Taxes and pro sports

December 11, 2010

Recently I was discussing our current budgetary fiasco disaster and the subject of increased taxes and revenue came up.  I tried to explain to the other parties that you simply cannot tax your way out of this.  there are many reasons for this, not the least of which is the problem is wholly one of spending.  Nobody ever goes into debt, either a person, a family, or a nation, by earning to little.  Debt is always a function of excessive spending.  But there’s another reason, and it’s Hauser’s Law.

Bottom line is that regardless the top marginal tax rates, the net revenues to the government theft will never exceed 19% of GDP.  The next question was obvious: why?

One need only consider basic economic principles (you know, those things that columnists at the NY Times so conveniently ignore!!) such as the law of diminishing marginal utility and the law of increasing opportunity cost.

Quite simply, the more someone works the greater the marginal cost.  In other words, each successive unit of work requires them to forgo more than the previous unit of work, be it an hour, a day, or whatever.  Also, the increased income suffers from diminishing marginal utility in that the increases in income are of less value than the previous amount of income.

Here’s how to look at it.  Someone earns $30,000 a year and has all his expenses covered with a little extra.  The first say, $25,000 is the most important, that which covers his bills.  A pay cut of say $1000 will not dramatically reduce his lifestyle, neither will another $1000 dramatically improve it (Keynesian charlatans take note).  So, earning $31,000 now, the increase of $1000 might be spent, perhaps even saved.  You save the money when the money has little use to you in the present.

Don’t confuse that with trade, as there the money holding has less utility than the item traded for.  In this case, there is nothing of greater utility than holding money.  This is a vital concept.

So, let’s say to earn the extra $1000, an individual would have to extend his working hours.  If that meant working on a weekend and missing some other activities, then the cost will have risen, while at the same time, the marginal utility of extra income will be less.  One might choose to work, but only would so as long as the cost was lower than the gain.

Should the individual simply receive a raise for being more productive or whatever, the same principle applies.  The extra $1000 in income would still have less utility than the previous $1000.  But this isn’t about a rudimentary example, it’s about sports.

Looking at the tax graph, I noticed that tax rates dropped dramatically beginning in the 1980’s.  Curious to note, that’s about the same time that pro sport athletes began to earn significantly higher salaries.  I recall, because I was a fan of his at the time, Pete Rose became baseball’s highest paid player

for the grand total of $800,000 a season.

Think about that for a moment.  Even as late as the 1970’s, there had never been a millionaire professional baseball player. Consider that today, the best players in the league earn $10-15 million a season, or more.  Hard to imagine today for sure.  But consider, the greatest the game has ever seen, Aaron, Mays, Mantle, Koufax, so many others, the greatest of the greatest, all hall of famers, and none ever was “rich”.  Sure, they were well off, and sure, they were famous.  But they were nowhere near the level of lifestyle that today’s mediocre ballplayers are.  After most left baseball, they ended up like the rest of us, working to put food on the table.  The only difference was that they had better stories.

But all that began to change, and I suspect it was due almost entirely to the decline in marginal tax rates.  Let’s go back to the concepts discussed earlier.  We noticed in the graph that as late as the 1960’s, the top marginal rate was 90%.  Who in their right mind would ever work for a 10% return on effort?  Consider it in terms of professional sports contracts.  If Pete Rose was paid $880,000 in 1968, he would have been taxed at the 90% bracket, and been able to “keep” all of $88,000.  As it was, he still was taxed at about 70% but $266,000 is remarkably better.

Now, that $880,000 in 1978 was such a high sum is mostly due to the high tax rates.  Look, if a pro athlete was to sign a contract for $500,000 in the 1960’s, they’d be bringing home $50,000. If the next lower tier was say 50% (I don’t know for sure, but let’s use it for the sake of argument) and they signed a contract for $100,000, they’d be bringing home the SAME amount, $50,000.  The sole difference would be how much the government stole.  The shock value sadly would have been at the nominal salary, not the theft.

Today, the top rate is 35% and I think it anything but a coincidence that as tax rates have fallen, professional salaries have skyrocketed.  Of course they would.

As salaries have risen in all pro sports, there has also been a corresponding increase in the level of competition and quality of all pro sports.  In fact, the influx of foreign players to the US has remarkably improved pro baseball.  And, oddly enough, so has it too in hockey.

It used to be that pro hockey in America was a thuggish sport, lacking grace, skill, and speed.  There were no European players.  However, hockey is huge in many European countries and the best players in the league today are mostly of foreign birth.  With the inclusion of these players into the league now, hockey is a much better game, faster, more athletic, and certainly more appealing to fans.  In fact, most of the league’s stars are foreign born, a fact of no importance or concern to hockey’s legions of fans.  They simply want the best product possible.  International trade works everywhere, all the time.  It’s a beautiful thing!!

So, why wouldn’t they have come to America before?  Yes, there was the Cold War thing, and many Eastern European players couldn’t escape.  But there was no such barrier to Latin American players.  The reason has to be, at least in part, the confiscatory marginal tax rates.  Why work so hard when most of it will be confiscated.  In economic terms, the marginal costs would have exceed the marginal revenues.

Yes, perhaps their lives would  have been better nonetheless, but it still begs the question.  Why didn’t they come earlier?  It must be that the tax rates before made it less profitable to come.  The athletes were thinking at the margin.

Basketball salaries have skyrocketed just the same.  In fact, basketball has imposed, as have all other sports, salary caps.  While price controls are destructive, at least within the sports themselves, there is no government intrusion.  Thus, though not the solution, at least the state was not involved, however I’ll wager the same economists were!!

Bastiat reminds us that we must look at the unseen as well.  Hazlitt reminds us that the good economist looks at the long term effects on all groups.  I don’t believe anyone cutting taxes three decades ago could have foreseen the dramatic rise in sports salaries and the commensurate increase in level of play.  But it did happen, and it happened because when athletes, just like anyone else, keep more of what they earn, they will do more, do better, and we all are the beneficiaries.

I’m hoping to see a special on ESPN about the effects of tax cuts and sports.  But that probably isn’t going to happen anytime soon.


A forgotten gem, couldn’t have been better written

November 18, 2010

In his wonderful short story “Boule de Suif“, Guy de Maupassant tells a story of ten travelers who’re evacuating from the oncoming Prussians in the Franco-Prussian War.  While his criticism is leveled at French society, this selection says all that needs to be said of war:

“Yes, madame, these Germans do nothing but eat potatoes and pork, and then pork and potatoes. And don’t imagine for a moment that they are clean! No, indeed! And if only you saw them drilling for hours, indeed for days, together; they all collect in a field, then they do nothing but march backward and forward, and wheel this way and that. If only they would cultivate the land, or remain at home and work on their high roads! Really, madame, these soldiers are of no earthly use! Poor people have to feed and keep them, only in order that they may learn how to kill! True, I am only an old woman with no education, but when I see them wearing themselves out marching about from morning till night, I say to myself: When there are people who make discoveries that are of use to people, why should others take so much trouble to do harm? Really, now, isn’t it a terrible thing to kill people, whether they are Prussians, or English, or Poles, or French? If we revenge ourselves on any one who injures us we do wrong, and are punished for it; but when our sons are shot down like partridges, that is all right, and decorations are given to the man who kills the most. No, indeed, I shall never be able to understand it.”

Cornudet raised his voice:

“War is a barbarous proceeding when we attack a peaceful neighbor, but it is a sacred duty when undertaken in defence of one’s country.”

The old woman looked down:

“Yes; it’s another matter when one acts in self-defence; but would it not be better to kill all the kings, seeing that they make war just to amuse themselves?”

Cornudet’s eyes kindled.

“Bravo, citizens!” he said.

Monsieur Carre-Lamadon was reflecting profoundly. Although an ardent admirer of great generals, the peasant woman’s sturdy common sense made him reflect on the wealth which might accrue to a country by the employment of so many idle hands now maintained at a great expense, of so much unproductive force, if they were employed in those great industrial enterprises which it will take centuries to complete.

I will have to investigate further whether de Muapassant was inlfuenced by Bastiat.  But no doubt, war is destruction, and let’s kill all the kings.  Sounds like a great start!!


Catching up…

November 10, 2010

From the “I’ll believe when I see it” department:

The West is turning against big government – but what comes next?

The governments of what were the richest countries in the world may be broke, but what is interesting is their response to this: the plan is not to make themselves rich enough once again to do all the things that they used to do, but to rethink the whole enterprise so that government never again finds itself so extravagantly overextended.

On this side of the Atlantic, there is now a broad understanding that the social democratic project itself is unsustainable: that it has grown wildly beyond the principles of its inception and that the consequences of this are not only unaffordable, but positively damaging to national life and character…

If ordinary citizens are to be expected to take back more control and moral responsibility, then some pretty basic things will have to be on the table. First, they must be allowed to keep significantly more of what they earn. The lowering of taxes cannot be a vague intention or a pious hope. It is a sine qua non of a more self-reliant, independent, morally resourceful private life. (And, contrary to the androids’ argument, lower taxation does not conflict with cutting the deficit: in fact, lower rates of tax will increase growth and revenue.)

Note: it might be the case that tax cuts will enhance revenue, but that should NEVER be the argument for tax cuts.  I’d rather tax cuts dramatically reduce revenue, if for no other reason, than to force the shrinkage of leviathan.

And this is a perfect example of how ingrained statism is: “they must be allowed to keep”.  Seriously, “allowed to keep”, how about must not steal so much of their wealth?  That language implies that we’re allowed to keep more, as if the fundamental basic right of property, ownership of one’s self and product, is now a state privilege.  We’re allowed to keep more?  Gee, thanks.

And speaking of leviathan…

Boo hoo hoo, such a sad thing to read:

Thousands of Democrats to be jobless in Washington

Well, I wouldn’t call them “jobless”, as that implies the recently booted actually did something useful enough to be called a job.  I don’t think lording over us, imposing one’s will upon us, and harassing us with myriad of laws, taxes, and regulations, then enforcing such measures counts as a job.  In fact, peaceful removal from office sounds like getting off way too lightly.

And from the “This isn’t anything at all called capitalism department” (and the same article):

Former Clinton press secretary Joe Lockhart, who runs the Glover Park Group, was a bit more optimistic. In 1994, when the Democrats lost the House for the first time in 50 years – and the Senate as well – the lobbying and political strategy business was a lot smaller and foundations hardly had a presence. “The industry is much bigger than it was in 1994,” he said, and the “corporate footprint in town is bigger.” So each potential employer may not be filling many slots, he said, “but there are a lot more of them.”

So, there is a much larger footprint of rent seekers.  Not surprising as government has grown by leaps and bounds the past decade.  And, if nothing else, it disproves the spurious notion that somehow we’re a free market economy.  It certainly disproves without any doubt, that the last decade and a half was an unregulated, laissez faire, system.

On another note, let’s put to rest once and for all the myth that consumer spending drives an economy.  (I know, this data is simple, and easily accessible to even the most enlightened, credentialed, and honored.  I mean, I bet they even have internet access in the bowels of the NY Times.)

From the Bureau of Economic Analysis (government data, so it must be true!!) NIPA tables:

Table 1.1.5 GDP

Personal Consumption:

1999 6342.8
2000 6830.4
2001 7148.8
2002 7439.2
2003 7804
2004 8285.1
2005 8819
2006 9322.7
2007 9806.3
2008 10104.5
2009 10001.3

Gross Domestic Private Investment

1999 1641.5
2000 1772.2
2001 1661.9
2002 1647
2003 1729.7
2004 1968.6
2005 2172.2
2006 2327.2
2007 2295.2
2008 2096.7
2009 1589.2

Let’s put a few things into perspective.  In the last decade, consumer spending has increased by 37%.  And today, there are fewer people employed than a decade ago.  Unemployment is officially 9.6%, but the more accurate number, U6, shows over 17%.  And some estimates put it around 20% when one counts those that have dropped out completely.  2008-2009 saw a mere 1% drop in consumer spending, yet GDP (which is hardly the best measure of economic well being by the way) plummeted.  If spending drives an economy, then, this is hardly the data I’d want to sell that idea with.

Investment (and of course the malinvestment, but in a the wrong manner) drives an economy.  Jobs don’t magically appear with more consumer spending.  In fact, Austrians know that consumer spending is the last act in a long chain of events, the many and various stages of production, which results in satisfying consumer wants.  Investment declined precipitously, and that’s the problem.

It’s actually only half the problem, as much of the investment was of course monetary expansion, credit bubble induced, driving a boom which invariably busts.  But that’s already been covered here, and far better here.  It’s clear, and something even a nobel prize can’t change, that economic growth is driven by business investment.  Real investment, supported by real savings matching consumer time preferences, is the only way to improve economic well being and the standard of living.

Spend all you want, it won’t matter.  In fact, it’ll only make things worse.

On a final note, there’s three things the newly elected party in congress can do to convince me they are serious.

1) immediate vote on repeal of obamacare
2) end of baseline budgeting
3) across the board, 5% real reduction in spending on everything

Obviously, they’ll be fighting both the senate and the president.  But they can draw a line in the sand, so to speak.  And that’s far from all, but given the political reality and entrenched bureaucracy, it’ll at least be the first real step.

There’s much more to be done, for example:

-eliminate the departments of: commerce, education, energy, transportation, HHS, HUD, veterans affairs, interior, labor (this one HAS to go!!!), agriculture
-audit, then eventually eliminate, the Federal Reserve, and move towards once again a gold standard and 100% reserve system.  (Perhaps nothing at all, a system of free banking, but that’s an altogether more complicated and esoteric point, one I’m not willing to, nor qualified to, take a stand on.)
-repeal of legal tender laws
-eliminate the IRS
-eliminate the capital gains tax, corporate/business taxes
-require that any bill or spending program be constitutionally authorized (cf. Pelosi’s “are you serious?”)
-phase out all entitlement programs
-end the wars of empire.  I am not a “purist” libertarian, as I understand that sometimes defense and national security isn’t always black and white.  Sometimes, to quote Thucydides, “human nature being what it is”, not everyone is going to see non-aggression from the same point of view.  But unending wars and nation building, needs an abrupt end.

I’m sure there’s more.  But until they prove to me that they really are serious, I’m not holding out hope for change, or something like that.


The Power of Ideas

September 16, 2010

Studying history requires one to study the history of ideas.  I know that ought to sound so obvious, but to many, probably most,  it isn’t.

The 20th century was witness to the most horrible acts of inhumanity and destruction, acts that were driven almost entirely by ideas.

Fascism and Bolshevism, while appearing to be opposites, are actually almost identical.  They are both a fanatical belief in the greater good, the community as a whole, the supremacy of the state over the individual.  The only thing that separates the two was one was based on ethnic/national identity, the other on class.

Nearer to home, ideas matter every bit as much.  We’ve just seen that with the disastrous stimulus bill, and it’s little siblings like cash for clunkers.  We’re poorer because if it, we’re deeper in debt, and farther from real recovery.  The Fed is still wed to the inflationist model, still pushing interest rates as low as possible, flooding the economy with money.

Now, one might argue that “they’re policy measures”.  But those policy measures are based on ideas: spending drives an economy, you can inflate your way to prosperity, etc.

Ideas matter, and they matter more when they’re put into the hands of people with the power to implement them.  By all standards, a “bohemian corporal” and failed artist, who happened to harbor some very extreme views, would be completely anonymous to history.  Unless of course, he was in a position of power.  And we know the rest.

We have people in positions of power today, in the current administration, with very dangerous ideas.  To compare them of course the worst horrors of mankind is ludicrous, but I won’t spend my anger on them.  They are fools at best, tools at worst.

No, the real criminals are those who use and abuse their authority to promote ideas they have to know are wrong at best, terribly destructive at worst.  There are “economists”, and I use that term loosely, who promote ideas such as deficits and debt are not harmful, inflation is a good thing, et al.  They have to know, they cannot not know, that those ideas are dangerous.

My real anger is directed towards those who sit in ivory towers, moonlight as newspaper columnists, are bestowed international honorifics, and command the attention of those in power.  They must know, absolutely must know, the terrible price of debt and inflation.

They must know that debt destroys wealth, that it transfers wealth upwards, from the productive to the idle.  They must know that it impoverishes, that the only way out is inflation.  They must know that inflation likewise is destructive, that it destroys wealth and savings, retards real growth and investment, and impoverishes a nation.  No nation, ever, in the annals of history, has ever trod the path to prosperity through debt and inflation.  In fact, if history is any guide, as well it ought to be, debt and inflation are the path to ruin.

They must know this as they are not unintelligent nor are they ignorant.  And that is why I hold them in such contempt.  It is precisely because they use their authority in nefarious ways.  I can almost excuse the fools who hear and believe, even those who once taught constitutional law (Of course, one has to wonder, which constitution!!).  And I can excuse, almost, those who are not knowledgeable in economics who listen and believe despite everything even common sense must tell them.

Yet they push forward their ideas in what must be a grand and selfish indulgence.  They see an outcome they desire, and a means to that end.  Though neither is possible, they act as though they are.  The abuse of their titles is no different from a prince or potentate who would do the same.


Policy driven economy #2

September 13, 2010

Central planners cannot know the necessary combinations of resources nor be able to determine the capital structure.  That is an obvious statement.  Here’s simply more proof:

Texas Clean Energy Hampered by Location

President Barack Obama has made the promotion of renewables central to his administration. A 2008 Department of Energy study found that the United States could, in theory, get 20 percent of its electricity from wind by 2030. Right now, however, that figure is less than 2 percent nationally. In Denmark, by contrast, about 20 percent of the electricity supply comes from wind.

Policy driven economy.  Do not allow markets to determine anything freely, rather “force” them through policy to “choose” the desired outcome.

In Texas, state officials have moved aggressively to remedy the transmission deficiency. In 2008 regulators approved a $5 billion network of wires, which ultimately will stretch more than 2,300 miles, or 3,700 kilometers, around the state. The regulators are determining, one by one, exactly where each line will go. Construction on the first of the lines should start this autumn.

Of course regulators will know how much transmission wiring is required.  They obviously can predict the demand in the future.  Oh to have such prescience!!

Lack of transmission is a national problem, especially for wind, which is often generated far from population centers. “The ability to site and build transmission is emerging as one of the highest risks facing the electric industry over the next 10 years,” according to a report last year from the North American Electric Reliability Corp., an industry group that sets operating standards for the grid.

Oh this one is easy.  If it’s regulations and laws, which no doubt are an issue, then the intervention is the cause.  No regulator nor planner could ever know where to place the turbines.  If it’s not, as might be the case:

Nonetheless, Texas seems likely to remain the leader in U.S. wind power for a long time. A big reason is that it is simply easier to erect turbines there than in other states. With its oil and natural-gas history, Texas is less concerned about environmental effects of the big machines than states like California. Indeed, wind turbines towering over pump-jacks for harvesting oil are common in Texas.

More than 90 percent of Texas is private land, and the state imposes virtually no permit requirements on that land. Randy Sowell, a 10-year veteran of the Texas wind industry, puts it this way: “In Texas, you can put anything you want on your own private land and nobody can say a thing about it.

Great.  So now we know what the problem is in other states, my home state for sure.  Regulations make construction terribly cost prohibitive, but not so in Texas.  What is the problem?

But even in Texas — a state long accustomed to oil pipelines and other energy infrastructure — opposition to the transmission lines is mounting. Many landowners do not want to surrender their land to high-voltage power lines, even though they would be paid to do so. “The meters on the attorneys are running,” said Robert Weatherford, the president of Save Our Scenic Hill Country Environment, one of several groups fighting to keep two proposed power lines out of a scenic patch of central Texas, with partial success so far.

No, the correct answer is they’re not paid enough.  And that’s the big difference.  Price is the signal by which consumers and producers communicate.  Simply “being paid” isn’t the problem, it’s how much are they being paid.  Period.  And if the price is too high, then apparently wind generated electricity is too expensive.  See, that’s how markets work.

So, once again, what do our benighted leaders do but try to skew the market:

A U.S. government tax credit brings down the cost substantially, however. Wind advocates, stung by assertions that their industry depends on federal largesse, point out that fossil fuels and nuclear power receive subsidies and tax breaks as well. Around-the-clock natural gas plants are also cheaper than wind, Mr. Webber said, given that natural gas prices are currently low. As the leading wind-power state, Texas is also figuring out the best way to integrate the new resource into the electrical grid.

So, instead of letting the market sort out through the pricing mechanism, they interfere and encourage production where it ought not be.  And the result?

There are too few transmission lines to carry the power.

Of course there would be.  Artificial prices distort markets.  We build turbines far from population centers because it’s “cheaper” then we find we haven’t the capacity to transmit the electricity to where it’s needed because it costs too much.  So, what do we get?

Forecasting the wind is getting more accurate. But operators of natural gas plants, who turn down production when the wind is blowing strongly but need to be ready to turn it back up when the wind drops, have begun to call for Texas wind-farm operators to pay a penalty if the turbines produce less power than expected. Wind companies, of course, want nothing of the kind.

Rent seeking.  Which ought to come as no surprise, given that wind is artificially cheaper through government intervention.

If:

  • turbines (supply) could be built nearer to population centers (demand)
  • costs of production accurately reflected available resources
  • price of electricity accurately reflected market demand and costs of production

then there’d be no problems.  The market would produce, or not produce, wind driven electricity and it would be sold at market prices.  If it was profitable, it would be produced.  If not, it wouldn’t.  Policy driven economy only distorts, wastes, and destroys.


Policy driven economy

September 9, 2010

I did a google search for policy driven economy.  Apparently no Princeton professors, or any other Keynesian charlatans, have defined or declared it, so I shall.  It will be my small contribution to the field.  No, it’s not as profound as others, but I think it will suffice.

First, I will define a “policy driven economy”.  It is one in which policy is used to direct market forces towards some outcomes, and away from others.  It is not central planning or socialism, as those make no use of market forces and further explicitly reject or forbid market forces from acting.  It is more akin to mercantilism, but mercantilism in its original guise, was nationalist (Fichte’s Closed Commercial State):

in which Fichte propounds a curious blend of socialist political ideas and autarkic economic principles.

A policy driven economy uses market forces.  A perfect example is the policy of an “ownership society”, whereby the government subsidized home purchases through the tax code for example, and through monetary policy artificially driving interest rates to historic lows.  Thus, no consumer was forced to buy a home, but through policy incentives, driven that direction.

It is tantamount to a cattle drive.  Look, several hundred head of cattle, each weighting upwards of one thousand pounds, will simply not go where you force them.  And a few men riding horses haven’t the power to do it.  Cattle haven’t enough brain power to understand that were a rancher to shoot a few wayward cattle, that they ought tow the line or else.  Force, or the threat of force will simply not work.  Neither will it in a market economy.

However, cattle simply follow.  All it takes is to “guide” them, to get them moving, and they just go.  They can easily be trained, or at the least, easily led.  And that DOES work in market economy.

It works for cattle, as cattle haven’t the slightest concept what awaits them at the end.  And when one considers the housing market bubble, herd mentality seems very apropos.

Buyers, tempted by low interest rates, were able to borrow far beyond their means.  Inflating home prices created artificial wealth which led them to borrow against their “equity”.  Note, I do not say “take money out” as it specifically was not real savings and there was no money per se, in the house.  Buyers were also motivated to “buy now” before home prices went higher.  All of this was artificial, but it is clearly markets being led by policy.  No force was applied, but sadly, same as cattle, they were led and one might argue, to the same destination.

Cash for clunkers is another example of policy driven economy.  In fact, I doubt there’s any sector of the economy where markets are not driven in some direction other than their natural course.

Sadly, the policy driven economy is wildly popular with both political parties because it affords them the best of both worlds.  They can achieve their desired centrally planned goals while still paying homage to the free market.  And yes, any policy driven economy is full of broken windows.


Oh how time flies

September 2, 2010

For many reasons, been busy and not as focused on posting.  Sometimes I thought to, but never got around.  But, alas, for many reasons both big and small, I shall return.

It was always the purpose that this was to be my personal repository, and any who happen by here, while very welcome, oughtn’t make anything more of it than that.

I’ve always wanted this to be something new and different, something that adds.  I’ve never intended this to be simply more chatter on the same.

Even discussing the current policies and policy disasters of the fed and this administration, is more of adding to the chatter.  I’d rather focus on the overlooked or undiscussed.

So I return with the same original purpose.  But now I have a little more time and opportunity to post.


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