Category Archives: Economics

Tax Rates are The Wrong Question:

As typically happens during campaigns, the arguments about tax rates in the United States focus on all the wrong questions.The real questions should be “what lifestyle do you want to live?” and, then, “what is the best route to get there?”

IncomeTaxRatesMitt Romney’s gaffe, describing the 47% of Americans who don’t pay income taxes as free-loaders is forgivable when you consider that the part of America that listens to Fox News regularly hears about it all the time.  The truth is there are people in all income brackets that pay no taxes, but most of them are poor – really poor.  NPR did a great job of framing up this part of the issue here.

I love this graphic from that report:

The Free-loader breakdown

It is an odd myth that has lead the American consumer to believe that controlling all their own money and spending would result in something “better.” Most people are not in a position to make well-informed decisions on all their purchases and most of the things they purchase are not necessarily best purchased by individual or effected by market forces.

You can search the internet and find dozens of people slicing the tax numbers dozens of ways and coming up with justifications for their own personal agendas.  You can say that you would like to pay lower taxes. Of course we would all like to pay less and get more on some level but the getting and giving are more complicated than that.

Personally, having experienced a few other countries with other approaches to this, I prefer to have good civil resources that keep everyone from being so desperate that they lose hope instead of having ultra low taxes and have to live behind barbed wire and armed guards.

Tax Rates in Industrialized Nations
Wikipedia

Real Markets

With the rhetorical overuse of terms like “let the market decide” being used in campaigns and debates I think it would be beneficial to define what real markets look like and when market forces work. Markets are neither magic nor wise. It is a term that describes the cumulative effect of a number of individual decisions made by real individuals.

I currently live in Cleveland where the economy is particularly bad but there is a very real market. The West Side Market has been a place where indicidual vendors come to compete for market share to a very real and identifiable “addressable market.” namely the very real humans that present themselves, cash in hand.

This market has worked very well for a long time because consumers can go there, review a range of choices for the goods they would like to purchase and make individual and relatively well-informed decisions as to which vendor they will use and what price they will pay.

This all works because the consumer who benefits from the purchase has informed choices.  It is very nearly the perfect theoretical market:

  • Choice with frictionless switching
  • Visibility of options
  • Understanding of value by the consumers
  • Feedback from consumers, usually in the form of switching

Lots of consumer goods end up having to make their way in a market with all these attributes, but most “markets” are not so well-formed and lack one or more of these criteria.  There is no “healthcare market” per se because almost no consumer has frictionless choice, visibility of options, understanding of value or any meaningful feedback except perhaps for lawsuits.  0 for 4.

As entrepreneurs, we often try to play against markets to gain at least initial advantage.  We do this because efficient markets drive down price and when you are starting up this is, obviously, undesirable. Once again, we can point to the  healthcare system as an example of what happens when there aren’t sufficient market attributes in place: prices rise uncontrolled.

Being first-to-market with anything can eliminate a couple of those attributes or at least mute them a bit.  Use this advantage to get to a place where you have what you need to compete in a more mature market (like efficient processes, optimized supply chains, or a ton of brand loyalty) – or even better, cannibalize your own market regularly and at a time of your own choosing.

The last bit that I’ll relate here is that markets have, historically, limited how fast things can increase in value.  If something is increasing in value for an extended period of time at better than 15%, you probably have a bubble caused by an inefficient market.

New Study: community-owned broadband is cheaper and faster

Regardless of what size you think government should be (I prefer a government powerful enough to protect the community’s shared interests), the one area where government has consistently played a positive and often powerful role is in the development of infrastructure. Sometimes – nay usually – the costs associated with developing large systems of roads or power transmission or, more recently, information transmission defy the time lines that businesses can operate on.  A community (another word for the government) can establish shared resources for a shared gain on a much more patient time line.

This study just released and reported on in TechJournal South supports what many of us have been saying for a long time.

Check out OneCommunity for a very positive example.

Pirates, Thieves and Terrorists: Who’s in charge of the economy?

For the last thirty years, the economy has been slowly taken over by [wikipop]pirates[/wikipop], thieves, and terrorists.

The economy – even before we called it that – always had a diverse set of participants. There have always been those who gathered raw materials, those who manufactured things from raw materials, those who traded in things of value and those who financed parts of the process. There have also always been those who made their living by disrupting this otherwise harmonious flow of value, namely: pirates, thieves and terrorists.

Value and Wealth must stay connected

If we go back a few generations – three for me – all these roles were what we would now call vertically integrated. The [wikipop]Quaker[/wikipop] farmers of my ancestry were soloists in the world  of commerce, as most people were back then. They gathered, built, and traded and maintained a keen sense of the market value of things because they lived and died by it. When things are on this simple level you can depend on “market forces” to keep the market players in line. Another way of describing those market forces is to say that wealth (things that represent economic possibilities like having 1 dollar in your pocket or owning something you can sell or use) must move somewhat proportionally to value. If you make something more valuable you see more return.  Defining value can be squishy and fluid – you know this if you are underwater on your mortgage. Lots of factors effect value. During a drought a gallon of water can fetch a better price than during a flood.  The newest iPod that retails for $249 is worth lots more than a new, still in the original packaging iPod that retailed at $249 two years ago. Under the right circumstances you might say “My kingdom for a horse.”The point is that a healthy capitalist economy requires that value and currency flow roughly together.  When they don’t, bad things happen.

If you are a farmer who has just sold your crop at a market, but get robbed on the way home, you no longer have the capital to grow the next crop.  That farmer suffers most, but everyone else does too. Suddenly there is less of that crop in the market place next year.  Costs rise for those who use the crop so funds must be diverted from other things or they buy less of it. If these buyers were making something to sell with that crop they are either making less of that thing, need to charge more for their product, or take less of a profit – the profit that they would use to invest in replacing tools or buying supplies. The ripples flow endlessly.

This is why human societies established law enforcement. Someone needs to stand in the way of these troublemakers or the whole thing falls apart because no one can predict what anything will really be worth.

For me, the economic troublemakers come in three basic flavors: pirates, thieves, and terrorists

Pirates

Pirates, by my definition, are those who absorb value from the flow of value. They position themselves in the path of delivery, real or virtual, and take whatever crosses their path. They obtain wealth from value transitioning from one entity to another. They tend to be indiscriminate of what types of wealth they take. This is a crime of structural opportunity. The ocean is vast, hard to patrol, and there are lots of places to run after the crime.

Thieves

Thieves target specific things that they want to have and take them by whatever means.Thieves obtain wealth from things that are supposed to be someplace in particular. Thieves take things out of cars, houses, and, increasingly often, the public coffers.  If you were to, say, contract with government, caretakers of the public coffers, to provide a service and that service fails to provide any value, then it is thievery.

Terrorists

Terrorists destroy value. Usually they are a proxy for someone else who sees some tangential gain from the destruction. Destroying someone’s business so yours will have less competition – that is an act of terrorism.

How they took over

If capitalism were a religion, piracy, thievery, and acts of terrorism would be sins. Unfortunately, we have confused capitalism and sinful capitalism. We have come to accept immoral activity that generates profit as acceptable, if not laudable, behavior. The truth is, however, that our willingness to accept these behaviors and not make them illegal or regulate against them, have created a randomness to the economy – rewarding all the wrong people far too often.

Pirates, Thieves and Terrorists have always existed in the economy but today they take new forms. In a large, complex, and mostly electronic economy there are lots of places to hide.  If there is no law enforcement in place, pirating or thievery start to look pretty enticing. Particularly pirating, is much easier than trying to create value on your own.

Unfortunately, these forces of economic destruction have grown so large that we have forgotten that they are dark forces instead of the norm.  Market forces cannot impact complex transactions.  The feedback loop that keeps markets efficient doesn’t exist when the buyers and sellers don’t have any access to understanding their choices or feeling the impact of their decisions. We need other players in the market – regulators of some form – to be the arbiters of safe value.

The New Normal

With regard to Mr. Schwaretz’s article on the “new normal”( NY Times “Jobless and Staying That Way”, 8/7/2010), both camps are right. Unfortunately, the same forces that created the new normal are fuel for the cyclical trends. The cycles are partly a reaction to inefficiency in the wider market; when the world’s wealth is not tied to, or moving in parallel with, value creation. The wrong market players are getting all the money.

Entrepreneurs know ideas are nearly worthless; Execution creates value. I promise that very few, if any, of the investment bankers are executing on tens of millions of dollars of value creation.  They are siphoning.

This continent was settled by the religious but the United States was founded by entrepreneurs.  Entrepreneurs will use whatever infrastructure we give them to build real value.  They will use whatever safety net we give them, like loans and health insurance, to take more risks and try new things.