billion dollar facilities.  And then getting the usable parts to the right people, including distribution outlets for you and I on almost every corner of town.

Right now gasoline in Phoenix goes for about $2.85 a gallon, which is about $2.40 before taxes.  This is 60 cents a quart, which compares to the retail price of a bottle of water of about $2.00-$2.50 a quart.  It's a freaking miracle of modernity that you can fill your car this inexpensively.

Anyway, it turns out that oil is the ultimate "you have to spend money to make money" kind of business.  And once you spend all that money, you investment immediately starts dying.  Oil companies have to completely rebuild retail gas stations every 20-30 years.  Refineries have to be constantly updated with really expensive improvements to take advantage of new technologies, to adjust to changing markets and regulations, and to handle different types of crude oil.  And then there is oil production.  Drill a well today and the moment you open it up, the production starts to fall off.  The flow will drop, the percentage of water might increase-- a million things can happen and all of them bad.  To keep wells flowing companies constantly have to reinvest their profits in reworking the wells (fracking and such) and adding enhanced recovery systems.  As fields deplete, new wells have to be drilled in new locations or at new depths, or else whole new fields have to be developed to replace them.

The "greedy and short-term-focused" oil companies reinvest much of their earnings to make sure the supply of oil is sustained.  The "enlightened" socialists harvest all the cash they can and hand it to their cronies, allowing the production assets to fall apart and, eventually, their economy to collapse.

Thoughts on Anna, the Millennial Sociopath

This article about Anna, the millennial sociopath, has been linked all around but it is a good yarn and I recommend it as an interesting read if you have not seen it.  I have a couple of thoughts.

I told me wife that I was unlikely to be fooled by Anna, because I have known a lot of rich and successful people and almost to a one they don't engage in this sort of name-dropping behavior.  Where I grew up we called that "all hat and no cattle."  I have met people with some of the same sorts of shticks as Anna and they have always been full of sh*t.

My wife, who used to live in Manhattan, said that from her experience things were different in New York and even successful people felt compelled to make a public spectacle of their success.   As much as I would like to believe there is a difference so we flyover country folks can feel a warm sense of superiority, this may be more a function of her having lived there in the 1980's.  I know successful New Yorkers today and they don't act this way, the one in the White House notwithstanding.

I actually think this may be more of a function of people without business experience building up their understanding of business from watching fictional shows on TV and in movies.  I call this the Dynasty effect, where everyone thinks big business works just like on Dallas and Dynasty (sorry, dating myself here).  Actually, business life is EXACTLY like fictional accounts on the screen, but you have to watch Office Space and Silicon Valley rather than Dynasty.

I want to add that there is something oddly compelling about this story for folks like me who are introverts.  When one starts a role playing game, one has a character sheet with different qualities.  Typically increasing one characteristic means decreasing another.  I think I found Anna compelling because her character sheet was filled in so differently from mine.   And I don't mean that in a self-serving way like she is dishonest and I am honest.  Sure, at the end of the day Anna is an unlovable parasite, but its hard as an introvert not to secretly admire so much daring, a willingness to walk up to pretty much anyone anywhere and ask them for almost any favorNext time you are playing your fighter in that RPG, wonder a bit -- as he wades through an ocean of blood with his sword and constantly takes near-fatal damage that has to be healed while watching you mage stand in the rear and just nuke creatures from a distance with spells -- whether that fighter might wish that you had specc'd him with just a bit of magic.

Why Monopsony Employer Power Is Virtually Irrelevant to the Impact of a Higher Minimum Wage on Employment

Most of us who took Econ 101 would expect that an increase in the minimum wage would increase unemployment, at least among low-skilled and younger workers most affected by the minimum wage.  After all, demand curves slope downwards so that an increase in price of labor should result in a decrease in demand for that labor.

There is a great body of work on employment effects of minimum wage, and surveying this corpus is beyond the scope of this paper, but a good starting point might be the recent detailed and careful study by Jardim et. al. of the University of Washington, which analyzed the employment effects of the increase in minimum wages in Seattle from $11 to $13.  They found that while average hourly wages for lower-paid workers went up by 3%, the total hours worked went down by 9%, resulting in a net reduction in total wages for lower-paid, lower-skill workers at the same time that other sectors of the Seattle economy were booming.

Monopsony Power & The Labor Market

Supporters of the minimum wage, however, argue that these employment effects are exaggerated, because employers have something called monopsony power when hiring low-skill workers.  What a monopoly is to customers – it limits choices – a monopsony does to suppliers, in this case the suppliers of labor.  The argument is that due to a bargaining power imbalance, employers can hire workers for less than they would be willing to pay in a truly competitive market, gaining the company added savings that increase its profits.  Under this theory, minimum wage laws help to offset this power imbalance and force companies to disgorge some of their excess profits in favor of higher wages.  If this assumption is true, then demand for labor would not be reduced due to a minimum wage increase because, prior to the wage increase, companies were paying less than they were willing to pay and thus are still willing to continue to pay the wages at the new higher rates.

While economists argue about this monopsony theory, my intuition as an employer makes me skeptical.  However, rather than argue about whether my little company that scrambles to staff itself every year somehow wields excess power in the labor markets, I am going to argue that the existence of monopsony power is irrelevant to the employment effects of a minimum wage increase: Even if companies are able to pay workers less than they might via such bargaining power imbalances, whatever gains they reap from workers will end up in consumer hands.  As a result, minimum wage increases still must result either in employment reductions or consumer price increases or more likely both.

Why? Well, we need to back up and do a bit of business theory.  Just as macroeconomics (all the way back to Adam Smith) spends a lot of time thinking about why some countries are rich and some are poor, business theory spends a lot of time trying to figure out why some firms are profitable and some are not.  One of the seminal works in this area was Michael Porter's Five Forces model, where he outlines five characteristics of markets and firms that tend to drive profitability.  We won't go into them all, but the most important of the forces for us (and likely for Porter) is the threat of new entrants -- how easy or hard is it for new firms to enter the marketplace and begin competing against an incumbent firm?  If new companies can enter into competition easily, a profitable firm will simply attract new competitors, and keep attracting them until the returns in that market are competed down to some minimum level.

Let’s consider a company paying minimum wage to most of its employees.  At least at current minimum wage levels, minimum wage employees will likely be in low-skill positions, ones that require little beyond a high school education.  Almost by definition, firms that depend on low-skill workers to deliver their product or service have difficulty establishing barriers to competition. One can’t be doing anything particularly tricky or hard to copy relying on workers with limited skills. As soon as one firm demonstrates there is money to be made using low-skill workers in a certain way, it is far too easy to copy that model.    As a result, most businesses that hire low-skill workers will have had their margins competed down to the lowest tolerable level.  Firms that rely mainly on low-skill workers almost all have single digit profit margins probably averaging around 5% of revenues (for comparison, last year Microsoft had a pre-tax net income margin of over 23%).

If there were some margin windfall to be obtained from labor market power that allowed a company to hire people for far less than their labor was worth to it, and thus earn well above this lowest tolerable margin,  new companies would try to enter the market, probably by lowering prices to consumers using some of that labor premium.  Eventually, even if the monopsony premium exists, it is given away to consumers in the form of lower prices.  If the wholesale price of gasoline suddenly falls sharply, gasoline retailers don't get to earn a much higher margin, at least not for very long.  Competition quickly causes the retailer's lowered costs to be passed on to consumers in the form of lower retail prices.  The same goes for any lowering of labor costs due to monopsony power  -- if such a windfall exists, it is quickly passed on to consumers.

As a result, the least likely response to increasing labor costs due to regulation is that such costs will be offset out of profits, because for most of these firms, profits have already been competed down to the minimum necessary to cover capital investment and the minimum returns to keep owners interested in the business. The much more likely responses will be:

  • Raising prices to cover the increased costs. While competitors that are subject to the same laws will likely have similar increases, the increase may not be acceptable to consumers and almost certainly will result in some loss in unit sales.
  • Reducing employment. There are a variety of ways in which a minimum wage increase could result in employment losses.  A company might raise its prices to compensate for higher costs, only to find its unit volumes falling, necessitating a layoff in staff.  Or the staff reductions may also be due to targeted technology investments, as increases in labor costs also increase the returns to investments in capital equipment that substitutes for labor
  • Exiting one or more businesses and laying everyone off. This may take the form of exiting a few selected low-margin lines of business, or liquidation of the entire company if the business is no longer viable with the higher labor costs.

A Real-World Minimum Wage Increase Example

A concrete example should help. Imagine a service business that relies mainly on minimum wage employees in which wages and other labor related costs (payroll taxes, workers compensation, etc.) constitute about 50% of the company’s revenues. Imagine another 45% of company revenues going towards covering fixed costs, leaving 5% of revenues as profit.  This is a very typical cost breakdown, and in fact is close to that of my own business.  The 5% profit margin is likely the minimum required to support capital spending and to keep the owners of the company interested in retaining their investment in this business.

Now, imagine that the required minimum wage rises from $10 to $15 (exactly the increase we are in the middle of in places like Seattle and California).  This will, all things equal, increase our example company's total wage bill by 50%. With the higher minimum wage, the company will be paying not 50% but 75% of its revenues to wages. Fixed costs will still be 45% of revenues, so now profits have shifted from 5% of revenues to a loss of 20% of revenues. This is why I tell folks the math of supposedly absorbing the wage increase in profits is often not even close.  Even if the company were to choose to become a non-profit charity outfit and work for no profit, barely a fifth of this minimum wage increase in this case could be absorbed.  Something else has to give -- it is simply math.

The absolute best case scenario for the business is that it can raise its prices 25% without any loss in volume. With this price increase, it will return to the same, minimum acceptable profit it was making before the regulation changed (profit in this case in absolute dollars -- the actual profit margin will be lowered to 4%). But note that this is a huge price increase.   It is likely that some customers will stop buying, or buy less, at the new higher prices. If we assume the company loses 1% of unit volume for every 2% price increase, we find that the company now will have to raise prices 36% to stay even given both the minimum wage increase and the lost volume. Under this scenario, the company would lose 18% of its unit sales and is assumed to reduce employee hours by the same amount.

In the short term, just for the company to survive, this minimum wage increase leads to a substantial price increase and a layoff of nearly 20% of the workers.   Of course, in real life there are other choices.  For example, rather than raise prices this much, companies may execute stealth price increases by laying off workers and reducing service levels for the same price (e.g. cleaning the bathroom less frequently in a restaurant).  In the long-term, a 50% increase in wage rates will suddenly make a lot of labor-saving capital investments more viable, and companies will likely substitute capital for labor, reducing employment even further but keeping prices more stable for consumers.

As you can see, in our example we don’t need to know anything about bargaining power and the fairness of wages. Simple math tells us that the typical low-margin service business that employs low-skill workers is going to have to respond with a combination of price increases and job reductions.

Seattle Minimum Wage Study

The Seattle city government commissioned a study (pdf) to see what the actual effects were of their increasing the city minimum wage to $13 (bless their hearts, politicians actually tried to evaluate the actual effects of a controversial policy change).  The study authors had access to a uniquely rich data set.  Unlike folks like Card and Kruger, who had to use proxies for low-skill labor employment such as employment in the fast food industry, this study's authors had access to individual wage and hour data by person by location.   The result was one of the highest measured negative net effects of a minimum wage yet calculated:

This paper evaluates the wage, employment, and hours effects of the first and second phase-in of the Seattle Minimum Wage Ordinance, which raised the minimum wage from $9.47 to $11 per hour in 2015 and to $13 per hour in 2016. Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016. Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies.

Note what this means -- the amount of pay raise some low-skill employees got was less than the pay lost by workers who had their hours reduced or eliminated.  This is against a backdrop of a huge boom in Seattle in total employment, meaning that the minimum wage greatly increased income inequality, reducing income to lower-skill workers at the same time higher-skill workers were making a lot more money.  This is not surprising given the data here, which shows the difference between low-income and middle class to be more than 80% due to hours worked, not wage rates.

To some extent, the severity of these results was influenced by the limited region to which the wage applied (making it easier for customers to run for the border, so to speak, to find lower-priced goods and services).  But it is telling that the study with by far the best data shows the biggest negative effects.  To this end, the authors actually evaluate the Card and Krueger approach of looking narrowly at fast food employment, and actually are able to replicate Card and Krueger's results (of limited employment effect of a minimum wage increase in the fast food industry) in Seattle.  This means that Card and Kruger, with their limited proxy, would have said Seattle had no negative employment effects while better more comprehensive data shows the opposite.

Thus, by using the imprecise proxy of all jobs in a stereotypically low-wage industry, prior literature may have substantially underestimated the impact of minimum wage increases on the target population. Finally, column 5 returns to evaluating effects on total hours, but now for all 34 jobs in NAICS 722. While the estimates continue to be insignificant, they are now more negative, averaging -3.3% in the last three quarters. This result is consistent with Neumark and Wascher’s (2000) critique of Card and Krueger (1994).

Why Monopsony Power May Be Irrelevant to the Effects of A Minimum Wage Increase

Most of us who took Econ 101 would expect that an increase in the minimum wage would increase unemployment, at least among low-skilled and younger workers.  After all, demand curves slope downards so that an increase in price of labor should result in a decrease in demand for that labor.

Supporters of the minimum wage, however, argue that employers have monopsony power when hiring low-skill workers. What they mean by this is that due to a bargaining power imbalance, employers can hire workers for less than they would be willing to pay in a truly competitive market.  As the theory goes, this in turn creates an additional consumer surplus for employers, which manifests itself as higher profits.  A minimum wage increase would thus reduce this surplus but not effect employment because companies before the new minimum wage were paying less than they were willing to pay.  Thus minimum wage supporters argue that higher wages mandated by minimum wage laws will be paid out of these excess profits, and not result in higher prices or less employment.

My understanding (and I am not an economist) is that the evidence for monopsony power in hiring low-skill workers is weak or at best limited to niche circumstances.  However, I am going to argue that it does not matter. Even if companies are able to pay workers less than they might via such monopsony power, whatever gains they reap from workers ends up in consumer hands.  As a result, minimum wage increases still must result either in employment reductions or consumer price increases or more likely both.

Why Monopsony Power May Not Matter

Why? Well, we need to back up and do a bit of business theory.  Just as macroeconomics (all the way back to Adam Smith) spends a lot of time thinking about why some countries are rich and some are poor, business theory spends a lot of time trying to figure out why some firms are profitable and some are not.  One of the seminal works in this area was Michael Porter's Five Forces model, where he outlines five characteristics of markets and firms that tend to drive profitability.  We won't go into them all, but the most important for us (and likely for Porter) is the threat of new entrants -- how easy or hard is it for new firms to enter the marketplace and begin competing against an incumbent firm.  If new companies can enter into competition easily, a profitable firm will simply attract new competitors, and keep attracting them until the returns in that market are competed down.

So let's consider a company paying minimum wage to most of its employees.  At least at current minimum wage levels, minimum wage employees will likely be in low-skill positions, ones that require little beyond a high school education.  Almost by definition, firms that depend on low-skill workers to deliver their product or service have difficulty establishing barriers to competition. One can’t be doing anything particularly tricky or hard to copy relying on workers with limited skills. As soon as one firm demonstrates there is money to be made using low-skill workers in a certain way, it is far too easy to copy that model.  As a result, most businesses that hire low-skill workers will have had their margins competed down to the lowest tolerable level.  Firms that rely mainly on low-skill workers almost all have single digit profit margins (net income divided by revenues) -- for comparison, last year Microsoft had a pre-tax net income margin of over 23%.

As a result, the least likely response to increasing labor costs due to regulation is that such costs will be offset out of profits, because for most of these firms profits have already been competed down to the minimum necessary to cover capital investment and the minimum returns to keep owners invested in the business. The much more likely responses will be

  1. Raising prices to cover the increased costs. This approach may be viable competitively, as most competitors will be facing the same legislated cost pressures, but may not be acceptable to consumers
  2. Reducing employment. This may take the form of stealth price increases (e.g. reduction in service levels for the same price) or be due to a reduction in volumes caused by price increases. It may also be due to targeted technology investments, as increases in labor costs also increase the returns to capital equipment that substitutes for labor
  3. Exiting one or more businesses and laying everyone off. This may take the form of targeted exits from low-margin lines of business, or liquidation of the entire company if the business Is no longer viable with the higher labor costs.

An Example

When I discuss this with folks, they will say that the increase could still come out of profitability -- a 5% margin could be reduced to 3% say.  When I get comments like this, it makes me realize that people don't understand the basic economics of a service firm, so a concrete example should help. Imagine a service business that relies mainly on minimum wage employees in which wages and other labor related costs (payroll taxes, workers compensation, etc) constitute about 50% of the company’s revenues. Imagine another 45% of company revenues going towards covering fixed costs, leaving 5% of revenues as profit.  This is a very typical cost breakdown, and in fact is close to that of my own business.  The 5% profit margin is likely the minimum required to support capital spending and to keep the owners of the company interested in retaining their investment in this business.

Now, imagine that the required minimum wage rises from $10 to $15 (exactly the increase we are in the middle of in California).  This will, all things equal, increase our example company's total wage bill by 50%. With the higher minimum wage, the company will be paying not 50% but 75% of its revenues to wages. Fixed costs will still be 45% of revenues, so now profits have shifted from 5% of revenues to a loss of 20% of revenues. This is why I tell folks the math of absorbing the wage increase in profits is often not even close.  Even if the company were to choose to become a non-profit charity outfit and work for no profit, barely a fifth of this minimum wage increase in this case could be absorbed.  Something else has to give -- it is simply math.

The absolute best case scenario for the business is that it can raise its prices 25% without any loss in volume. With this price increase, it will return to the same, minimum acceptable profit it was making before the regulation changed (profit in this case in absolute dollars -- the actual profit margin will be lowered to 4%). But note that this is a huge price increase. It is likely that some customers will stop buying, or buy less, at the new higher prices. If we assume the company loses 1% of unit volume for every 2% price increase, we find that the company now will have to raise prices 36% to stay even both of the minimum wage increase and lost volume. Under this scenario, the company would lose 18% of its unit sales and is assumed to reduce employee hours by the same amount.  In the short term, just for the company to survive, this minimum wage increase leads to a substantial price increase and a layoff of nearly 20% of the workers.   Of course, in real life there are other choices.  For example, rather than raise prices this much, companies may execute stealth price increases by laying off workers and reducing service levels for the same price (e.g. cleaning the bathroom less frequently in a restaurant).  In the long-term, a 50% increase in wage rates will suddenly make a lot of labor-saving capital investments more viable, and companies will likely substitute capital for labor, reducing employment even further but keeping prices more stable for consumers.

As you can see, in our example we don’t need to know anything about bargaining power and the fairness of wages. Simple math tells us that the typical low-margin service business that employs low-skill workers is going to have to respond with a combination of price increases and job reductions.

How My Company Has Responded

Just to put a bit more flesh on this, I will give a real example from my own company.  My company operates public recreation facilities, mainly campgrounds, under bid contracts.  To understand our response to rising minimum wage, you need to understand some background:

  • In bidding these, we bid both the camping fee we will charge to customers as well as the rent we will pay to the government for the concession.  Given the weights the government uses in the bid process, keeping customer price low is more important than the rent we pay, so in most cases the prices we charge customers are well below the private market rate for similar campgrounds.
  • We have limited ability to further increase productivity, in part because our ability to invest in these campgrounds in limited.
  • Because we have many contracts across the country, our reputation is important and so we seldom will entertain reductions in service, such as cleaning frequency
  • Labor and labor-related costs are about 50% of revenues, and most employees are paid minimum wage.  Profit margins hover around 5% of revenues

One of the states we operate in is California.  We are in the midst of a minimum wage increase there from $8 an hour several years ago to $15 several years hence, or an increase of 87.5%.  Basically we have had two responses:

  • In places where we are under the market price, we have been able to raise prices without a lot of drop in volume.  But this means that our camping rates in some locations have risen from $18 to a future $26 a night, an enormous increase in just a few years.
  • In places where we did not think the market would bear such a rate increase, or where our contract did not allow such a rate increase, we closed our operation.  In fact, we have exited about half our business in California (while simultaneously growing it aggressively in states like Tennessee).  In all cases this has resulted in a loss of employment -- either the location was never reopened by anyone else, or else it was reopened by a competitor with different reputational concerns who staffed the location with far fewer employees.

Scooped George Will By A Decade

George Will has a good article making the point that you are almost certainly richer today, in terms of the products and services you have access to, than a billionaire was in 1916.  Loyal Coyote Blog readers will have read roughly this same article over a decade ago.  In that nearly ancient post, I compared a middle class home-owner in my neighborhood to the owner of one of the largest mansions in America in the late 19th century:

House1aHouse2b

One house has hot and cold running water, central air conditioning, electricity and flush toilets.  The other does not.  One owner has a a computer, a high speed connection to the Internet, a DVD player with a movie collection, and several television sets.  The other has none of these things.  One owner has a refrigerator, a vacuum cleaner, a toaster oven, an iPod, an alarm clock that plays music in the morning, a coffee maker, and a decent car.  The other has none of these.  One owner has ice cubes for his lemonade, while the other has to drink his warm in the summer time.  One owner can pick up the telephone and do business with anyone in the world, while the other had to travel by train and ship for days (or weeks) to conduct business in real time.

I think most of you have guessed by now that the homeowner with all the wonderful products of wealth, from cars to stereo systems, lives on the right (the former home of a friend of mine in the Seattle area).  The home on the left was owned by Mark Hopkins, railroad millionaire and one of the most powerful men of his age in California.  Hopkins had a mansion with zillions of rooms and servants to cook and clean for him, but he never saw a movie, never listened to music except when it was live, never crossed the country in less than a week.  And while he could afford numerous servants around the house, Hopkins (like his business associates) tended to work 6 and 7 day weeks of 70 hours or more, in part due to the total lack of business productivity tools (telephone, computer, air travel, etc.) we take for granted.  Hopkins likely never read after dark by any light other than a flame.

If Mark Hopkins or any of his family contracted cancer, TB, polio, heart disease, or even appendicitis, they would probably die.  All the rage today is to moan about people's access to health care, but Hopkins had less access to health care than the poorest resident of East St. Louis.  Hopkins died at 64, an old man in an era where the average life span was in the early forties.  He saw at least one of his children die young, as most others of his age did.  In fact, Stanford University owes its founding to the early death (at 15) of the son of Leland Stanford, Hopkin's business partner and neighbor.  The richest men of his age had more than a ten times greater chance of seeing at least one of their kids die young than the poorest person in the US does today.

Hopkin's mansion pictured above was eventually consumed in the fires of 1906, in large part because San Francisco's infrastructure and emergency services were more backwards than those of many third world nations today.

Here is a man, Mark Hopkins, who was one of the richest and most envied men of his day.  He owned a mansion that would dwarf many hotels I have stayed in.  He had servants at his beck and call.  And I would not even consider trading lives or houses with him.  What we sometimes forget is that we are all infinitely more wealthy than even the richest of the "robber barons" of the 19th century.  We have longer lives, more leisure time, and more stuff to do in that time.   Not only is the sum of wealth not static, but it is expanding so fast that we can't even measure it.  Charts like those here measure the explosion of income, but still fall short in measuring things like leisure, life expectancy, and the explosion of possibilities we are all able to comprehend and grasp.

I have a similar reaction every time I tour the mansions in Newport, RI.  They are magnificent in their way, but they are also cold, and to my modern eye, unlivable.  Think of it this way -- You are trapped alone on a desert island.  A plane airdrops you a crate of diamonds.  You are rich, right?

 

 

The Staggering Administrative Bloat of Universities

This chart is from a recent state audit report of Janet Napolitano's office at the University of California, an audit I already wrote about here.

Obviously Napolitano's office is particularly bad as compared to peers, but she has 1667 staff and spends over a half billion (billion with a B) just on the office of the President!  This is not in any way shape or form the total administrative size of the system - each university has its own administrative staff, for example.  This is just her central office.  This is a staggering number.  It equates to every student in the system paying over $2500 a year just for the central headquarters staff that they will never see, this is before the first dollar is spent on their individual campus -- or God forbid -- on teaching or academics.  To my mind this is way more of a scandal than her hiding a money reserve in various accounts.

This begins to get at a conflict I keep expecting to happen, but doesn't.  Time and time again, particularly in places like California, we find examples where agencies that are supposed to be serving the public are in fact diverting much of their resources to maintain the staffing levels, salaries, and rich benefits and pensions of their employees.  For years I have expected some sort of civil war on the Left, where Progressives figure out that providing things they care about (e.g. education, parks) is being limited by the huge resources that are being diverted to government employees.  Just look at the chart above -- California Democrats have twisted themselves into knots trying to find an incremental $50 or $100 million of funding for the California public university system, and here it is -- I can see an easy $400 million one could easily pull out of Napolitano's office.  Unfortunately, government employees and their unions are a big force in electing Democrats, and so they are reluctant to challenge these folks.  It is a classic example of "do you care about the things you say you value or do you care about power" and so far in places like California the answer has been "power."

S-Corps and Faulty Income Inequality Data

In a traditional C corporation, the corporation pays its own taxes, and then income that is passed on it its owners in the form of dividends is taxed again as personal income on an individual's 1040.  The S-corporation was an positive innovation that has corporate income passing through to the tax return of the owners, and getting taxed only once on these individual returns.  Over the last 50 years, there has been a steady shift of small businesses from C corps to S corps.

Over a decade ago, I suggested that this shift may be in part to blame for the rise in income inequality.  Entrepreneurial profits that would have stayed before in a C-corp are now showing up immediately on individual tax returns.  In January, 2007 I wrote

The introduction of the "S-corporation" means that an increasing amount of entrepeneurial income is showing up on 1040's.  With C corporations, the incentive was to delay taking any income from the company for as long as possible to avoid double taxation, preferably taking it at time of the company's sale.  With S-Corporations, there is no double taxation problem so corporate income flows through to the individual 1040.  Business owners are suddenly reporting more income not because they are making more, but because they are recognizing it in a different way in a different tax form.  Much of the rich getting richer is actually just the rich recognizing their corporate income in small businesses in a different way

I am happy to see empirical proof of this hypothesis start to arrive:

Since 2000, different measures of top income inequality have exhibited very different trends. Top income shares based on measures of total income show a continued rise, whereas top income shares based on wage and salary income show no increase in inequality post-2000. The most important difference between these two measures of income is the income that accrues to S-corporations....

But interpreting trends in the S-corporation component is extremely difficult. Feenberg and Poterba (1993), Gordon and Slemrod (2002), and Cooper et al. (2016) warn that much of the recent increase in S-corporation income is income that previously accrued to C-corporations. Such income is not “new” income earned by top earners but is simply income that was previously labeled as corporate income rather than household income.

Progressive Narrative Fail: Why Are Low Income Workers and the Unemployed Running from High Minimum Wage States to Low Minimum Wage States?

I think many folks are aware of how certain wealthy neighborhoods use zoning to keep out the lower-income people they don't want around  (e.g. minimum lot sizes, minimum home sizes, petty harassment over home and lawn maintenance, etc.)  If you think of California as one big rich neighborhood, many of their labor and housing laws have this same effect of keeping lower income people out.

From the Sacramento Bee

Every year from 2000 through 2015, more people left California than moved in from other states. This migration was not spread evenly across all income groups, a Sacramento Bee review of U.S. Census Bureau data found. The people leaving tend to be relatively poor, and many lack college degrees. Move higher up the income spectrum, and slightly more people are coming than going.

About 2.5 million people living close to the official poverty line left California for other states from 2005 through 2015, while 1.7 million people at that income level moved in from other states – for a net loss of 800,000.

...
The leading destination for those leaving California is Texas, with about 293,000 economically disadvantaged residents leaving and about 137,000 coming for a net loss of 156,000 from 2005 through 2015. Next up are states surrounding California; in order, Arizona, Nevada and Oregon.

Wow, I am totally lost.  The minimum wage currently in California is $10.50 an hour, going up to $15 over the next 5 years.  The minimum wage in Texas is the Federal minimum at $7.25.  If I understand it right from progressives, minimum wages are a windfall for workers that raise wages without any reduction in employment.  So why are the very people California claims it is trying to help leaving the state in droves?  For unenlightened Texas, of all places.

Of course the reason is that minimum wages do indeed have employment effects.If you think of California as one big rich neighborhood, minimum wages act as a zoning plan to keep the "unwashed" out.  Setting a minimum wage of $15 is equivalent to saying, "if your skills and education and experience are low enough that your labor is not yet worth $15 an hour or more, stay out."

Of course, there are a lot more problems for jobs in California than just minimum wages.  At every turn, California works to make operating a business difficult and hiring unskilled workers more expensive.  And then there is the cost side.  With its building restrictions and environmental rules, most California cities have artificially inflated housing costs, just another way to tell lower income  people to keep out.

Well-paid new arrivals in California enjoy a life that is far out of reach of much of the state’s population. Besides Hawaii and New York, California has the highest cost of living in America.

During the past three years in Sacramento, median rent for a one-bedroom apartment has risen from about $935 a month to $1,230 a month, according to real estate tracking firm Zillow.com. A single mother working 40 hours a week at $15 an hour would spend nearly half of her gross income to afford an apartment at that price. She would pay about 10 percent less for a one-bedroom rental in Houston or Dallas.

Sacramento remains relatively affordable compared to other California markets. Median rent for a one-bedroom apartment in Los Angeles is about $2,270 a month. In San Francisco, $3,700. Without subsidies, those prices are unreachable for a single parent making $15 an hour.

The key to attacking poverty is creating more jobs, not artificially raising the rates of entry-level jobs.

If The US Won't Defend Market Capitalism, No One Will

Yesterday at an event called One Day University, I saw a talk by William Burke-White of Penn and formerly of the Obama state department (I think he was one of many consultants, but I can never figure out seniority from people's biographies - his is here).

Mr. Burke-White was discussing the liberal world order created by the US after WWII and recent decline / threats to this world order and American power.  He discussed five trends or forces driving changes, and you probably can predicts many of them.  He discussed the rise of new world powers (e.g. China), the rise of powerful NGO's (e.g. ISIS) and the expansion of the Internet (which can destabilize traditional powers).  All fine, I have no particular comment on that stuff.  He also discussed climate change, with a picture of Manhattan underwater, and though I am tempted, I won't even respond to that.

What caught my attention was his fifth point -- about income inequality.  He showed a slide with the meme that 8 people (Warren Buffet et al) had more wealth than something like half the world's population put together.   His conclusion was that the liberal world order had failed because so much wealth had been concentrated in a few hands.

Well, if American power and influence is declining in the world and Mr. Burke-White is an example of the thinking of the Obama administration over the last 8 years, I now have a better understanding of why.   Sure there are really rich people.   There were probably 8 really rich guys in 1400 (though they would have all been Kings and Emperors rather than private business people).  The really different, world-changing event over the last 50 years has been the emergence from poverty of over a billion people, as facilitated by market capitalism.  Never before in all of the history of the planet have so many people been pulled out of poverty in such a short time.  Never before has such a large percentage of the globe moved beyond pure subsistence farming.  If the leaders of this country find it impossible to communicate this simple good news, then of course the post-WWII liberal world order is going to struggle.

Look, I understand that baby boomers (a group of which I am barely a member) have a hard time figuring out how to cope with this country's many past missteps.  Yes, we have been ham-handed (and that is generous) in exercising our power and we have often failed to live up to our stated values.  But helping to unleash a wave of market capitalism on the world is among our true successes.   And this is the US's one true source of power, this wave of prosperity we have helped to birth.  Other supposed sources of our power -- a big military and atomic bombs -- are horrifying.  Market capitalism is our one source of strength that is genuinely positive.  If we are staffing the state department with people who don't get this, then no wonder we are losing influence in the world.

Why the Minimum Wage is A Bad Anti-Poverty Policy in One Chart

This is a regular chart used by Mark Perry, updated for the most recent data.  It is one of my favorites.

click to enlarge

Mark has a lot of great analysis of this data, too long to excerpt, so I refer you back to the link to see his comments.  But I want to add one of my own.

Let me restate the numbers in this chart one other way to give a pretty stark view of utility of raising the minimum wage as a poverty program. Let's look at the first lowest vs. the second lowest quintile.

Raising current workers in the poorest quintile to second quintile earnings ($28,970 to $35,858) would increase the first quintile's average income by $2,962. On the other hand, keeping first income wages flat but raising first quintile household's average earners to second quintile number of earners (0.43 to 0.91) increases the first quintile's average income by $13,905.

By this analysis, increasing first quintile hours worked (and % employment) has 4.7 times more leverage than fiddling with wage rates.

So now consider raising the minimum wage, which will raise some wages but reduce unskilled employment -- it is exactly the wrong thing to do, even before we consider that the majority of minimum wage earners who benefit from such an increase and keep their jobs are not in the lowest quintile but are 2nd and third earners in rich and middle class households.

My Nomination for Corporate State of the Year: Napa County, California

Last week I went on a wine-tasting tour in the Napa Valley with a bunch of friends who are passionate about wine.  It was an odd experience, because I am not passionate about wine and do not have the tasting ability to discern many differences between the wine.  I could tell it was a red wine, and maybe if it was dry or fruity, but hints of tobacco and blackcurrent?  Not so much.  It was also weird to be in a place where I really was not very passionate (wine is behind both beer and cocktails in my drinking hierarchy) but I was surrounded by people with a an excess of passion -- by people who seem to build their whole life around wine.  There was a lot of competitive one-upsmanship and virtue signalling going on around wine that I only barely understood.  I would equate the whole experience with my wife's experience at Comicon, standing in line behind two guys passionately arguing about comic book hero backstories.  I tried my hardest to be tolerant of those who had really different interests than I have, though I will say that this tolerance was NOT shared by most wine enthusiasts who treated me as demonstrably defective when I admitted that wine did not do that much for me.

Anyway, at each tour we typically got the whole backstory of the business.  And the consistent theme that ran through all of these discussions was the simply incredible level of regulation of the wine business that goes on in Napa.   I have no idea what the public justification of all these rules and laws are, but the consistent theme of them is that they all serve to make it very hard for small competitors or new entrants to do business in the county.  There is a board, likely populated by the largest and most powerful entrenched wine makers, that seems to control the whole regulatory structure, making this a classic case of an industry where you have to ask permission of your competitors to compete against them.  There are minimum sizes, in acres, one must have to start a new winery, and this size keeps increasing.   Recently, large winemakers have started trying to substantially raise this number again to a size greater than the acreage of any possible available parcel of land, effectively ending all new entrants for good.  I forget the exact numbers, but one has to have something like 40 acres of land as a minimum to build a structure on the land, and one must have over 300 acres to build a second structure.  You want to buy ten acres and build a small house and winery to try your hand at winemaking? -- forget it in Napa.

It took a couple of days and a bunch of questions to put this together.  Time and again the guide would say that the (wealthy) owners had to look and wait for a long time to find a piece of land with a house on it.  I couldn't figure out why the hell this was a criteria -- if you are paying millions for the land, why are you scared to build a house?   But it turned out that they couldn't build a house.  We were at this beautiful little place called Gargiulo and they said they bought their land sight-unseen on 3 hours notice for millions of dollars because it had a house AND a separate barn on it grandfathered.  Today, it was impossible to get acreage of the size they have and build two structures on it, but since they had the barn, they could add on to it (about 10x the original size of the barn) to build the winery and still have a separate house to live in.

This is why the Napa Valley, to my eye, has become a weird museum of rich people.  It seems to be dominated by billionaires who create just fantastically lovely showplaces that produce a few thousand cases of wine that is sold on allocation for 100+ dollars a bottle to other rich people.   It is spectacularly beautiful to visit -- seriously, each tasting room and vineyard is like a post card, in large part because the owners are rich enough to care nothing about return on capital  invested in their vineyards.  The vineyards in Napa seem to have some sort of social signalling value which I don't fully understand, but it is fun to visit for a few days.  But in this set-piece, the last thing the folks who control the county want is for grubby little middle-class startups to mess up their carefully crafted stage, so they are effectively excluded.

I know zero about wines, but from other industries this seems to be a recipe for senescence.  It would surprise me not at all to see articles get written 10 years from now about how Napa wines have fallen behind other, more innovative areas.  I have never been there, but my friends say newer areas like Paso Robles has an entirely different vibe, with working owners on small plots trying to a) actually make a viable business of it and b) innovate and try new approaches.

Postscript:  The winner of the cost-no-object winery award had to be Palmaz.  Created by one of the folks who invented the heart stent, it was a wonderfully eccentric place.   The owner theorized years ago that pumping wine (something that is done at many steps to transfer it between process steps) hurts the wine by breaking up longer chain tannin molecules (search me if this is true).  Anyway, he wanted everything gravity fed, but that meant you needed grapes to come in at the top, with fermenters below that, and filters below that, and wine barrels for aging below that.  Well, if you have been reading this post, you can guess that a building tall enough for this certainly can't be built in Napa.  So he carved it out of a mountain.  Seriously, this place is like NORAD, with probably a mile of underground passages stacked 18 stories deep from top to bottom.  In the center of the mountain is this room:

In a circle behind the railing are fermenters on a train track that can rotate as a group all around like a giant carousel to position them under the grape chute or over the filters.  The room is carved out with a giant dome, and on the dome are projected process control data about each grape or wine batch.  It was truly incredible.  (More about it online here)

Don't get me wrong, I love this.  It is a pleasant eccentricity, from which others can benefit.  And the wine was good, at least to my admittedly weak evaluation skills.  I just hate it that the arbiters of the Napa Valley feel the need to exclude others who want to use their own land in different ways.

Update:  A Coyote Blog reader writes that they ARE doing things differently making wine in Paso Robles.  Here is his web site and story.

Another Trump Triumph -- He Has The Left Defending the American Economic System

The American Left generally spends most of its time telling us how much better things are in Denmark or France.  I can't find a lot of reasons to like Trump, but he has apparently convinced the Left that they need to defend the American economic model against other countries.  This post by Kevin Drum at Mother Jones reasd more like what one might expect from Mark Perry at AEI.

"We're a poor country now." I wonder how many people believe that just because Donald Trump keeps saying it? In case anyone cares, the actual truth is in the chart on the right. There's not a single country in the world bigger than 10 million people that's as rich as the US.

I agree!   In fact, not only are American rich richer, but the American middle class is richer and the American poor are richer.  From an earlier post, here is the purchasing power of individuals across the income spectrum in the US vs. Denmark

The Fallacy of Centrism

I thought this was a fascinating article on how political reformers may be underestimating the moderation of voters

Most voters support some liberal policies and some conservative policies. Academics have long taken this as evidence of voters’ underlying centrism.

But just because voters are ideologically mixed does not mean they are centrists at heart. Many voters support a mix of extremeliberal policies (like taxing the rich at 90 percent) and extremeconservative policies (like deporting all undocumented immigrants). These voters only appear “centrist” on the whole by averaging their extreme views together into a single point on a liberal-conservative spectrum....

Donald Trump’s rise exemplifies these dangers.

Political scientists and pundits alike argue that it would improve governance to devolve political power from the political elites who know the most about politics and policy to the voters who know the least. Polarization scholars hold these uninformed voters in the highest esteem because they look the most centrist on a left-right spectrum. They are also Donald Trump’s base.

Yes, you read that right. Political scientists have long exalted the centrist wisdom of those who now constitute some of Trump’s strongest supporters — the poorly educatedauthoritarianxenophobes who are attracted to a platform suffused with white supremacy, indulge in unapologetic nationalism and use violence to silence opponents. As commentator Jacob Weisberg has written, these extreme voters’ views are a mix of “wacko left and wacko right” — the key credential one needs to qualify as centrist by scholars’ most popular definition.

A large part of the problem is the left-right political spectrum with which we are saddled.  This spectrum was pushed on us by Marxist academics of the 1950's-1970's.  It is meant to show a spectrum from really bad (with fascism at the far Right) to really good (with their goal of communism on the far Left)**.  For some reason non-Marxists have been fooled into adopting this spectrum, leaving us with the bizarre scale where our political choices are said to lie on a spectrum with totalitarianism on one end and totalitarianism on the other end -- truly an authoritarians "heads I win, tails you lose" setup.  In this framework, the middle, whatever the hell that is, seems to be the only viable spot, but Brookman is arguing above that the middle is just a mix of untenable extreme positions from the untenable ends of the scale.

The Left-Right spectrum is totally broken.   Trump is unique in the current presidential race not because he appeals to centrists, but because he simultaneously demagogues both the Conservative civilization-barbarism language and the Liberal/Progressive oppressor-oppressed narrative.  The fact that his supporters find appeal in extreme versions of both narratives does not mean they should average to centrists.  A libertarian like myself would say that they are extremists on the far authoritarian end of the liberty-coercion axis  (I, of course, am an extremist as well on the other end of this scale).

 

** Postscript: This is part of a long history of the Left trying to define political terms in their favor.   I love the work on totalitarianism by Hanna Arendt, but you will sometimes hear academics say that Arendt was "repudiated" (or some similar term) in the 1960's.  What actually happened was that a new wave of Leftish professors entered academia in the 1960's who admired the Soviet Union and even Stalin.  They did not like Arendt's comparison of Nazism and Stalinism as being essentially two sides of the same coin, even though this seems obvious to me.  Nazism and Stalinism were, to them, opposite sides of the political spectrum, from dark and evil to enlightened.  Thus they dumped all over Arendt, saying that her conclusions did not accurately describe the true nature of life under communism.  And so things remained, with Arendt pushed to the margins by Leftish academics, until about 1989.  As the iron curtain fell, and new intellectuals emerged in Eastern Europe, they cast about for a framework or a way to describe their experience under communism.  And the person they found who best described their experience was... Hannah Arendt.

The Contradiction at the Heart of Speech Limitations Sought by Campus Progressives

Campus Progressives are becoming increasingly open about their opposition to unfettered free speech.  As a minimum, they seem to want restrictions on (and thus punishments for) speech they feel disparages ethnic minorities, homosexuals, various flavors of trans-gendered people, etc.  If pressed, many might extend these restrictions to other speech they don't like, e.g. climate skepticism or advocating for the Second Amendment.

What often confuses outsiders about these calls for speech restrictions is that they are generally asymmetrical -- eg it is OK to criticize Christians but not to criticize Muslims.  You can impugn the motives of rich white males but not of blacks or Hispanics.  Critics of these limitations will say, "aha, you are a hypocrite" but in fact Progressives are quite open about this asymmetry.  They argue from a framework where everything comes back to the powerful vs. the powerless.  In this framework, it is OK for the powerless to criticize the powerful, but the reverse is not allowed -- they call it "punching down".  Thus the need for asymmetric speech limitations to protect the powerless from the powerful.

But this is where we get to a massive contradiction.   Because whoever is in a position to enforce speech limitations is always going to be the person with power.  By definition.   The powerless don't write and succesfully enforce speech codes, or else if they do, we now have to call them powerful.  And historically, people in power always use speech limitations to protect their own power.  That is why the First Amendment exists, to protect minorities of any sort from the power of the majority.  If historically disenfranchised people suddenly start making speech codes stick that protect them from criticism, it only means that the in-group and out-group tags have been shifted and the new in-group is acting just like all the other in-groups have in the past.  That is why we don't rely on assurances of good behavior by people in power, we try to circumscribe them with Constitutional limitations.

Do We Care About Income Inequality, or Absolute Well-Being?

I am going to reprise parts of an article I wrote in Forbes several years ago, because I think the conclusions are particularly relevant given the Democrats' discussion of income inequality and the Scandinavian economic model.

When folks like Bernie Sanders say that we have more income inequality than Sweden or Denmark, this is certainly true. By just about any test, such as Gini ratios, we have a much wider range of incomes.

However, we Sanders implies that this greater income equality means the poor are better off in these countries, he is very probably wrong.  Because the data tends to show that while the middle class in the US is richer than the middle class in Denmark, and the rich in the US are richer than the rich in Denmark, the poor in the US are not poorer than those in Denmark.

And isn't this what we really care about?  The absolute well-being of the poor?

I am not a trained economist or economic researcher, but I have looked for a while for a data source to get at this.  I can find Gini ratios all over the place, but how do I compare the absolute well-being of poor in one country to poor in another?

The first clue that I was maybe on the right track was this chart that actually came from a left-wing group trying to promote the idea of reducing income inequality.  The chart is hard to read (the study is no longer online and all I have is a bad screenshot), but it seemed to show that the poor in the US were no worse off than the poor in Denmark and Sweeden

 

So the data had to be there somewhere.  Finally I found a set of data that seemed to does the trick.  I used data from the LIS Cross-National Data Center.  I cannot vouch for their data quality, but it is the same data set used by several folks on the Left (John Cassidy and Kevin Drum) to highlight inequality issues, so I used the same data source.  I then compared the US to several other countries, looking at the absolute well-being of folks at different income percentile levels.  I have used both exchange rates and purchasing price parity (PPP) for the comparison but my feeling is that PPP is a better approach when we are comparing consumer well-being.

You can click through the Forbes article to see all the comparisons, but I will focus here on Sweden and Denmark since they are very much in the policy-making discussion on income inequality.  As usual, you can click to enlarge:

What does this mean?  If the data is correct, it means that all the way down to at least the 10th percentile poorest people, the poor in the US are as well or better off than the poor in Denmark and Sweden.  And everyone else, including those at the 20th and 25th percentile we would still likely call "poor", are way better off in the US.

All this talk about reducing income inequality by emulating Denmark is thus not about making the poor better off, but just about cutting the rich and middle class down to size.

Great Wealth is Bad Only When It Comes from Cronyism Instead of Creating Consumer Value

I book marked this long ago when I was in Europe and forgot to blog it.  From the Washington Post

You might be used to hearing criticisms of inequality, but economists actually debate this point. Some argue that inequality can propel growth: They say that since the rich are able to save the most, they can actually afford to finance more business activity, or that the kinds of taxes and redistributive programs that are typically used to spread out wealth are inefficient.

Other economists argue that inequality is a drag on growth. They say it prevents the poor from acquiring the collateral necessary to take out loans to start businesses, or get the education and training necessary for a dynamic economy. Others say inequality leads to political instability that can be economically damaging.

A new study that has been accepted by the Journal of Comparative Economics helps resolve this debate. Using an inventive new way to measure billionaire wealth, Sutirtha Bagchi of Villanova University and Jan Svejnar of Columbia University find that it’s not the level of inequality that matters for growth so much as the reason that inequality happened in the first place.

Specifically, when billionaires get their wealth because of political connections, that wealth inequality tends to drag on the broader economy, the study finds. But when billionaires get their wealth through the market — through business activities that are not related to the government — it does not.

Megan McArdle on "Washington Issues"

I thought this was a pretty good observation:

Why then, do so many people know about the tax treatment of carried interest? Because it is the epitome of a Washington Issue. A Washington Issue is something that sounds terrible, has little meaningful impact on more than a handful of people, and most importantly, allows you to pretend that you are addressing a different, very difficult issue that would impact a large number of people if you actually tried to make meaningful change -- people who might get angry and do something rash, such as voting for your opponent.

The carried interest issue is thus a convenient way for Democrats making stump speeches to claim that they’re really going to do something about inequality and cronyism, and maybe fund some important new spending on hard-working American families. With the entrance of Jeb Bush and Donald Trump into the arena, it is also a way for Republicans to seem tough on rich special interests while simultaneously proposing tax plans that will help affluent Americans hold on to a lot more of their income and wealth.

As with most Washington Issues, my actual level of concern about carried-interest taxation hovers somewhere between “neighbor’s bathroom grout drama” and “Menudo reunion tour.” Nonetheless, I’m beginning to wish that Congress would get rid of it without demanding anything in return, just to force politicians to talk about something that actually matters.

My tax proposal, as a reminder:

1.  Eliminate all deductions in the individual income tax code

2.  Eliminate the corporate income tax.

3.  Tax capital gains and dividends as regular income.

4.  Eliminate the death tax as well as the write-up of asset values at death

The New Rich -- Living the High Life Through Your Non-Profit

Several months ago, a lot of folks where shocked to find that the Clinton Foundation only spent $9 million in direct aid out of a total budget of $150 million, with the rest going to salaries and bonuses and luxury travel for family and friends and other members of the Clinton posse.

None of this surprised me.  From my time at Ivy League schools, I know any number of kids from rich families that work for some sort of trust or non-profit that has nominally charitable goals, but most of whose budget seems to go to lavish parties, first-class travel, and sinecures for various wealthy family scions.

But this week comes a story from the climate world that demonstrates that making a fortune from your non-profit is not just for the old money any more -- it appears to be a great way for activists to build new fortunes.

The story starts with the abhorrent letter by 20 university professors urging President Obama to use the RICO statute (usually thought of as a tool to fight organized crime) to jail people who disagree with them in a scientific debate.  The letter was authored by Jagadish Shukla of George Mason University, and seems to take the position that all climate skeptics are part of an organized coordinated gang that are actively promoting ideas they know to be wrong solely for financial enrichment. (I will give the near-universal skeptic reply to this:  "So where is my Exxon check?!"

Anyway, a couple of folks, including Roger Pielke, Jr. and Steve McIntyre, both folks who get accused of being oil industry funded but who in fact get little or no funding from any such source, wondered where  Shukla's funding comes from.   Shukla gets what looks like a very generous salary from George Mason University of $314,000 a year.  Power to him on that score.  However, the more interesting part is where he makes the rest of his money, because it turns out his university salary is well under half his total income.  The "non-profits" he controls pays him, his family, and his friends over $800,000 a year in compensation, all paid out of government grants that supposedly are to support science.

A number of years ago Shukla created a couple of non-profits called the Institute for Global Environment and Security (IGES) and the Center for Ocean Land Atmosphere Interactions (COLA).  Both were founded by Shukla and are essentially controlled by him, though both now have some sort of institutional relationship with George Mason University as well.  Steve McIntyre has the whole story in its various details.

COLA and IGES both seem to have gotten most of their revenues from NSF, NASA, and NOAA grants.    Over the years, the IGES appears to have collected over $75 million in grants.  As an aside, this single set of grants to one tiny, you-never-even-heard-of-it climate non-profit is very likely way higher than the cumulative sum total of all money ever paid to skeptics.   I have always thought that warmists freaking out over the trivial sums of money going to skeptics is a bit like a football coach who is winning 97-0 freaking out in anger over the other team finally picking up a first down.

Apparently a LOT of this non-profit grant money ends up in the Shukla family bank accounts.

In 2001, the earliest year thus far publicly available, in 2001, in addition to his university salary (not yet available, but presumably about $125,000), Shukla and his wife received a further $214,496  in compensation from IGES (Shukla -$128,796; Anne Shukla – $85,700).  Their combined compensation from IGES doubled over the next two years to approximately $400,000 (additional to Shukla’s university salary of say $130,000), for combined compensation of about $530,000 by 2004.

Shukla’s university salary increased dramatically over the decade reaching $250,866 by 2013 and $314,000 by 2014.  (In this latter year, Shukla was paid much more than Ed Wegman, a George Mason professor of similar seniority). Meanwhile, despite the apparent transition of IGES to George Mason, the income of the Shuklas from IGES continued to increase, reaching $547,000 by 2013.

Grant records are a real mess but it looks like from George Mason University press releases that IGES and its successor recently got a $10 million five-year grant, or $2 million a year from the government.  Of that money:

  • approximately $550,000 a year goes to Shukla and his wife as salaries
  • some amount, perhaps $90,000 a year, goes to Shukla's daughter as salary
  • $171,000 a year goes as salary to James Kinter, an associate of Shukla at George Mason
  • An unknown amount goes for Shukla's expenses, for example travel.  When was the last time you ever heard of a climate conference, or any NGO conference, being held at, say, the Dallas-Ft Worth Airport Marriott?  No, because these conferences are really meant as paid vacation opportunities as taxpayer expense for non-profit executives.

I don't think it would be too much of a stretch, if one includes travel and personal expenses paid, that half the government grants to this non-profit are going to support the lifestyle of Shukla and his friends and family.  Note this is not money for Shukla's research or lab, this is money paid to him personally.

Progressives always like to point out examples of corruption in for-profit companies, and certainly those exist.  But there are numerous market and legal checks that bring accountability for such corruption.  But nothing of the sort exists in the non-profit world.  Not only are there few accountability mechanisms, but most of these non-profits are very good at using their stated good intentions as a shield from scrutiny -- "How can you accuse us of corruption, we are doing such important work!"

Postscript:  Oddly, another form of this non-profit scam exists in my industry.  As a reminder, my company privately operates public recreation areas.  Several folks have tried to set up what I call for-profit non-profits.  An individual will create a non-profit, and then pay themselves some salary that is equal to or even greater than the profits they would get as an owner.  They are not avoiding taxes -- they still have to pay taxes on that salary just like I have to pay taxes (at the same individual tax rates) on my pass-through profits.

What they are seeking are two advantages:

  • They are hoping to avoid some expensive labor law.  In most cases, these folks over-estimate how much a non-profit shell shelters them from labor law, but there are certain regulations (like the new regulations by the Obama Administration that force junior managers to be paid by the hour rather than be salaried) that do apply differently or not at all to a non-profit.
  • They are seeking to take advantage of a bias among many government employees, specifically that these government employees are skeptical of, or even despise, for-profit private enterprise.  As a result, when seeking to outsource certain operations on public lands, some individual decision-makers in government will have a preference for giving the contract to a nominal non-profit.   In California, there is even legislation that gives this bias a force of law, opening certain government contracting opportunities only to non-profits and not for-profits.

The latter can have hilarious results.  There is one non-profit I know of that is a total dodge, but the "owner" is really good at piously talking about his organization being "cleaner" because it is a non-profit, while all the while paying himself a salary higher than my last year's profits.

Dear Americans: You Are All Rich

I have made the point a number of times that the bottom 20th percentile (in term of income) of US families would actually be in the 80th percentile in many nations.  In fact, it turns out that the 20th percentile person in the US would not just be relatively rich in many other countries, but on a global scale sits around the 85th percentile of world income.  Virtually no one in the US would even be in the bottom half of world income. This chart from a recent study was shared by David Henderson:

 

The axes are not well labelled here.  How to read this is the X axis is the income percentile of a person in their home country.  Then one reads up, and the Y axis is the income percentile that person would be at for the whole world.  So a person who is at the 20th percentile in the USA is around the 85th percentile worldwide.  It is interesting that by hugging the 45 degree line, China mirrors the world average.  If you want to envision the distribution of absolute incomes around the world, think of China.

This raises a certain question for American redistributionists.  Ayn Rand used to point out that redistributionists always love the idea because they feel like they got to pick the pocket of the guy wealthier than them, forgetting that someone poorer gets to pick their pocket.  Essentially, in a truly global redistribution scheme, everyone in the US would be paying rather than receiving.

A better way to achieve global income equality would be to have more countries emulate the American rule of law, property rights regime, and relatively free markets.  Ironically, most American redistributionists support the opposite, arguing that in many was the USA should emulate the authoritarianism of these poorer countries.  Which I suppose will achieve global income equality as well, though in a much less attractive way.

Cargo Cult Regulation -- How Much Effect Did Card and Krueger Have on New York's Fast Food Minimum Wage Ruling?

New York is proposing a $15 minimum wage for any fast-food restaurants that are part of a national chain with 30 or more stores.  How this survives any sort of equal protection test is beyond me -- if I own a restaurant and call it "coyote's place" I don't have to pay $15, but if I own a single restaurant where I pay franchise fees to McDonald's, I do.

Let's leave the inevitable court challenges on fairness aside.  Of all the possible industries, I wonder why the focus on just fast food and on just large franchises.  Some of it is obviously mindless Progressive soak the rich thinking, and some of it is a liberal distaste for any foods that are not kale.  Is it just because the fast food workers have been the most vocal?  If so, that is pretty lame the the government is merely focusing on the squeaky wheel, a real indictment of any pretensions technocratic politicians have to legislating intelligently.

But I wonder if it is something else.  Pick a progressive on the street, and in the unlikely event they can name any economic study, that study will probably be Card and Krueger's study of the effect of a minimum wage increase in New Jersey.   Sixty bazillion studies have confirmed what most of us know in our bones to be true, that raising the price of labor decreases demand for that labor.  Card and Krueger said it did not -- and that a minimum wage increase may have even increased demand for labor -- which pretty much has made it the economic bible of the Progressive Left.

What intrigues me is that Card and Krueger specifically looked at the effect of the minimum wage on large chain fast food stores.  In this study (I will explain the likely reason in a moment) they found that when the minimum wage increased for all businesses in New Jersey, the employment at large chain fast food restaurants went up.

So I wonder if the Progressives making this ruling in New York thought to themselves -- "we want to raise the minimum wage.  Well, the one place where we KNOW it will have no negative effect from Card and Krueger is on large fast food chains, so...."

By the way, there are a lot of critiques of Card & Krueger's study.  The most powerful in my mind is that when a minimum wage is raised, often the largest volume and highest productivity companies in any given business will absorb it the best.  One explanation of the Card & Krueger result is that the minimum wage slammed employment in small ma and pa restaurants, driving business to the larger volume restaurants and chains.  As a whole, in this theory, the industry saw a net loss in employment and a shift in employment from smaller to larger firms.  By measuring only the effect on larger firms, Card and Krueger completely missed what was going on.

Best Possible Thing for Low-Skilled Workers: Having Others Get Rich off Their Labor

I had an argument in a comment thread of one of Kevin Drum's minimum wage or some such posts (sorry, I can't even find which one now to link it).  Anyway, my concluding remark was that the best thing that could ever happen to the unemployed, and particularly to low-skilled workers, would be if people were to discover ways to get rich from their labor.   Of course, I was met with total scorn, as if I had suggested sacrificing virgins to improve the climate.

The reason I mention this is that this disconnect seems to be at the heart of the problem of Progressivism.  I am convinced that they honestly want to help low-skilled workers and the poor do better economically, but they advocate for policies that are 180-degrees askew.  Most of what they wish for -- higher minimum wages, larger mandated benefits packages, more paid leave, more ability to sue employers over trivial slights -- absolutely, with near mathematical precision, raise the cost of hiring low-skill workers, making it increasingly unlikely anyone will do so.  Low-skill workers get hired for one and only one reason (which is the same reason any worker gets hired):  someone thinks they can profit from that labor.  It is the potential for profit that is the sole reason for hiring anyone, but it is exactly that profit potential that Progressives most fear and deride.

Rental Market in San Francisco

One of the problems with making predictions about bad public policy is that sometimes you have to wait 20-30 years until after the policy was passed to see all the negative consequences play out, by which time people have forgotten about the initial policy changes that caused all the disruption.

But I got to skip those 30 years in San Francisco.  I never really paid that much attention to the city until I read a book called "Season of the Witch" written by a progressive about life in San Francisco in the 60's and 70's.  As I wrote previously:

What struck me most were the policies these folks on the Progressive Left had on housing.  They had three simultaneous policy goals:

  1. Limit San Francisco from building upward (taller).  San Francisco is a bit like Manhattan in that the really desirable part where everyone wants to live is pretty small.  There was (and I suppose still is) a desire by landowners to build taller buildings, to house more people on the same bit of  valuable land.  Progressives (along with many others across the political spectrum) were fighting to have the city prevent this increased density as a threat to San Francisco's "character".
  2. Reduce population density in existing buildings.  Progressive reformers were seeking to get rid of crazy-crowded rooming houses like those in Chinatown
  3. Control and cap rents.  This was the "next thing" that Harvey Milk, for example, was working on just before he was shot -- bringing rent controls to San Francisco.

My first thought was to wonder how a person could hold these three goals in mind without recognizing the inevitable consequences, but I guess it's that cognitive dissonance that keeps socialism alive.   But it should not be hard to figure out what the outcome should be of combining: a) some of the most desirable real estate in the country with b) an effective cap on density and thus capacity and c) caps on rents.  Rental housing is going to be shifted to privately owned units (coops and condos) and prices of those are going to skyrocket.  You are going to end up with real estate only the rich can afford to purchases and a shortage of rental properties at any price.  Those people with grandfathered controlled rents will be stuck there, without any mobility.

Since reading the book, I have paid attention to stories on the rental market in San Francisco.  In short, it is just as screwed up as would have expected 40 years ago when both density and rent caps were put in place.

As San Francisco's housing crisis continues to pit long-term residents against the recent influx of affluent tech employees, Airbnb and other short-term rentals have become a source of tension. Today San Francisco Mayor Ed Lee and Supervisor Mark Farrell hoped to ease some of that tension by introducing reforms to the city's short-term rental laws that put a 120 day yearly cap on all short-term rentals. The package of amendments also introduced the creation of a new Office of Short-Term Rental Administration and Enforcement for the city staff to "coordinate in the administration and aggressive enforcement of the law."

Airbnb and other short-term rental services have come under fire in San Francisco because they take rental units off an already limited housing market. The current law caps short-term rentals at 90 days when the host is not present. If the host is present -- for example a room rental in an occupied home -- there is no yearly cap. Today's amendment package sets caps for both types of rentals. Mayor Lee said in a statement, "this legislation will help keep our City more affordable for homesharers, preserve rental housing for San Franciscans, protect neighborhood character and streamline permitting and enforcement under a fair set of regulations."

This is from a tech site that has developed a reputation, at least with me, for being astoundingly ignorant of even basic economics, so one has to make some guesses at what is going on here.  For example, it seems odd to say that renting a space on a short term lease rather than long-term somehow takes rental units off the market.  They are still being rented, are they not?  How could one describe them as being taken off the market?

My guess at what is going on here is that short-term rentals are likely exempt from some of the most onerous portions of San Francisco tenant law.   Likely, renting short-term allows one to bypass rent controls and charge more.  It also likely gives one some relief from the city and the state's horrendous tenant protections that make it virtually impossible to evict a tenant.  You lease to someone in SF, and you are stuck with them for life like a shark with a remora on his back, even if that tenant refuses to pay rent for years or constantly trashes the apartment.

San Francisco has created a system where they are absolutely guaranteed to have a shortage of rental properties.  Rather than address those laws that create the problem, politicians put their whole effort -- creating brand new agencies, no less -- to stop entrepreneurs from circumventing the madness and trying to provide housing.

Postscript:  The war against wealthy tech workers in SF is in full swing.  What SF would really like to do, I think, is close its borders and institute immigration controls to keep these folks out.  I know there are many parts of the world, including unfortunately our country, that work to keep poor uneducated immigrants seeking opportunity out.  But has there ever been a time or place in history where a particular place worked so hard to keep out rich educated immigrants seeking only to spend their money?

Authoritarian Quote of the Day

From San Francisco Board of Education member Sandra Fewer:

“Choice is inherently inequitable”

Because some people make choices that their betters, like Ms. Fewer, do not agree with, government needs the power to override individual decision-making.  We will come back to this, but it turns out the problem here may not be too much choice, but too little.

The entire article is about school choice (defined VERY narrowly as the ability to pick what monopoly government school you want to attend, not the ability to take a voucher and pick any school) leading to a greater racial sorting, rather than mixing, in San Francisco schools.

I have no idea why that would be.  And I still have no idea, because the article presented absolutely no facts.  Oddly, my first guess -- that racial sorting of schools might match racial sorting of neighborhoods since people want to send their kids to a school that is close with kids and parents they know -- is not even mentioned until, in passing, it comes up around the 35th paragraph.

One of the issues that seems to be confusing the author is that people sometimes express preferences they don't act on.  You see that in the very examples in the article.  All the parents interviewed say they want a multi-cultural school, perhaps because they are really passionate about that or perhaps because they know they are supposed to say that, but it is not hard to see that these folks care more about having a school nearby with kids and parents with whom they are culturally comfortable.   I find it a little weird that the city with possibly the most famous ethnic neighborhood in the country (ie Chinatown) has trouble understanding that there are totally non-racist reasons why ethnic groups, particularly those who speak other languages, might voluntarily sort.

One funny thing in the article that I have pointed out in other contexts: in the absence of facts people like to explain bad trends (and it is not even established that this is necessarily a bad trend, just a trend that planners don't like) with whatever they were against before the trend revealed itself.  Teachers don't like the school choice system, so school choice is to blame.  Social activists are concerned with income inequality, so they blame the problem on income inequality.

In fact, a lot of the article pursues the inequality thesis, but the interesting lede, in my mind, was buried way way down in the article:

Though the number of racially isolated schools jumped by 22 percent over three years, according to a district study, to date none are more than 60 percent white. Yet in a broader sense, white children are the most isolated in the city.

Whites are 42 percent of the city’s overall population, 33 percent of the children but only 12 percent of public school students. Why aren’t more white children in public school? Again, money appears to be the key factor: The average white San Franciscan makes three times more money than the average black resident. Whites on average also make 66 percent more money than Latinos, and 44 percent more than Asians. Possibly as a result of this wealth, white children are much more likely to be enrolled in private schools than other racial groups.

So the reason public schools are sorting into minority-majority  schools is that whites have mostly bailed from the school system altogether.   My response to this is not that "choice" has created inequality but that choice hasn't gone far enough.  Don't just give public school kids a choice of which crappy public school they want to attend, but hand them the public money the system was going to spend on their education and let them go anywhere for school, just like rich kids.