The 6 Pack Economist

I know that it makes people feel so much better when they can go after the rich corporate fat cats.  Of course it all turns to tears when they realize the rich fat cat was the one who was paying their salaries.  Even microsoft is threatening to move jobs overseas.

When are people going to learn that if you eat the golden goose it won’t lay any more eggs.  But it makes a bunch of short-sighted people feel better.  Everyone who works for corporations please raise your hand.  Ok that is just about everyone who still has a job.  And everyone who works at a school raise your hands too.  The corporations give educational institutions a lot of money.  So in a way you too work for the corporations.

I believe that corporate income taxes are simply counter productive.  The reason being is simple, when you have corporation the corporation has to employ people.  When people are employed by a private company then the state does not need to pay them to not come after the government with pitchforks. 

Employment for the average person has a lot of advantages both for the person but also for the government.  When a person is working they are less likely commit crime, protest in the street, and in general are just so much less annoying for the government.  After all if someone is home all day watching TV, surfing the internet, or just hanging around they so much more likely to start causing trouble.  This just requires more police, fireman, and morgue employees.

Employment is not just good for the government either it is also good for the person doing the work.  Let us assume the person doing the work at least believes that what they are doing is meaningful to someone (which is one the failures of communism more on this in a later post).  So the person has a job that they believe is doing some type of good, they don’t have wake up in the morning thinking they have the greatest job in the world for this to work either.  Said person has a purpose to their life.  They feel that they have some form of control.  In addition they have a strong separation between free time and work time.  This is very important as someone who either works all the time is burden to themselves, and a person who plays all the time is burden to everyone else.

Now that we have established that employment of people is a good thing we can also establish that we need something to employ them.  Well that is where corporations come into play.  Unlike small businesses (which are just smaller corporations), corporations have to employ a lot of low skilled specialists, in addition the usual skilled specialists.  These types of low skilled specialists must be drawn from the local population.  These are positions like mail room clerks,  janitors, the random copy and printer lady, computer helpdesk people (these are little more skilled), and we can’t forget the random hottie that always ends up at the front desk to greet people.  We all know that she is not going to be climbing the corporate ladder, maybe the corporate pole, but not the ladder.

See all these positions must be filled by the local population of the corporate office.  And when the government makes it very hard to do business and make a profit the corporation will move its offices.  There are plenty of countries in the world who would be more than happy to have these corporations put their shell headquarters in their country. 

Given all the bonuses I have outlined about the employment opportunities of keeping corporations happy why piss them off with higher taxes?  Because some left wing nut bags who can’t see the end result of their own jealously leads them to?

Well it seems that there is a report out that the TARP program could be mismanaged and is open to corruption.  In other news water is wet and Lindsey Lohan is unstable. 

Did anyone seriously think that when the 700 billion dollar number came out that is was going to be spent wisely?   I thought it was joke when I first heard it, a bad one but still a joke.  It turned out that it was a joke on us.  To top it off a few months later we get a gigantic stimulus bill that will also have to be paid for.  Then the regular budget of the government will run into numbers unthinkable.  Who the hell is going to pay for all this?  We are.  The rich will pay for it directly while the poor will pay by inflation.

This whole debacle is just another in a long list of examples of government mismanagement of money.  This not just an American problem, all governments have the same problem.  It has to do with a combination of human conditions.  Greed and Sloth are the most prevalent.  Greed in that the various representatives want to get the money to pay back constituents and their own pockets.  Sloth in the bureaucrats and the elected reps in ensuring the money is spent after due diligence.  The reason they can do all of this is that it is not their money, it is ours.

I really thought I had more to write on this, but so much of it is too obvious.

I want to say I am sorry to the 8 of you how read this.  I deprived you with my wisdom for a week.  I am sure you are all very sad.  Unfortunately for me, your sad because I decided to write again.

In today’s post I want to talk about government overplaying their hand with their bailout money and thank god they did.  In this story about the strings the government attached to the bailout money the banks have basically balked at taking the money or they are trying to give it back.  In classic government fashion everyone tried to get their little social engineering or pet project task on the strings of the bail out money.  I am very thankful for that.

In general am not a big fan of large government.  The primary reason is that the government is incompetent.  Like the old saying about those that can’t do something, teach it.  Well those who can’t work, go to the government.  And of course my disclaimer about some people at the government actually trying to do the right thing.  That being said I love to limit the governments power.  By returning the money and overall telling the government bureaucrats to stay out their business they are limiting the governments power.  Which I think is great.  In addition it is less of my money going to people who are incompetent (If you needed this money then you were incompetent).

Here’s to the government continuing to overplay their hand.

One of the ads that google gave me when I was re-reading my post on the death of capitalism was on Socialism vs Communism.   I find it entertaining because the difference is simple.  Socialism is communism with sugar on top.  Its like argueing if its better to be stuck in the water with a bunch of tiger sharks or great white sharks. 

In socialism the incrediably rich don’t have to change their name.  In communism they have register as part of the communist party.  Anyone not part of the super rich get screwed in either system.  Socialism will legislate the small guy out of business while communism just take it.

And remember all big corporations started as small business.

If you ever wanted to do a little experiment to figure out why socialism fails do the following.

Get a little lunch group together.  Preferably with a jerk or two.  The second requirement should not be too hard to do, as most people are jerks.  Hopefully you have a group of about 8 people or more. Go to lunch and get one bill.  At the end of the meal just split the tip and bill 8 ways (or how ever many people are in the group). Do not account for who got what.  Just split it evenly.  Note who got what and how much each person spent individually.  Especially note what the experimental jerks ordered.

Do the same lunch again next week.  At the end of the meal again check what people ordered.  The per person expense should have increased.  If not keep repeating for a few more weeks.  It will eventually increase (before the restaurant raises prices itself). 

It should not take a genius to figure out what is going on.  The first few people will see a real benefit to their bottom line by scamming the system, but soon the whole group will be recklessly ordering food.  This my fellow readers is the primary reason that socialism fails.  People figure out the game and very soon they begin to exploit it. Soon everyone is scamming the system and it collapses under its own weight. 

Good luck and there is never a free lunch.  Occasionally government subsidies but it’s never free.

One of the ads that google gave me when I was re-reading my post on the death of capitalism was on Socialism vs Communism.   I find it entertaining because the difference is simple.  Socialism is communism with sugar on top.  Its like argueing if its better to be stuck in the water with a bunch of tiger sharks or great white sharks. 

In socialism the incrediably rich don’t have to change their name.  In communism they have register as part of the communist party.  Anyone not part of the super rich get screwed in either system.  Socialism will legislate the small guy out of business while communism just take it.

And remember all big corporations started as small business.

So who is to blame at the UAW for this mess?  My last post talked about the corporations blame.  This one will go into the UAW blame.

 I never begrudge someone from making a good living and trying to become rich.  I hope to be there one day.  What I don’t like is when it gets abused.  And looking at the salaries of the UAW, I firmly believe that it was abused.  

 Unions can be just as short sighted as Corporations and this is definitely the case with the big 3.  Who signed these contracts?  147K a year (salary plus benefits) for an assembly-line worker?  Is there a special talent needed for this or perhaps many years of technical training?  Just a high school degree and a good work ethic (plus a connection I am sure) is all that is needed. 

 I think what we have here is a supply and demand problem.  I can’t believe that the supply of high school grads with a good work ethic is so low that these assembly line workers can demand such a high salary (I would love to get the salary by the way).  I will never begrudge someone from getting a good salary but this is just ridiculous.

 Was there a time when the big 3 controlled all and were so full of profits that they could pay these salaries? Sure there was, oddly enough it was when they were making some of their worst products.  The unions pushed to get ever little bit they could out of the corps with the idea that they were only going to get stronger and would be able to pay these benefits.  But alas like all things, this was soon to change. 

 Now Detroit can no longer pay these extravagant salaries (the upper management too).  Detroit needs to change and change fast.  They need to cut costs and make better cars.  Some people will have be cut or everyone will have to be cut.

 Figures, just when they make a car I am really excited about too.

 NOTE: Although the orginal salary was based on a shady number, the real number is closer to $55 an hour for pay and benefits or about 100,000 a year.  Still seems like their would be a larger supply of people willing to the do the job then the demand for the jobs but who knows.

I love to hear this.  It makes me feel all warm and fuzzy because someone doesn’t get it.  It’s like watching someone turn the screw the wrong way.  Of course there are far too many people who refuse to turn the screw the other way and I just get frustrated and walk away.

Tax the Rich is actually counter productive.  The first thing is that what the government considers rich is not really rich.  It’s well off but your still only about 4 months from poverty.  I was shocked to learn that I was considered rich.  I was like “wow my used car is actually a Bentley”.  Who knew?

Second point is that the truly rich are ones writing the tax laws.  They will ensure that they have a way out.  As the taxes go up for them and the incentive to hide income goes up so does the use of these income hiding techniques.  In the end they pay just about the same they paid before the taxes went up.  But the not-really rich get hammered.  The extra 500 bucks we have to pay does not pay to get a really good account who can hide your money.

Third the government gets little blip of extra income and quickly spend it.  The worst thing for a government to have is a lot of money.  It’s like extra heroin or crack.  It only feeds the addiction.  They will budget it and depend on it next year.

My final point is never try to screw someone who can screw you worse.  The truly rich can get the hell out of the way the on rushing train of taxes.  They can move to the Caribbean.  The not-really rich get hammered and start cutting costs.  Which means your job.

So your taxes are higher but you lost your job so maybe they are not higher. At least you feel good about sticking it to the rich guy.  I am sure he feels bad while sipping on his margarita. 

Just accept that the truly rich have more then you.  What you should be trying to figure out instead is how to get to where they are and not how to take it way from them.

I am sure that you have heard all about the banking industry and its crisis.  If you have not, the cave you are in must not have cable or internet in which case you are not reading this.  In the following post I will go into the reason for this crisis from the basis of a simple economic principle of Risk and Reward. 

 In the beginning god created the mortgage payment (part of terms of the agreement was the last payment was to be personally delivered to god himself).  The person who lent you the money for the mortgage was also on the hook if you decided to spend your mortgage payment on lottery tickets instead of paying him.  So he had a self interest to ensure that he did not lend you money, that you could not payback.  There was a self interest on both parties not take too big of risk.  After living on the street because you paid too much for a home you could not afford was your risk, the reward was some place to go when it rained.

All was right in the world, unless of course you lived in California but then again California is fantasy land anyway.  The rest of the world see periodic increases and decreases in home values but they were generally because of real factors, not because you want to live near where Brad Pitt gets his Starbucks. 

So what screwed this all up?  Well the federal bank, which by the way is not run by the federal government lowered interest rates after the dot com bomb to help jump start the economy.  In addition rules(created by the government to help those less fortunate) in the mortgage industry pushed them to help those that had shady or no-credit.  Well with the low fed interest rates the industry was able to offer lower mortgage rates.  These rates were substantially lower then what they were previously and dramatically lowered the monthly mortgage payment made by the average person (most people judge what they can get by the monthly payment and not the actual price).  They could now afford a bigger home.  Since they could afford a bigger home the demand for a bigger home drove the prices for bigger homes up.  This in turn drove the prices for every other type of home also.  After all people still need to live somewhere.  Caves can get musty after all.

So the price of homes began to move up.  Since the price of homes was going up the risk of the loan was lowered since the home was the collateral.  If you had an outstanding balance of 100K but the home was worth 200K you could get out of loan by selling the home and still have some money to find something smaller or less expensive.  In addition if you defaulted on the loan the bank could do the same.  So in essence the risk was lowered.  No matter what happened everything worked out.

With the risk of the these loans lowered the banks were able to start selling these loans to other banks filling their coffers with the sale and then use that same money to offer more loans that are then quickly sold to the next etc..  And here is where the problem started.

The person offering the loan only had a short term exposure to risk but a large reward.  They held it for a few months and sold it.  Very few people fail to make the first year of mortgage payment.  Soon the prices of houses began to get higher and higher, even with the low rates they became unaffordable.  But with the prices still going up and the advent of the “house flipper” mortgage companies got creative (there were always scams out there, these new ones just got rediculous).

So how creative did they get?  Since they were dumping the loans on someone else after a few months, they began to make mortgage terms that kept the price of the loan low in the beginning so they could get the person the mortgage.  Now that they have someone making payments they needed to get rid of it before the terms of the mortgage made the payments too high for the person to afford and they defaulted.  So they packaged all these bad loans into more traditional loans and sold them to bigger banks that could deal with a bad loan here or there.  The first guy selling the mortgage effectively had a big reward with little risk.  This led to more and more risky loans.  People could sign up with no proof of income or negative amortization of the loan (you had a higher balance each month despite making payments). 

It does not take a genius to figure out that this was set to fail.  It depended on three things; home prices rising, dumb people to sign the mortgage, and dumb banks to buy them.  If anyone of these failed the dominos would fall.  And it did.

Everyone knew the game, and they all went along with it.  Except for a few people just looking for a home they could afford,  but most of them were smoking their cigars and drinking their brandy laughing all the way to the bank.  Of course the bank they were walking to eventually collapsed right after they took out their money.  Falling on the guy who just signed up for a loan.

A whole lot of crap was out there basicly poisoning anything it touched.  The whole sham was about to fall in.  Unfortunately those that benefited from this whole thing the most are not going to take a brunt of this mess. They had golden parachutes.  These were all the executives of the banks that knew this crap was going on and authorized it.  After all one year’s salary for these bastards was enough to live for the rest of your life.  So screw it if in two years it all collapses they were safe.  So they did not have any risk.  See a pattern here.  The person benefiting most held no risk.  Therefore they only looked at the reward and the reward was an incredibly high salary and bonus.  Their future well being was not wrapped in the future of the company/bank they were heading it was in the huge bonus they were set to receive in one year.  Year two be damned.

Now here we are.  A bunch of fat cats have beaten the system.  And we are left holding the bag.  And the bag is full of dog crap.

I will go in what to do about it later.  Good luck and make your mortgage payment.