Archive for March, 2011

Social Security: Welfare or Earned?

March 28, 2011

In 2010 President Obama’s Deficit Commission (ODC) announced some findings regarding, among other areas, Social Security. The result of all this political brain power are proposals to raise the full retirement age (again), raise the income subject to taxation (again), raise the minimum benefit amount (again), add (more) means testing, lower the cost of living adjustment (by changing how it is calculated) and enact a variety of bureaucratic administrative changes. Their combined efforts amount to little more than rough tweaking and kicking the SSA can down the road another 50 years. So they say. Given the obvious failure of the 1983 Greenspan Social Security Commission whose “solutions” didn’t even last 30 years it is highly unlikely that the ODC proposals will make it that far if they even see the legal light of day.

Missing from the political discussions of Social Security (SSA) is any description of the of actual program versus the rhetoric used to describe the program. Rhetoric from opponents of SSA claim individuals could obtain higher retirement benefits if they invested their own social security taxes and that SSA bankrupts the young to support the old. Rhetoric from supporters of SSA claim it is good social policy with descriptions ranging from insurance against senior poverty to wholly earned benefits. Neither side provides even a basic understanding of the actual SSA program. Instead they are content with tossing rhetorical fire bombs left and right.

To examine today’s SSA program in operation it is useful to determine how initial benefits payments related to the SSA taxes paid in to the system over a theoretical working career. If taxes paid amounted to less than benefits received then the recipient would be receiving some portion of welfare in their SSA benefits. If taxes paid were more than the benefits received then those individuals would, in effect, be subsidizing the benefits of the welfare group. One could certainly consider that subsidy as an ongoing “tax” paid by those, usually higher income, workers.

Chart #1 depicts the initial maximum SSA benefit provided in the year of retirement versus the level of benefit provided by the assumed SSA Earned Annuity. The earned annuity is a fixed payment lasting for 22 years and is dependent on the amount of SSA taxes paid. The higher the tax paid the higher the initial annuity. Thus the annuity beginning in 2007 is much higher than the annuity in 1987. And so were the SSA taxes. The initial SSA benefit assumes the maximum benefit payout in the year of retirement. While there was a flattening of this curve from 2002-2004 it otherwise is rising each year.

The key point in this chart is the difference between the two curves. From 1987 through about 1998 the maximum SSA benefit was far above the assumed earned annuity. The difference represents a welfare payment to the benefit recipient. In later years, starting about 2000 the earned annuity rose above the initial maximum SSA benefit. The difference this time represents earned income that is taxed away.

SSA Benefits vs Earned Annuity

Initial Maximum Benefit at Year of Retirement

Using data from the SSA website I created a spreadsheet that links maximum tax payments with maximum SSA benefits over the period 1937 through 2010. For its own reasons the SSA website assumes a 40 year working career. Thus someone retiring at the end of 1976 who worked the full 40 years and who paid in the maximum amount of taxation each year would have paid a total of $6,962 in SSA taxes. Their employer would have paid the same amount. Upon retirement at the end of 1976 this worker would be eligible to receive an SSA benefit of $3,427 per year. In just under two years this worker would have received back every dime they paid in SSA taxes. And this assumes the worker retires with reduced benefits at age 62.

That same worker retiring at 65 would receive $4,368 per year if a man and $4,546 per year if a woman. [There is a period from 1962 through 1977 when women aged 65 received a larger maximum SSA payment than men. It was 1962 through 1974 for women aged 62.] A woman retiring at 65 in 1976 would receive her entire SSA contributions back in just under 1 ½ years. A man would receive his back in just over 1 ½ years. But each would continue to receive those payments, along with inflation adjustments for the rest of their lives. Was that benefit earned or is it welfare?

Reasonable arguments regarding the earned versus welfare aspect of SSA benefits can be made on three grounds: (1) employer contributions are not included; (2) prospective earnings on the SSA contributions are not included; and, as always, (3) the situation is different now. Fair enough.

Employer Contributions: as a small business owner and employer, if I was not required to pay SSA taxes based on employee wages that money would not accrue to my employees. This is after all a tax on my status as an employer. If I had partners or utilized sub-contractors no SSA tax would be charged. Certainly some of that tax might find its way to the employees for competitive reasons but it is highly unlikely that all of it would accrue to them. More importantly that tax is no more the employee’s money than the income tax, property tax, unemployment tax or worker’s compensation tax. However, there is a substantial argument regarding the employer portion of SSA taxes. That money provides a revenue stream to the government be used for the other benefits (disability, spouse, etc.) currently provided by SSA.

Earnings on Contributions: this argument could turn either way depending on the investment return being assumed. It may or may not be sufficient to cover a retirees SSA benefits. There is a myth that individuals could have earned a far better return on their SSA tax than is implied by the benefits paid. Maybe, but not very likely. Consider that as long term retirement savings it is not reasonable to assume that individuals would be able to invest their SSA taxes in the stock market (or any other market). No rational person wants the government to do so and politics argues against letting individuals do so on their own behalf. If individual investors or markets temporarily failed it could result in a massive taxpayer cost for outright welfare support during retirement. (Politics would require a bailout whether I agree or not.) That would be a prime example of public risk versus private gain albeit on an individual basis. There is another alterative the Retirement Certificate of Deposit (RCD).

In order to estimate the earnings power of SSA taxes I assumed that individual employee SSA taxes earn the higher of 6% or the 10 year treasury bond rate and that all earnings be tax free. Accumulated contributions would be compounded annually and the rate would adjust annually depending on the then current 10 year treasury bond rate. Note that since 1968, 30 years had a 10 year treasury bond rate above 6%. This may seem rather conservative but then again, a conservative investment policy for retirement funds is wholly reasonable. As a example of how this might work we could assume all SSA taxes are held in a bank retirement certificate of deposit or RCD on behalf of each individual worker. Each year the bank accrues the current taxes and then pays the higher of 6% or the 10 year treasury bond interest rate on the total sum which is compounded annually. Note that a 6%, tax free, guaranteed rate of return provides good value compared to the 10% average historical stock market returns. Yes, government would be required to subsidize the interest rate as necessary to ensure the minimum 6% rate of return. Where might that money come from? From the employer portion of the SSA tax.

On this basis our worker who retired in 1976 after 40 years work, paying SSA tax at the maximum rate and receiving the aforementioned return on those taxes would accumulate a total of $14,439 of which $6,962 was actual taxes. At the maximum SSA benefit level of $3427 per year at age 62 the payback takes just under 4 ¼ years. At $5069 for women age 65 the payback takes just over 3 years 2 months. But the payments continue, with partial inflation adjustments for the rest of their lives. Since SSA uses a life expectancy of 22 years that means roughly 18-19 years of welfare payments for the 1976 retiree.

It’s Different Now: yes, actually it is different now but not all that much. It was earlier noted that the employer portion of SSA taxes is unlikely to accrue to the individual employee. Either because the employer would retain all or a portion of them or the government would utilize that revenue stream for other purposes. And, in all likelihood that’s exactly what would happen. So only the individual portion of SSA tax could be invested in a bank RCD on behalf of each individual while the employer portion of the tax would be retained by the government. It would be used for such purposes as: (a) subsidize the 6% retirement earnings as necessary; (b) provide for the disabled; (c) provide for non-working spouses or other individuals; and (d) pay existing retirees their benefits. Note that items (b), (c) and (d) are existing SSA programs. Good arguments can be made to shift all or some of those existing programs to general welfare as a more appropriate funding source but that’s another issue.

It is reasonable then to only look at the individual portion of SSA taxes versus benefits to determine how much welfare – if any – exists in the program today. An individual retiring at the end of 2009 (the first of the baby boomers) after working 40 years and who paid the maximum amount of SSA taxes would have paid in $115,800. If we assume the 6% RCD earnings scheme noted above the taxes plus earnings would amount to a combined total of $333,826. Continuing the 6% earnings scheme through retirement and assuming a life expectancy of 22 years that amount provides an annual annuity of $27,723. But only for 22 years. And no inflation adjustment either.

However, an individual with that work history who retires at age 62 at the end of 2009 would today be awarded an SSA benefit of only $21,228 per year. Thus today’s baby boomer retiree would be forgoing earned benefits of $6,495 per year (reduced by any future inflation adjustment). However, if that worker were married their spousal benefits would be $10,614 or $4,119 in net unearned – welfare – benefits. Of course that would be reduced by the work history and SSA taxes of the spouse.

Chart #2 is similar to Chart #1 except that it shows the SSA benefits as of the beginning of 2011 instead of the initial maximum at retirement. While the earned annuity curve has not changed the series of cost of living adjustments (COLA) has raised the SSA benefit level well above the annuity curve until the year 2004. Retirees from 2004 to the present who paid the maximum SSA tax and who could receive the earned annuity amount are actually receiving less from SSA than they would from the assumed annuity. More recent retirees are receiving considerably less. Again, this represents a tax on high earning retirees.

SSA Benefits vs Earned Annuity

Maximum SSA Benefits as of 2011 vs Earned Annuity

If instead this boomer retires at the end of 2009 at age 65 their SSA benefit would be $26,064 or $1,659 below their “earned” amount. Of course spousal benefits would raise the total accordingly well above the “earned” amount depending on the spouse’s work history. The significant point is that while SSA Welfare isn’t as substantial for boomers as it is for WWII’ers even today’s boomer retirees could receive major welfare payments (if married) in the guise of SSA benefits. Single retirees however, end up subsidizing others. So, yes it is different today but only in degree.

Millennials: How will it be tomorrow for today’s millennials? Well, the bottom line is that since 1999 high earners (if single) began receiving less in SSA benefits than they would by investing and annuitizing their own tax payments. This trend will only be exacerbated as full retirement age is increased, as income levels are raised and as the tax rate inevitably increases. The trend then is for the upper earner millennial to become more and more a subsidizer of  lower income earners. At some point in the future even the addition of spousal benefits may not shift a high earner into a welfare recipient. This can only be considered as a stealth tax on high earning millennials above the federal income tax and hidden from view by bureaucratic dictate.

What is important to take away from this exercise is that whatever the rhetoric, social security was clearly designed in the form of a massive Ponzi scheme that required an ever larger number of workers to support current retirees. When that quickly became impractical the tax rates and income levels were raised in lieu of additional workers. Indeed, were it not for those who die before receiving benefits or who die early after receiving benefits (thus cheating their families out of their tax payments) the SSA program would have long since imploded. Adding fiscal injury to monetary insult one Congress after another purchased votes by raising benefits, expanding eligibility, and adding inflation protections. Again the total cost as well as tax rates and income levels rose dramatically. From an original 1% tax on the first $3000 of wages in 1937 (over $45,000 in current dollars) the cost has risen twelve fold to a 6.2% tax on $106,800 (and rising) of wages. The worst of both worlds.

Regrettably as the 1983 Greenspan Social Security Commission did so does the Obama Deficit Commission. Both simply tweak the system and kick the SSA can down the road. There is no discussion of the inherent structural flaw of the SSA program. By continuing the dishonest assumption that SSA benefits are somehow fully “earned” workers (and non-workers) continue to expect to receive those benefits. Yet even today a high earner with a non-working spouse continues to receive unearned benefits especially as they live beyond the actuarial life span. A more honest explanation of the structural flaws in the program would provide a firm basis to propose more realistic and responsible long term solutions that might provide some financial security for individuals and their families without robbing their neighbors or their children. It’s time to trust the people with the truth.

My proposal is to vest individual SSA tax payments in an RCD investment vehicle with a minimum return and taxpayer guarantee. This provides a wealth creation mechanism for the working class and ensures that future Congresses cannot borrow and spend that money and that Wall Street will never get their hands on those funds. At the same time the employer portion can provide benefits for the non-working spouse, the disabled and those who exceed their actuarial life span as well as the minimum investment subsidy. However, some SSA programs such as disability should be transferred to general welfare.

Social Security: The 6% Solution *

March 27, 2011

* Or, How to Transform SSA into an Individual Retirement Plan

Late in 2010 President Obama’s Deficit Commission disgorged their budget recommendations. The complex and difficult work under the combined wisdom of these earnest, well regarded, leaders has resulted in a series of entitlement proposals that are significant for their disregard for physical laborers, all young people and every responsible individual. Not to have seized this opportunity to revamp a failed program is a feckless and cowardly insult to hard working, responsible individuals and is most egregious to young people. Choosing to raise the taxation level, institute means testing and bump out the full retirement age could not be a bigger insult to America’s responsible citizens. No, this is just another instance of kicking the entitlement can down the road just as did the 1983 Greenspan Commission on Social Security. It too failed to correct the long term entitlement program and so will these proposals.

Raising the taxation level will, under the current SSA benefit scheme merely result in larger benefits to the upper income retirees down the road. It only temporarily solves the current benefit issue and does so by creating a worse predicament in future years. Means testing seems viable but it ignores the current SSA rules that link tax payments to benefits. Further, to change the program after the fact, when upper income individuals have already paid in their full tax payments only to find their benefits arbitrarily reduced upon retirement is dishonest at best. It will achieve full disrepute not by means testing directly but by instead instituting an increased tax rate on upper income SSA benefits. The left hand will take what the right hand gives. And the always favorite scheme of bureaucratic desk warmers to bump out the retirement age, is so rife with discriminatory application one wonders how it can pass the ADA (American’s with Disability Act). Anyone who physically labors will pay a steep price in lost benefits and lost jobs as they approach their later years. Who will hire a 60 year old laborer?

I propose a “6% Solution” to the current Social Security Ponzi scheme. My proposal gives individuals control over their retirement funds and retirement age. It also provides a wealth creation scheme that protects their families in the event of early death or disability. It specifically avoids giving monies to Wall Street or to the government. It utilizes existing government guarantees to protect the individual accounts along with a new scheme to provide a minimum return on their retirement funds. At the same time it provides a secondary revenue stream to government to provide funds for current retirees, those who are disabled and to provide for the minimum return on the retirement accounts. That secondary revenue stream is simply the employer’s portion of the current social security tax.

My proposal will result in the “Individualization of Social Security”. This is not privatization with its Wall Street connotations. Individualization uses the existing banking system with its FDIC guarantees and is premised on typical bank Certificates of Deposit. In essence an individual’s monthly social security tax payments would be deposited in a Retirement Certificate of Deposit (RCD) in a bank of their choosing. This RCD would, to the bank, be the same as any other CD. The bank would use those funds to make loans to individuals and businesses. The RCD would receive the current FDIC protection ($250,000 at present). However, the RCD may not be cashed or used as collateral. It is strictly intended to provide retirement benefits.

The new minimum return scheme is to ensure that every individual is able to earn a minimum 6% return on their RCD. This is necessary because of the Federal Reserve’s repeated and ongoing action to maintain interest rates at levels that provide little or no interest income. The basic idea is that the bank will pay the RCD interest at the higher of 6% or the current 10 year treasury note rate. The government will guarantee the bank the difference between 6% and the current 10 year treasury note. This difference is currently about 3.35% owing to the Federal Reserve’s monetary policies. The money to provide this subsidy is obtained from the secondary revenue stream. Of course if the Federal Reserve would raise interest rates to more normal levels the subsidy would all but disappear.

There would need to be a transition of course for those who have been in the workforce for some time but who are still distant from retirement age. Such a transition could be accomplished by a transfer of the existing Treasury notes or notes in the social security trust fund to each individual according to their own individual work history. Each bank can redeem those treasury notes/notes for capital from the Federal Reserve. In this way the individual retirement CD accounts, the RCD’s, can be funded.

This not a perfect scheme and likely has serious flaws. However, it is an attempt to put each working individual in charge of their retirement. At the same time it removes government from direct responsibility while leaving government (e.g., taxpayers) liable to protect and guarantee the retirement accounts. By limiting the accounts to an RCD as opposed to stocks or bonds the taxpayer guarantee is likely to have limited exposure. There are three principal benefits to this scheme.

  1. charge each individual worker with responsibility for their own retirement by giving them direct ownership of their retirement account.
  2. remove the workers retirement funds from government control thus eliminating the resulting spending of those funds by the government and limiting government control over individuals retirement choices.
  3. ensure workers retirement funds are isolated from Wall Street and in exchange provide guaranteed minimum returns and security of the accounts.

Do Ask, Do Tell

March 24, 2011

Repeal of “Don’t Ask, Don’t Tell” (DADT) on the premise of Gay Rights is a false step on a left footed march to utopia. Advocates for the repeal of DADT are only considering homosexual or Gay Rights. The rights of heterosexuals or Straights are simply ignored in a conspiracy of silence. Such silence needs to be challenged. The intent of the DADT repeal is not simply to end one policy, it is to create a wholly new policy of: “Do Ask, Do Tell” (DoADoT). Repeal of DADT now means homosexuals have a constitutional right to openly and freely participate in the military. It also means that they are now free to openly and actively seek and engage sex partners within the minimal limits conditioned by military policy. Even so, they can now “ask” and “tell” with constitutional protections.

The political expectation is that military training and discipline should be sufficient to cure all social ills. Yet most often those who demand that military discipline restrain the hormonal instincts of young people are anti-military forces in pursuit of a political agenda. Pregnancies of military women by military men while both are on duty testify to the limits of such discipline. Not to mention the volume of sexually transmitted diseases (STD’s) by military men and women. The greatest military discipline at issue under DoADoT it will be how to keep homosexuals from widespread sexual activity and the concomitant spread of HIV and other STD’s throughout a unit. Good luck with that. But the discipline issue is a mere distraction, not the key issue at hand. Individual rights – for straights and gays – are the key issue. Straight Rights deserve and must have equal constitutional protections as any presumed Gay Rights.

The issue, indeed even the very concept of Straight Rights has been willfully ignored out of political cowardice. As DoADoT becomes policy male and female homosexuals will be granted superior constitutional rights to male and female heterosexuals. For Straights to have the same constitutional value as Gay Rights, heterosexual men and women must not and cannot be segregated simply because of gender. This new DoADoT policy should require that males and females not only work together but live together in an unrestricted environment. After all, if such physical differences as skin color, height, weight, hair color, and sexual orientation are immaterial then why are mere physical differences in genitalia of any importance?

Clearly there are obvious differences in genitalia within gender as well as between genders. What ought to be equally obvious is that such differences pale in comparison with sexual attraction as a valid rationale for gender segregation. Males and females have not been segregated merely because of physical differences. They have historically been segregated due to presumed sexual attraction. Yet the DoADoT policy explicitly eliminates sexual attraction as a valid basis for gender segregation.

Under DoADoT homosexuals are entitled to openly and actively live with and among that gender to which they are sexually attracted. By what constitutional doctrine or legal logic are heterosexuals to be denied those same rights? Yet, what member of Congress or military policy maker will require male and female military personnel to live together in a wholly unrestricted environment? Will the military chiefs fulfill the constitutional requirement that men and women now must use the same showers together, toilet together, use the same sinks side by side and of course dress and sleep in the same room or barracks? Will Congress stipulate that there cannot be any segregation based on gender? Will the President, Congress or the military chiefs acknowledge that under DoADoT all gender segregation will in fact be constitutionally prohibited?

Presuming that gays are somehow immune to sexual attraction towards straights is utterly laughable. Are straight males immune to sexual attraction towards females, homosexual or not? And since a DoADoT policy enables gays to openly ask and tell if any sexual attraction is mutual it follows that sexual solicitation and activity will follow. And because gays will be living with and among that gender to which they are sexually attracted they will be able to ask gays and straights alike. Homosexual “Gaydar” is no more effective than anyone else’s. But straights will not be able to “ask” and “tell” until living arrangements within the military are modified to remove all gender segregation. Under DoADoT there will no longer be any constitutional doctrine or legal logic to preclude such modifications. Indeed, one can presume that removing gender segregation is not merely permitted, it is mandated as equal protection.

Ultimately DoADoT  means females (homosexual and heterosexual) will be subject to sexual solicitations from heterosexual males while both are showering, toileting or dressing. Males will be equally subject to such solicitations. Under the DoADoT policy there cannot be any gender segregation, everyone is free to “ask and tell” and everyone will be subject to sexual solicitation. Will females freely submit to such a policy? What about homosexual males? It can only be imagined what impact such a constitutional right may have on the military enlistment rates of females (heterosexual or homosexual). It is unlikely to raise them. Nor is any of this likely to improve military readiness or morale.

But the DoADoT  policy rises well beyond the military. If the military must follow a constitutionally mandated social policy of DoADoT, then by what constitutional doctrine or legal logic will civilians be excluded from such a policy? And under a DoADoT constitutionally mandated social policy all gender segregation will henceforth be prohibited. That means bathrooms, locker rooms, and dorm rooms, for elementary, middle and high schools as well as all colleges and universities will be gender neutral. No gender segregation period. This policy will apply to adults as well whether in business or government although one can assume Congress will (as usual) exempt itself. Repeal of DADT is not a trivial exercise to provide one thin segment of society with a presumed “right”. It will result in a massive cynical overthrow of the most intimate human social policy for mere political gain.

When Experts Disagree –

March 21, 2011

For some time now I have been pondering the conumdrum of what to do When Experts Disagree. Naturally the next line would have to be, ” And, When Don’t They?”

My interests (as with many people) lie in the political, economic, financial and investment worlds but like most folks I dip into other worlds such as medicine, environment, education and social policy as I meander down life’s paths. And as I peek into those side worlds and stare at my intrinsic worlds I am confident that this issue of When Experts Disagree flows into nearly (if not every) facet of our modern life. The great question is what, exactly, do we – the decided non-experts do when those experts upon whom we supposedly depend disagree?

As an example,Professor Don Boudreaux wrote a letter to the Wall Street Journal, noting one such disagreement among economics experts:

Justin Lahart accurately reports that, as recently as last year, the late Paul Samuelson dismissed F.A. Hayek’s book The Road to Serfdom as alarmist and wrong: “Sweden and its Scandinavian neighbors are among the most socialistic countries in the world, as Mr. Hayek defined them, Mr. Samuelson pointed out.  ‘Where are their horror camps?’ he [Samuelson] wrote” (“The Glenn Beck Effect: Hayek Has a Hit,” June 17).

Indeed, do physicists even agree on the speed of light? The short answer is, at best, maybe, maybe not. From another area, Curious About Astronomy, comes another type of disagreement among experts.

However, other astronomers disagree that the experiment is able to measure the speed of gravity, arguing that the effect is much smaller than the scientists claim and that (in effect) they got their arithmatic wrong when they decided that the speed of gravity did come into the equations. They are not claiming that the speed of gravity is different to that of light, just that it could not be measured in the experiment.

Clearly this disagreement is at an intellectual level far beyond my capability. But, then, I’m not an expert in anything so almost every disagreement by experts is beyond my intellectual capability. The question though remains: what do I (we), as  non-experts do when experts disagree – as they almost always do?

Take another set of disagreements at the stratospheric intellectual level. This is the abstract for a translation of a disagreement between Albert Einstein and Walter Ritz.

During 1908 and 1909 Ritz and Einstein battled over what we now call the time arrows of electrodynamics and entropy. Ritz argued that electrodynamic irreversibility was one of the roots of the second law of thermodynamics, while Einstein defended Maxwell-Lorentz electromagnetic time symmetry. Microscopic reversibility remains a cornerstone of our current paradigm, yet we are finding more and more evidence that experimentally discerned time arrows are asymmetrical and that they all point from past to future. This paper furnishes some comments about events leading up to the Ritz-Einstein confrontation, some subsequent developments, and an English translation of their agreement to disagree. A side by side comparison of two recent summaries of their battle communiques is included to provide an overview of what they had to say about this current issue.

In matters of scientific fact we may – and most assuredly I emphasize MAY – allow scientists to conduct their experiments to discover the facts of a situation. But what happens when the science community cannot experiment but can only create models they think mirror reality? This is precisely the circumstance in the arguments regarding global warming. Or, more specifically, anthropogenic global warming (AGW), warming caused exclusively by the acts of man. The facts cannot be determined by experiment. The various scientific camps create computer models and argue about the models and the input data and it all has taken on the slimy sheen of a political argument, not a scientific one.

What would we do if our lives were dependent on deciding which of these experts, these intellectual giants was correct? Or even which was more correct? How would we decide? What would be the basis of our decision? Ultimately, might one even be so arrogant as to ask why even consult the experts? For if they ultimately disagree and we are not expert yet we must make a decision then why consult them at all? How would we, on what basis would we, differentiate between the various expert camps?

What do we do when our experts disagree?

When Ears Don’t Hear, Truth is Futile

March 21, 2011

Comment in response to this article by Leonard Pitts, writer for the Miami Herald           03/19/2011

Mr. Pitts,

You claim to be presenting “objective fact” and rue the idea that no one gets it. That your article will be futile, I agree. But it will be futile because you have not and will not present “objective fact”.

“For instance, in her book, The New Jim Crow, Michelle Alexander reports that white kids are a third more likely to have sold drugs than black kids. But in some states, blacks account for up to 90 percent of all drug offenders in prison.” Thus your column infers drug arrests must be racially motivated.

Michelle Alexander claims, “white kids are a third more likely” to deal drugs. This is clever word usage designed more to hide information than provide it. Let’s assume any randomly selected drug dealer has a 33% probability of being black. But if that drug dealer is 1/3 more likely to be white then a randomly selected drug dealer has a 44% probability of being white. We can assume a 23% probability of the drug dealer being Hispanic or Asian or of mixed race.

Out of every 100 drug dealers then about 33 are black and 44 are white. Thus “white kids are a third more likely to have sold drugs”. But black’s only constitute about 13% of our population while whites are about 80%. If we look at any random sample of 100,000 Americans and of those we assume 100 are drug dealers then of those drug dealers 33 are likely to be black and 44 likely to be white. But in that same 100,000 population sample only 13,000 are black and 80,000 are white. The rest being of other races. (See U.S. Census Bureau Quick Facts)

That suggests a 0.254% probability of a black being a drug dealer and a 0.055% probability of a white being a drug dealer [33/13,000=0.254% and 44/80,000=0.055%]. This means blacks are 4.6 times more likely to be a drug dealer than whites [0.0254/0.055=4.62]. Is that racist Mr. Pitts? If random members of the black race are nearly 5 times more likely to be drug dealers than random members of the white race then isn’t it “objective fact” that they are far more likely to end up in jail?

Other questions regard the nature of the drug offense. Is the drug dealer who only sells marijuana more likely to be white or black? Is the drug dealer who sells powder cocaine more likely to be white or black? Is the drug dealer who sells crack cocaine more likely to be white or black? Is the drug dealer who sells methamphetamine more likely to be white or black? Is the drug dealer who sells heroin more likely to be white or black? Mr. Pitts you claim “objective fact” but all I read is subjective bias. You and Michelle Alexander conflate various types of drug offenses together as if selling heroin on a street corner is no more offensive than selling a nickel bag of marijuana to a college buddy. You obscure “facts” with sophistry.

And that sir, is why your column is so futile. You continuously harp on the racial makeup of statistical outcomes  and rarely harp on the choices being made by individuals. In so doing you drive a wedge between those of us who expect individuals to make responsible choices and to enjoy (or not) the obligations thereof and those who seek to have the state provide an outcome. It is not racist to ask why so many black children are born out of wedlock yet few black leaders complain publicly. It is not racist to ask why so many black children grow up without a father yet few black leaders complain publicly. It is not racist to ask why so many black males have criminal records while black leaders only complain about the racist police instead of stupid choices made by individuals. Instead of challenging the choices members of your racial community make you charge the white population with racism and then demand that the state force an alternative outcome regardless of choices individuals make. If expecting individuals to make responsible choices about their lives means that I am racist then so be it.

And for the record, it is objective fact that most murders are committed within racial categories. That is most blacks are killed by other blacks and most whites are killed by other whites. Indeed, in all cases most often by someone they know.


March 21, 2011

Wilmington, NC
StarNews      03/03/2011
Letter to Editor:

[Note: NC has a film industry incentive to give filmmakers a 25% rebate on their expenses. The editors of the local paper find this just peachy.]

The editors congratulate themselves on the erstwhile success of the film industry in, “Wilmington’s film business on a roll; let’s hope it continues”. Yes, the local film industry is on a roll all right, they’re rolling away with our tax dollars. Golly, who would have thought that bribing a favored industry with a tax credit equaling 25% of its expenses would actually bring that industry to town. Amazing, simply amazing. As Claude Rains famously remarked, “I’m shocked, shocked …”! And as the film industry responds to these tax credit bribes the surprised editors shout with “Glee” or is it just glee? But economically this is “The Night of the Living Dead”.

As a small business owner I’m tired of the endless pleadings for “more porridge tax credits please sir!” as if film is the only industry that needs to remain competitive. What pray tell (is prayer permitted in Willmingwood?) would the editors expect to happen if other industries received the same bribe? Would pharmaceutical companies (PPD) show up in force? What about nuclear (GE) facilities? Might some more build plants nearby? How about a 25% tax credit for specialty glass (Corning)? Would Corning manufacture their Gorilla Glass locally? Or, forsooth, would a 25% tax credit lure more cement plants (Titan)? The list is endless really. In fact, the State of North Carolina could bankrupt itself by bribing industry to locate here. We know that the film industry responds to “The Bribe” (1949). So will others.

Bond Portfolio Frustrations

March 21, 2011

Below is an excerpt from a Morningstar article by Christine Benz published on 2/28/2011

 The Error-Proof Portfolio: Nervous Bond Investors–Don’t Make These Mistakes

“The second potential risk for individual-bond investors right now is one of lost opportunity more than anything else: If available bond yields pop up from today’s ultralow rates, buy-and-hold individual-bond investors won’t be able to take advantage of them until their securities mature. And when they do, they’ll be forced to reinvest their bonds at whatever interest rates may be on offer, even though interest rates could go even higher in the future.”

This attitude is so frustrating. I’ve seen it from Morningstar and individual investment advisors alike. In a discussion of bond allocation in a portfolio to infer that individuals should remain in cash or only buy a capital losing bond mutual fund because otherwise we’ll miss other investment opportunities is downright insulting. What the heck are the alternatives? Bond funds? The implication is that individuals should only invest in bond mutual funds so that we don’t miss investment opportunities! Phooey.

If I invest in a bond mutual fund I will lose a lot more than opportunity compared to buying individual bonds. I will lose capital and with it the opportunity to invest in anything. So what if I have to re-invest my matured bonds at “… whatever interest rates may be on offer, …”. Doesn’t that give me the chance to re-invest at much higher yields? And this is as compared to a bond mutual fund throwing my capital away in order to maintain a fixed duration in their fund. And rarely does the resulting yield rise recoup my capital loss. This comment poisons the rest of the article.

U.S. Experience With Deflation

March 21, 2011

Letter to St. Louis Federal Reserve employee                                   10/03/2010

 Dear Mr. ——,

 I just read your cover article regarding the “U.S. Historical Experience with Deflation” (National Economic Trends, October 2010). As you will readily ascertain I am not a credentialed economist just a street level economic person. As I read your article I was struck by several points. First, the Mark Twain story about the cat that slept on the stove came to mind. You may recall that story. A cat routinely slept on top of what was normally an unlit pot bellied stove. One day the cat jumped up on the stove and found it had been lit and was very hot. The cat learned not to sleep on the stove. The cat should have instead learned to check if the stove was lit.

Is the U.S. experience with deflation analogous? Have we simply learned to avoid deflation at all costs rather than to manage an economy to avoid both excessive inflation and deflation? Is it not possible that our economy would be better overall if we accepted limited deflation as well as limited inflation? If not, why not? Has it been any easier to rein in excessive inflation than to correct excessive deflation?

It is not clear to me why the rationale of reduced economic growth as a result of deflation is accurate. If deflation is a symptom of reduced growth rather than a cause the linkage is even more tenuous is it not? As a street level economic person I would not hold cash per se during deflation but would invest it so as to earn a return. Clearly a 2% deflation makes cash more “valuable” in real terms but cash invested at 3% (or 2% or 1%) provides even more value. Nor would I hold off buying items just because they might be cheaper in a year. This is of course the common argument against deflation.

Indeed, if I need a car why would I wait a year? If I needed (or wanted) a new house why would I wait? Yes, it might be cheaper but 2% or 5% even? Is the “cost” of waiting a year worth some modest percentage of the value? Presumably I would receive at least that much value from the new asset else why buy it? The short answer is yes, I would buy it even if it would be cheaper a year from now.

Consider please every single electronic device created over the past 30 years or more. Every single one has gone down in price year after year but people continue to buy today rather than wait a year or two or three. Where is the practice of sitting on ones cash evident? Would a business not invest today if they believed it would be profitable? As a small business owner I can assure you I would even if I knew that a new building, new equipment, new vehicles – new computers? – would be cheaper in a year. I might lose 5% or 10% of additional profits by waiting for 2% cheaper prices. That would be stupid and while I might not succeed I try real hard not to be stupid.

But there’s the rub isn’t it? Business would invest if they thought it would be profitable but because they don’t think it will be profitable they don’t invest. From my perspective way down at street level the issue isn’t deflation but demand that has been pulled (yanked, jerked, dragged) forward through every imaginable type of macro-economic policy government can conceive. Now that the U.S. has reached the end of that economic gaming the worry is deflation. Yet just as I lag behind the inflation curve so too I would lag (my income that is) behind the deflation curve. Allowing prices to decline may incur some pain (possibly severe) but it would certainly clear the surplus assets faster and permit a more measured and sustainable growth to resume. The big losers will be those who benefitted from the unsustainable, inflationary economic policies. And I care about them as much as they care about me. Seriously though I understand such a policy would present a severe economic disruption but I also believe our nation and economic system is strong enough to survive. Most forests benefit, in the long term, from a forest fire. We need the economic version of a forest fire which is deflation.

Second, why is a 2% inflation rate considered “price stability”? I certainly don’t consider the annual loss of 2% of my dollar value as stable. It means that every 25 years my dollar buys half what it used to buy and that assumes (wrongly I believe) that the published inflation rates are in fact accurate. It also means I must run twice as fast just to keep up with those “stable prices”. Worse, inflation rises ahead of and typically faster than my income. Consequently I am always behind that inflation curve. Government is not of course and the suspicion is that that is the actual intent. Is this the best that our Federal Reserve can do?

Why wouldn’t a true zero inflation/deflation rate be better for the average worker? Would we not gain economic value through productivity gains and technological advances? Why is it necessary to devalue our currency to achieve economic growth? Mind I am not suggesting stable money supply. I recognize that as population grows the money supply must grow to accommodate that increased population. What I don’t recognize is why it must grow faster than the population.

 Thanks for your article. Clearly I found it quite interesting if also frustrating. I’ve not read a review of the economic history presented in this way and I appreciate the perspective.

The Right To Judge

March 21, 2011

Wilmington, NC

 StarNews                                                      08/13/2010

Letter to Editor:

In the article, “Who has the right to Judge”, by Leonard Pitts he makes the point that a judges personal circumstance does not invalidate their ability to pass judgment on issues – even when those issues may impact the judge personally. He challenges those who claim that a supposed homosexual judge (who overturned California’s Prop 8) is biased in favor of homosexual rights. Mr. Pitts writes, “… that reasoning would require women judges to recuse themselves from cases with women plaintiffs, Jewish judges to abandon cases with Jewish defendants, white judges to leave cases tried by white lawyers.” 

I am curious then how Mr. Pitts views the NC Racial Justice Act that requires investigations of bias in sentencing? From the “Sentencing Law and Policy” blog:

“Under the terms of the Racial Justice Act in 2009, convicts can use statistical evidence to argue bias in their sentencing. The law allows judges to consider evidence that one racial group is being punished more harshly than members of other racial groups.”

Which is it Mr. Pitts? Can a white jury judge a black defendant or a black jury judge a white defendant? Can a male jury judge a female defendant or heterosexual jury judge a homosexual defendant. Or, based on your past writings, is it only bias when a black defendant is on trial? Consider what Supreme Court Justice Sonia Sotomayor said in 2001. “Hence, one must accept the proposition that a difference there will be by the presence of women and people of color on the bench. Personal experiences affect the facts that judges choose to see. … I simply do not know exactly what that difference will be in my judging. But I accept there will be some based on my gender and my Latina heritage.”

I love that line: “Personal experiences affect the facts that judges choose to see.” Facts that judges choose to see. Never mind the whole truth, here’s what I want to see.

 So, Mr. Pitts, is it truly unreasonable to expect a homosexual judge will in fact be biased when ruling on a case involving presumed homosexual rights? And, if not, then justify the NC Racial Justice Act. Either we are all capable of bias or none of us are, right?