Free Markets and Good Beer

Interesting Rail Comparison

2011-06-30T17:20:00.000-07:00

While I love the idea of high-speed rail in the US, especially having experienced how comfortable and convenient it can be while traveling in Europe and Japan, I've always been a little skeptical as to how practical it is in the US given our relatively low population density. Outside of California and the corridor from DC to Boston, our country is so sparsely populated that I'm not sure rail can be viable. But a recent email from the Midwest Highspeed Rail Association doing a comparison between a hypothetical Chicago-NY route and a recently opened route in China is certainly intriguing in addressing this point:

At 3:00 PM on Thursday, the first revenue train departed Shanghai on the much anticipated high-speed rail line to Beijing, connecting the political and business centers of the country. The line is expected to have a transformative impact on China's economy, population mobility, and over-crowded transportation system. Shanghai - Beijing is comparable to Chicago - New York.
Click here to see some pictures of the new Beijing-Shanghai train.
The new Beijing to Shanghai route will offer a mix of express and local trains totaling an expected 90 trains a day in each direction. The fastest trains make the trip in 4 hours 48 minutes. Imagine traveling from Chicago to New York City in that time! (It currently takes 5 hours to get from Chicago's Loop to Manhattan by air today, IF everything goes right at two delay-prone airports and on two very congested highsways.)
Below is an interesting comparison of the Beijing - Shanghai route and a hypothetical Chicago - New York high-speed route.
(***A note: We used the existing railroad mileage between Chicago and New York; a high-speed line would likely be much shorter.)

Beijing-Shanghai high-speed railway stations serviced and their county-level city or district populations:
Beijing
13.3 million
Langfang
0.7 million
Tianjin
3.8 million
Cangzhou
0.5 million
Dezhou
0.4 million
Jinan
2 million
Taishan
0.6 million
Qufu
0.1 million
Zaozhuang
0.5 million
Xuzhou
1.8 million
Suzhou
0.2 million
Bengbu
1.1 million
Chuzhou
0.1 million
Nanjing
3 million
Zhenjiang
0.6 million
Changzhou
1 million
Wuxi
1.1 million
Suzhou
1 million
Kunshan
0.7 million
Shanghai
19 million
TOTAL= 51.5 million people

= along 818 miles
(62,958 people per route-mile)

Then, consider:

Midwest-Northeast (Chicago-New York + branches to Detroit and Washington DC) high-speed railway potential stations and their consolidated metropolitan area populations:
Chicago 9.7 million
Fort Wayne 0.6 million
Toledo 0.7 million
Detroit 5.7 million
Cleveland 2.3 million
Akron-Canton 1.1 million
Youngstown-Warren
0.7 million
Pittsburgh 2.9 million
Altoona 0.1 million
Harrisburg 0.5 million
Baltimore 2.7 million
Washington DC 5.4 million
Philadelphia 5.8 million
New York 22.2 million
TOTAL = 60.4 million people

= along 1,075 miles
(56,186 people per route-mile)

The strikingly similar population densities along the similar length routes makes one wonder: Why haven't we done this yet???

If you haven't already emailed your public officials to ask them to fund high-speed rail in the United States, you can ask them by clicking here!

Were slaves just a bunch of "free loaders?"

2011-04-23T18:08:00.000-07:00

The current debate about who "earns" most of the income in our country, who "pays" most of the taxes, and who is really getting the shaft in the whole deal just keeps making me think of the old slave plantation. There's a popular idea that the richest people all got that way because they "earned" all of their money through hard work and skill. Further, since close to half of Americans now have so little income that they owe no federal income tax, it's become popular to portray the half of Americans at the bottom of the income scales as "free loaders" who live off the hard work of the rich.

But this is based on a very flawed definition of "earning" income. It seems like if you're able to somehow get your hands on money, then you have somehow "earned" it, no matter what resulted in you getting your hands on it. But would any rational person argue that it was the slave master who "earned" all of the plantation's income merely because he collected the revenue generated by the operation? Or could a sane person say that the slaves were "free loaders" because they received no monetary compensation for their efforts, and subsisted purely on the "generosity" of the master in providing food and shelter?

Yet, so often the in today's debates the rich and powerful are portrayed as heroes who contribute so much to society based on what they "earn". Meanwhile those who toil away at productive (but poorly paid) jobs, providing real goods and services that people actually use, are vilified as free loaders because they make so little money that they owe no income tax.

Some data in response to Koch's WSJ editorial

2011-03-19T10:02:00.000-07:00

A friend of mine who works for Koch Industries recently forwarded me some corporate propaganda from his boss, Charles Koch. First, I have to say that based on what has been forwarded to me over the years, Koch Industries has to be the most blatantly propagandist corporation I've ever seen. For anybody who sympathizes with Koch's Tea Party organization and libertarian views in general, any accusations of left-wing agendas on the part of NPR or any other organization would seem to be simply the pot calling the kettle black. I can tell you from observation that the Koch empire takes indoctrination to levels I've never witnessed in other organizations. It's really quite remarkable what tens of thousands of Koch employees put up with on a regular basis. But, then, I guess the old adage about how easy it is to make somebody believe something when his paycheck depends on it still applies.

Anyway, here's the article that was sent to all Koch employees and forwarded to me, and below is my response:

As somebody who used to be a registered Libertarian, I appreciate the emotional appeal of the platform. However, as somebody who regularly questions what I'm told and what I believe, and tries to confirm it with actual data whenever available, I'm also aware the libertarian position is buttressed by a broad array of "misrepresented" facts and "facts" based on nothing more than assertion.

For example, I'm not sure which category of "fact" to put this statement in:

"When Canada recently reduced its federal spending to 11.3% of GDP (...)"

I don't think the author simply made this number up (?), but I am very aware that this number is wildly inaccurate. A simple look at the official statistics from Canada during the last five years (http://www40.statcan.ca/l01/cst01/govt48b-eng.htm) shows that expenditures have run between $500 billion and $700 billion, while a look at something like the CIA World Fact Book will show the Canadian GDP in this period was between $1 and $1.5 trillion. It doesn't take a calculator to know that $500 billion divided by $1.5 trillion is nowhere close to 11%. Canadian government spending as a % of GDP is consistently around 35%.

In fact, in every single developed nation on earth, government spending accounts for between 25% and 50% of GDP. And here's something really odd to consider: The Heritage Foundation (a libertarian think tank which I believe receives considerable funding from the Kochs), on their very own list of "economic freedom", ranks the US only number 9 on the list (http://www.heritage.org/index/ranking). Of the eight countries ahead of the US, six of them have government spending as a percentage of GDP that exceeds the US...including Denmark with government spending of about 50%!

The "economic freedom" index has been regularly criticized for arbitrarily considering criteria in such a way as to boost rankings of nations most in-line with the ideology of the Heritage Foundation. And yet, despite these criticisms, the list shows that most of the 10 "free-est" nations have greater government spending than the US.

So this begs the question, are the Heritage Foundation, the CIA, and the Canadian Statistics Bureau all part of a vast liberal conspiracy?

I don't think they are. I think that there are many sources of raw, unbiased data, including organizations with a clear political agenda. Another popular organization with libertarians is the Tax Foundation. And once again, their own data does not support their position. Among many examples is this report which shows that the "high tax" states are overwhelmingly the richer, more economically productive states. Interestingly, the Tax Foundation has stopped publishing its annual report of tax burden by state, presumably because the results were so consistently unfriendly to their position that raising taxes always makes economies grow slower.

All this is not to say I think raising taxes is always better or that we need to turn into Cuba. (Hell, my wife and are both small business owners, so it's awfully hard to call us anti-capitalism.) But I am convinced that we need to consider actual data when deciding who to vote for and what policies to support. Lowering taxes, like eating ice cream, is easy to support, and it's easy to get elected by promising everybody free ice cream...er, tax cuts. But a diet of nothing but ice cream is not healthy. For most of the last 30 years, our nation has bought into the mantra that cutting taxes is always the solution, no matter the problem. During that time, we've experienced the most anemic growth of the last 80 years. In fact, if you take out the Clinton era which began with tax increases, you would have a little over two decades of barely more than 2% real annual GDP growth. By comparison, the awful 1970's, which supposedly proved that government spending kills economic growth, produced annual real GDP growth rates of about 3% (measuringworth.com/growth).

In the US, we have about 80 years of data on income tax rates and economic growth. It's not difficult at all to do a statistical analysis and find correlation between economic growth and taxes. In fact, it's been done. The results of numerous variations on this theme are regularly posted to a blog at www.presimetrics.com. Here's one of the best cut-to-the-point blogs he's done looking at top marginal tax rates & GDP growth: http://www.presimetrics.com/blog/?m=201012.

It's abundantly clear from looking at the data that the United States is much closer to Mexico than Canada in terms of our taxation and government spending policies. And I don't think many people would look at those two countries and argue that we should continue to become more like Mexico. However, there is one clear exception to this. If you're a billionaire, Mexico may indeed look more attractive. Mexico, after all, is home to the richest man in the world. So if you're a billionaire, then it makes all the sense in the world to support policies that will make us more like Mexico. But if you're part of the other 99% of the population, you should ask yourself: Should we really try to solve the illegal immigration problem by making our economy as poor as Mexico's?

The tax-rates-affect-hiring-decisions fallacy

2011-01-18T13:25:00.000-08:00

If you listened to the debate about whether to let the temporary tax breaks expire on earners in the top income bracket, you might have heard an absurd assertion over and over again. The assertion is that higher tax rates discourage hiring. Now, there are many, many ways to demonstrate this is an absurd assertion--my favorite is simply looking at the empirical evidence of historic unemployment rates vs. top marginal tax rates. (Conclusion: unemployment is actually lower historically during the periods with highest marginal tax rates.) However, in this post I want to point out a basic fallacy in the argument that is commonly presented to "prove" higher tax rates discourage hiring.

The argument goes something like this: When business owners and managers decide whether or not to hire a new employee, they look at how much extra income they expect to make from that employee and compare it to how much the employee will cost the company. If the employee is expected to result in net income to the company after considering costs, then the employee will probably be hired. Of course, most companies will expect a certain minimum level of expected profit to justify the risk being taken, and many times the numbers aren't exactly precise calculations on paper, but more a general sense of expected returns and costs. But the basic idea is always there.

So, the argument continues, if we reduce the expected return by taxing some of that additional income, then we reduce the incentive to hire, and fewer people get hired.

To use an example, if hiring an employee is expected to cost $100,000, and that employee is expected to bring in $150,000, the net income is expected to be $50,000. Of course, there's a risk the employee won't pay off, and the decision to hire will actually cost the company money. But assume in this case that the expected return of $50,000 is worth the risk. However, if a tax rate of 50% is in place, then the $50,000 in net income will actually only result in $25,000 income to the owner, not $50,000. And in this example, the owner might decide the risk of losing $100k by hiring a worthless employee is too great for a return of only $25,000, even though the risk would have been worth taking for an expected return of $50,000. Makes sense up to a point, right?

But here's the problem: The above argument and example don't consider that taxes also reduce the real cost of hiring an employee. If the employee costs $100k, and generates $0 additional income, then the employer simply deducts the $100k from his taxes and (at 50% rates) sees a $50k reduction in his taxes. So the analysis should actually look like this:

With no taxes, the employer is risking $100k for an expected net return of $50k. That's earnings of 50% of the investment ($50k earnings/$100k cost). But with taxes of 50%, the employer who incurs $100k of costs to hire an employee has actually only incurred a real cost of $50k because of the tax deduction available. The expected net return is now only $25k as a result of taxes. But the expected real earnings remains 50% ($25k net earnings/$50k real cost).

This analysis holds regardless of what tax rate you use. Increasing or decreasing taxes does nothing to change the fundamental Return On Investment ratio that owners, investors, or managers will use in making hiring decisions. Anybody who attempts to claim increasing taxes will reduce incentives to hire employees using the argument outlined above is either being very dishonest or very foolish.

Businesses don't create jobs

2011-01-11T22:01:00.000-08:00

I recently hired my first employee. I may be hiring two more by the end of this month. Most people would say I've just created 3 jobs.

They would be wrong.

My business provides a service in a more efficient way than the competition, allowing one person to do the work of two. So whenever I get enough new business to hire another person, the competition has to lay off two people. So rather than creating jobs, as my business is successful it accomplishes a net destruction of jobs.

And that's the way business works. Every business innovation since the Industrial Revolution has been about destroying jobs by deploying labor-saving techniques. (Actually, that's probably been true since before the Industrial Revolution, but things really took off at that point.)

You see, the true source of jobs is demand, i.e. the desire of people to receive goods and services. People have practically unlimited wants, and it takes work to satisfy those wants. The purpose of competitive enterprise is to find ways to satisfy those wants using less and less work. The more jobs business destroys, the more society is able to satisfy the wants of people using the limited resources available.

The problem is, demand is more than simply somebody wanting something. For business to take the initiative to find a better way to do something, they must believe that they are going to receive something in return, usually money. Simply wanting something by itself is not enough to generate demand...a person must want something AND have something to give in exchange. Then you have demand, and it's that demand that actually creates jobs.

So in a perfect world, businesses destroy jobs, freeing those people up to do other jobs and meet other needs by performing new jobs...more productive jobs. As long as they are able to transition into new jobs relatively quickly, then overall demand will be maintained and more jobs will continually be created for the people whose jobs are destroyed by business. But, in the real world, it's entirely possible that people whose jobs are destroyed in this process might not be able to find a new job for some time. This would happen if the wealth from the new processes accrues to a small group of people, and the demand for goods/services from this small group of people does not rise fast enough to offset the lost demand from the people who lost jobs. As a result, the overall level of demand might drop, or at least not rise fast enough to create jobs at a fast enough pace to replace the jobs being killed by business. The wealth will steadily accrue into fewer and fewer hands as fewer people are needed to satisfy the overall demand of society.

In fact, looking at history would suggest that what I've just described is the natural order of things. The Great Depression occurred just as the US reached historically high levels of income disparity. The Great Recession occurred when the US returned to such historically high levels. Looking at other nations around the world and through history does not reveal many examples of highly affluent societies with high levels of income inequality.

The obvious solution when the system gets "gummed up" in this way would seem fairly logical. A massive redistribution of wealth.

In fact, this is exactly what occurred to end the Great Depression. First, New Deal programs were enacted that raised taxes and provided jobs for many unemployed people, and this created real GDP growth of about 10% annually for almost a decade, a feat never matched before or since in this country. However, the New Deal was followed by WWII, which in economics terms was simply a larger version of the New Deal. Even more wealth was confiscated from the richest members of society, and even more jobs were created for everybody else, and furthermore people had very little to spend money on because so many materials were going to the war effort. Once WWII ended, wealth had been massively redistributed in our nation, and healthy long-term growth returned to the economy for decades.

Of course, the idea is not new...it's actually at least as old as the Old Testament of the Bible. Even in ancient Hebrew society, the law called for a Jubilee to occur every 50 years. During this jubilee year, debts were cancelled and land was redistributed. It's interesting that for well over 3,000 years now, it has been obvious that societies "naturally" experience a concentration of wealth that becomes unhealthy for the entire economy. Over 3,000 years ago, societies saw the need to periodically push the "reset" button on the economy.

Businesses destroy jobs. Demand creates jobs. When business does its job well, it will destroy nearly all of the jobs in society, which will eliminate nearly all of the demand in society. For a competitive free enterprise system to work in the long run, it has to be reset from time to time. So why does our society continue to strongly resist such policies even though they're the obvious solution to our current economic problems?

Quick observation

2010-09-23T10:21:00.000-07:00

The practice of governance is a lot like the practice of medicine. No matter what you do or how hard you try, society ends up with injustice and unfairness, and patients end up eventually dying. That doesn't mean it's not still worth our best efforts.

generosity tax

2010-08-25T16:38:00.000-07:00

In a generally interesting interview, Penn Gillette makes the case that government taxation is a form of theft and that if society has genuine needs, they should be met by the charitable giving of citizens. Of course, I find it very amusing and ironic that he makes this argument in an interview that is primarily devoted to Penn arguing that all religious people are naive idiots for believing in any sort of deity. Talk about the pot calling the kettle black...

But what really strikes me about this argument, an argument I've heard many times from extreme libertarians and anarchist-types, is this essentially amounts to a tax on generosity. Governments exist to meet needs that cannot be met on an individual basis. Of course, there can be considerable debate about what exactly those needs are and how to best meet them, but most people can agree that at least some level of government is needed for society to function. And from that it follows that revenue must be collected to pay for the services of government.

Typically, this is done by requiring everybody who operates under the protection of the government, with access to the services provided, is required to pay a portion of the cost. What the libertarians desire, however, is that this be voluntary. While that sounds nice in theory, this simply leads to a situation where selfish people can choose to pay nothing and still receive the benefits of having a government. Generous people, meanwhile, must pay extra to make up for the shortfall caused by those who give nothing.

Next time somebody throws out the idea that government has no right to "coerce" or "force" people into giving, ask that person why they believe the government should tax generosity.

Citizens United Against Everything

2010-08-16T19:24:00.000-07:00

Do you want to destroy democracy?

It's very simple: just vote all incumbents out of office and continue to do so until you get an elected official who represents the majority opinion on most significant issues.

It seems counter-intuitive, because we're taught that in a democracy, the majority should rule (except in cases where fundamental civil rights are at stake, but I'm leaving that out of this discussion). The problem is, most issues aren't limited to only two possible approaches. And when there are more than two possible approaches, there may not be a majority in support of any of the approaches.

Simple example: health care. Poll after poll will show that the majority of Americans think the status quo (prior to the passing of recent legislation) needs to be changed, so the majority opposes the status quo. And polls show the majority of Americans oppose the reform bill that was passed. The majority of Americans also oppose single-payer. The majority of Americans oppose a public health insurance option, but a majority also opposes getting rid of Medicare (a public health insurance option, ironically). A majority of Americans oppose absolutely every approach to providing health care in America.

And health care is just one of many important issues where there are countless possible solutions...immigration, unemployment, tax policy, and on and on, most major issues can't simply be reduced to a simply choice between A or B. And, unfortunately, voters (and politicians) are becoming less willing to compromise on complicated issues.* In a functioning democracy, rational people will realize that there may be 10 different approaches to a problem, and probably nobody will get all elements of their preferred solution. However, a functioning governing body will generally craft a solution containing elements of the most popular approaches, and perhaps find ways to appease those whose preferred solution cannot be accommodated in any way. Unfortunately, we seem to be descending to a point where we no longer have a functioning governing body...and voters have nobody but themselves to blame.

(*I base the statement that compromise has become less acceptable on a number of studies I've seen indicating that voting across party lines is at an all-time historic low. During the tumultuous, divisive 60's, for example, members of Congress voted with their party about 60-70% of the time. Today, it's 80-90%. There are numerous other examples I've seen of actual, quantitative analyses indicating we are at a more partisan period in our nation's history than any period, excepting the Civil War obviously.)

The abundance of wedge issues and single-issue voters is having a poisoning affect on American politics. Angry protesters are constantly demanding that politicians do the will "of the people," even though a majority of "the people" don't support anything, even the status quo.

So what's a politician to do? Supposing this regular churning of politicians continues to grow more steady and terms in office grow steadily shorter; then what's the rational response?

Well, economists have actually looked at a very similar issue and the response is quite predictable. It turns out dictators aren't always bad for the prosperity of their nation. In some cases, they can be beneficial. What's the difference? There is one essential factor that usually determines whether a dictator will be beneficial or detrimental to the health of the nation: Expected time in power. A dictator with a tenuous grasp of power will generally just loot the economy and grab as much as possible because he expects to lose power soon. However, a dictator with firm control of the country, who expects his reign to be lengthy, will engage in activities that are often beneficial for the nation as a whole (not always, of course, as dictators are human and make mistakes--but the point is they attempt to improve the nation).

The rationale is simple: If you don't have much time, then you'll grab as much loot as you can as fast as you. But if you feel you have lots of time, then you're better off trying to grow the economy and skim a steady portion of it off on a regular basis. (see joke at the bottom...)

So what does this say about what a strong anti-incumbency campaign will do in America? Well, not good things, obviously. If politicians can expect to only serve a single term in office, then they're not going to consider the long term impact of their actions. Instead, we'll be encouraging politicians to simply look out for their short term interests and grab as much loot as they can. Some may say this is already going on...but if you compare the political practices in the US to most undeveloped nations, you'll see the current crop of US politicians are rank amateurs in the area of corruption compared to what's possible. Increasing the churning of politicians will likely just encourage them to turn pro.

(And now for the joke: A mayor of a large American city is hosting the dictator of a small, undeveloped nation. He takes the dictator on a tour of the city. As he's driving along, the mayor says, "You see this highway we're driving on? This whole project was completed while I was mayor." Then he gives the dictator a knowing nod, rubs his fingers together and pretends to put the money in his breast pocket. He winks, grins, and says, "10%". Then the mayor takes the dictator to an arena that's under construction. Again, the mayor gives the dictator the knowing look, says, "See this arena? 10%." And gives the same wink and grin. Finally, he takes him to his office with a great view of the city, points out construction zone after construction zone, then gives the same look and says, "See all those projects? 10%."

The dictator looks at the mayor, laughs, and says, "Come to my country and you'll really be impressed." So the mayor arranges to travel to the dictator's country. The dictator takes him straight to the top of the tallest building in town...the only building over two stories. He spreads his arms, allowing the mayor to take in the slums, the squalid ramshackle homes, the open sewers draining straight into the sole river running through town, the dirt roads, the people walking the streets or, in the case of the well-to-do, pulling carts with animals.

After the mayor has taken this in, the dictator says, "You see all this? 100%!")

A splash of cold water in the face...

2010-08-13T20:28:00.000-07:00

It's popular rhetoric today to say that the key to maintaining and improving the American standard of living is to simply make sure Americans have broad access to education which will allow us to be highly productive workers. Being highly productive will allow nearly all Americans to continue to have high-wage jobs and enjoy the comfortable and steadily improving standard of living that we've become accustomed to.

While I wish things were so simple, I think the cold reality is that the problem is a lot more intractable than anybody wants to admit--and probably beyond the capability of our political system to address.

First, creating productive, capital-intensive jobs is one thing. Making sure workers get paid accordingly is another. It's well-documented that over the last 3 decades, worker productivity has risen dramatically but wages have been stagnant. It's easy to blame the conservative economic policies, and I'm sure that's contributed, but it's hard to see how things could have been dramatically different. In the first few decades after WWII, the US was far and away the dominant developed economy because most others were left in ruins. If somebody wanted to run a modern, industrial business, there weren't a lot of other options. Today, there's educated workers and highly productive machinery and equipment all over the world. So if US workers want a large slice of the pie while Indian workers, with comparable education, are willing to settle for 10% or less of what US workers are, it's pretty easy to open a production center there and ship (or electronically transmit) the results back to the US (or anywhere else that can pay for the output). We can pass laws and regulations that require companies to pay workers some legal definition of "fair" wages, but if the laws become to onerous companies can simply move their entire operations overseas. We can restrict imports, but considering about half of all revenues from S&P 500 companies come from overseas, it's easy to see how such a strategy could blow up in our faces (see: Hoover's tariff policies).

Second, making sure Americans have the skills for the jobs requires not simply that they have the skills, but they have them in greater degree than anywhere else. Assuming that Americans are, on average, not dramatically more intelligent and capable of acquiring skills than residents of any other nation, it's going to be impossible to keep Americans ahead of the rest of the nations in terms of skills. Knowledge is nearly impossible to contain. Witness how after a few years of American dominance in IT, the industry is now dominated by foreign workers who are able to learn the skills just as quickly as the brightest Americans, but can apply them for a fraction of the price.

Unfortunately, there exists a global imbalance between the standard of living Americans are accustomed to, and the standard of living most of the rest of the world experiences. Innovative production methods have become extremely mobile, making it nearly impossible for Americans to maintain superior productivity levels that justify the higher standard of living. I don't think there's any realistic way to maintain the global imbalance that currently exists where Americans expect to earn 10-100x what workers earn in the rest of the world (often for similar work). Either the American standard of living will drop dramatically, or the rest of the world's standard of living has to rise dramatically. Clearly, the latter alternative is preferable. The problem is achieving it would require essentially a global Marshall plan. And that's pretty much a political impossibility. Explaining to the typical American that spending trillions of dollars annually on building schools and infrastructure in foreign countries is ultimately in his best interest seems like political suicide to me. Of course, we spent, as a percent of GDP, more than that to prevent a global takeover by Nazi & Fascist forces. But politics is easier when the enemy has a face.

If Pete Rose ran the banking industry...

2010-07-21T21:29:00.000-07:00

...it would probably look...pretty much like it already does.

No, I don't see bankers out setting hitting records. But bankers do bet against their own team. All the time. Trillions of dollars are devoted to hedging; basically just placing bets against your own investments--your own team.

In just about any other industry this would never be tolerated. In sports, this will get you banned from the industry altogether--like Pete Rose who got banned from baseball forever after betting against his own team. Imagine lawyers who could place bets on themselves losing cases. They'd be disbarred faster than you can say "unethical behavior."

Yet we allow this kind of behavior in finance. Of course, there are valid reasons given for why this is appropriate. But a case could be made that lawyers would benefit from this in much the same way that bankers do.

Many lawyers work on a contingency basis, collecting a fee only if they win the case. Of course, lawyers have to take a pretty large cut to justify the risk they take by investing so much time and energy into a project that may pay out absolutely nothing. Imagine if lawyers could hedge by betting against themselves. By removing the risk, lawyers could charge much lower fees to clients who can only afford to pay if they win. Lawyers reduce risk. Clients get lower fees. Everybody wins! Right?

That's pretty much the same argument that's made in the finance industry. Bankers, investors, finance professionals all have to take considerable risks when they pick investments. If they can bet against their own investments, they minimize risk resulting in more predictable returns. And this in turn allows them (theoretically) to charge lower fees for services. So what's wrong with it?

Well, would you hire a lawyer that bets against himself? Finance pros do a much better jobs of concealing this behavior with exotic names for products, but ultimately they're doing the same thing.

Maybe this is the kind of problem that the market would solve if people are simply made aware of what's really going on. But some things are simply too important to wait for the market to achieve what we all know is the desired result. Lawyers aren't allowed to bet against themselves, it creates a clear conflict of interest. So we need to stop bankers, who have an obligation to protect people's investments and by extension their well-being, from betting against themselves and their clients.

The economy is booming for some

2010-07-20T09:24:00.000-07:00

Just a quick article I ran across while checking stock prices: How the Rich are Winning. There's nothing surprising in the article, except for the source. Reading an article with this content (various measures of how the top 1% inhabit a different world from everybody else) wouldn't be very surprising on HuffingtonPost or some liberal political organization. I would take it with a grain of salt knowing it may be largely true but probably contains some misrepresentation and facts out-of-context to make political points. But coming from MarketWatch, a news organization dedicated to covering financial markets, it's pretty shocking.

Let the Republicans win

2010-07-11T10:09:00.000-07:00

Like most mid-term elections, the coming mid-terms will probably see the party out of power make significant gains in the House and Senate (see fivethirtyeight.com, for example). It seems the Republican strategy of the last couple years has been simply oppose everything (even plans they proposed and have always supported*) in a thinly-veiled attempt to make it impossible for Dems to accomplish anything. And, disgustingly, it appears the strategy has worked and voters will reward Republicans for this behavior that most parents wouldn't tolerate from an 8 year old. But I think we'll be better off if Republicans take control of at least one branch of Congress. Here's why:

Politics is a game, and the goal is to win by getting elected. So game theory should be considered in examining current Republican behavior and what is likely to change the current obstructionist environment. In politics, you don't win the game if your opponent does something good and is able to take all the credit. So Republicans, being completely out of power, have known that they can not allow anything positive to be accomplished because there is no way they can take credit for it. That's why they have consistently opposed legislation based on Republican ideas* since Obama was inaugurated. Republican opposition has nothing to do with their fears that plans would fail, but that they would succeed. Viewed from the perspective of game theory, if Dems succeed, Reps lose.

But, if Reps are able to take control of the House and/or Senate, suddenly they have the opportunity to claim credit for success. The bi-partisan legislation of the last two years* has so outraged Reps not because it was partisan (it certainly was not), but because the Dems would be able to claim all credit for it. With Reps controlling something, they have a stake in the outcome and have incentives to do something positive. By allowing the Reps some power, and some opportunity to claim credit for success, then we re-align the game so that the interests of Reps are no longer in opposition to the interests of the nation. As a result, with Reps achieving some level of power, we will see Reps go along with positive legislation because a win for the country can be claimed as a win for Reps as well.

It's childish. But politics is a childish game. So unless Republicans can be sufficiently marginalized that they have no influence, the next best alternative is to let Republicans control one branch of government. Just don't let them control all branches because we just saw what a disaster that was...

*Just a few examples of how the current Congress and Administration have been governing from the center/slightly right of center:

Defense: De-escalated one war, but escalated another. Overall defense spending and troop deployments continue to rise. A Republican remains Secretary of Defense. The new administration claims to have ended torture (there's some question about those claims), but have done nothing to investigate crimes (under US and international law) that appear to have been committed by the past administration. Overall: pretty centrist/right-of-center.

Economy: Continued Bush policy of bailing out big businesses based on the supply-side belief that if you take care of the wealthiest members of society, the benefits trickle down to the rest of society. Economic stimulus plan was a pretty equal mix of government spending (left) and tax cuts (right). Advisors are composed largely of individuals with considerable private sector background. Proposals for top marginal tax rate remain significantly lower than the top marginal tax rate during most of the Reagan years. Overall: centrist/right-of-center.

Energy: More investment in alternative/renewable energy than previous administration, though no large-scale commitment. No definitive steps toward putting a price on carbon. Support for expanded off-shore drilling. Overall: centrist.

Health Care: Single payer never considered. Public option removed from plan. Final plan is based entirely on private delivery of health insurance. The plan is very similar to what Republicans have proposed for decades as an acceptable alternative to government delivery of health care. Indeed, the plan is much like what a Republican governor passed in Massachussetts. Overall: Centrist/right-of-center.

I could go on, but that should give the idea. On a policy level, the current administration and congress have pursued a clearly centrist legislative agenda. Allegations of partisanship are based entirely on the fact that Democrats hold all the power and Republicans have withheld votes for purely political reasons...not because the ideas are so far to the left of what Republicans have traditionally advocated until just two years ago.

A dirty little secret about the stock market

2010-06-29T15:11:00.000-07:00

Wow. Now here's something that will blow your mind if you believe stocks are the best place to invest your money:

A study of 160 investment advisors over the last 30 years shows the single top performing advisor of the bunch holds only about 20% in stocks!

The last 30 years, it should be pointed out, had possibly the largest bull market run for the stock market in history. Yet Charles Allmon was never more than 50% in stocks; most of the time he had less than 25% of his portfolio in stock. And only a few stable, high-dividend stocks at that. Turns out that over the last 30 years, a time frame in which stocks have done exceptionally well by historical standards, you could have done just about as well parking your money in safe money market accounts.

Of course, most financial advisors will tell you stocks are the best investment in the long run. I'm sure the fact that stocks are most profitable for these financial advisors has a little something to do with that. Of course, it should be noted that yes, historically stocks have done quite well relative to other investments. But, as Paul Krugman noted in an essay in The Economists Voice, that probably just means that historically stocks have been under-priced. By historic standards, stocks are priced very high today, indicating those rich returns of the past may not be the reality anytime in the near future. Look at it this way, the market has a choice of different investment vehicles. If one vehicle consistently outperforms the others, the market will recognize that and bid up the price until the performance matches the price. If history is any indication, investors will bid up the price beyond the point it's a good deal, thus rendering the asset to be an inferior choice even though historically it was a better choice.

Given the phenomenal performance of stocks in the 80's and 90's, and the subsequent abysmal performance, I think we're just seeing the reversion to the mean for stocks. This process will probably play out for quite some time before stocks become a superior asset class again.

What if there's no fix for high unemployment?

2010-06-11T13:52:00.000-07:00

The above Fortune article asks a brave question. The central idea of the article is asking the question of whether we may be reaching a point where technological progress is eliminating jobs faster than new ideas, products, and industries can replace them, leading to permanently higher unemployment. Anybody who dares assert that technology might just possibly in the long run have any sort of negative impact on employment is automatically an imbecile and/or heretic in many economic circles.

Of course, to the general public, the idea that technology which replaces workers will cause unemployment seems obvious. The reality is much more tricky. Because it seems apparent, but time and time again has wound up being false and there are models explaining why it's false, many people with the most fundamental economic education assume anybody who would make this observation, or hint that there might be something to this observation, must be some sort of ignorant rube. Over the last two centuries, technological innovation has been accelerating relentlessly, while populations have been growing exponentially, yet in the developed world we have generally been able to find employment for nearly everybody, with temporary exceptions during downturns in the economic cycle. When technology renders one type of job obsolete, another way has always been found to employ the labor of those displaced. This has been true for centuries.

For centuries, it was also true that US housing prices did not dramatically drop across the board. So it turns out centuries of observation is not adequate to formulate an unbreakable economic law. And given our historically high unemployment levels, I think it's fair to question this observation. Perhaps the observation will continue to hold and in a few years everything will be back to normal.

But one has to wonder just how many more productive uses of human labor we can come up with. We produce more food than the world can eat--though people go hungry because they don't have jobs to earn income to buy food. We have more houses in the developed world than we have families to live in them--though people go homeless because they don't have enough income. There are more cars in the developed world than people to drive them--though, again, not everybody can afford one. We have access to more entertainment and communications technologies than anybody could ever use. It is hard to think of anything for which there is a shortage in the developed world--with the exception of positional goods. Positional goods are things like "better" schools or "better" neighborhoods...items that only have value because they are perceived as more desirable than alternatives, even though the alternatives are perfectly adequate by objective standards.

In an absolute sense, there's very little that can actually be produced to add to the economy in the developed world. The best way to "grow" the economy is through the inflation of prices for positional goods. Higher education (which is better than secondary education) has seen skyrocketing prices even though there's little evidence today's graduates are much smarter than a few decades ago, health care costs (particularly at institutions deemed better than average) have skyrocketed while life expectancies (at least in the US) have barely budged, real estate costs have skyrocketed as people compete for the limited homes available in "above average" locations, spending on financial advise and products have skyrocketed as people chase better than average returns--and most investments have performed at rates near historical lows in the US.

In short, we're running out of actual wants and needs to meet by putting people to work. We've produced nearly everything anybody can possibly use, and we're simply competing to see who will get the "better" goods out of what is produced. At the same time, companies continue to find more efficient ways to produce these goods, which means less labor is needed to produce them.

It seems like at some point, we'll hit a wall where we realize there just aren't enough productive things for people to do to maintain anything close to full employment. Of course, that's been said before, and it's been wrong over and over again. But then, people who were worried about home prices dropping were wrong over and over again too...

Just the Facts

2010-06-04T15:51:00.000-07:00

The above chart shows US GDP over a time period of well over a century on a log scale. That dramatic upturn on the far right represents well over a decade. I've removed the years from the bottom for purposes of posing a question. What year do you think this graph ends?

First, a little background. This chart comes from measuringworth.com, one of the greatest collections of economic data on the internet. Not only is there a ton of information available, but it's very easy to request exactly what you need and get it in either a table format or a convenient chart. These charts are done in log form because that's the only way to get a sense of the growth rate over time. If you don't do a log chart, nearly every economic chart looks like a hockey stick. That's because the same growth rate over time (say, 3%) results in exponential growth. 3% growth when GDP is $1 billion produces way less growth than 3% growth when GDP is $1 trillion. Also, this chart uses "real GDP", which attempts to correct for the effects of inflation. The result, over long periods of time in the US, is what appears to be remarkably smooth growth. Now...back to the quiz...

If you're a fan of Reagan, you probably assume that dramatic upturn is thanks to Reagan's strong growth policies. You've got the dramatic downturn just before that, which must represent the stagnant 70's. And you've got the beginning of a collapse at the end. So naturally, this graph must end in the present day or some very recent year.

Yes, that would make sense if you live in the fact-free world of political ideology.

OK, so now here's the full chart, with years, for the years 1790-2005:

So when did that remarkable, unmatched period of economic growth occur in the US? That's right, it was the FDR years. The beginning of the remarkable upturn occurs precisely in 1933, the year FDR took office. The end occurs in 1945, as WWII begins winding down. During that decade-plus of near-socialism--with sky-high taxes, incredible government interference in the economy, and out-of-control government spending--the US experienced an average GDP growth of roughly 10%.

Yet if you listen to so many pundits and politicians today, they'll tell you low taxes are the key to prosperity, FDR's big government economic policies failed, and many other whoppers that simply don't stand up to scrutiny. The "Reagan boom" of the '80's doesn't even show up in the chart. The "big government is over" boom of Clinton...you can't even see it. The only decade-plus period of economic growth in American history that significantly stands out from any other period is the New Deal era.

One other interesting item...there's only one large country in the new millenium that has managed to achieve that magic combination of average annual growth of 10% or more over a period of a decade or more. That country, of course, is China. And I don't think anybody would dispute that China's economy runs with a heavy dose of government intervention.

Central planning without markets is a proven failure. But free markets without central planning have also proven to be a colossal failure over and over again. A healthy economy needs a strong dose of both.

The Paradox of Simplifying the Tax Code

2010-04-25T17:54:00.001-07:00

It's been a couple months since my last post as I've been busy helping people navigate the complicated mess that is our income tax code. And the last couple of years, I've noticed an interesting contrast between what people say they want, and what they actually want.

Over and over again I hear from the media and simply talking to people in public the common refrain that our tax code is way too complex. An unnecessarily complicated tax code creates an enormous burden on business and individuals, stifling productivity. Out in the open, you hear almost universal support of the idea of simplifying the tax code. So if we live in a democracy and nearly everybody says they want a simpler tax code, why don't we have one?

Simple. People don't tell the truth. Or they simply don't think things through to the very next logical step.

Everybody says publicly they hate how complicated the tax code is. But privately things are very different. Privately, most people buy tax software or pay somebody like me to search for all the tax breaks they can possibly get. And what is a tax break? It's simply an exception, a "complication," to the straight-forward application of tax rates to income. And everybody wants as many as possible when it comes time to do their taxes.

If we want to simplify the tax code, we'll have to start eliminating all these tax breaks. Who wants to vote for eliminating the deduction for mortgage interest? Who will vote for ending exemptions and credits for dependents? Any takers? Maybe a few, but overwhelmingly people tend to like tax breaks. Sure, most people aren't big fans of "unfair" tax breaks for "others." But it turns out when you try to eliminate any tax break, suddenly the "others" turn up to argue their tax breaks are just as "fair" as the tax breaks you receive.

I'm not saying our complicated tax code is a good system. But I am saying that "simplifying" the tax code is one of the most politically difficult things to accomplish in a democracy. Any politician who promises to simplify the tax code is probably blowing smoke.

And let's consider just how much most people would like the alternative. It turns out our tax code already has built in to it a couple of flat taxes. First, there's the FICA taxes that come out of people's paychecks automatically and aren't subject to deductions or credits. Because they're almost invisible, most people don't think much about them (plus only half the amount is shown on your paycheck, the other half truly is invisible to employees). However, self-employed people see this tax directly as it's not withheld automatically from them. They have to cut a check. And most self-employed people howl about this one when they learn about it. Over and over I have to explain to self-employed people that their medical expenses, their mortgage, their kids...none of those personal deductions make any difference when determining self-employment tax. And self-employed people hate it.

The other flat tax in our system already is Alternative Minimum Tax. Like Self-Employment Taxes, this tax is pretty flat as well. (There's a 2% higher tax rate at the higher end of the income spectrum, and they can still deduct mortgage interest and charity, but other than that it's pretty close to a flat tax.) And what tax is universally loathed by upper-middle-income earners who sometimes find themselves subject to it? AMT, of course. Again, people are outraged that their kids, their state income tax, and countless other deductions they get under the normal tax system don't make any difference for AMT purposes.

Turns out that--privately, at least--most Americans hate a flat tax even more than a ridiculously complicated tax.

Ah, irony...

2010-02-05T17:32:00.000-08:00

I was glad to see in this Time article that the Tea Partiers have calmed down a bit. But the incoherence is still there.

According to the article the attendees were "mostly white and older." This probably wouldn't surprise most people who've seen a TP rally. I'm not going to touch the race issue, but there's no doubt the TP movement is popular with seniors. In the paragraph following the description of attendees, the article goes on to quote an attendee saying they "want to take back this country back those who are robbing it blind." The paragraph after that indicates attendees "all support 'first principles' of small government".

Looking at the most recent federal budgets, I wonder who exactly is robbing the country blind? About $1.2 Trillion, over 1/3 of the budget, is going directly to seniors in the form of SS payments and Medicare. Seniors represent the single largest recipient of federal government money. Do the seniors at this convention intend to take the country back from themselves? If they want smaller government, the most effective way to reduce the government's size is lobbying for cuts to SS payments and Medicare benefits. Somehow I don't see that happening.

But maybe somebody else is robbing the country blind in the rest of the budget. Let's see, the next biggest recipient of government dollars is members of the defense community. Maybe the TPers think that our troops are robbing us blind? Haven't seen that on any of their posters yet.

(Of course, a good argument could be made that defense contractors are getting rich off bad policy...but any time cuts to defense spending are proposed, it's always politicized as a swipe at the troops.)

Then you've got those other nasty entitlement programs for children, the very poor, and the disabled. A lot of money goes there (not as much as to seniors or the defense community, but still it's a lot). Maybe the TPers should start marching into the homes of the disabled and impoverished children and demand their money back.

And then there's the interest on the national debt. That's where those evil thieves are robbing us blind, right? Problem is, over half the national debt is held by Social Security, meaning that interest is going to SS recipients. So we're right back at giving government money to seniors. And even though a large portion of that interest does indeed go to private and overseas investors, we're talking about 2-3% of the entire federal budget. Not chump change, but hardly enough to say we're being robbed blind.

And finally there's the EVERYTHING ELSE category. Yep, everything else the government does besides what I mentioned above, when added together, comes to a total of about $500 billion. Highways, food inspections, environmental protection, national parks and public lands, payments to farmers (and ag corporations), education, NASA, judicial system, etc. etc. all added together comes to a grand total of significantly less than half of what seniors receive in direct support from the government.

So again I ask, *who* exactly is robbing the country blind??

I have no problem with seniors receiving substantial subsidies from the government. I believe one of the major roles of government is to protect society's weakest members. And when people reach an age where they are no longer able to work, when their health may be failing, when biology and the demands of our modern society make it impossible for people to support themselves, then I think it's important and admirable that society as whole, acting through government, is willing to offer support.

But what infuriates me to no end is when those who are receiving the lion's share of government resources rail against "big government" and demand that government spending on everybody else be cut. Until seniors who claim to favor "smaller government" start rallying against their SS & Medicare benefits, their cause is nothing but hypocrisy.

My take on the Tea Party movement

2010-02-02T09:00:00.000-08:00

My take on a blog post I recently ran across trying to make sense of the Tea Party movements...

I've tried really hard to understand the message of the Tea Partiers, and finally concluded there is no message. It's just a bunch of people who are angry about the way they perceive the world.

Some TPers are angry that Medicare exists, others are angry that at some point in the distant future government plans to cut benefits in some small unknown way. Some TPers are angry about government getting involved in markets, others are angry that government isn't stepping in to "fix" their underwater mortgage. Often the same TPer holds both mutually exclusive views.

Your mistake, Bruce, is attempting to find some sort of logic to the TP movement, and there is none. It's an emotional outpouring and it's open to anybody who shares their misery and anger with "the government." It doesn't matter if what they're angry with is nothing the government did, it doesn't matter if what they're angry with is the government doing (or proposing) exactly what they say they want the government to do. It doesn't matter if Tim Pawlenty's ideas are utterly illogical and incoherent. All that matters is that he's very upset that society isn't working *exactly* the way he wants it to, and he blames "government" for that. That's the only thing that unites TPers, anger with government.

That's why this movement should be so scary to rational, thinking people. It is an entirely destructive movement. They propose no coherent alternative to the way things are now, they simply want to end the system as it exists now. End taxes, destroy government, and hope that all the problems of human beings living together in large groups suddenly resolve themselves. That's the future if the TPers get their way.

Any rational person could simply look at Somalia or tribal regions of Pakistan and conclude this is a terrible idea. But while the TPers may be perfectly rational people in many areas of life, the logical part of their brain has simply turned off with respect to government. Despite the fact America is near the top of nations by just about any standard of living, they seem ready to destroy it all over the (relatively few, by global standards) problems that exist.

Clinical research offers support of a pet theory of mine

2010-01-31T21:42:00.000-08:00

I have long had this pet theory that society would be better off if our legislative bodies were generally composed of common citizens chosen by lot. In such a system, the executive branch would consist of people who rise through the ranks of managing successively higher levels of government, just as modern executives in the private sector generally attain their position. But the legislative branch would be a large body--probably at least 1000 people so statistics almost guarantee you'll get a random sample representative of the whole population--that would function much like a board of directors that wields the ultimate authority to dictate what the executive branch should be trying to accomplish.

Simple observation leads me to believe our system of elected representatives pretty much guarantees that we will be governed by liars and hypocrites whose dominant attribute is the ability to say whatever they believe people want to hear and sound really sincere at it. Government by lot would no doubt produce a number of completely incompetent people (and perhaps there would be the option for popular election or some other method to cull 10% or so from those randomly selected to weed out the truly crazy), but with a large enough sample, the competent people would almost certainly far outnumber the incompetent and allow the incompetent to be steered along. Besides, majority decisions would not require everybody be on board, and a majority requirement would prevent small groups of lunatics from accomplishing anything--unlike our current system, it would appear.

And so, with extreme satisfaction, I read this article in The Economist discussing recently published psychological experiments about the effects of power on people's moral compasses. The study "primed" people for different states of mind--either a state of mind of one who has earned and deserves power, a state of mind of somebody who does not have power and does not deserve it, and a state of mind of somebody who received power fully aware that they did not deserve it. This is accomplished by having people randomly formed into groups and assigned to write about times in their life when they experienced a situation that made them feel the way the researchers were intending them to feel--a method that has been used time and time again in psychological studies and shown to have significant validity.

After being put into the appropriate frame of mind, the subjects were asked questions or put in situations designed to tease out the subjects' feelings about ethical behavior as applied to themselves and others. It turns out those who were in a frame of mind reflecting earned power held other people to a significantly higher standard of ethical behavior than they held themselves. Those who felt they had little power generally held themselves to roughly equal ethical standards as they applied to others. And the group that was thinking of a time they'd been given power that they did not deserve held themselves to a significantly higher ethical standard than they applied to others.

It is not hard to see the parallels with our system of government. People who campaign and win an election no doubt tend to feel that they have earned their position of power. As such, psychologists would conclude, regardless of other personal characteristics, that they are likely to feel entitled to cheat the system and play by a different set of rules than apply to "everybody else." On the other hand, people who are selected by lot for a position of power would not merely be likely to view themselves as equal to others, they would in fact be likely to hold themselves to a higher moral standard than "everybody else."

Combining the selection method with reasonably high salaries (i.e. keep the current salary/benefit structure, or even raise it a little bit) would increase the "undeserving" feeling for those chosen and would likely increase the effect. Plus high salaries (and the promise of a future pension for service completed proficiently) would help insulate the legislators from the effects of being bought by corrupt parties.

In the comments with the article, there is an interesting comment discussing George Washington. Apparently Washington's personal diary and other comments recorded at the time indicate Washington felt completely undeserving of his appointment to lead the colonial army. His career prior to that point had been unremarkable and his appointment was largely for political reasons. As such, the research would indicate he would be more likely hold himself to a higher ethical standard than those around him, and be uninterested in seizing further power through any means available. Indeed, that seems to be exactly what happened.

But while Washington's intentions, and those of many other founding fathers, may have been good, the system they established has turned out to be one that does not propagate leadership by those humble enough to use it responsibly. It would appear that the best way to achieve a system of government "of, by, and for the people" is not through direct election, but by lottery.

The real problem with government handouts is they turn people into conservatives

2010-01-29T22:51:00.000-08:00

Watched "Food Inc." the other night. One thing I couldn't stop thinking about during the movie was the massive government handouts given to farmers...and the intense political conservatism among many farmers. I would guess that on a per capita basis, farmers probably receive more government aid than any other large group.

Another group that would have to rate high on government handouts is seniors. Once you turn 65 in this country, you get single-payer health care and the option to receive a steady stream of income from the government (or you can wait until you're 70 and receive more). Yet if you threaten seniors with "big government", they'll run to the polls to elect whoever promises to keep that evil provider of their health care and income at bay.

Look at the states. Many states receive far more in government spending than they contribute in income taxes, and these same states almost invariably support conservative candidates promising "smaller government." One such state not only receives massive federal aid, but even "nationalizes" the oil revenues so every resident receives an income just for having a pulse...and yet they recently produced a VP candidate who warned of the evils of big government and "socialism."

Maybe it's time we give conservatives what they want. Let's pass the following laws:
-End agricultural subsidies. If farmers want smaller government, let's start with the handouts they receive.
-Cut Medicare spending in half and require that outlays for Medicare can not exceed receipts from payroll taxes. Seniors hate big government, so let's stop forcing them to receive medical care at taxpayer expense.
-Pass a law legislating that federal spending in any state must match the revenue collected from that state. This will reduce the size of government in the conservative states, and grow the government services available in liberal states. Both groups get what they want.

Conservatives like to claim that government hand-outs make people lazy and dependent. Perhaps there is something to that. But it seems the more predictable and dangerous effect of government handouts is it turns people into conservatives.

[For the record, I have no problem with honest conservatives who recognize the need for government, but simply believe that we should be suspicious of government intervention and be willing to cancel government programs that aren't working. This group seems to be harder and harder to find these days, as the hypocritical all-government-is-bad-government-except-for-my-handouts groups seem to be the voice of conservatives right now.]

Another Stock Bubble Is Well Under Way

2009-12-01T13:01:00.000-08:00

Just a heads up for anybody with significant stock investments.

For some time now I've been analyzing long-term data on stock valuations from Robert
Schiller (one of the few economists who never stopped trusting long-term valuations and was therefore able to correctly predict both the stock market bubble of the last decade and the housing bubble). From his exhaustive data I've found that every time in the last 130 years that the PE10 of the S&P 500 has gone over 20, an investor would have done better to just pull out of stocks, invest in government bonds, and wait for the bubble to collapse. This last bubble took almost 15 years to collapse, but it did. And an investor who had bought bonds the last time PE10 passed the 20 mark (Jan, 1995) and just waited for valuations to return to the historical average of about 15 (February of this year) before buying into stocks again would have done about 20% better than an investor practicing buy and hold. Today the PE10 passed 20 again for the first time since last year's collapse.

** (PE10: P/E ratio w/ earnings averaged over the last ten years)

Maybe we're headed into another decade+ bubble, but staying in at this point means trusting your (or your broker's) ability to call the top of the bubble, something nobody has ever done with any consistency. Individual stocks may be able to buck this phenomenon, but again it's trusting your (or your broker's) ability to be significantly better than average at picking individual stocks, something few "professionals" are able to do with consistency. In fact, the "professional" mutual fund managers do better than average only about 20% of the time, even though by pure luck they should do better than average about 50% of the time.

Draw your own conclusions.

Entitlement Programs Drive Health Care Innovation

2009-11-29T11:57:00.000-08:00

America's health system is a world leader in innovating new treatments for many diseases. This is often attributed to competition in the delivery of health services. What is generally overlooked, however, is the way entitlement programs contribute to innovation.

When I say "entitlement programs", I'm referring specifically to Medicare, Medicaid, and any program in which government at any level pays for medical services, generally for those who would be otherwise unable to afford these services. Such programs account for around half of the health care spending in America. They are frequently blamed for the high cost of health care in America. The reality, however, is far more complex.

Entitlement programs do undoubtedly increase demand for health care services. By their very nature, they generally provide payment for services for individuals who would not have the financial means to demand these services otherwise. And increasing demand, according to basic economics, does indeed drive up prices for a scarce good.

But the history of economies since at least the Industrial Revolution shows that there are far more factors at work. Indeed, the success of economies of scale in driving down prices for countless products (think computers, as an obvious example) has led to a widespread belief that the fundamental economics principle is that increasing demand actually lowers prices. While this is not true in the case of a scarce resource, what is true is that increasing demand creates incentives to produce more of a product, and do it more efficiently (aka cheaply), which causes an increase in supply that actually drives down the cost. Increases in supply actually do decrease prices, according to fundamental economic theory. So increases in demand frequently are countered by larger increases in supply, which has a net effect of driving down prices.

Entitlement programs are typically designed to accommodate people who have no reasonable means of paying for their own treatment (i.e. they are unable to generate "demand" for services). They primarily are for the elderly and the disabled. The disabled, obviously, are unable to work and therefore unable to provide economic incentives for health care providers to meet their needs. And the elderly, while they may have access to significant financial resources after a lifetime of working, will frequently find that their medical costs will generally exceed what a lifetime of aggressive saving and investing could have accumulated for all but the wealthiest. Simply put, without entitlement programs there would be little economic incentive for health care providers to increase the amount of services they deliver. Without these incentives, it is likely supplies of medical services would be far lower and it is quite possible that prices for these services would be even higher than they are now.

Even more interesting is considering what medical services would simply not be available were it not for entitlement programs. Consider that most new medical innovations cost billions of dollars to develop. Then consider that most new innovations are only useful to a small percentage of the population afflicted with an ailment that might actually benefit from the specific innovation. You're now talking about an item that costs many billions to develop, but might only be useful to a few million people. Now, consider that if we took away entitlement programs, only a small percentage of the people who could benefit from an expensive new innovation will actually be able to afford it. That changes the economics of product development considerably. Now, rather than a new innovation potentially delivering treatment to a few million people, it might only deliver treatment to a few hundred thousand people (or less!). The cost-benefit analysis for seeking new medical innovations changes significantly as the number of people who could potentially afford to use the innovation goes down...and that is precisely what would happen if we ended entitlement programs.

Right now in America, about 80% of the population is covered by either a government program, or by health insurance through their employer which is heavily regulated by the government to prevent companies from denying payment in all but the rarest of circumstances. When developing a new medical treatment, companies can essentially count on the fact that at least 80% of the people needing their treatment will be able to pay for it. (In reality, it's probably much higher because people with serious diseases often become eligible for government benefits.) In a truly market-based system, government would not get involved to provide services for the severely ill. Further, private insurers would be free to eliminate the seriously ill from their plans. Ultimately, only the seriously ill who are also extremely wealthy would be able to afford to pay for treatments of serious diseases. The net effect is the financial demand for medical innovations would drop by roughly an order of magnitude (aka ten-fold) as we go from a system where close to 90% of the people needing serious medical treatment have a way to pay for it, to a system where probably fewer than 10% of people needing serious medical treatment have a way to pay for it.

What do you think will happen to the pace of medical innovation in our country if demand drops by around 90%?

It's true that a "socialized" way of paying for medical services will drive up the cost for healthy people. But what is also true is that when a healthy person becomes an unhealthy person, as nearly all of us do at some point in our lives, a "socialized" method of paying for medical services not only guarantees we will be able to afford treatment when we need it, it also means we will have far more medical treatments and innovations available to us than we would in a purely free-market system of paying for health care.

Why finance professionals earn so much...for knowing so little

2009-11-09T13:45:00.000-08:00

About five years ago I applied for a job as a financial advisor with a large, reputable financial services firm. I have a strong aptitude for math and a strong background in customer service, so I thought this would be a good fit for me personally as well as highly lucrative. I made it through a couple rounds of the process, but was confused by one thing: nobody seemed the least bit interested that I had no background in finance. While I felt confident that I could learn this field quickly, I didn't understand why I was never asked to provide all the answers I had prepared to justify my suitability for this position without a finance background. I finally asked an interviewer how I was supposed to provide the services I was selling when I had little formal background and the training period was only about a month.

His response: you don't need to know anything. We'll provide you the basics to sound informed. You just have to project confidence and sell the product. Once you pick up clients and have money to play with, you'll figure it out as you go along.

I couldn't handle the ethical implications of selling myself as a "professional" or "expert" so I could get other people's money to play with and figure things out. It's too bad, I might have made a lot of money. Instead, I decided to take my interest in economic and financial issues and pursue a career that seemed more genuine. I chose accounting.

Interestingly, as I was recently reading Nassim Taleb's "Black Swan", I came across a chapter on the "expert problem". Basically, some fields have true experts and some don't. Some "experts" have a lot of facts, but don't have a genuine understanding that translates into better results than what a non-expert would get through simple chance. Other experts (think surgeons, farmers, engineers) are genuine experts who will consistently deliver results far more useful and accurate than a non-expert could produce. Taleb confirmed my impressions of financial advisors and accountants by putting financial advisors squarely in the "expert" category, and accountants in the expert category. There's plenty of empirical evidence to back this up, of course...80% of mutual fund managers aren't able to beat average market returns; in the years prior to the (now obvious) meltdown of securities, most advisors were recommending buy-and-hold for stocks, and buying as much home as you can finance; just to name a couple of the more obvious examples.

So the question is, why are financial advisors and analysts and others in the "expert" category compensated so much better than accountants and others in the expert category? Why do the people who are unable to demonstrate any level of skill beyond what's easily explainable by pure chance demand so much more compensation than the people who can actually explain what they're doing and why and how it works?

And recently I realized why there is a disparity. And it's precisely because accountants practice a consistent method while financial advisors practice alchemy.

One of the pitfalls of the human brain (Taleb, among many others, discusses this at length) is our weakness for the narrative fallacy. We want a theory, a story, a narrative to explain every phenomenon. Even when the best theories are proven wrong over and over again, if nobody suggests anything better, we will assume the best narratives are accurate (even when proven wrong) until something better comes along. We are unable to simply accept that sometimes the only correct answer is, "Nobody knows."

In accounting, the best practices are known and have been understood and refined for many centuries. As a result, these practices have become broadly taught and can be practiced very systematically. Therefore, many people have been trained to be accountants, and they nearly all deliver consistent results.

In finance, the best practices are unknown. There is no proven strategy that has consistently been proven to perform better than average (of course, such a strategy is impossible, but that's another discussion). As a result, everybody comes in with their various ideas and narratives about how the market works. Through sheer luck, some will wind up doing much better than average. However, because of our human tendency to see order where there is none, we will attribute this success not to luck of the draw, but the accuracy of the person's methods and ideas. Over time, most will experience runs of bad luck as well as good, but a small number, by sheer luck, will have a long run of success. If humans were rational, we would see these "successful" stockbrokers, advisors, and analysts for what they are: lucky. But instead, we believe there must be an explanation behind their string of luck, it must be because they are extremely talented. And because this "talent" is so rare (runs of good luck are rare things, after all), the market is willing to pay extraordinary prices for this rare "talent".

Of course, to somebody considering whether to go into accounting or finance, the decision is easy if you only look at top salaries (or even average salaries for those who've been in the field for many years since, after all, only those who remain relatively lucky overall stay in the field). However, if you average in all of those who have "failed" at finance by being unlucky, and therefore left the field altogether, the picture might be very different. Either way, the wisdom of entering one field or the other ultimately boils down to one characteristic more than any other: luck.

Just goes to prove the old adage: It's better to be lucky than good.

A "Right" to Health Care

2009-10-14T11:51:00.000-07:00

I recently ran across this article questioning whether defining health care as a basic human "right" has done more harm than good. This article trips on a basic fallacy, however, that I simply don't understand. It jumps on the notion of "highest attainable standard" as though somehow universal access to health care means everybody gets every health service they want regardless of actual need or effectiveness. Some critics of universal health care in this country seem to think that as soon as we allow everybody access to health care, we're allowing everybody access to unlimited, exotic, expensive health care for any and every conceivable "condition", real or imagined. While it's true that for a tiny minority of extremely irrational people, this is exactly what it means, the reality is that there's plenty of middle ground between the position of people can only have the health care they can afford to pay for and the position that everybody gets every procedure and pill they want. I don't understand why this seems so hard for many people to grasp. Perhaps some analogies would help:

-In America it's widely accepted that everybody has a right to a basic education, through secondary school, that should at least give everybody the opportunity to be literate, numerate, and familiar with basic concepts in important areas. This does not mean, however, that everybody is entitled to an Ivy League education.

-We generally believe that every part of America--rich, poor, rural, urban, etc.--is entitled to national defense. A military attack to any American's domestic property will invoke a response by America's military. Yet, I don't know anybody who believes every American is entitled to their own tank, jet, or nuclear warhead.

-Every American has access to the court system if accused of a crime or the victim of a criminal injustice. However, not every American is entitled to the services of Johnny Cochrane.

There are many more examples. So why is it so hard for some people to wrap their mind around the idea that everybody should be guaranteed a certain minimum level of health care services, paid for by their tax dollars, with premium medical services available to those with the means to afford them? I've proposed before that we could simply use our neighbor Cuba as our baseline. How hard could it be for the richest nation on earth to provide every citizen with the same level of guaranteed medical coverage as they would get as a citizen of their third-world neighbor? Obviously, if somebody wants cosmetic surgery or an expensive, unproven procedure, then the Cuban standard will not provide it. But that's where the free market comes into play. If a person wants expensive medical procedures with limited effectiveness, or if they want to go to Harvard, or if they want to hire Ted Olson as their attorney, they can pay the price and receive these services. But for the basic version of these services, everybody in America should have access regardless of means. Why is this such a difficult concept?

Health Care Costs & Cars

2009-09-21T22:49:00.000-07:00

I was thinking recently about what are some of the unique drivers of cost in America's health care system. Sure, there's insurance profit margins eating up maybe 10%, there's litigation and insurance against this litigation which eats up less than 5%, and other items that we frequently hear about. But here's an item that's a pretty big driver of health care costs that I've never once heard mentioned: cars.

It occurred to me that car accidents must be a tremendous source of ER visits and expensive procedures. I decided to try and find out just how much cost our car-dependent culture adds to our health care system. OK, this was much harder than I expected. I wound up not being able to find anything that gave an estimate for costs to treat injuries caused by car accidents. The closest I could come was a page by the National Safety Council that gave numbers of traffic fatalities, traffic injuries, and cost of treating all unintentional injuries (whether or not they were caused by cars) in 2005. So I used this information to make some estimates.

First, the basics. About 45,000 people were killed in car accidents and about 2.4 million people were injured by cars. Total visits (cars or not) to the ER amounted to about 28 million at a cost of about $625 billion. So...cars were responsible for about 10% of visits to the ER and about 40% of accidental injuries leading to death (about 110,000 people killed from unintentional injuries overall). So car accidents must account for at least 10% of the cost of treating accidental injuries. And experience, combined with the fact about 40% of fatalities from injury are the result of cars, indicates that injuries sustained in car accidents are far more likely to be serious injuries requiring expensive treatment. So let's just assume that the total cost of treating car accident victims comes to roughly midway between 10% and 40% of the cost of treating all injury victims. That would be 25% of $625 Billion. That's over $150 Billion. With rising health care costs and rising population leading to more people on the road, we're probably looking at close to $200 Billion in medical costs for treating car accident victims. (Just FYI, that's considerably more than what we pay to build and maintain roads.)

Of course, all developed countries have cars. But no country uses cars nearly as much as America. I looked up traffic fatality rates by nation and found that Canada is the only major industrialized nation with a traffic fatality rate much more than half of America's (their rate is about 2/3 ours). So if we used cars at the same frequency as other developed nations, our spending on medical care for car accident victims would be roughly cut in half at least. That's $100 Billion. That's 5% of what we spend on health care in this country. That's not enough to solve the health care problems we're facing...but it's not chump change either. And, frankly, I'm not hearing many other proposals offering savings of 5%.

I've made the point over and over again that by simply diverting the funds we're already spending on maintaining highways to building and maintaining a high-speed rail network and efficient transit within cities, we could build an efficient transportation network capable of meeting most people's transportation needs and reducing our dependence on cars (and oil). Turns out yet another of the many, many benefits of this change would be a dramatic reduction in our national health care costs. And, of course, it would save about 20,000 lives every year, too. For a comparison, that's about how many people die from all criminal activity in the entire country on an annual basis.

Why aren't we investing in better transportation??

It's Not Class Warfare, It's Just Math

2009-09-19T09:31:00.000-07:00

I came across this neat little thought experiment on a blog recently, so unfortunately I have no idea who to attribute it to. But here it is:

Suppose you have a population where the top 1% of income earners make 10% of the income at Year Zero (this is approximately where the US stood in 1980). Suppose the overall economy grows at a real rate of 2.5%, while the incomes of the top 1% grow at 6%. (This is basically what has happened in the US since 1980--ignoring the last 12-18 months, more on that later.) This seems perfectly reasonable since, after all, the top 1% are probably far more productive (at least by 2x) than the rest of society, so why shouldn't their wages grow slightly over twice as fast? As long as everybody is making more money, everybody should be happy even if a very slightly larger share goes to the top 1%. So after 25 years at these growth rates, what has happened to incomes? In our hypothetical world, Year 25 would have the top 1% earning a little over 20% of the income. (This is basically the situation in the US in 2005, 25 years after 1980.) The top 1% earning 20% of the income might not sound so bad. After all the top 1% may be far more productive, produce far more jobs, provide far more investment, etc. After another 25 years in our hypothetical world, the top 1% are now earning over 50% of the income. From a purely economics point of view, this may be entirely reasonable. Of course, in the real world, one must consider the political reality of whether a population will stand for 1% receiving the majority of all income. History suggests dramatic revolutions occur at far lower levels of wealth for the highest ranks. The US launched into a vast campaign of wealth redistribution in the '30's at a time when the top 1% received about 20% of income. But enough reality, let's continue for another 25 years in our hypothetical world. By year 75, the top 1% is earning (drum roll, please) 120% of income! Clearly, this situation is not sustainable from any perspective.

So here's my thoughts on the thought experiment:

Of course, for a fraction of the population to earn 120% of the income is a statistical impossibility. (Although recent events have demonstrated in reality this may be possible if the bottom 99% simply borrow money in excess of their incomes to give to the top 1%.) So what does this thought experiment mean? The most obvious conclusion is that our historic rates of overall growth and growth for the top 1% are mathematically unsustainable and will have to change, certainly within the lifetime of most young people today. Let me restate that: Mathematically speaking, the income distribution in America has to change from what it has been in the last 3 decades. This is not class warfare. It is a simple application of math. It took me about 5 minutes to set up a spreadsheet to run the numbers--I'd be happy to send a copy to anybody who wants it and isn't sure how to create it themselves.

The real question is, how will this change occur? History suggests two possibilities, and ideologues suggest a third. Let's start with the ideologues. There is a libertarian fantasy that a middle-class is a naturally occurring phenomenon. In this line of thinking, at some magic number, the share of income earned by the top 1% will level off, reflecting some sort of "natural" balance, and the overall economy would grow at the same rate as the income growth of the top 1%. (Basically, any time the top 1% grows at a rate faster than the overall growth, no matter how small the difference, the result will be unsustainable over a long enough period of time.) There is no need for government to get involved, rational people making rational decisions about their money will lead to a perfectly efficient and stable economy. It sounds good in theory, but never in history has anything like this ever come close to happening. History does not reveal any examples of a society experiencing economic growth that is evenly distributed across the population without a government intervening to make it happen. And, historically speaking, there are only two ways to achieve evenly distributed income growth. The first is revolution. This method involves overthrowing the government, forcibly seizing assets of the wealthy, and effectively ending economic growth so that income inequality can not rise...because nobody's income is rising. I would call that a very bad method. The second way history shows that income growth can achieve even distribution is through incremental change--more evolution than revolution. This is what happened in the US in the '30's & '40's, and most of western Europe at about the same time, particularly at the end of WWII. The result was decades of growth shared across populations with incredible improvements in living standards for nearly all. The alternative method, revolution, was tried by Russia and the nations that came under its influence with considerably less positive results.

So there we have it: basic math demands that something must change in the way income is distributed in America. History indicates there are 3 options for how this change can happen. We can:
a) do nothing at a governmental level and hope for a miracle to occur--or simply ignore the problem presented by basic math.
b) start a revolution to overthrow the current government and economic order and try another Soviet-style experiment.
c) repeat the methods used successfully in the US (and most western European nations) in the '30's and '40's in which the government makes incremental changes through tax policy, social programs, and the like, to achieve a more sustainable distribution of incomes without destroying the entire economic system that has worked in the aggregate quite successfully for centuries.

I enthusiastically support c). Of course, once we all agree on c) there's still the question of what policies and programs need to change and how. But the conversation would sure be a lot easier to have if the room weren't full of people shouting for option a).

One last point: I mentioned earlier that I was ignoring the last 12-18 months. Some might pounce on the last 12-18 months as an example of how natural economic cycles will return income distributions to more sustainable levels. After all, this downturn has not been kind to the rich, with many losing vast amounts of wealth and seeing huge cuts in their income. But this ignores two things. First, all economic levels have taken huge hits in terms of wealth and income. Second, and far more important to my point, recessions have come and gone over the last 3 decades and not interrupted the long term trend of increasingly skewed wealth distribution. In fact, nearly every analysis I've seen about boom-bust cycles indicates that the net effect of boom-bust cycles is nearly always to increase the skewing of wealth toward the top 1%. The wealthy nearly always bounce back from recessions at a much faster rate than the general population (witness the fact stock market securities, held disproportionately by top income earners, rise quickly at the end of recessions while unemployment, far more important to low income earners, is widely considered a "lagging indicator" because of its generally slow rate of recovery). Assuming the US emerges from this recession, it seems safe to assume, barring government intervention, that the wealthy will more than make up for their losses and the long-term trend of increasingly skewed wealth distribution will continue to hold.

Is printing money really a bad thing?

2009-09-15T10:48:00.001-07:00

On a discussion board for an accounting class I'm taking, somebody made a comment to the effect of our government is currently printing money and so the economy is just a house of cards that will come collapsing down at any moment. Here's my response:

"Whether it's really bad for the government to just print money is an interesting topic. In effect, that's what the quantitative easing strategy deployed recently by the Fed amounts to. Instinctively, it would seem like a bad thing. The dollar's value will slide to nothing if the Fed just prints endless quantities of it. Countless examples of this exist around the world in the last few centuries. However, what if the government just prints a relatively small quantity of money relative to the overall supply? Obviously, the dollar still falls in value, but not to zero if done on a limited scale. And what are the consequences of the dollar falling in value? First, our buying power of foreign goods will drop. We won't be able to be quite such a nation of excess. We'll produce domestically more of the items we consume because it will become economically efficient to do so. This will create more jobs. We'll also produce more goods for export because other nations will have more buying power with respect to the goods we produce. Again, more jobs in the US. Certain aspects of our material standard of living might be reduced...primarily cheap electronics from Asia and the cheap plastic junk that you find at Walmart won't be as cheap. But the trade-off is there will be far more opportunities for America to actually produce goods and services again. Personally, I'm willing to accept a smaller TV and less plastic junk in this trade.

Of course, there's always the risk of devaluing the dollar to practically nothing. But there's actually very little risk of that for one simple reason. Numerous countries have devalued their currency to being worthless, but they virtually all share one crucial difference with the current situation in the US. In countries like post-WWI Germany & Hungary, or Argentina, or Zimbabwe, the people in control of monetary policy (i.e. printing money) were/are not the same people who actually held the bonds that underlie the value of the currency and they did/do not hold significant assets with values denominated in that currency. By contrast, in the US, the members of the Fed, as well as the political and economic leaders with the clout to influence the Fed, hold significant assets that are dollar-denominated, including large amounts of the bonds that underlie our currency. In Post-WWI Germany, the people who set monetary policy had little incentive to maintain a sound monetary policy because it was foreign investors who stood to lose the most while they themselves stood to lose little from a default on their currency. Our situation is very different. The people who set our monetary policy stand to lose tremendously if they allow the dollar to default.

And what's more, global investors seem to agree. Even with the announcement of quantitative easing (printing money), there has been no flight from dollar-denominated assets by foreign investors. Clearly, they also realize that the US does not have adequate incentive to destroy its currency. A moderate devaluing of the dollar will actually offer us a number of competitive advantages that will correct our trade imbalances and probably bring more jobs back to the US. People who understand these issues far better than myself are for the most part betting that a devaluation without default is by far the most probable outcome."

A lot of that information comes from Niall Ferguson's "The Ascent of Money".

The Origins of Anti-Immigration Sentiment

2009-09-13T08:39:00.000-07:00

I'm amazed at the amount of outrage being expressed at the notion that somebody, somewhere might be receiving medical care while illegally in the US. I wonder if these same people, if they were involved in a car accident while they were speeding, would say, "No, don't treat me. I was breaking the law and don't deserve medical care." Somehow I doubt it.

I'll preface this by saying I'm about as pro-immigrant as you can get. Maybe that's colored by the fact that the only person I know who is definitely an illegal immigrant is an entrepreneur employing several people in his successful software company (and paying taxes on it, too). Doesn't seem like we should be trying to kick this guy out of the country. But beyond personal experience, I also know history. I know that the US has always had a lot of immigration, and that's been a source of strength, not weakness. People have always worried about whether the new immigrants will assimilate, and point to the previous immigrants as "good" immigrants while the current immigrants are "bad" immigrants. Heck, near my hometown of Kansas City was an entire region around Hermann, MO, that was almost exclusively German for decades. Schools taught in German, public signs were largely in German, etc. And what did it hurt? Nothing. The second generation, born in the US, eventually integrated into US culture, influencing it but not overwhelming it, and our country did not turn into Germany. In fact, Hermann and the region are a popular tourism destination in Missouri because of all the authentic German character in the region.

To me, immigration is simply a natural expression of free markets at work. I like free markets. I've devoted a lot of space on this blog to pointing out cases where markets break down. But this is an area where I don't see the failures being more costly than the benefits of markets. Let workers go where the jobs are, and let things sort themselves out. Yes, this will mean people will enter our country who are willing to work harder for less money. But that's not necessarily a bad thing...after all, I thought we were a country that supported hard work. There will be challenges, but they will mainly be related to income distribution, which is something we're dealing with anyway. And I refuse to accept that the solution to maintaining a decent middle-class standard of living is to exclude certain groups of people and relegate them to poverty. Oddly, many people who claim to support free markets also want closed borders.

More tellingly, I know the legal history of anti-immigration laws. (Read a summary here) For nearly the first hundred years of our nation, there was no such thing as "illegal" immigration. Our nation was open to anybody, although ideally they would be white people, but that wasn't written into law, yet. I always find it ironic when anti-immigration folks invoke the Constitution or the founding fathers. Our country was founded on the notion that anybody who came to our country (as long as they were white) could become a citizen. As citizenship was expanded to more non-white people, people decided they'd better do something to keep more non-whites from moving here. The first law making any form of immigration illegal wasn't passed until 1875. While on the surface it was aimed at "prostitutes", the reality was it was simply a cover to exclude Chinese women from entering the country, and hopefully that would keep the men out as well (reference). Soon after, we would add more laws that were more explicit in who we wanted to keep out: Chinese Exclusion Act (1882), Alien Contract Labor laws (1885 & 1887) which singled out specific nationalities, Immigration Acts of 1903 & 1907 to clamp down on Mexicans entering the country, etc. Basically after 100 years of open immigration, our nation entered a hundred year period of race-based exclusion. It wasn't until 1976 that laws were changed to stop giving preference to Western European immigrants--officially anyway. You don't have to talk to many people to realize there's still racial under-tones that determine who the "good" immigrants are and who the "bad" ones are. The fact is banning immigration is not in the spirit of our nation. When we have banned immigration, it has overwhelmingly been for racist reasons.

Do we really want to maintain the legacy of race-based exclusion, or embrace the original ideal of a nation open to all?

Hey Missouri & Kansas! You're welcome.

2009-09-11T09:30:00.000-07:00

It's well known that California is having some serious budget problems right now. Many conservatives are almost gleeful about the situation and point to California as an example of how liberal policies inevitably lead to out of control government spending, poor economic growth, and practically the downfall of civilization as we know it. However, being the geek that I am, and wanting to apply some of what I'm learning in a governmental/non-profit accounting class I'm taking, I started digging into the California budget and looking at where our tax dollars are going. The truth is California's budget crisis is a result of California's robust economy and the massive extent to which our tax dollars go to subsidize other, poorer (mostly politically red) states.

I didn't strictly limit myself to looking at state revenues/spending. I also looked at taxes Californians pay at the federal level and where that money goes. There's a helpful data sheet published by the Tax Foundation at this link (http://taxfoundation.org/files/ftsbs-timeseries-20071016-.pdf) that breaks down by state how much each state pays in federal taxes and how much of that money each state gets back. Turns out, in 2005, the latest year for which data was available, California contributed ~$50 billion more in federal taxes than it received in federal spending. This number fluctuated considerably in the time period covered, but for the last two decades California has paid considerably more than it has received almost every year. In the last decade in particular, $50 billion is a pretty good estimate for the annual average that California contributes in excess of what it receives.

Now some people might think that most states are like that. After all, DC is a money pit, right? Well, DC may waste a lot of money. But the fact is DC wastes money primarily by spending it somewhere, and usually that somewhere is in one of the states. Turns out a lot of states receive substantially more in government spending than they contribute. And as can plainly be seen here, the majority of the states being subsidized by California and other net contributors are demographically conservative, Republican-leaning states--including my native state of Missouri and its neighbor containing much of the Kansas City metro area, Kansas. In 2005, Missouri was a net drain on the system to the tune of ~$13 billion and Kansas to the tune of ~$3 billion. And yet, even with billions of dollars in federal welfare, these conservative states still can't match the per capita economic productivity of states like NY, Massachusetts, California, etc.

If California didn't have to support the welfare states, and instead had that $50 billion to spend on our own state government, we would actually have a state surplus of over $30 billion. We could eliminate the sales tax altogether, or almost do away with the income tax. Or we could do what has made us so rich to begin with, continue to invest in better schools and infrastructure.

However, I'm not advocating California stop supporting the welfare states. The fact is, thanks to massive public investment in education and infrastructure, Californians are far more economically productive (i.e. rich) than citizens of more conservative states. And the culture that keeps states like Louisiana and Mississippi so poor is unlikely to change anytime soon. So, like it or not, we probably need to keep supporting the poorer state, or else their situation will get unimaginably worse.

What should be more widely publicized, however, is the fact that conservatives states are overwhelmingly welfare states. Their economic policies are not working. They depend on more liberal states like California to maintain their standard of living. And it is the states with more liberal policies that are far more economically productive.

Department of Defense & Health Care?

2009-09-08T09:54:00.001-07:00

I've made several posts listing examples of ways the government has made enormous contributions to the well-being of our society. Just since WWII, the federal government has provided an interstate highway system, satellite technology, and laid the foundation for the Internet. One can only imagine what our lives (not to mention our economy) would be like without these interventions. And I've also made the case that renewable energy spending & health care would also benefit from government intervention (and in fact already have to a large degree). But it occurred to me recently the connection between most of the interventions that are widely recognized as successful by most of society--they were nearly all connected to national defense.

The interstate highway system was justified in the name of national defense because it would allow us to quickly move weapons around in time of war. Perhaps if the case had been made that the increased mobility and ease of moving goods would provide economic growth that would far exceed the costs, free-markets fundamentalists could have shot it down by arguing if the highway system could really be so valuable, private investors would fund it. Satellite technology was developed as part of the space race to militarily control outer space. The Internet was developed on the rationale of having a robust communications network that would be nearly impossible to wipe out. In all cases the economic benefits proved to be far more valuable than the military benefits, but the programs could not be sold on economic grounds.

While talking with a right-wing ideologue, I mentioned the Internet as an example of wise government investment. She thought that was nonsense and I must believe that Al Gore invented the Internet. When I explained the actual history of the Internet (DARPAnet, etc.) and how it grew out of a military project, suddenly she said that OF COURSE military projects were good government spending. In her mind the military is the only branch of government that deserves funding and can be trusted to spend our tax dollars wisely.

After being shocked at the notion that the only branch of government some people trust is the branch with all the weapons, it occurred to me the way we really need to sell universal health coverage in America. We have to make it a national defense priority!! Put a national health system under the defense department nominally. Sell the benefits of universal health coverage in terms of maintaining a healthy population in case of a draft. Sell it in terms of being more capable of detecting a biological threat early if terrorists use bio-weapons. I don't care what lies are used (since the lies used to justify wars never seem to really matter either), the way to win massive support for universal health care from right-wing ideologues is sell it in the name of national defense. As we have seen over and over in the national health care dialog, fear trumps reason over and over again. And fear for our "national security" seems to be the most easily exploited fear in America. Let's exploit it for something positive for a change.

A NATO for health care

2009-09-04T09:02:00.000-07:00

One of the few valid criticisms I've heard for health care reform and trying to control the costs of health care delivery goes something like this: Medical companies spend billions creating new medical innovations--drugs, machines, devices, etc. The only reason they invest these billions is they know, when successful, the US market will pay just about any price for these innovations, allowing them to earn their money back. They can also sell to other nations, but because of the cost controls in those nations, they won't be able to make nearly as much money. So, the argument goes, if the US implemented cost containments practices similar to other nations, medical companies would lose a powerful incentive to innovate and the US and the whole world would see a dramatic decrease in new medical innovations.

I don't entirely buy the argument. Plenty of medical innovations come from countries with strict cost controls, and some of these innovations have not (yet, anyway) made it to the US market. I've read about very wealthy Americans travelling to certain European nations for the superior treatment for certain types of cancer, for example. Even with cost controls, there is still plenty of money to be made in the health care field. Plus, there are doctors and researchers who actually care about helping people, and would do so even without the carrot of billions of dollars being dangled before them.

But I agree there is a grain of truth to that argument. I think the massive pool of money available in America, particularly Medicare, the largest buyer of health services in the world, is a powerful incentive for medical innovation. And I think the US does tend to bear a disproportionate share of the costs of medical innovation, giving the rest of the world...well, not quite a "free ride", but certainly a cheaper ride, in enjoying the benefits of these innovations without bearing nearly as much of the cost.

So suppose the rich nations of the world created a sort of medical NATO. In NATO, all the members have to spend a minimum amount on defense (I believe it's 2% of GDP), and they are sworn to defend each other if attacked. With the medical NATO (MNATO), all rich nations that agree to it would put up a given amount of money, say 1% of GDP. This money would go to reward medical companies that come up with new treatments that are proven effective. The remaining budgets for health care in these countries could focus on delivering proven, established services and treatments at costs that are tightly-controlled. It seems like this would allow the US to achieve some level of control over our health-care costs, while still providing tremendous incentive for medical innovation. And in this solution, the cost of that innovation would be shared equally among many nations, rather than shouldered disproportionately by the US.

Obviously, not all rich nations would be interested in joining, but that could easily be addressed by requiring all medical companies who want access to the money for their new products to then offer those products to member-nations at a specified discount to member-nations below what they offer the products to non-member-nations. Sure, the details could get ugly at times, but the same is true of NATO, and that seems to have worked out pretty well for many decades now.

Infrastructure follow-up

2009-09-04T08:51:00.001-07:00

As I write this, the famous Bay Bridge connecting Oakland to San Francisco is closed for four days of construction. This vital link between two major cities normally carries tens of thousands of cars (hundreds of thousands, maybe?) every single day between the two sides of the San Francisco Bay. So did the closing lead to massive grid-lock? Are people unable to get around without this major highway--without being able to use their cars to get where they need to go?

No.

On the traffic report today, the worst traffic snarls were in San Jose, nearly an hour south of the bridge in an area absolutely unaffected by the closing. People were told about the closing ahead of time and made other plans. Some went the long way around, adding 10-20 miles to their trips by using other bridges. But most, apparently, resorted to public transit, since the other bridges didn't have much higher volume than usual. And word is public transit is handling the extra capacity just fine. I'm sure there will be some minor snags here and there...hard to reroute 100,000 people without some unexpected incidents arising. But all in all public transit has demonstrated just how flexible and accommodating it can be.

The point is that we don't need to stay on the treadmill of endless road expansion. Building new roads just encourages more driving, and more congestion. Narrowing roads, closing roads, these activities encourage people to find other options. And people are usually smart; they'll find another way. Shifting our nation to a cleaner, more efficient form of transportation isn't nearly as hard as critics make it out to be. Stop spending on roads, build better public transit. People will adapt just fine. The proof is on the (empty) Bay Bridge right now.

Rethinking America's Infrastructure

2009-08-31T20:54:00.000-07:00

On NPR today, several commentators discussed the impact of ~$8 billion in stimulus funds that is targeted for high-speed rail. Being NPR, they had to include at least one critic, who in this case questioned whether we could afford such a high cost, and that even this huge amount was only a small fraction of what it would take to build a national high-speed rail network.

While I don't doubt a national high-speed rail network would cost hundreds of billions of dollars, I do wonder how we can think of this as expensive. Aside from the obvious comparison to the $700 Billion we just spent to bail out the financial system, I think a more significant comparison is to the hundreds of billions currently spent by federal and state governments annually just to maintain the existing road network. And we must consider that the existing road network is soon going to require a tremendous overhaul to stay viable. Just tonight the History Channel showed "The Crumbling of America" which examined the poor state of America's infrastructure, including our highway system. Many of our major highways were built to last 50 years, and are now well into their 40's and being used more heavily than designers 50 years ago probably would have anticipated.

One way or another, America will have to spend trillions of dollars over the next decade or so if we want our nation to continue to have a viable transportation system in the 21st century. We need to be seriously consider whether we want to pour this kind of money into just maintaining the status quo, or do we want to have the kind of vision our predecessors did 50-100 years ago when building the transportation network we have enjoyed for so long.

The sad part is I hear nothing being seriously discussed that is at all bold or ambitious. High-speed rail would be nice, but the projects currently being looked at are often no more technically advanced than what was being used nearly 100 years ago in this country. Even the "ambitious" proposals do not represent any sort of advance over the technologies currently in use in Europe, Japan, and elsewhere. Several years ago I ran across a plan for something called a dual-mode system. While I disagree with many aspects of the proposal, it is certainly interesting and has many great ideas. Why aren't revolutionary, forward-thinking proposals being considered as we face the end of an era in American transportation infrastructure? Why does it seem the only two choices we have are to maintain an oil-dependent status quo (cars & planes) that is bad for the environment, accident-prone, reliant on hostile regimes and anti-democracy powers, and offers little chance for efficiency and safety improvements; or to turn to rail at a technological state that we should have moved beyond decades ago?

When did America become a land of such small thinkers?

America's socialist roots

2009-08-20T21:29:00.001-07:00

Just started reading Alan Beattie's "False Economy" and I'm not even 20 pages in before learning a very interesting piece of information. I wasn't aware of this, but 100 years ago, apparently Argentina and the US were pretty much in the same boat economically and socially. Both were emerging economic powers, ranked in the top 10 of world economies, with abundant resources, excellent access to global markets, stable democratic governments, etc. Obviously, the situation is dramatically different now...Argentina is close to third world nation status while the US has the most powerful economy in the world. The book starts off the explanation for the divergence with this:

Argentina settled its inland territories by auctioning off large tracts of land to the highest bidder. Yep, capitalism at its finest. So Argentina became a land of extremely wealthy aristocrats with huge tracts of land...and lots of minimally skilled, poorly paid workers to tend the land. Because the aristocrats were already loaded, they had little incentive to invest in the land or do much to make the economy more productive. Grazing large animals that made for good eating was a perfectly good way to use the land. Argentina came to be a land settled by a small portion of very privileged people, and huge portion of unskilled laborers who tended the land but had little attachment to it. Many were actually seasonal migrants. Few immigrants (~5%) became citizens. Few really committed to seeing the nation prosper because all the benefits were going to be reaped by the tiny minority anyway, so what was the point?

America, on the other hand, gave away many smaller tracts of land to lots and lots of people. Sounds pretty damn socialist if you ask me. America attracted many people with skills and initiative who simply didn't have the opportunity to benefit from their skills in the old world because it was too difficult to break out of the lower rungs of society. In America, on the other hand, they were given, for free, a piece of land, where they could live, and build on whatever talents they had. They could share in the wealth that was being created in America. Because so many people were given relatively small pieces of land, all of these people had an incentive to make the best of it, unlike the affluent in Argentina who already had plenty of money and had no incentive to wring all they could out of their vast landholdings.

Two obvious lessons:
-America has always had "socialist" leanings, and these "redistributive" policies have given us an incredible competitive advantage over nations where the rich continue to be rich and get richer.
-The idea that the rich will make the wisest investment decisions, since they obviously had to be wise to earn all that money in the first place, is bunk. That argument *might* have some merit for first-generation wealth, but the majority of the very wealthy got their wealth the old-fashioned way, they inherited it. Generally speaking, the wealthy aren't going put a lot of effort into finding the most productive use for every asset they control. People with lots of assets simply don't have time to find productive uses for all their assets. Without a healthy amount of redistribution, a society can wind up like early 20th century Argentina, where the people who would make productive use of assets have too few assets to matter, and the people who control most of the assets have too much to care about making productive use of them. Shit may roll down hill, but history does not support the notion that wealth trickles down.

A 50% increase in American health care professionals--overnight

2009-08-20T08:52:00.000-07:00

In an article ostensibly on rationing, blogger and economist Mark Thoma provides a rudimentary set of equations to summarize where health care costs come from. The gist of his opinion is that critics of health care reform claim the only way we achieve universal coverage and/or cost savings is by reducing quality. He's of the belief that the experiences of other nations suggest there's enough waste in our system that we can cut costs and expand coverage without sacrificing quality of care. I would have to agree with him.

A couple months back the Economist did a number of articles on health care in America. Of particular interest to me was a graph comparing costs among different developed nations (see full article). Obviously the US was way out in front, but what I found interesting was Switzerland came in second, spending roughly 30% more per person than the average of other developed nations--spending over $4k per person while the OECD average is about $3k. Switzerland is one of the only countries besides the US that uses private insurers to pay for health care. Seems like remarkable confirmation of the oft-cited statistic that private insurers add about 30% to the cost of health care through their overhead. If we just eliminate this 30% of health care spending that gets wasted, we'd have plenty of money to cover everybody.

Furthermore, I've worked with lots of doctors in my line of work, and the general consensus is they spend anywhere from a quarter to half their time dealing with insurer billing issues. Again, eliminating private insurers would immediately solve the problem of shortage of health care workers as we would see an effective 50% increase in health care workers overnight.

I've mentioned it in a previous post (here), but it's worth repeating. The legal duty of corporations is to make money for shareholders. A corporation can not carry out its legal duties if it pays for treatment that costs more than the customer is statistically expected to provide in future revenue. We already have a system where a corporate accountant is doing a cost/benefit analysis on every significant procedure you need and determining whether to pay for it based on profitability. That's how we're rationing health care now. I have yet to see any proposal mentioned in the health care debate that's any scarier than that.

A History of Markets (& the Boston Tea Party)

2009-08-17T09:22:00.000-07:00

I'm currently reading Niall Ferguson's Empire: The Rise and Demise of the British World Order. While reading the "Rise" part of the history, it's fascinating to be reminded of just how much capitalism has always been an ideal more than a practice. In a previous post I addressed the issue of some of the many things government provides for us that the free market has been unable to provide on its own. I only discussed America, but actually I could have broadened the discussion to Great Britain, the nation that gave the world the very ideals of capitalism. It is important to realize that even in Great Britain, capitalism was only a rough guiding principle but in practice there was never any such thing as "pure capitalism" or "unfettered free markets". The British conquered the world through a public/private hybrid system. Companies like the British East India company were granted monopolies by the government to control specific areas of the world market. These companies were given naval protection on the seas by the most powerful navy in the world. They enjoyed numerous favors from the government at home, and abroad they were free to dismiss the ideals of free exchange between consenting parties by forcible seizure of assets controlled by any native people they encountered.

For centuries, "capitalism" has operated with extensive government protection (i.e. "interference") and a healthy dose of coercion when "free markets" weren't producing desirable results. The British government had a long history of using protectionism and militarism to invade and conquer nations and territories, then demand that the colonized territories respect market principles and play by the rules of free exchange without protectionism. Obviously, such demands only came after Britain had firmly established its power by flouting market principles and free exchange.

I'm not picking on Britain here. The history of America has also been a mix of protectionism, government involvement and subsidy in industry, and of course exploitation of resources forcibly taken from native people.

And we need look no further than the largest developing economy, China, to see that the pattern continues today. China practices a highly regulated, authoritarian, state-run model of capitalism. Numerous enterprises compete for private gain, but the government is actively involved in the market place to insure the success of various industries.

The lessons are there all through-out history. The most successful markets have always had a strong dose of government "interference" to insure their success.

And one more note from the book...Ferguson provides the most scholarly affirmation of something I've recently read in a number of locations regarding the famous Boston Tea Party. American mythology attributes the Tea Party to a rise in taxes. In reality, the Tea Party was in response to a LOWERING of taxes. Here's a quick synopsis of the events leading to the Boston Tea Party:

America actually had it pretty good as a colony of England. We enjoyed the protection of the British navy, as well as privileged access to the British market and all that it controlled. In fact, America probably enjoyed a higher per capita income than England, thanks to the fact that they enjoyed the benefits of British government and protection, but paid no taxes for these services. Britain was able to extract some tax revenue through things such as the Stamp Act (effectively a tax on all paper) and by adding a tax to products that passed through British ports on their way to America, e.g. tea. However, the Americans did not like paying any tax at all (sound familiar?) and Britain relented to most American demands and removed most taxes. In particular, they removed a 25% tax on tea that passed through British ports and replaced it with a 3% tax on tea when it arrived on American shores. The lowering of the tax on tea proved very harmful to powerful bootleggers who had built large enterprises by smuggling tea into America without passing it through British ports and paying the 25% tax as required. These powerful bootleggers (I can't help but see them as the equivalent of modern day corporate interests) rallied the masses to protest this egregious offence of a 3% tax on tea because most people were ignorant of the fact this represented a reduction from the previous 25% rate paid in British ports. So when early Americans bravely protested at the Boston Tea Party, they were actually protesting a REDUCTION in taxes in order to allow businesses to charge higher prices.

Apparently some things never really change.

The US is NOT friendly to small businesses

2009-08-11T21:32:00.001-07:00

As a small business owner, THIS is exactly what I'd like to see more of. It's an article on the portion of the US economy composed of small businesses and their employees. The graphic says it all. Not surprisingly, to me at least, the US ranks almost dead last among industrialized nations in employment by small businesses. Turns out we're not so friendly to small businesses after all.

Obviously, inaccessibility of health care is a huge obstacle. But more than that is the lack of social safety net in general that makes the consequences of failure so enormous. Critics of taxes and social programs like to point out that people won't take risks if they fear too much of the reward will be taxed away. They completely ignore the other side of the equation--that people won't take risks if they fear the consequences of failure are too great. And considering the oft-cited statistic that 90% of new businesses fail in the first year of operation, maybe our society needs to think more about minimizing the consequences of failure for budding entrepreneurs than maximizing the reward for the very few that have the talent, persistence, and luck to succeed wildly.

In the debates over health care reform, taxation, and social issues, progressives need to make the argument that providing a safety nets ENCOURAGES entrepreneurship and innovation...not stifles it.

Economic Incentives & the Olympics

2009-08-03T10:57:00.001-07:00

In all the current talk about possible higher tax rates on the rich, much is made in some circles about how this "penalizes" the rich. On the face of it, the notion that a person who only makes $5 million in take home pay instead of $6 million is somehow a victim is absurd, but let's consider the argument for a moment.

Those concerned about taxation rates being too high on the rich do have one valid point that if tax rates go too high, people who might otherwise have done something economically productive might choose not to take the risk of losing money since the reward will be too low after taxes are taken into consideration. This is certainly a legitimate perspective when the top marginal tax rate is 94%, as it was in the 1940's. However, when the top marginal tax rate is in the 30s as it is now (actually much lower when AMT considerations and lower capital gains rates are considered), this argument is not nearly so powerful...especially considering virtually every other developed nation has higher tax rates than the US and still manages to turn out plenty of highly successful businesses that compete just fine with American ones on the global stage.

But there are some who seem to feel that ANY progressively increasing tax (or at least any tax increase on high earners) amounts to penalizing the rich and perhaps outright socialism. One interesting analogy I've heard is that a progressive income tax is like asking Michael Phelps to share his gold medals with all the other swimmers in the Olympics because it's "unfair" that one person should have so much more than others. This argument is often portrayed as a clear example of why capitalism is vastly superior to socialism, because only the possibility of receiving the one gold medal will bring out people's best performance.

However, on closer inspection, the Olympics actually serves as a very useful model for how a society might build an effective socialist society. The reason is this: every athlete at the Olympics receives excellent food and accomodations, among other things. Of course, the Olympics committee could choose to provide nothing for any athlete except the medalists. This, actually, would be a far better model for unfettered capitalism. In this warped Olympics, the medals would be much larger (hence, more valuable) and perhaps a larger proportion of athletes might receive them since, after all, the Olympic committee wouldn't have to worry about wasting money on things like food & lodging. However, the athletes would then have to barter their medals in exchange for food & lodging and any other needs and wants they have while at the Olympics ("Oh, you want to make an international call home to your family? Well that's gonna cost you half of that bronze medal.") Yes, some athletes would be better of in this Olympics--Michael Phelps would probably own most of China by now--but the vast majority would be far worse off.

A fundamental problem in capitalism is that people are incentivized out of the same "budget" as people are fed and provided with basic needs. It's all done with dollars and there are a finite (though generally growing) number of dollars in circulation at any time. This isn't necessarily a problem if the number of dollars is growing faster than the rewards for those at the top, and this is generally the case for a nation that is still developing its economy with reasonably sound policies. But when the rewards for those at the top are growing faster than the number of dollars in circulation (which can be roughly thought of as the overall size of the economy), then we do have a case where the rich are growing richer at the expense of the poor. And once an economy reaches a certain point of development, it becomes difficult to find to find ways to continue to grow the economy at a fast enough pace to keep up with those at the top.

It seems to me that the US has been struggling with this fundamental problem since the 1970s. Numerous studies have pointed to wage stagnation for most workers since that time. And while we've come up with numerous tricks to increase overall wealth (immensely) for those at the top of the economic heap, the rest of the population has been forced to try and keep up through longer working hours, increased leveraging, and asset bubble after asset bubble. As these bubbles pop and the country deleverages, however, it's becoming increasingly clear that the net economic effect of the last 3-4 decades has been a massive increase wealth at the top and little gain, at best, to possibly a sizable loss in wealth at the bottom.

The Olympics does not have to worry about athletes going hungry or homeless because of the increasing size of medals for the winners. That's because the Olympics creates separate budgets to deal with each of these needs, and clearly making sure all athletes are fed and sheltered is a paramount need, taking precedence over the size of medals. Yet, even though the medals aren't nearly as large as they could be if the Olympic cut back on the budget for taking care of all athletes, Olympic athletes still put enormous amounts of dedication into delivering the maximum possible performance they can deliver. The actual market value of the medals that athletes receive generally is quite small relative to the amount of time and work that goes in to earning one (and for those who argue that medalists often receive very rich endorsement deals, consider that many Olympic medalists come from countries where this is not possible and the only tangible reward will probably be the medal).

As a believer in a hybrid economy--one in which everybody's basic needs are met, but market forces and incentives still play a significant role in the overall economy--I think there's a valuable lesson in the Olympics. It is absolutely possible to meet everybody's needs in a community while still providing adequate incentive to spur significant achievement.

I.O.U.S.A.

2009-07-29T11:34:00.000-07:00

Just saw the documentary IOUSA on Netflix today. Nothing new to me, but the film definitely does a great job of explaining in relatively short, simple pieces the enormous economic hole our nation has dug for itself and what it may mean if we don't address the problem soon.

It's hard to be optimistic after viewing a film like that because when you analyze where the money's going, it becomes obvious that America almost certainly doesn't have the political will to address it. Just google "federal budget" and look at any of the graphs of where the money is going and you'll see why.

The problem is there are only four areas that matter: defense spending, social security, medicare/medicaid, and debt interest. Add everything else and you get less than what is spent on any one of these areas. Put homeland security and veterans affairs under defense spending where they belong and "everything else" becomes even less relevant. So to balance the budget involves:

a) cutting defense spending. Will probably never happen because we are simply too cowardly as a nation. We spend more than every other nation combined and any mention of reducing defense spending is met with outcries about how unsafe we'll become. Unsafe? The US has never, in its entire history, suffered an attack from foreign powers that killed more people than are killed in a typical month in car accidents. 9/11 was terrible, but put in perspective it was no worse than a bad disease outbreak. Nobody in their right mind would suggest spending $750 billion annually on the CDC. Yet we spend it on the military because we're a bunch of cowards afraid to fall asleep without a night-light because the boogeyman might get us.

b) cutting Social Security. Not going to happen. Seniors are the most reliable voting bloc. Besides, the system collects pretty much what it spends. This will change as the Boomers retire, but increasing retirement age by a few years could easily fix it. Regardless, ending SS will do nothing to balance the budget because the reductions in spending would be directly offset by reductions in collections.

c) cutting Medicare/Medicaid. Again, seniors are the most reliable voting bloc. Seniors will march in the streets against taxes and even, amazingly, against universal health care, but they sure as hell aren't going to give up their own access to universal health care. What politician is going to stand up to grandma and tell her she needs to drop dead because we can't afford to keep her living? Never gonna happen. Besides, as with SS, if we end the program we also end collections. In this case, the spending exceeds collections, but still if we end the program the deficit doesn't go down by the amount we've cut, only by the much smaller gap by which spending exceeds collections.

OR

d) cutting interest on the national debt. If we can't cut the major sources of spending, the only way to reduce interest is by raising taxes.

Democracy was long opposed because if people had a voice they would simply vote themselves money out of the treasury until the nation was insolvent. Turns out, the gentry may have been right and we the people don't deserve the power we fought for. Let's hope I'm wrong about that.

...OK...I was going to end the post right there, but I've decided to think positively and consider why these things could possibly have a tiny chance of happening, and the rational defenses that may win over enough reasonable people to make them reality. So here's how an heroically brave politician might try to sell these necessary actions to the American public.

a) We could cut defense spending in half, which would put us right in-line with other developed nations as a percent of GDP, and we would still be spending far more than any other nation by a huge margin. And our NATO allies (bound by treaty to defend us) comprise 2 of the next 3 top spots on the list. Further, any non-Allies with significant spending (i.e. China & Russia, really the only two nations that can reasonably be described in those terms) are generally speaking hugely economically dependent on us (they hold vast amounts of our currency, rely heavily on exports to us, etc.). For these nations to attack us would mean tanking their own economy to attack a far more powerful nation with far more powerful friends. Hard to imagine anybody being crazy enough to try that...and if somebody is crazy enough to try that, then spending an extra few hundred billion dollars on defense isn't going to stop them anyway.

b) SS, as I already discussed, really won't matter since at this point receipts are roughly equivalent to outlays. Of course, it's a demographic necessity that we must gradually increase the retirement age to make up for a pending gap, but I've previously addressed that in other posts.

c) Our country does seem to be finally having a serious discussion about health care reform. I'm disappointed that President Obama is still not being completely straight about the sacrifices that may be involved. Yes, a lot of money can be saved by simply replacing ineffective treatments with more cost-effective options. But the reality is we can not contain costs until we actually have a plan for containing costs. Seems obvious, but unfortunately that idea can also be referred to as "rationing" and that's pretty much an untouchable idea in American politics. At some point Americans have to wake up to the reality that we can not spend an unlimited amount of money for every possible improvement to health no matter how minor. We have to make a policy that says we will not spend half a million dollars on procedures that only extend life by a few weeks. That means at some point the Medicare/Medicaid system and all other public systems will have to implement something along the lines of Britain's unpopular NHS that catalogs the likely effectiveness of all treatments and sets a maximum amount the state will pay for these treatments. It sounds harsh, but that's reality. When I had a tooth-ache awhile back, I could have gone to a dentist for total relief, but I popped Ibuprofen and dealt with it for a week and it went away (of course, if it had persisted longer or gotten worse, I would have eventually paid up to see a dentist). I can't afford to see a doctor and have a procedure over every little ache or pain. The government can't afford to pay for that either. I would hope my parents wouldn't want to see their life extended by a week if it meant there kids would be paying it off the rest of our lives and their grandkids wouldn't be able to go to college. The reality is if we don't implement cost containment, then that's ultimately the burden being passed to future generations.

AND

d) Ignoring the temporary effects of the stimulus package, it's possible that cutting defense spending and reigning in health care costs could balance the federal budget and possibly create a surplus. But if we really want to restore the fiscal health of our country, we have to raise taxes to start paying down the national debt. The only other time since the creation of the income tax system that we've had taxes as low as they are now was in the years preceding the Great Depression. That alone should demonstrate the fallacy of the lower-taxes-alway-lead-to-economic-growth argument. The period of highest taxes in our nation was during the 1940's, when we were simultaneously combating the Great Depression and the Nazi threat of world domination. Hmmm...terrible economic conditions and a global military threat from proponents of a horrifying ideology. Sound familiar? We've been waging war for almost eight years now (arguably against a threat to our very way of life, but that's another discussion), and we're mired in an economic slump unparalleled since the Great Depression. The American public needs to be made aware that wars aren't free, and we now have to start paying for the wars we fought in recent years. Tax hikes are never popular, and they're not always effective, but the only tax increase in a generation (Clinton's tax hike in 1993) was followed by the most prosperous period in a generation and the only balanced budget in a generation. In our nation's history, the largest tax increase ever allowed us to emerge from the Great Depression while fighting a World War.

I'm still reserving judgment on Obama's performance as president until the next election nears, but I'm beginning to think that in my future voting I'll be looking for three promises from every politician I vote for: reduced defense spending, health care rationing, and higher taxes. Yeah, I probably won't be voting for many winners (in fact I'll probably be doing a lot of write-ins), but it seems like it's the only responsible thing to do at this point.

Health care again

2009-07-21T17:09:00.000-07:00

So this article in The Economist got me thinking about health care once again. According to the first chart in the article (and there's a better one in the print version that puts government health care spending as a percentage of GDP), the US and Canadian governments spend a roughly equal amount per person on health care. But in the US, that coverage only covers those over 65, very poor, or disabled. In Canada, it covers EVERYBODY.

So here's the plan: copy the Canadian system--with one exception. Let the private health care market continue to function. For the same amount of tax dollars, we can cover everybody. So let's start by doing that, since it won't cost anybody any more, and will allow millions of uninsured people to get coverage. For people who don't like the Canadian system, fine. They won't be paying any more than they are now, and they'll be free to continue receiving their coverage through the private market.

I don't like this solution. Nonetheless, it's incredibly simple to implement as it requires zero original thinking or innovation. (Here I naively thought America was a place that encouraged innovation but it's clear in the current health care debate that is not the case.) It costs no more than what we're already spending and requires no additional contributions from anybody. Everybody is free to remain with their private market solution if they choose. And people who are unable to get coverage under the current US system now have coverage. Voila, we've just improved the US health care system. Now was that really so hard?

Tournaments and psychopathic chickens

2009-04-28T10:22:00.000-07:00

I recently ran across an article about a fascinating biology experiment. In the experiment, biologist William Muir bred two groups of chickens with similar techniques but one slight difference. In one group, only eggs from the single most productive hen were used to produce the next generation. In the other group, only eggs from the single most productive cage (a group of hens) out of numerous cages were used to produce the next generation. After six generations, the second approach had produced a group of very healthy, productive hens. On the other hand, the first approach, selecting the single most productive hen, had produced only three surviving hens, all in poor health. These were the survivors of on-going violence that had killed off most of that generation. Essentially, selecting the single most productive animal had produced a bunch of psychopaths. It turns out the optimal survival strategy when only one "winner" is allowed is to suppress the competition...attack the other hens, eat their eggs, etc. When a whole group is allowed to win, the optimal survival strategy is one of altruism. Every member of the group must be as productive as possible.

This brings to mind something I read in the book Freakonomics. In one chapter, the "corporate structure" of a crack distribution network is compared to the structure of a typical Fortune 500 company. It turns out, the two are quite similar. Crack distribution networks, and many Fortune 500 companies follow closely a "tournament" model of success.

In a single-elimination tournament, most contestants don't advance very far at all. Half of the participants are eliminated in a single contest, another 25% in the second round, and so on. In a large tournament, only a tiny percentage of entrants will advance to the final round or two where prizes might be up for grabs.

Crack distribution networks, as well as large companies like Wal-Mart and McDonald's, approximate this model very closely. The largest group of workers are at the very bottom, making little more than minimum wage, frequently dependent on public assistance just to get by. As you move up the org chart, smaller groups might make modest salaries that allow them to get by and enjoy a modest middle-class lifestyle without the need for public assistance. And finally, at the very top, there is a very small group of people who enjoys spectacular wealth.

It turns out from the perspective of human behavior and economics, a tournament model is frequently the most effective model for motivating the maximum productivity for the lowest total compensation. The masses of employees working for salaries that don't allow them to escape the welfare system largely do so because they believe they will reach a "later round in the tournament" and compensation will improve dramatically and justify the earlier effort. Because most employees will fail to get this far, the company is able to offer far less than what an employee would normally agree to work for simply by holding out the possibility of excellent compensation at a later date.

The thing that concerns me is how much the tournament model resembles the chicken experiment in which only one chicken is chosen to produce the next generation. If the entire economy was structured on a Wal-Mart model--that only a small number succeed, and they do so individually, not as a group--then aren't we in essence breeding for psychopaths?

Historically, this seems to be the case. Throughout most of human history, societies have tended to follow the tournament model. Wealth distribution has generally looked like a pyramid, where only a few are "winners" at the top. Anybody who has read much history has probably also noticed that societies used to be far, far more violent than today. The US has one of the highest crime rates among developed nations, and even our worst crime rates since records have been kept would pale in comparison to murder rates through-out most of history. Stories of monarchs throughout history are full of tales of murder and genocide, often performed on members of one's own family for purposes of eliminating competition for the throne. Kinda sounds like the psychopathic chicken, doesn't it?

Yet beginning with the advent of modern democracies 200+ years ago, and particularly since WWII, the world has seen a radical re-structuring of wealth distribution in the developed world. In the developed world, wealth distribution looks far more like a diamond than a pyramid, with the vast majority of populations living comfortably, if not extravagantly. And, not surprisingly, as the economic model changed, crime rates plummeted. What has changed is that economic success is less dependent on a winner-take-all model, but on a group-success model. The success of America post-WWII was shared by nearly all of society. Nations with a strong middle-class tend to succeed or fail together, so there is motivation to work together to succeed. Undercutting a member of your own group poses no advantage if success depends on how the group as a whole does. In other words, democracy and a strong middle-class enabled society to stop breeding psychopathic chickens.

This is why wealth distribution is absolutely essential to a strong nation. This is why it's concerning to see the super-wealthy thriving while middle- and low-income people overall are making no progress or even losing ground. Companies like McDonald's and Wal-Mart have demonstrated the (short-term) success of the tournament model of compensation, and unfortunately this model is becoming more and more widely adopted within business. In fact, since government employs roughly a quarter of all workers, a thorough analysis might conclude that government employment is the only thing maintaining a middle-class in our nation right now. Government pay scales are generally far more tightly concentrated around the middle than private-sector pay scales. As a result, it's probably fair to conclude that government workers may well make up nearly half of the workers in the 25th-75th percentiles.

Without the stabilizing effect of government employment, our nation might already be closer to a pyramid economic model than one based on a robust middle-class. If history is any guide, and it usually is, such a change would inevitably lead to tremendous spikes in crime, massive drops in economic productivity (because, of course, far fewer people would be able to afford goods), and a general destabilization of the entire nation. Ultimately, the psychopathic chickens would once again rule the roost.

Explain this capitalism thing to me again...

2009-04-20T16:36:00.001-07:00

Recently I've run across a lot of articles like this one explaining that people making $250,000 annually or a little more really aren't that well off. Of course this is in the context of potential tax hikes for incomes exceeding $250,000/yr. The article quotes one person in particular who claims to be "barely getting by" on an income of $400,000 per year.

Maybe I misunderstood this one in my Economics courses, but I thought the idea behind capitalism was that people are financially rewarded for being smart and resourceful and productive. Ideally, somebody making $400k annually--or more than 99% of the population--should be smarter and more resourceful and productive than 99% of the population. Maybe the ideal scenario doesn't always work out, but still, I would expect people with incomes in the top 1-2% would at least be pretty damn smart and productive and resourceful the overwhelming majority of the time. But apparently people who make this much money are struggling, not sure how to make ends meet on a paltry $250,000 income.

Yet, oddly enough, there are plenty of people in this country (half of them in fact), who manage to make ends meet on about 1/5 or less of what these top earners make. Look, if I've got a choice between two engineers for a project, and one of them can meet the project specifications with 1/5 of the resources required by the other one, I know who I believe is the smarter engineer. Yet in whatever bizarre form of capitalism we're practicing in this country, we seem to have rewarded the people who are less intelligent and resourceful.

As somebody working on building my own business, I want to believe that success comes through intelligence and resourcefulness and creativity and hard work. But it appears people at the high end of the income scale are seriously lacking in most of those qualities. If this is how capitalism works in America, maybe socialism is worth a try after all...

A simple health care proposal

2009-04-16T13:59:00.000-07:00

One of the strengths of the US is the fact we have 50 different states that can function as 50 different "laboratories" for trying different approaches to tackling society's problems. Since many states are very different politically, and have very different ideas of the best way to do things, it's often best to let states choose how they want to address a problem within certain parameters.

Here's a simple proposal for taking advantage of this to tackle our health care problem in this country.

We currently spend about 17% of GDP on health care. This is far more than any other nation. Let's start by bringing this down to 15%. Currently 2.9% of payroll is collected for Medicare/Medicaid. The Federal government should turn this money directly over to the states to administer a health care system. Then the feds should offer to double this money (with funds from general income tax revenues) as long as the state meets two criteria:
-Everybody has access to health care.
-Nobody has to pay more than 10% of their income for it.

This will limit health care spending to roughly 15% of all economic activity. The states will be free to try whatever solutions they like. They can try single-payer, private health insurance with limited government involvement, or anything else they want. After several years, it's likely one approach will emerge more efficient than others, and all states will adapt some variation of it. Or maybe, because of the various trade-offs in the different methods, it may be that states continue to take very different approaches because certain political trade-offs are more palatable than others to different states. Either way, we wind up with everybody able to get health care at a reasonable price and on a macroeconomic level we finally get a lid on health care costs.

More wasteful government spending...

2009-04-16T13:04:00.000-07:00

The Internet

Satellite GPS technology

Microprocessors

Interstate Highway System

California Central Valley Irrigation System (responsible for producing about half the nation's produce and $30 Billion in agricultural productivity annually)

Jet engines

National Parks

Transcontinental Railway

As millions protested taxes with their teabags yesterday, I couldn't help but wonder what our nation would be like without the innovations listed above. All of these innovations, not to mention a highly educated populace, a very low overall crime rate, and countless other conditions that make economic prosperity possible, all exist because the government spent tax dollars on creating them.

It's interesting that another topic dominating the news lately has been the piracy problem off the coast of Somalia. Now, there's a perfect example of what a nation is like without an active government. Do you think the pirates pay tax on their million-dollar bounties? Of course not. No government is taking their hard-earned money away from them. Of course, no government is providing them with an infrastructure to build a functioning economy with that money. No government is educating the population to engage in productive activity rather than theft. No government is protecting the work of productive people from those who prefer to steal. The Tea Bag protesters clearly don't want a government that does any of those things. Maybe the protesters should simply move to Somalia.

Let me propose a small tax increase to buy all these whiners passage to Somalia. Then the rest of us (and the millions of immigrants who want to come in, pay our relatively low taxes, and enjoy the countless benefits of living in the US) can go about the business of paying taxes and working WITH government to produce the conditions for private enterprise to continue producing economic prosperity.

Taxing our way to prosperity

2009-04-03T22:09:00.000-07:00

We hear it over and over again, "We can't tax our way to prosperity." It's a mantra of the right. The left doesn't seem to disagree...they just don't even address it. Well, I've probably written it here before but I'm writing it again now: Yes, we CAN tax our way to prosperity. And WWII is the proof.

We entered WWII with massive deficits and a terrible economy. Beginning in 1940, we raised tax rates to 23% on middle-income earners and as high as 94% on the highest earners (http://eh.net/encyclopedia/article/tassava.WWII). We increased government spending to nearly 50% of GDP. And in well under a decade we had a booming economy ushering in one of the longest sustained periods of prosperity in American history.

What's most amazing about this is the fact the government spending wasn't even very productive. The popular mantra today is we can't increase taxes because it will reduce consumer demand and further damage the economy. Bullshit. What's better for the economy, a smart energy grid or a new big-screen plasma TV in every household? I think the answer's obvious. Both outcomes would cost tens of billions of dollars, possibly hundreds of billions, and therefore have roughly the same effect on demand. But one of the outcomes can be achieved by consumer spending, and one of them can be achieved by taxation and subsequent government spending. We're obviously better off in the long-run if we are all taxed in such a way that generates sufficient revenue for a smart energy grid, even though it means giving up a big-screen plasma TV.

But this isn't just theory. This is exactly the kind of thing that happened during WWII. Americans were asked to sacrifice and make do with less. With increased revenues, the government built lots of bombs and tanks and planes...mostly non-productive assets meant for almost immediate destruction. But part of that money also went to very productive assets, like factories and power plants and transportation networks. It also went to education in the form of the GI Bill. And after the war the government continued to spend on the Interstate Highway System. These productive assets were instrumental in the post-WWII boom that America experienced. And this was accomplished with only a small portion of government spending going into productive assets.

Today the need for military (economically non-productive) spending is far less than during WWII. Despite our fears of terrorism, there is simply no threat to our national existence like there was during WWII. Our current defense spending is almost entirely discretionary. We could bring all our troops home, leave the terrorist networks alone, and face zero threat to our national existence. Of course, we might face an elevated threat of terrorist attacks. But these are entirely different from the existential threat posed by totalitarian national regimes during WWII. Our military spending today is out of a choice we make that we are willing to spend half a trillion dollars to potentially save a few thousand lives every year. And even making this choice, we are still spending a small fraction of what was spent fighting WWII, leaving a tremendous potential for spending on productive assets. If we spent four years devoting a quarter of GDP to creating productive assets (this would still be significantly less than the spending during WWII), we could probably afford to build a national smart energy grid, install renewable energy on a sufficient scale to power the nation, and build a better national transportation system far faster, safer, and cheaper than the Interstate Highway System. We would have to train people to install all of this, and at the end of four years of spending we could unleash our highly-trained workers and our technology on the rest of the world where we could make unimaginable sums of money bringing this technology to other developed and developing nations.

Of course, to accomplish all this would require Americans to temporarily cut back on big-screen TVs, designer clothes, luxury cars, and all the other perishable goods that we've come to love. And I guess maybe we can't have that.

Of course there are limits to this kind of thinking. Government doesn't always know best. After the overwhelming success of WWII spending, government tried to solve every problem...an approach that naturally led to problems of its own until the Reagan revolution took the pendulum back the other direction with considerable success for the better part of two decades. But now that the hands-off approach has run its course, and the pendulum seems naturally ready to swing back...it seems like most politicians are still hesitant to embrace the new direction.

Call a Spade a Spade

2009-03-26T22:23:00.000-07:00

Amidst all the talk of how to regulate financial markets, it seems like there's one simple solution that will prevent a lot of the wild speculation and financial bubbles that have caused so many problems. Let's call a spade a spade and treat financial derivatives and options and short term trading for what they are: gambling. Gamblers can only deduct losses up to their winnings in a given year. They don't get to carry losses over to future years.

Betting on short-term fluctuations in stock prices is no different than gambling. There's not an honest trader or economist or banker or finance professional anywhere who would say otherwise. And there is no greater benefit to society from betting on stocks than betting on cards.

Legitimate investment is a great thing. Giving a company money to do something productive and reaping the rewards for it is a valuable foundation of a healthy economy. But confusing short-term bets with investment is a huge mistake. It's a mistake that brought about a collapse in our financial markets. And it's a very easy mistake to fix.

A Biblical defense of Keynes

2009-03-12T23:47:00.000-07:00

I've listened with interest as commentators have talked about the revival of Keynes-ian economics. Not being an economist myself, I guess I didn't realize he had fallen so far out of favor. The notion that a government can spend in lean years from the excess from the good years as a way to ease economic hardship just seemed fairly obvious to me. But then, I was raised with a thorough knowledge of the Bible.

Of course, the Bible doesn't talk a lot about government fiscal policy. But one of the most famous stories of the Bible seems to be a pretty clear endorsement of Keynes' ideas. I'm talking about the story of Joseph in Pharoah's court. Long story short: Joseph was a government official who advised Pharoah to save up grain for several years. After years of saving grain, a famine hit. There wasn't enough grain to go around and the government used the reserves it had been saving to get the people through the lean years. Joseph was a hero, the nation was saved, everybody lived happily ever after...more or less.

Today things are more complicated. We deal in dollars and other currencies, not just grain. The world of finance has allowed us to borrow "grain" from future years to consume today. But when you get right down to it, the Keynes-ian notion of government spending to ease economic hardship is a notion nearly as old as government itself and endorsed by the Bible.

Oddly enough, some of the loudest remaining critics of these ideas are Christians conservatives. I just saw where some Christians are going so far as to point out "un-Christian" elements of the recovery plan in their wild efforts to oppose it. Of course, many of these same Christian conservatives were also opposed to the government saving up during the good years, preferring tax cuts and deficit-spending even when the economy was growing.

Maybe they should try reading their Bibles...

Our health care system works perfectly

2009-03-12T23:25:00.000-07:00

As I was listening to "Fresh Air" on NPR yesterday, I was astounded to hear some expert attempting to dissect why our health care system works so poorly. Really? Our health care system works poorly? This "expert" clearly doesn't understand. Our health care system works brilliantly. It is the best in the world at doing what it is designed to do. It's just that our health care system, unlike those in other countries, isn't designed to make sick people well. Our health care system, because it is run entirely by corporations, is designed to make money.

And our health care system makes more money than any other health care system in the world by far.

Corporations are legal entities governed by one basic principle. The primary motive of a corporation is to make money for the investors in that company. Any officer in a corporation who does not put the financial interest of the corporation above all other interests is subject to not only dismissal, but legal action. It is actually a crime for a corporate officer to put any motive above profit in making decisions regarding a corporation.

Let me be clear: If a child is dying and the insurance company can avoid paying for treatment because of fine print in the contract, the corporation is under a legal obligation to let the child die.

Some people think it's cruel to refuse somebody vital medical treatment over a technicality in a contract. Well, cruel or not, this is what any corporation is legally obligated to do. When corporations hire people to search out every conceivable possibility to deny payment for a treatment, they're simply fulfilling their legal obligation.

As we consider altering health care in America, we need to ask one vital question: What should be the primary goal for our health care system in America? If the answer is to make money, then we shouldn't change a thing. But if our goal is something other than spending as much as possible on health care regardless of the physical outcomes for patients, then we need to consider that any involvement by corporations is fundamentally at odds with the notion of treating people with the most medically necessary treatment.

People opposed to universal health care often like to pose the question of whether or not Americans want some government bureaucrat making our health decisions for us. Well given that our health decisions are currently made by accountants whose legal obligation is to put profits before health, you can count me firmly in the camp that would rather have my treatment options determined by a doctor (even a government doctor) than an accountant.

Lament for the savers

2009-03-05T21:49:00.000-08:00

I'm an incurable saver.

I hate spending money.

Despite years as a raft-guide, snowboard instructor, outdoor guide, and general live-for-the-now lifestyle, I never learned how to overcome the basic impulse to live within my means. I've taken out one auto loan in my life, and I paid it off in three months. I've never carried a balance on a credit card. I bought a home during the run-up in the housing bubble...after moving from California to Kansas City, because there really wasn't a housing bubble there, and I currently have about 30% equity in the place by even the most conservative valuation. Yes, despite many years surrounding myself with people who spent all their money before they earned it, I remain stuck in my ways as an incurable saver.

So am I bitter about the current bail-out of the irresponsible? Angry?

No. Not really.

The financially literate and responsible like myself have benefited from the foolish for years. We will continue to benefit from the foolish for years. Why should I be upset that in one instance, in order to save the economy that everybody (including myself) depends on, the irresponsible get a hand-out? People who get a great new loan deal, or get their principal value written down, or receive some other benefit from all the economic rescue efforts, are going to do one of two things. Either they're going to learn their lesson and start to live within their means as productive members of society. Or they're going to go back to squandering their money in ways that allow the wise and responsible among us to benefit.

At 19, I learned my first lesson in how the responsible benefit from the irresponsible. It was a simple thing. At a Cardinals baseball game, I got a free Cards T-shirt for signing up for a credit card. I had no intention of using the card, but I got a free T-shirt out of the deal. I realized the reason the credit card companies give away all those goodies is because of friends like the one I had at the time who was always struggling to just pay his minimum balance. I'm sure they've made thousands of dollars off of him during the years. Meanwhile, I get goodies for signing up for credit cards, and then collect points and rewards. I've received two free flights, one to Europe, just by signing up for credit cards and using them for everyday purchases. Again, I never carry balances, and I'm not the kind of person who buys things just because I have the ability to do so. So the credit card costs me nothing, but because irresponsible people rack up huge interest charges, the credit card companies can afford to give me something for nothing.

And it doesn't just stop at credit card goodies. As an investor, there's countless great investments out there because of irresponsible people. For starters, I could buy shares of credit card companies. Or Apple. Does anybody think Apple would have been such a great investment over the last decade if it weren't for hordes of young people buying iMacs and iPods and iPhones they can't really afford? Countless companies have made mountains of cash by selling products nobody really needs, but irresponsible people buy up by the truck-load. And savers have had plenty of opportunities to profit from this.

Then there's the housing bubble. There's a lot of focus on the downside, but what about all the people who made huge amounts of money selling their homes during the bubble? How about all the people who made a living from building and selling homes, and of course dealing with the loans? Sure, the well's dry now, but irresponsible people spending too much money on homes supported a lot of people for a long time. And for people who didn't own homes when the bubble started, now they have the chance to snatch up great deals among the wreckage of foreclosures flooding the market.

I agree that, generally speaking, society should not reward irresponsible actions. I also agree that killing is wrong. But we recognize as a society that there is a time to kill when it comes to defending our nation from ruin. And by the same token, we seem to be at a point where the only way to save our nation from economic ruin is bailing out a lot of people who just don't deserve it. If that's what is required, so be it. Sometimes what is necessary is not pretty.

If the economy breaks down, we all suffer--responsible and irresponsible alike. If the economy recovers, some people will benefit more than others over time--and I think it's pretty clear that over time it's always the responsible who benefit most.

Welfare for the rich

2009-02-26T19:36:00.000-08:00

As a tax preparer, I sometimes find myself thinking about estate tax issues. Now the estate tax is the official name for the nasty "death tax." You know, it's bad enough the government takes from you when you're alive, but then they even take your money from you when die. Oh, the humanity. I mean, how will anybody get into Heaven when the IRS is taking all their money so they can't pay the entry fee?

OK, so estates are all about leaving something to your heirs and the outrage is really about why shouldn't the heirs be able to keep everything that's left to them? Usually the debate is framed along whether it's fair to the recipient that they may have to lose land or a business or some other piece of the property that's been in the family for generations. I think it's time to reframe the debate.

One of the biggest criticisms of welfare to poor people is the notion this creates a culture of dependency. And certainly there is much validity to this criticism. One of the reasons getting welfare right is so difficult is precisely because even welfare's biggest advocates want programs for the poor to be a bridge to a better life or a safety net when people catch a bad break. I don't know of anybody who wants to create an entire culture of people who generation after generation do not know how to earn a living. Not only is this outcome bad for the nation that has to support the free-loaders, but it's bad for the dependent class themselves who never get the pride of achievement or the simple satisfaction of earning one's own way in life. Most people rightly condemn social programs that function to create a culture of dependency.

But why is that we are so concerned about a culture of dependency on the state, but I have never heard anybody express concern about the culture of dependency on the ESTATE?

I spent years living in mountain towns near ski resorts. In these areas was a high concentration of what were known as trustafarians. These were the beneficiaries of trust funds who would never have to work a day in their lives. Go hang out in any highly desirable vacation destination and you're bound to run across some trustafarians. (I'd recommend starting your search at a trendy bar or nightclub.) These people are typically quite smart, as their parents generally were talented and successful people. Yet despite whatever talents they may have, they contribute nothing to society except whatever unearned cash they toss around. Though they live lives most people would consider pure bliss, they often are rather unhappy people, hence high rates of drug abuse. Yet nobody seems much concerned and there is a highly vocal group of people who defend the institution that leads to their dependency.

It's time we look at inheritances for what they are: welfare. Abolishing estate taxes, or making them only applicable at absurdly high levels as we do now, only serves the idea that if people are given a bunch of money they didn't earn, they'll be happy. Handouts for the rich are just as destructive as handouts for the poor.

Of course, one of the main reasons people work hard to achieve is so they can give their children a high quality of life. There's nothing wrong with that. But let's consider what composes a high quality of life. A good education tends to correlate with a high quality of life, and wealthy people are certainly able to provide that for their children. Professional achievement and success are big contributors to a high quality of life, and wealthy parents can give their children tremendous advantages (besides education of course) in this area with insider knowledge and excellent connections. And then there's the more intangible (and important) things like quality relationships with friends and family. It's hard to see how inheriting mountains of money will help with this either; in fact, this may also be complicated by a massive inheritance as it can lead a person to question whether they are really liked for who they are or just what they have.

Something must be done with the assets of the deceased, and clearly letting enormous assets simply pass to heirs is bad from a public policy perspective and bad for the heirs.

Here's what I propose: Limit the amount of cash and highly liquid assets (stocks, mutual funds, etc.) that can be inherited tax-free to the equivalent of roughly one year's average salary. If an heir wants to take a year off to mourn the loss of their loved one, now they have the funds to do so. Beyond that amount, however, tax the hell out of it. Maybe implement a 100% tax at some point. Then there's the sentimental things. Valuable items that may have sentimental value should be allowed to be passed on, as long as they're not income-producing, and with one catch. The recipient gets no basis in the property. You can inherit the 1000-acre ranch that's been in your family forever and not pay any tax on it. But if you sell it, you're paying tax on the whole amount...and at ordinary tax rates, not long-term capital gain rates.

Finally, there's the issue of income producing property. Treat it like liquid assets. Allow a small allowance, and beyond that it gets taxed. Since it's producing income, heir can be given the option to pay the tax in installments which will be paid by the income-producing property. This won't work in every situation. But again, back to the point about earning one's own way. For the heir who just inherits a successful business, where's the sense of accomplishment? Shouldn't the heir have the opportunity to build their own business? For family businesses, it will be easy enough for the heir to simply establish their own business and rapidly build it with the clients of the decedent. For large businesses, it can be incorporated and the heir will have a chance to earn their way to the top (with a tremendous advantage of course).

It's time we stop the madness of encouraging a culture of dependency among those born into wealth. Both dependency on the state and dependency on the estate serve to rob society of human resources and individuals of dignity.

Reaping dividends from our military investment

2009-02-22T10:33:00.001-08:00

Over the last eight years, it's clear the one area of government that has seen significant spending increases has been the military. Official military spending in the budget stands at around $500 Billion. "Emergency" spending for the operations in Iraq and Afghanistan tends to consume another $200 Billion or so each year. This represents the most significant single investment the government makes each year. So the question is how do we use dividends from this investment to help us out in our current recession?

Obviously, the biggest dividend that military spending pays is providing a secure environment back home for economic activity to take place. But given the massive size of what we've spent in the last eight years, maybe we need to start getting a little more creative in how we collect dividends from this investment.

The most obvious way would be to simply start cutting back on this spending. We spend as much on the military as the rest of the countries of the world COMBINED. Clearly, we can afford to cut back significantly and still have by far the most powerful military on earth. While it's true we have operations in Iraq and Afghanistan that can't simply be stopped overnight without dire consequences, we have countless operations throughout the world that aren't nearly so necessary. Are we concerned that Germany is about to embark on another conquest to take over the world? Or Japan? What about the dozens of other countries where we maintain bases? If we pull out of Poland, for example, are there really going to be dire consequences for us, the world, or even Poland? How much could we save, and divert to more productive ends, if we shut down overseas bases that aren't absolutely vital to active military operations?

I don't know the answer to how much we could save, but I have an idea for how to get an estimate. The Department of Homeland Security operates on a budget of about $40 Billion. Now think for a second about what the DHS actually does. The DHS essentially performs the only function outlined for the military in the Constitution: defending the nation and its borders. The traditional branches of the military have strayed so far from the Constitutionally defined mission of national defense that we've been forced to create an entirely new government department to do the job. It seems by focusing military resources on defending the homeland rather than building a global American empire, we could cut hundreds of billions out of the federal budget. If we simply redeployed troops to either active war zones or within US territory, we would have a surplus of soldier and could stop recruiting for years. By redeploying our equipment in the same way, we could stop procuring additional equipment for several years.

The true cynic in me wonders if there's the potential to go even further. We've spent trillions on weapons that, in many cases, have no application in our current military operations. Could we make an effort to identify potential markets for these weapons? I'm thinking nations with large, belligerent neighbors that threaten their security. The world seems to have no shortage of such situations. How much could we make by arming weaker neighbors? If done strategically, it seems like such an approach could paradoxically lead to greater peace by making it less appealing for powerful nations to pick on their weak neighbors. Of course, the easiest, but least likely, example would be Palestine. While Palestine is guilty of killing 3-4 Israelis a year with its hostile actions (source: The Economist), Palestine suffers hundreds, if not thousands, of casualties from its more powerful neighbor. A well-armed Palestine would be better able to deter massive invasions by Israel like the one they just experienced. And if Palestine didn't feel so utterly impotent, they might even stop the guerrilla rocket attacks that are currently the only outlet to vent frustrations. Maybe some of Palestine's oil-rich allies would be willing to loan them the cash? Alright, my utterly cynical side is done.

The point is if we're ever going to restore fiscal sanity to our national government, the most obvious place to start is reigning in military spending. We spend twice as much as a percentage of our GDP than just about any other developed nation. And if there's ever been a program that defines the notion of a wasteful black hole in the budget, the military has to be it. Clearly, the more we spend on developing and maintaining a military presence around the world, the more we need to spend in subsequent years. This is because our very presence around the globe provokes resentment and hostility from people who don't like the presence of foreign powers in their nation. (Really, why should this be questioned? Would Americans tolerate the presence of French bases within our borders? And the French aren't all that different from us or hostile to our interests. How would we react to a Cuban base on our land?) This resentment and hostility eventually leads to action against our military (or at least the presence of our military) and this requires us to devote additional resources to battling back.

At least when we spend on things like NASA or National Parks or Medicaid, we don't create such non-negotiable requirements for additional spending. People may decide they like those programs and want more spent on them, but people do not attack their presence in a way that necessitates exponentially increasing spending just to maintain status quo. But this is what we face when attempting to maintain a global military presence. It's time to end this game of diminishing returns. Let's take our existing investment and redeploy as much of it as possible to supporting the core mission of the military. This reallocation should allow us to drastically cut spending for several years while the existing extraneous assets are reallocated to more vital roles. The spending that is saved can be used to spur economic development, creating future wealth that can be tapped to increase military spending when the need later arises.

Why are we repeating an obvious mistake?

2009-02-20T18:27:00.000-08:00

The best judge of how best to spend a person's money is that person himself, not the government.

Such an obvious truism. My inner libertarian instinctively nods in agreement. But many obvious statements prove to be not quite so true when closely examined. If there's ever been a clearer demonstration of the falsity of this statement than the last five years, I can't imagine what it would be.

Every economy is a mix of public and private goods. Even the most ardent communist economies have had some level of private markets at work, even if they were underground. And every government exists to provide some sort of common good for its citizens, even if it's only something as basic as national defense. The key to a prosperous economy is a matter of finding the right mix.

In recent years, the US has been governed with the philosophy that we need to move more goods into private hands. This philosophy saw its fullest expression in the latest round of tax cuts in 2003. Since 2003, the US has had its lowest levels of taxation since the beginning of the Great Depression. If the idea that the economy will always do best by moving more money under private control to spend as they see fit has merit, then we should be enjoying incredible prosperity at this point. And while we did experience a brief period of economic growth, it's clear this growth was experienced purely as a result of easy credit and people living beyond their means. The excess money released into the economy was used by investors to pour into financial derivatives that have mostly gone up in smoke. It was used by consumers to buy horribly overpriced assets that have now returned to more reasonable prices and erased that extra money from the economy.

By moving too many goods and too many choices about the production of goods into private hands, we have wound up with a terribly dysfunctional economy that is in worse shape than any American economy in decades by pretty much any measure. Yet, in attempting to fix the economy we're going to devote almost half the money in the stimulus package to MORE TAX CUTS! What are we thinking?! Did we not learn from anything from the last time around? It was only six years ago!

We need intelligent spending to fix the economy. More big-screen TVs, gas-guzzling SUVs, and over-priced homes are not going to fix the economy. Productive assets are what is needed. And over the last decade, private investors have proven just how irrational they can be in identifying productive assets. For the economy to recover, we need to invest in transportation, communication, and energy infrastructure. We need to invest in education to make workers more productive and innovative. We need to invest in a regulatory environment that rewards real increases in productivity, not simply inventive ways to cut corners and not get caught. Unfortunately, these types of things have gone underfunded for decade because they don't mesh well with private investment. The major innovations of recent decades...Internet, satellite technology, microchip technology...were the result of massive government investment in the early stages of development until these products reached commercial viability. But at this point there's not much in the pipe for the next round of real economic expansion. It could have been renewable energy, but funding for that was nearly eliminated for a couple of decades and so we remain years away from those technologies being marketable and "ready for prime time."

By devoting so much money to tax cuts instead of productive spending, we're simply repeating the same mistakes that got us to this position in the first place. I'm all for reaching across partisan lines, working together, and compromise, but there do come times when truly great leaders must recognize the sensible course of action and pursue it despite objections. I hope President Obama has not compromised too much when a resolute commitment to doing the right thing is what is really needed.

Health Care

2009-02-12T11:31:00.001-08:00

For all the talk about the health care reform and the dangers of "socialized" medicine, I wonder why I haven't heard this simple question: Why is it when we dial 911 for emergency services, the fire department comes for free, the police department comes for free, but an ambulance results in a bill?

Of course, nothing is really free. Fire and police services are paid for by our tax dollars. But, really, would we want that any other way? Can we imagine a system where the fire department shows up and demands a credit card before starting to put out the fire? Our how about a police department that can't address an armed robbery in progress because they're responding to a petty vandalism call from somebody with better "police insurance?" Yet we accept as normal the idea that medical treatment, even in emergency rooms, is typically not delivered until billing information is collected. Why do we not hear more outrage at how absurd this is?

How do free market ideologues justify the notion that people suffering a medical emergency will behave as the economic rational actors required for free market principles do be effective? We recognized as a society long ago that emergency situations can not be handled by market principles. Yet for some odd reason we've "socialized" police departments and fire departments, and we've had a "socialized" military since the founding of our country, but there remains a disconnect when it comes to health care.

Here's a further absurdity. We already have universal health care...but only for people over age 65. (Is it just coincidence that seniors also make up the most reliable voting bloc?) If government-provided universal health care is so bad, why do we give it to all of the seniors in society? What makes this arrangement mind-bogglingly nutty is the effect this has on who gets care. Much is often made of how a socialized system requires the government to make choices regarding who gets care...in rare instances involving older people not getting care in favor of a younger person. While this situation is unfortunate, why is it better to subsidize care for a person beyond working age at the expense of not allowing a working age person to receive care? Currently, young working people in America are frequently uninsured. So somebody just starting out in the work-force, possibly starting a family, might not be able to get access to necessary health care. Yet we're willing as a society to make sure this person's grandparents receive health care? This makes no sense. If we can afford health care for those who need it most and are least able to afford it, why can't we, as a society, afford to provide health care for those who are least likely to need it and most likely to repay the costs in their working life?

Baffling...

Paying for the stimulus (and fixing SS, too)

2009-02-12T10:56:00.001-08:00

There's a very simple way to pay for the enormous stimulus bill. It starts with the realization that people are living longer, healthier lives than they were decades ago when Social Security was established. Yet even though most people are staying healthy well into their 70's, SS retirement age hasn't budged in nearly three decades. We just had a man in his 70's, a man who'd endured years as a POW no less, run for President. Congress is full of people in their 70's and beyond. The notion of a "full retirement" age of 66 seems absurd.

SS outlays account for roughly $500 Billion. Raising the retirement age by 3 months, would cut the number of people receiving SS by about 1%, saving roughly $5 Billion. Do this every year for 32 years, and the result would a savings of over $3 Trillion. That could pay off the stimulus bill, plus interest, and still have money left over to address any fears people have about the insolvency of the system. At the end of the transition, people would be eligible for benefits at 70 instead of 62, and full retirement age would be 74 instead of 66. By that point, average life expentancy will likely be well over 80 (unless our health care system continues to deteriorate), leaving seniors with nearly an entire decade on average to enjoy full retirement benefits.

While many will whine about the unfairness of this, let's consider why we have such an enormous deficit in the first place. Fiscal responsibility has been rampant since 1980. Everybody who will be affected during the phase-in period of this change has been a voter since before that point. Collectively, there's a responsibility there and this is one of the most reasonable ways to address it. Unfortunately, the younger generation bearing the full impact of this change had nothing to do with the massive fiscal irresponsibility that got us here. But at the same time, we have enjoyed a tremendously high standard of living our whole lives and will probably hit 70 in better health than just about any generation in the history of the world. Plus we'll have had decades to prepare ourselves for this reality and get used to it. We'll get by.

A simple way for government to help the middle-class

2009-02-08T21:40:00.000-08:00

If your employer offers a 401k, chances are you've been encouraged to join it. You've quite possibly been auto-enrolled in the 401k so you wind up contributing to it without having to do a thing. So are employers working so hard to get employees to contribute to 401k's because of a strong sense of concern for the welfare of their employees when they enter retirement? Of course not. Employers are working really hard to encourage employees to participate in 401k's because the Highly Compensated Employees (HCEs) are limited in how much they can contribute to retirement plans by the amount that average employees contribute to the plan. Since the HCEs usually are involved in decisions about how to promote 401k participation, it's in their own best interest to do as much as possible to get employees to contribute as much as possible. This relatively simple rule that ties executive perks to the perks available to common employees undoubtedly makes a huge difference in the level of participation in retirement plans by countless rank and file employees.

Well why not use similar incentives in the income tax code. Rather than set the tax brackets at arbitrary levels, why not tie the top brackets to the median income of the nation? I'm sure by the end of a calendar year, it would be possible to determine an official number for the mid-point of that year. So on December 1, for example, the government could announce what the median annualized income was midway through the year and what the corresponding top tax brackets will be. Done right, this could give tremendous incentive for very high wage earners, who frequently make decisions affecting the wages of very large numbers of people, to take significant steps toward improving the wages of middle-income workers.

Here's an example: Currently the highest tax bracket starts at a little under $400,000. Why not replace that arbitrary number with a value equal to 10 times the median income? Currently, that would come out about the same. As median wages rise, the amount of income not subject to the maximum tax rate for higher earners would also rise. But to make this plan truly effective, an additional tax bracket (or two) would need to be added. Suppose we made a tax bracket set to 100 times the median wage. For the plan to work, taxes above this level would have to be significant, say 60% or so. This sets up significant incentives for senior executives making multi-million dollar incomes to work to create not just McJobs, but Good Jobs, and to pay mid-level workers more generously. When senior executives know that giving raises to rank-and-file workers ultimately means a raise for themselves in terms of reduced taxes, I think most executives will suddenly find ways to wring a little more out of the budget to go towards salaries.

The Era of Big Government must return

2009-02-05T21:14:00.000-08:00

Almost thirty years ago, Reagan announced the government is not the solution to our problems, it is the problem. (Although to be fair to Reagan, it should be noted he began the statement with "In this situation", something modern-day Reagan-worshippers seem to have forgotten in their zeal to apply the eliminate government solution to every problem.) Over a decade later, Clinton announced "the era of big government is over." But now in response to the most far-reaching economic crisis since WWII, government leaders are frantically trying to expand government to address the problem while many in the public are wondering if government is capable of positive intervention in the economy...or asserting quite simply that it isn't.

This belief that government can not help doesn't square with history as I understand it. We Americans like to believe that we are as affluent as we are because we are hard-working, industrious, intelligent, virtuous, and generally deserving of our prosperity. But do we really think we are the first nation of good, hard-working, smart people? By necessity, most humans throughout history have been smart and hard-working...and very poor. Only in the last few hundred years has work been rewarded with prosperity and abundance, and only in a few nations. While these nations have been lucky to have significant natural resources in addition to smart, hard-working people, again they hardly seem alone in these respects. Countless nations in recent times have squandered significant natural resources.

The difference, in my opinion, seems to be democracy. Before the spread of democracy, monarchy was the rule. Government was very efficient...at protecting the interests of the small group of people who had a voice in the government. Democracy changed that. In a democracy, government can not be small and efficient. It's inherent in the nature of democracy. Because in a democracy, the government's job is not to protect the narrow interests of a small group of people. The job of a democratic government is to protect the interests of ALL people. And as a result, democratic governments would seem inclined to grow rapidly.

In fact, in US history, as well as the history of most western nations, the democratically elected government has steadily expanded since the beginning of our nation and its democratic government. A small-government ideologue would be inclined to condemn democracy at this point. But consider what has come with the expansion of government. The history of the US has seen the creation of a large and affluent middle-class unlike anything ever seen in the history of the world. The expansion of government and the rise of the middle-class have gone hand-in-hand throughout the history of this country. It takes a big government to defend the interests of a large and affluent population. I am aware of no nation anywhere on earth in all of its history that has had a sizable and affluent middle-class without a government composing a significant portion of the economy. A survey of sizable nations with prosperous middle-classes would reveal the ideal government size is between 1/5 and 1/2 of the total economy. The US, of course, falls at the very low end of this scale. And our middle-class is currently the weakest it has been in many decades, and ranks near the bottom of industrialized nations in things like health, education, etc. I think this is more than mere coincidence. While it is certainly possible for a government to grow too large to be effective, and history gives no shortage of examples, it is clear from the data that an overly large government is not a danger to us right now. Our problems seem to arise from demanding government be too small to do its job of defending ALL the people effectively.

We need leaders brave enough to say, "At this moment, small government is not the solution to our problems, small government is the problem."

Jobs = Market Inefficiencies & Government Waste

2009-02-01T21:08:00.001-08:00

As I listen to the stimulus bill being debated, I can't help but feel the free-market side of my brain being twisted in pretzels trying to follow the logic of commentators. Time and time again, I hear proposals to do things a particular way because it creates more jobs than the alternative way to achieve the same end. For example (and I'm a huge advocate of sustainable energy, BTW), I've heard and read numerous comments that wind energy, for instance, should be pursued because it creates more jobs than something like simply retro-fitting coal-plants to be more efficient and less polluting. This strikes me as insane. I believe we should move toward wind and solar and other sustainable sources of energy, but not because they "create more jobs." Move to those sources because they don't pollute, they don't emit CO2, they don't require sticky geo-political negotiations that may later require massive military spending to maintain...but don't argue for renewable energy because it creates more jobs!!

What are we saying when something creates more jobs? We're saying it's less efficient. We're saying the alternative can be done with less effort and expenditure. If we want to have full employment, the solution is simple: simply mandate that various activities be done in a highly inefficient way. If we require all clothing to be produced in America with no mechanical means used at any point in the process of the fibers, we would immediately have jobs for all Americans. But such an approach is absurd. What's the point of labor-saving technology if our goal is to put as many people to work as possible for as many hours as possible?

And this gets to the fundamental paradox we're entering into economically. At the beginning of the Industrial Age, I understand there was some concern about what would people do for work not that machines could replace them. Of course, it turned out that at the beginning of the Industrial Age, the rampant desire for consumption had only begun to be tapped in the western world, and people found numerous other occupations to fill their time productively. Though the refrain has been repeated many times since then (I can remember it as recently as the '80's in relation to robots replacing auto workers and other manufacturing jobs), these concerns have so far always proved to be unfounded. But perhaps this is no longer the case.

Most proposals for creating new jobs right now come from government funded public-works projects. Private sector employers are laying people off left and right. But nearly every government proposal has been criticized by some on the grounds it is wasteful. But maybe that's the point. Maybe some in government realize that the only way to keep people employed is to create inefficiencies. As a tax preparer, I often wonder if part of the reason for the absurd complexity of the tax code is to keep people like me employed. If we had a straight-forward tax code that allowed nearly everybody to prepare their own return in under an hour, millions of people would be out of work.

Psychologists studying happiness generally conclude that once an individual reaches a certain level of wealth--roughly equivalent to what most American achieved not long after WWII--there is almost no further increase in happiness from increasing wealth. It would seem the last few decades have produced economic growth for no other reason than we've simply been conditioned to believe that more is always better. Suppose as a result of this financial crisis, most Americans finally realize that they no longer need to keep increasing their consumption in order to achieve greater happiness, and as a result the economy stagnates. (Of course, the economy seems to be stagnating regardless of what Americans have realized about happiness.) If levels of consumption (and by extension, production) remain pretty much stable, what will ultimately happen to employment as innovation makes workers more efficient? Obviously, the same level of production will be possible with fewer and fewer workers. Over time, the laid off workers will decrease consumption enough that more workers can be laid off. And the cycle will continue. Maybe that's what is already happening.

It seems to me there's a very important discussion we should be having right now as a nation. If we're producing everything we want, but we don't need everybody's labor to do it, where do we go from there? Do those who are the least talented get a free pass because we can produce everything they need without their labor? Or do we let the least talented starve and reduce the overall demand, leading to a new round of least talented being removed from the labor force? And what is the point of all this labor-saving technology if everybody is still expected to work all the time? Is it possible to create a system in which everybody does less work in order to allow everybody to work and still meet consumer demand?

It seems like we're putting forth a lot of effort and spending to make sure everybody works full-time for no particular reason. If we can meet all of our reasonable desires with everybody working only part-time, is it possible to set up a system in which that is what actually happens?

A new Marshall Plan is in order

2009-01-26T21:07:00.000-08:00

While our nation debates the merits of a possible new, New Deal I find myself wondering why we don't instead consider the merits of a new Marshall Plan.

The Marshall Plan involved giving massive amounts of money and resources to people who in many cases had just tried to wipe out the entire free world. In hind-sight, it's easy to see that the Marshall Plan enabled the "economic miracle" that stabilized virtually all of Europe by providing almost universal prosperity to all western European nations. Funny thing, prosperous people tend to not engage in suicide missions bent on global destruction. All this is clear to us today, but it had to have seemed outrageous to most people at the time. I wonder how the American taxpayer felt knowing his taxes were going to help rebuild the nations that had just a few years before nearly conquered us. But would anybody regret it today? Would anybody say it would have been better to keep Europe in poverty, wounds and resentments festering, waiting for the next dictator to come along and promise redemption against those who had vanquished them to this miserable state? Without Europe and Japan as trading partners, the US almost certainly wouldn't be as prosperous today, to say nothing of how much more miserable those nations and the rest of the world would probably be.

So the question is why are we not considering a global Marshall Plan? The cost of our global War on Terror must certainly have run well into the trillions at this point. What if we considered investing directly in the economies of places like Iraq, Afghanistan, or Pakistan? Rather than spending trillions to run military operations in these places, why not spend trillions to raise the populations into a level of prosperity that would make it impossible for terrorist organizations to recruit. If this seems naive, why is it any more naive than thinking that Germany in the 1940's could turn from its long history of militaristic brutality into a peaceful and prosperous nation? Let's not whitewash history here, the history of Germany, like nearly every western nation, is one of regular violence and tensions, both within and without, culminating in decades of aspirations to world domination in the world wars. Why should we have thought that they could settle down once they achieved a little prosperity? Yet that's exactly what happened.

What if Pakistan and Afghanistan could share in the growth that China and India are experiencing? And what if that growth could be further accelerated to the levels of growth experienced in the decade or two after 1945 in western European nations? Our military might be unable to find bin Laden amidst all the warring tribes in Pakistan and Afghanistan. But if these countries were prospering, the military wouldn't need to find him...the real estate developers would kick him out of his cave to make way for a new time-share development in the mountains. The crazed young men out to conquer the world for Allah would be venting their testosterone during football matches after class just like young men do in any prosperous nation.

The crazy thing is this kind of investment probably wouldn't cost any more than we're already spending to try to keep order militarily in these places. And furthermore, the rapid spread of prosperity to every nation on earth as rapidly as we can spread it would also serve to raise living standards in America as well. It's no secret that one of the biggest threats to the American middle-class is the off-shoring of countless jobs to other countries where work can be done by far more desperate people in far more inhospitable conditions. How come nobody notices that we're so worried about jobs going to Mexico but there doesn't seem to be the same concern about jobs going to Canada? Of course this is because Canadians live as well as we do in the States, so there is no incentive for employers to seek lower labor costs there. The fundamental difference is prosperity.

A common justification for countless policies in favor of the wealthy of the last few decades has been the statement, a rising tide raises all ships. Don't the people using this statement realize the absurdity of this statement in that context? "The tide" must certainly be the mass of humanity, while the ships are the wealthy who sit atop them. To raise the standards for the wealthy and expect this to automatically raise the living standards for all is as backwards as thinking that by lifting boats out of the water that the water level will automatically rise to meet them. We have seen in the last few decades that this trickle-down approach does not work. The wealthy have seen their wealth grow at a tremendous rate, while the bottom half of society has barely seen their incomes or net worth rise at all. By contrast, the policies enacted after WWII, both in the US and abroad, were focused on allowing the masses to prosper and raising the living standard for as many people as possible. The result was an economic boom throughout the world. And the wealthy did not suffer, but benefited tremendously as a result. I'm sure an examination of wealth among the richest members of society during the decades after WWII would reveal that the growth of their wealth was scarcely any different than the last few decades.

It's time we take this to the next level. If we want to emerge from the current economic crisis stronger than we were going into it, then the only way to do that is by reimplementing the Marshall Plan. We must invest in every nation that will accept our money, including--especially--our enemies. The only condition on the money must be the adoption of basic labor and environmental standards to ensure that the investment raises living standards for the greatest number of people possible. Only by raising the tide can we keep all ships from running aground.

Are taxes taking more than your employer?

2009-01-25T21:44:00.000-08:00

I doubt it.

I know people who begrudge every dime of taxes they pay. But while they whine up and down about all the taxes that government takes out of their paycheck, they don't seem as upset about what their employer takes out of their paycheck. Of course, what the government takes is clearly visible on the paycheck, while what the employer takes is not nearly so visible. For example, I work for a CPA firm that charges $75/hr for my work. I only receive about a third of that. So one could argue that my employer is keeping 67% of the money that I'm earning for the company.

Of course that would be absurd because my employer has to pay all sorts of overhead...advertising, office space, insurance, etc. etc. Plus my employer also pays me for many hours that aren't billable. But really, is that so different than the government providing the overhead that makes the economy possible? The government pays most or all of the cost of our education. The government provides nearly all of the transportation and communication infrastructure that makes commerce possible. The government maintains order. It seems to me that government does just as much to provide me with gainful employment as my employer does. Why should I begrudge the government taking far less than a quarter of what I earn when my employer keeps about 2/3 of what I earn?

It's unfortunate that people don't recognize this obvious truth. Maybe if the government was able to take taxes from us before our wages show up on paychecks there wouldn't be so much resistance. Maybe this would allow us to raise the necessary funds for government to operate and get our nation out of massive debt.

Reagan/Bush NEVER cut taxes

2009-01-20T20:18:00.000-08:00

As the Congress and Obama negotiate the latest economic stimulus package, one item sure to be debated is the size of "tax cuts". Maybe it's time the American people realize something: No President since Truman has ever cut taxes. Not Reagan, not Bush Sr, not Bush Jr, nobody. I say that because no President since Truman at the end of WWII has actually reduced government spending. The closest we've come in recent times was in 1989 when post-Cold War military spending cuts allowed us to increase government spending by less than inflation. Without actually reducing spending, we're not actually reducing the tax burden. So WE'RE NOT CUTTING TAXES, WE'RE SIMPLY DEFERRING THEM.

For three decades the government has been deferring taxes at a level never seen before. How much more can we possibly afford to defer? As the size of the "tax cut" in the economic stimulus program is debated, "we the people" need to realize, and remind our representatives, that we're not really talking about a tax cut, we're simply talking about how much debt to deal with down the road.

A New Direction

2009-01-20T19:58:00.000-08:00

Just some ramblings on my reaction to today's inauguration...

-YES!! First of all, the end of the previous error could not have come soon enough. Obama's intelligence, willingness to entertain a diversity of opinions and ideas, and political pragmatism will be a welcome departure from the idiocy of the last 8 years. I don't know if Obama can undo the damage of the reckless policies (foreign and domestic) of the last 8 years (and in many cases much longer), but at least we have a new direction that can't possibly be as self-destructive as the path we've been following.

-Obama clearly set the tone for a new approach to the economy...an approach that should be a departure from the free-wheeling market idolatry of the last three decades. While recognizing the tremendous power of markets to create wealth and prosperity, he also recognized the potential for self-destruction in unregulated, unchecked markets. (If I could buy President Obama a good beer for that, I would.)

-In the pointed barb department, the most memorable line from Obama's speech was when he rejected choosing between our principles and our safety. The intent was clearly a condemnation of the pro-torture policies of the previous administration. I'm glad he was clear on that (as clear as you can be at such a diplomatic moment while trying to be a bi-partisan leader). If we want to be recognized as a moral authority in the world once again, we must renounce these tactics. We can not defend freedom with the same deplorable tactics as those who oppose it.

-The call for sacrifice. I'm glad Obama repeatedly used imagery of hard work and sacrifice. I heard a Republican commentator criticize the speech for not being "upbeat" enough, and that it should leave people with a "spring in their step." BS. Now is not the time for happy-go-lucky-everything-will-be-taken-care-of sentimentality. For too long Americans have been fed the line that if we just pay less taxes and go shopping with the extra money then everything will be alright. The current financial situation is the inevitable result of such foolish policies. As we go through this financial mess, a process likely to take several years, people must be willing to help each other out, to show kindness and charity toward one another. And we must accept that taxes will have to rise to pay for the reckless spending of recent years.

I'm cautiously optimistic, and that's about as optimistic as I've been about the direction of our country in my entire adult life.

Why the dollar must plunge to save the US economy

2009-01-14T21:26:00.000-08:00

It seems like every day more money is being thrown at the financial crisis. Reasonable people worry about what this will do to the value of the dollar if people lose confidence in our ability to pay back our debts. With any luck it will destroy the value of the dollar.

Nothing will do more to bring jobs back to the US than when our unsustainably high global power erodes. It is inconceivable that an average American worker can be a hundred times more productive than an average Asian worker, but our current exchange rate requires it if we're going to have jobs for American workers in an economically competitive environment. Of course, the notion that a weak dollar will bring jobs back to the US is nothing new. The downside is that prices will rise as (artificially) cheap imports are no longer so abundant. Essentially the trade-off comes down to giving up new big-screen TVs in order to provide enough jobs for everybody who wants to work.

But then, there's the bigger picture. I can't help but think we're in a period similar to what Spain went through when it dominated the seas in the 16th Century. I've read in Galbraith's economic history about what caused Spain to recede as a world power. When Spain dominated the seas, ships full of jewels and gold were frequently brought into the country. The country quickly became the richest nation in the world. Once Spain had more wealth than any other nation, they realized it was more economically efficient to simply import goods rather than make goods themselves. Over time, two things occured. First, and most obvious, is the nation slowly lost wealth to other nations who actually produced goods. When the incoming treasure slowed, the overall wealth of the nation started to recede. But a second, and far more enduring, effect was that Spain lost the ability to produce things. The money couldn't keep coming in forever, and when it stopped Spain was no longer able to produce wealth for itself. I fear the same thing is occuring in our country. The best jobs and most lucrative money-making ventures are often in areas like sales and finance and brokering exchanges of property. People who create no real value, but simply move large amounts of money around, are generally compensated far better than people who actually create real products or provide real services. History has shown that such a system is unsustainable.

Our problem is not that our banks and financial companies might fail. Our problem is that we seem intent on propping up a system where moving money around is seen as a more valuable profession than actually creating things or providing useful services. Rather than throwing money at banks, we should be throwing money at artisans and tradespeople and doing whatever it takes to make apprenticeships a viable alternative again. We should be making entrepreneurship as lucrative as pushing papers for a big corporation (and the main way to do this is providing universal health care so people don't have to choose between starting their own business or being able to provide health care for their families). We need to tax the HELL out of trading securities and flipping real estate. Our current tax system imposes a lower tax rate on "unearned" income (capital gains and dividends) than on money that people actually earn through working. This can't be any more absurd. If I was trying to destroy a nation, then imposing a lower tax rate on unearned income would be a good place to start.

Of course, changing all this will cause all sorts of harm. A modest 1% surcharge on all stock trades would go a long way toward ending the speculative bubbles that have caused so much economic harm recently--and also start to pay for all the financial burden Wall St is currently passing on to the taxpayers. Of course, it would also cause stock prices to fall even further. But these are the trade-offs we have to make. We've been coddling the rich for so long that people have come to accept the notion that this is simply the way it should be. But we must change this status quo if we want the country to continue to thrive. We must stop rewarding unproductive activities more than we reward proctive activities. We must stop giving favorable tax treatment to unearned income. We must find ways to make it more lucrative to do actual work and provide a real good or service. If we are unable to figure out how to do this again as a nation, we'll go the way of every other failed empire that has fallen into this trap.

Why metals make lousy currency

2009-01-14T21:03:00.000-08:00

As the government throws more and more money at the financial crisis, the cries of the gold standard folks seem to be getting louder. On the surface, the idea of a currency based on gold or some other precious metal seems sound. The notion of a paper currency that can be printed at will seems dubious at best. I don't read much about why metals aren't used to back currency, but maybe it should be more broadly discussed. I've actually arrived at my conclusion as to why metals aren't used as currency independently, though it's so obvious I'm sure professional economists are well aware of it. They just need to tell the public.

As best I can tell, the idea of a currency that is fixed in quantity is incompatible with an expanding economy. Throughout most of human history, economies really didn't grow...or at least they grew so slowly as to be imperceptible in a human lifetime. In such a steady-state economic environment, the idea of a currency of fixed, finite quantity makes perfect sense. However, the Industrial Revolution has changed all that. For the last two centuries, the global economy has experienced remarkable growth due to both increased productivity and surging populations. Nearly every year, the global economy and nearly all individual national economies produce measurably more goods and services than they did the year before (2009 may prove to be an exception...we'll see). If we were stuck using a fixed currency such as gold, this would require that products and services get cheaper and cheaper every year as a result. This should be obvious: If a fixed amount of money has to be used to purchase an increasing amount of goods, the only way this can happen is for the goods to get cheaper. So as a result, if somebody chooses to simply put gold under the proverbial mattress, the savings of this person would increase in value over time.

Now so far this probably sounds great to savers, especially savers who believe in bringing back the gold standard. But think about what would happen in such an economic environment where simply hoarding money is the most economically sensible thing to do. Investment in productive activity would severely diminish, of course! Why should an investor risk losing money by lending it to a business when they can simply stash their money away safely and watch it rise in value? Further consider that any enterprise they invest in is going to perpetually receive diminishing returns. While ACME Widget company might be able to return 10% of an investment the first year, the diminishing value of their product will reduce returns year after year. (Of course the company's costs would also decline, but if the profit margin remains the same, then return on investment will diminish.) Investing in productive economic activity becomes foolish in such an environment. Of course, this problem would quickly find a "solution". Once investment activity stops, or drops off dramatically, overall productivity of the economy will cease to improve. At this point, the value of goods would stop deflating...and hoarders of gold might be tempted to invest in productive activity again. Of course, the moment the economy starts increasing productivity, deflation would again set in and the best investment strategy would once again be to simply hoard gold.

For this reason, using a currency based on gold, metals, or any material found in finite quantities will doom an economy to zero growth in the long run. It seems counter-intuitive that the quality of gold that makes it so desirable to some as a currency--the fact that it cannot be created and it's quantity cannot be increased by any significant amount--is actually the quality that makes it terrible as a currency.

Ironically enough, the non-sensical central banking games we play now where money is created almost from thin air is actually the only effective currency for an economy capable of experiencing long-term growth.

"It's much better to underproduce than overproduce"

2009-01-12T20:34:00.000-08:00

This evening on NPR I was listening to an interview of one of the auto executives at the big convention going on in Detroit. When asked about his company's failure to make enough of a particular model of car last year, he responded that it's far better to under-produce a product than over-produce. Most of their current troubles stem from over-production and having tons of unsold inventory. Of course, all of this is perfectly obvious. We have reached the point where it is is simply more profitable to not produce enough to meet demand, even though we have the capability of doing so. Producing enough of a product to meet demand will require producers to sell at a price just high enough to eek out a tiny profit. But producing less than enough allows producers to reap handsome profits because of the pricing power of scarcity.

But isn't the whole point of capitalism that it's the most efficient system for producing goods and services? But if capitalism rewards those who don't produce enough and punishes those who produce too much, then doesn't that mean capitalism is doomed to failure at the task of producing goods and services to meet demand? Of course, in a purely theoretical model, another producer can come along and fill in the gap by producing the same product. But we live in the real world, where patents and trademarks would explicitly forbid a competitor from doing this. If we're going to enforce patents and trademarks, and we're going to embrace capitalism, aren't we simply embracing a perpetual state of underproduction?

Update

2009-01-10T15:25:00.001-08:00

Wow, I'm a real slacker as a blogger. I've been busy moving to California and haven't had a change to log in. When I just added the post about my comments to Marketplace, I didn't realize I hadn't posted since October. And I'm about to enter Tax Season and will be working 60+ hour weeks so I'm not sure how much I'll be able to get to this. Oh well. I was inspired while running to change the blog name to Free Markets and Good Beer, so I did it. Now I'll just try to keep adding interesting (to me, at least) thoughts as they come to me.

The move to California made me think about something. Dominant economic thought indicates that higher taxes will hamstring businesses and encourage them to go elsewhere. Yet upon moving to the Bay Area, I've moved to an area with much higher maximum tax rates than my former home of Missouri. Yet the Bay Area is a major center of commerce for our country and the source of much of its innovation. Now I could dismiss this as a result of the nice scenery and mild weather. But look at the country as a whole. Some states have no income tax at all: South Dakota, Nevada, Alaska, Wyoming... The only no-income-tax state that's a major center of industry is Texas, and that's easily explained by oil money and an abundance of refineries. On the other hand, New York and California are probably the two most important states for business and they also have among the highest tax burdens. If taxes made such a huge difference on business activity, should there be at least SOME correlation between state tax rates and the amount of business activity??

Letter to NPR's Marketplace

2009-01-10T15:12:00.000-08:00

I was recently contacted by NPR's Marketplace regarding a letter I'd submitted. I was responding to a commentary from a guy about my age saying he was willing to sacrifice the luxury of retirement if it meant digging out of the massive debt we've been saddled with and providing a decent health care system. I absolutely agreed and sent the following letter in response:

***I just listened to the commentary by Tim Evanson and I must say he
nailed it for my generation. It should be required listening for every
politician. I, too, am fine with the concept Social Security probably
won't be there for me. It's there for my parents who will soon start collecting
it, and that's good enough. I'm far more concerned with access
to health care and, of course, keeping the dollar and our overall
economy solvent for my grandkids.

I don't think people in the 30 and under crowd have quite the
entitlement mentality that our parents had. The Boomers inherited the
greatest middle-class standard of living the world has ever seen as a
result of massive government investment by their parents in things
like the GI Bill and Interstate Highway System. They turned around and
demanded tax cuts and an end to that public investment. But that's OK.
They gave us the Civil Rights Act and broadened the idea of what the
phrase "liberty and justice for all" should truly mean. But they've
left the responsibility of rebuilding our nation's infrastructure and
salvaging the economy to their descendants. Each generation has their
responsibilities to bear. I think many people in my generation
understand ours.***

It was a quick rough-draft, and I want to add some additional explanation.

The line about "entitlement mentality" might bother some Boomers, but here's what I meant by it. I've been thinking lately how the Boomers were born into a world that was
all about them. After WWII, all the attention of the nation was turned
to the post-war children. Initially, that was a really good thing as
Boomers had the courage to defy the status quo with regards to gender
and racial equality. But it seems like after the "hippie euphoria"
wore off, the next big movement of the Boomers was the Reagan
Revolution and the corresponding abandonment of all sense of financial
responsibility (on a national level, of course...obviously on a
personal level many boomers have been very responsible). The
last three decades have seen taxes slashed, along with investment in
education (hence skyrocketing college costs) and infrastructure (hence
collapsing bridges). And of course, that tax money that was no longer
being collected continued to be spent...on the military. So the
deficits have piled up. And now that the Boomers are starting to
retire, the bill for all this will fall on future generations. It's
amazing the WWII generation managed to fund the New Deal and the
largest war effort in history, and then paid almost all of it back
within a decade or two. The deficit spending of Reagan still hasn't
been paid back--it's been added to--and what do we have to show for
it? The economic policies of the last 3 decades didn't "create"
economic growth as much as they "borrowed" growth from future
generations. The scary part is the major innovations of the last few
decades (the internet, microchips and PCs, satellite technology,
wireless communication, etc.) were pretty much all developed in their
early stages by government spending in the 50s through 70s. Since
government hasn't been doing that kind of R&D for the last few
decades, where will the innovations of the next few decades come from?

A New Laffer Curve

2008-10-12T09:45:00.000-07:00

In economics, many common-sense assumptions turn out to be false and counter-intuitive actions can prove to be the best prescription for a given ailment. A classic example of this is the Laffer Curve. The basic premise is that at certain high tax levels, a nation can increase its overall tax revenue by decreasing tax rates. The idea is that at very high tax levels, people lose the motivation to engage in productive activity (that can in turn be taxed). As tax levels come down, people have more motivation to engage in productive activity, and the increase in productive activity leads more taxes being collected even though the tax rate is lower. [This is not a discussion of where the US currently is on the Laffer Curve, though that's certainly an interesting discussion.]

I propose a similar principle is at work when it comes to taxing extremely high incomes. However, in this case, I believe that by redistributing some of the income taken in at the extreme levels and redistributing it, the wealthy can actually achieve greater wealth in the long run. Here's why I believe this:

People with extremely high incomes usually do so because they have very high numbers of 'clients'.

[I put clients in quotes because some explanation is needed as to what I mean by a client. People with extremely high incomes (at least 7 figures, let's say) probably fall into one of the following categories: business owners or executives, sales people, athletes and entertainers. Business owners and executives need customers for their business. Sales people need buyers. Athletes and entertainers need fans to pay for their works. I am referring to customers, buyers, and fans when I say clients. In general, extremely high incomes come from large numbers of people willing to pay for a product or service.]

The 'clients' need to have an adequate source of income in order to pay for the products and services provided by those with extremely high incomes. People with extremely high incomes do not make for good 'clients' because they generally spend only a tiny fraction of the income on consumption; most of it is saved or invested. People of low to moderate income are generally more effective 'clients' because they spend most of their income on consumption that creates wealth for the business owners, entertainers, sales people, etc. If income is not redistributed through taxes on the wealthy, they end up with ever increasing shares of national income, leaving the rest of the population with little income to spend on goods and services. As a result, those who provide these goods and services wind up with fewer 'clients', and therefore, decreasing income. On a macro-level, the extremely high-income people must give up some of their income in order to sustain the spending that creates their income in the first place.

The last economic expansion in the US was not accompanied by growth in real wages for the middle class. As a result, this economic expansion was entirely driven by credit, and the entire expansion is now being undone. Clearly, the best way to grow the US economy in real, sustainable terms is to institute stronger redistributive policies that will result in real economic gains for the middle class. In turn, this will create a stronger client-base, and therefore higher incomes, for the wealthy. Call it the Martin Curve.

A Nation of Malcontents

2008-10-12T09:38:00.000-07:00

As the political campaigns turn increasingly ugly (kudos to McCain for chastising his own supporters as they booed him for recognizing that Obama is a decent man), I can't help but make an observation about the make-up of the American people. America is made up overwhelmingly of people (or direct descendants of people) who chose to come to this nation from all over the world in search of better prospects. While this is certainly a noble motive, what does it say about those who came here versus those who chose to stay? Those who came to America are the people least able to be satisfied with the way things are. In the face of economic hardship, political oppression, or outright hostility, some people are able to simply make do and adapt. Others, the ones who came to America, are unable to make such concessions. This intense hunger for a better life is what has made America great. Americans (particularly new immigrants) work very hard and save and do the things that built wealth and have built this nation. At the same time, this inability to be content also can lead to significant discord. Unfortunately, this unwillingness to get along may prove to be our undoing if we do not learn how to set aside our dissatisfaction and work for the greater good.

Acknowledging scarcity

2008-07-08T18:19:00.000-07:00

Another thought I had while reading "Small is Beautiful" relates to how things are priced, or valued. The author points out that natural resources have no intrinsic value until they are used up. A fair point. Certainly it's hard to see why anything natural would be preserved if economic growth is the only thing society values and therefore nothing natural has any value until it is put to economically productive used. However, the author laments that the price of scarce natural resources is set no differently than any other good which can be produced over and over again. While I agree that it's true that both are set by the simple measure of what price the market will bear, I don't think this means that scarce natural resources are priced the same as manufactured goods that can be produced repeatedly. The difference in price is set by the buyer who recognizes that one good is limited and the other is not (or at least one is more limited than the other).

Overlooked in the recent debates over what's behind rising oil prices is one simple idea: the buying public has reached a tipping point where most buyers recognize that oil is a scarce good whose economically viable supplies may be exhausted within the lifetime of most people alive today. (I did not say run out, because we will never "run out" of oil in the earth. It simply becomes exponentially more expensive to extract oil as reserves become more depleted. Long before we "run out" of oil, it will simply be impossible to get oil from the earth for any reasonable price.) For decades after oil was first put to productive use, people assumed that the reserves within the earth were so great as to be considered unlimited. Over time, more and more people have called this assumption into question. As so often happens in human society, this idea was marginalized until it reached a "tipping point" at which a sufficient quantity of people believed the idea to make it broadly acceptable. I believe we've reached that tipping point where people are beginning to price oil as a scarce good rather than an unlimited good. And as long as a sufficient number of buyers are willing to price oil as a scarce good, that will be how it is priced, as the buyers who want to price it as an unlimited good will simply be unable to find sellers.

Until something happens to convince a significant number of people that oil can in fact be treated as an unlimited resource, oil prices will probably remain at or near current levels.

More silver lining

2008-07-08T18:06:00.000-07:00

I've been reading the book "Small is Beautiful" lately, which is best described by its sub-title: "Economics as if people mattered." The author argues about the foolishness of making consumption our only indicator of success when we live on a finite planet with finite resources. Of course (especially in current economic conditions), it's easy to argue that the only alternative to increasing consumption (i.e. economic growth) is economic recession, and everybody knows that's a bad thing. Or is it?

I'm a big fan of science and the pursuit of knowledge. I believe the advances we've made in the developed world over the last few centuries are a great thing and we should be happy to live in an age with so much knowledge about how the world works and how we can provide for ourselves materially. I'm certainly not opposed to the material gains of the last few centuries. However, attaining great knowledge is not the same as attaining great wisdom. The knowledge we've gained as a society over the last several centuries has given us enormous wealth with far greater ease than at any previous point in human history. While I'm not opposed to wealth per se, there is certainly a danger in acquiring great wealth too easily (Paris Hilton comes to mind as an example).

I've heard many stories of life during the Depression. While it certainly doesn't sound like an ideal time to be alive, those who lived through it have many stories of survival through ingenuity, of close ties to friends and family, of people learning to get by and thrive with just "enough." In other words, people learned to live more wisely with their available resources. Maybe the time has come for another large-scale depression. Maybe what we need is another long period of learning how to use the many toys we've acquired over previous decades. Maybe we could gain some wisdom about how best to use the wealth we enjoy in the modern developed world.

Adversity usually isn't fun, but it seems to be the surest path to wisdom. And while we have lots of knowledge in our modern world, we seem pretty short on wisdom.

Why I love $4/gallon gas...

2008-07-02T17:24:00.000-07:00

It's summer again which means rafting season is keeping me busy and disconnected. Not altogether a bad thing...

Though "high" gas prices seem to be keeping business down on the Arkansas River, I still can't help but be happy about gas prices. Here's my top reasons:
1) I'm safer. As a frequent bicycle-commuter and user of the highways for very long training rides (for which bike paths and other non-highway options simply aren't available or are completely impractical due to speed limitations), fewer cars on the road means less risk for me.
2) Youth are safer. It's a pretty widely known fact that the biggest risk to youth, particularly males from 16-25, is driving. Well, of course, those same young people are also one of the demographics most likely to be kept off the road by high gas prices and spend a lot less time driving recklessly and endangering themselves and others.
3) Neighborhoods and communities become stronger. One of my biggest problems with suburban development is people never interact unless forced. People leave their homes inside a steel shell and don't come out until they're many miles away. High gas prices encourage people to look locally for entertainment, shopping, etc. As a result, community and neighborhood identity is built as people get to know their neighbors again.
4) Jobs stay in and return to America. Now that the fuel cost of transporting materials across the oceans multiple times in the course of production has quadrupled, the economics of localized production is starting to look a lot more attractive. Buying "Made in the USA" is no longer just a patriotic statement, it simply makes more sense in an era of expensive fuel.
5) It's good for the environment...in many more ways than most people realize. Of course everybody knows now that carbon emissions from burning fossil fuels is a likely contributor to potentially dramatic or even catastrophic climate change. But even more immediate and indisputable is what high concentrations of other fossil fuel emissions can do to people's health when concentrated in dense areas (like LA, for example). Almost nobody doubts that thick smog contributes to asthma and other respiratory problems, particularly in the young and elderly. And of course by slowing suburban sprawl, high gas prices fight the trend of bull-dozing and paving over endless miles of agricultural and forested land. There's other ways that heavy use of fuel and large vehicles for transportation degrades environmental quality, but that's for other posts.

I can't help but notice that by failing to enact any meaningful energy policy, the Bush administration has accomplished exactly what Democrats and liberals have wanted for some time. Strong incentives are now in place to keep jobs in America. Strong disincentives are in
place when it comes to environmentally destructive activity. Who knows, maybe Bush is a closet tree-hugging liberal??

Environmentalism the enemy of industry?

2008-06-14T10:42:00.000-07:00

An old friend of mine has recently forwarded some newsletters from the company he works for. This successful industrial company has devoted significant portions of the newsletter to dispelling "myths" about the environment. What I found most interesting was how much the company seems to fear that environmental regulation will devastate us economically. This seems to be a common theme among those who oppose environmental regulations, but I have a hard time understanding what they base it on.

It's not hard to find a list of the world's countries ranked by GDP per capita. While not perfect, it's a pretty good indicator of the overall wealth and economic productivity of nations. Here's a wikipedia entry that lists nations according to IMF, CIA, and World Bank numbers separately: http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29_per_capita

The US is not at the top of the list according to any of the three institutions. And when looking at the nations that rank higher than the US in per capita GDP, nearly all of them have significantly more stringent environmental regulations. What's even more interesting is to consider that as little as a decade ago, the US was clearly ahead of all these nations. In the past decade, during a period when many of these tough environmental laws were passed, these nations have actually moved ahead of the US in terms of per capita economic productivity.

Now, of course, I realize that there's far more going on than just environmental regulation. Monetary policy, tax code changes, and countless other forces are always at work on an economy. However, it seems clear that strict environmental regulation is not going to bring down our economy or standard of living in any significant way.

In fact, given the currently skyrocketing costs of energy on the global scene, the countries with strict efficiency standards have gained an incredible competitive advantage over those without. American car companies have long fought regulations to increase fuel efficiency...and now they find themselves playing catch-up to European and Asian companies that made fuel efficiency a priority long ago. American airlines seem to be on the verge of death, while European carriers, who operate far more efficient fleets, are weathering the crunch more comfortably. In business, adversity and challenges often reveal stunning new ways of doing things. The challenge of operating in a more environmentally-sensitive way has been embraced by some businesses--particularly in countries where they had no choice--and many of those companies are currently thriving as a result of their willingness to embrace change. However, some companies will find themselves unable to adapt, but that's just the nature of business.

When companies blame environmental policy for their troubles, it's clear they're simply looking for excuses. As an investor, I would steer well clear of such companies.

What America needs

2008-06-10T09:21:00.001-07:00

With all the discussion about Presidential candidates, one thing that's mentioned a lot is Obama's "cult of personality". Sometimes it's mentioned negatively, as in that's all he has, and sometimes positively in the context of how he will inspire change.

Well here's my take on it: I'm of the opinion that America desparately needs a cult of personality right now. Kennedy's cult of personality inspired America to build a space-program that has been unmatched since by any nation or company. (And for those who question the practical value of the space-program, satellites have become a pretty essential tool in modern communications networks, and they're a product of the space program.) Reagan's cult of personality was probably more important than any of his policies in getting American past the economic doldrums of the '70's and early '80's. Outside of a few speeches immediately after 911, Bush seems incapable of inspiring a drowning man to swim. When asked what ordinary Americans could do to help the nation a few months after 911, the response was to travel and go shopping. Hardly the kind of spirit that defeated the Nazi threat, that's for sure.

We have the attitude of a defeated country right now. Never was this more clear to me than on my recent trip to eastern Europe. People expect things to work there. Trains run on time. As soon as I got back to the States, the abundance of things that were "out of order" was staggering. My connecting flight to KC was delayed over an hour while they tried to get the luggage count right. People on the plane just shrugged our shoulders and said, well, that's typical. In Kansas City, we can't figure out how to keep the sewage systems functional. Don't get me started on the suburbs, where the solution to EVERYTHING is: well, I guess we'll just have to move again.

What our country needs more than anything, in my opinion, more than tax breaks, more than universal health care, more than stimulus packages, is to simply believe we can do big things again. I doubt Obama can make that happen, but his cult of personality is the best shot we've got in my opinion.

Idiocracy: documentary of our future

2008-06-09T05:49:00.000-07:00

I just read this article about the intellectualism, or lack thereof, among today's young people. I'm not one of those who buys into all those "kids today!" and "well back in my day..." cliches, but the article did discuss the broader anti-intellectualism of American culture. It brought to mind the movie Idiocracy, a comedy about America several hundred years in the future as a result of the dumbest members of each generation out-breeding the smartest. The movie was equal parts amusing and horrifying. Everything I've seen points to the conclusion that dumber people are, in fact, having more kids on average than smart people. But my real concern is the antagonism toward intelligence in our culture.

The Star allows people to post responses on-line, and at the time I read the article, about half the responses had been attacks on "them", be they people of a certain age group or political affiliation. The abundance of name-calling and finger-pointing instead of rational discussion is a perfect example of the dumbing down of our country. And while it might be true we never have been that smart to begin with, it's also pretty clear we are pretty much an embarrassment on the global level. By American standards, I'm very informed about history, politics, and most global issues. But when I've talked to people in Europe (or Japan through my wife who speaks Japanese), I have trouble just holding my own in discussing AMERICAN politics, let alone other global issues where they're usually way more knowledgeable than I am.

I'm not trying to point fingers here, but it really does start at the top. I'm not trying to bash Bush, but it's absurd that Bush has cultivated his bogus cowboy accent and has to constantly pretend to be an idiot (well, I hope he's usually pretending, anyway) in order to get elected President. The problem isn't with Bush per se, but the people who elected him. As a whole, we are so against intelligence and knowledge that it's frightening. Blaming politicians, the school system, political parties, etc. are all just ways to shirk responsibility. If you think the "dumbing down" of our country is a problem, consider these questions: Which do you visit more often, libraries or sporting events? If you have kids, do you spend more time reading with them and helping with homework, or watching TV and playing video games? Do you spend more time talking about celebrities, or leading authors and academic figures with great ideas?

As Rome declined, the masses flocked to the Coliseum. I can't help but see parallels with our modern entertainment-obsessed culture.

Time to drill more domestically?

2008-06-08T15:55:00.000-07:00

So for all those who wish we'd been drilling all over Alaska and off all the coasts years ago, here's a question. If you could have sold your home a decade ago for $100k, and now it's worth $500k, would you regret not selling it a decade ago? I mean essentially what you're saying is you wish America had started selling one of its most valuable natural resources when it was cheap, rather than waiting until we can get a premium price for that resource. That doesn't seem like sound policy to me.

I've long opposed additional drilling in the US, for both environmental reasons and because I think we should simply be focusing on other energy sources and weaning ourselves from oil. But now I'm rethinking things. Let's say that by drilling ANWR and a few major coastal areas, we can generate at least 20 billion barrels over the next couple decades. If America chooses to sell that oil to the oil companies at a rate of no less than $80-90/barrel, and presumably the average rate over the next couple decades would be well over $100/barrel, then we're looking at generating over $2 Trillion over the next couple decades.

If, and only if, we were committed to using that $2 Trillion to aggressively pursue alternative energy and a more energy-efficient economy, then more domestic drilling might finally be a good idea. Over two decades, such a figure would work out to around $100 billion a year at least. I'd say we split that three ways.

One, provide grants for cities to make necessary upgrades to the infrastructure to support denser population patterns. (i.e. KC could apply for a few billion to finally fix the sewer lines as well as improve our mass-transit system. Over 20 years, every major city would get at least $5 billion or so.) One of the major ways we waste energy in our country is our sprawling population patterns. I realize this will be a tough sell because psychologically Americans are still pretty sold on the American dream of a big lawn in a quiet neighborhood. But really, is it all that great to have to spend 2-4 hours in your car every day? Wouldn't it be nice to have more time to spend with your family or friends? Is it really so terrible to live close enough to your neighbors that they could hear your cries for help in an emergency? If large numbers of people "sacrifice" two hours of commuting every day, that alone would make a tremendous impact on our national energy needs. But it will be expensive and take time to rebuild our cities to be more integrated and actually enjoyable to get around on foot or bike. Of course, the end result will not only save us tons in energy expenditures, but also health care costs as well. Not only would obesity rates and rates of heart disease and other expensive conditions improve, but there would almost certainly be a drop in rates of depression and certain other non-genetic mental illnesses as a result of people being "forced" to be less isolated from each other.

Two, implement a decent national rail network. Amtrak is a joke because it's century-old technology. Modern rail technology moves people at over 200mph, meaning trips of about 1000 miles or less are actually faster by rail than plane when you factor in the shorter loading and unloading time for trains. The airlines that are currently collapsing like dominoes with $100+/barrel oil are a testament to the fact the planes are hugely energy inefficient. They'll always have a place, but they shouldn't be our nation's primary form of long-distance travel, it's just too expensive.

Finally, major investments in renewable energy must be made. The most important technologies of the last 50 years would not have been possible without massive government investment. Microprocessors, satellites, and the Internet are what I'm referring to specifically. They all took massive government spending to reach the point of commercial viability. Renewable energy will be no different. In fact, it will require more government investment because it ultimately has to replace an existing, entrenched technology. But the payoffs will be even bigger than the three technologies mentioned above. Ultimately (and, yes, it may possibly-though unlikely-be over 100 years off, but it's still inevitable), the world will run out of easily accessible oil. We can either be prepared when we reach that point, or civilization will be wiped out and most of the human population will die and many generations will pass before a technological civilization emerges again, if it ever does. Seems like the choice here should be pretty obvious, but a lot of people are trying to make it a lot harder than it needs to be.

As an environmentalist, it's hard for me to consider that additional oil drilling in beautiful, natural areas of our nation is what's needed. But I usually find that I'm a pragmatist and a realist first. And realistically, this seems like the best way for our nation to fund the changes that we absolutely must make to remain a strong nation and help keep advanced civilization around on planet Earth.

The Robotic Economy

2008-06-08T15:00:00.001-07:00

One of the things I'm always dealing with in my life is when I'm finally going to "grow up and get a real job."

A little background: Ever since graduating with honors from the University of Missouri-Rolla, I've bounced around all over the country in a variety of jobs in a variety of fields. I attribute this to two major factors. First, I went through a really religious phase while in college that kept me from taking my classes all that seriously. I did well enough to graduate with honors, but I never really got absorbed in my class-work and developed the solid skill set that employers seek. And as I left college, I didn't immediately enter the work-force because I wanted to spend some time in urban ministry. Of course, about that time I began to really question my faith, and I wound up dropping out of the ministry I was involved with because I couldn't make myself fully believe it anymore, and I didn't want to live a lie. I'd missed the big round of hiring of new grads for that year, and the dot-com collapse was beginning to occur, so I didn't have great immediate job prospects. I chose to travel for awhile, taking whatever jobs I needed to get by, and sort out what I believed in. After a few years, I realized my degree was no longer valid since the computer field changes so quickly and I had no recent experience. But there's another major factor, and that is that while in school I regularly received what has turned out to be really awful career advice, and I followed it. Basically, the advice was to be well-rounded. Professors and other people who spoke to us about preparing for the work force always told us that having the degree meant we could program, but employers wanted more than somebody who could just sit in a corner and program. To stand out, we should cultivate talents that involved leadership and teamwork. I did that in spades. I founded a chapter of Habitat for Humanity and built two homes. I led the International Student Club for awhile, organizing events with people from dozens of nations. After college, my various jobs had me working with all kinds of people and required excellent interpersonal skills. But when I tried to enter the industry again, I realized that employers don't want well-rounded people at all. They want people with a very specific skill set that they can plug in to a specific location in the machine.

And that's what keeps bothering me as I try to get a "real job." Respectable, high-paying jobs don't involve thinking anymore, at least not in any broad sense. Based on every interview I've had, employers are looking for the person who is the best at performing one specific, narrowly-defined function. If an employer needs somebody to administer databases of employee information on SQL Server, then the candidate who has the most experience administering databases of employee information on SQL Server will get the job. Nevermind the fact that the business world is constantly changing and this person might have to adapt to Oracle within a year of being hired. No, businesses don't seem interested in people with broad skills and abilities who can quickly adapt to new environments.

Our economy seems to view people as robots that perform a specific function, and only a specific function. This makes sense when running an assembly line that does the same thing over and over. But it seems like we've converted all businesses and virtually all jobs to the assembly line model where everybody just does the same action over and over again.

I can't imagine anything I would want to do over and over again, 5 days a week, 50 weeks a year, for years on end. I used to really enjoy teaching. But then I did it 5 days a week for an entire school year. And now I hate it. I enjoy following the stock market and examining companies' balance sheets and finances. But I have a feeling if that's all I did all day every working day, I'd get very bored with it very quickly. Everybody's advice for finding a good job is to learn a marketable skill. Well I can't think of anything I'd want to learn how to do if learning it meant I'd have to do it every working day for many years.

Are there any jobs that aren't simply repetitive behavior every day? If so, how does a person learn the "skills" to get hired at such a job?

Wow!

2008-06-07T14:16:00.000-07:00

No deep thoughts here, just the sickest snowboarding video I've ever seen.

http://www.youtube.com/v/Rd8AJdcnw4A.swf

Overlooking the Obvious

2008-06-07T14:09:00.000-07:00

Recently I read about a stunning discovery archaeologists made when they un-earthed a toy from a pre-Columbian American civilization. The toy was a simple wheel. This finding was shocking because despite the many accomplishments of the Mayans, they never seemed to have used the wheel. Apparently they did discover it, but never saw any potential for it other than a child's toy.

Today we have a mode of transportation that requires about 100 times less material to produce than a car, produces about 100 times less CO2 emissions than a car, requires over 10 times less road surface area and parking spaces than a car, burns no non-renewable fuel, and in urban areas often allows people to get from place to place faster than a car would allow. However, few people use this mode of transportation because most people view it simply as a child's toy. Of course, I'm talking about the bicycle.

In addition to the above benefits, bicycles are incredibly affordable and easy to maintain and repair when they break down. They are far safer than automobiles (ignoring, of course, the dangers posed to cyclists BY automobiles). They promote excellent fitness habits and would certainly reverse the rising rates of heart disease and obesity in the US if their use became widespread.

The Mayans have the excuse of living in hilly terrain that might have made wheels impractical. What's our excuse?

The dying American empire

2008-06-06T15:39:00.000-07:00

My recent trip to Europe made very clear what I've known for some time: The US is a dying empire.

The eastern European nations I visited are on the rise and making tremendous gains. Travelling around Europe involved clean, comfortable, efficient trains that ran on time. Everywhere we went things were improving. European societies are seeing phenomenal economic growth while maintaining a reasonable social safety net to ensure prosperity for all. The cities are compact and easily navigable. Because of the urban density, the countrysides are still full of open space that is easily accessible to urban residents.

The day I left was a vivid example of the contrast. The day started in Hannover, Germany. My wife and I walked to the train station. As a rule, almost everybody in European cities lives close enough to the transit hub to reach it in 20 minutes or less by public transit or bike, ridding them of a dependency on oil-sucking autos. At the train station, Skye departed for Prague, taking a route that required a transfer with only an 8 minute before the second train departed. She easily made it, of course, as the trains almost always run right on time. I left for the Frankfurt airport, covering a couple hundred miles comfortably and in a little over two hours. The train pulled right into the airport and I was at my gate in no time. Everything in the airport was well laid-out and clearly signed. The airport was also the train station as well as a shopping center and banking complex.

After arriving in the States, everything changed. The entire customs and passport-control process was poorly laid out with minimal signage. Unlike in Europe, all the airport staff appeared to be monolingual and unable to help the visitors from other countries. The baggage collection area was chaotic...the signage conflicted with what agents were telling us. When the baggage was re-checked, nobody seemed able to tell us where to put our bags. I left the secure area to meet my dad, who lives in the area, during my long layover. Finding a simple place to eat required almost 45 minutes of driving around. I noticed multiple ATMs and electronic kiosks were out of order. Simply driving a few miles from the nearest restaurant back to the airport took over 20 minutes. The final leg of my journey began with a wait of well over an hour at the gate. First the subcontractors who loaded the luggage spent 45 minutes trying to figure out what to do with oversize luggage. Then another 30 minutes was spent trying to locate somebody authorized to drive the truck that pushes planes away from the gate. On the other end of the flight, we spent 30 minutes waiting for the luggage to get unloaded. Overall, the whole experience on the US side of the Atlantic reminded me of experiences I've had in Costa Rica and Jamaica.

Clearly the US is on the downside. We've had a good run, but it looks like our time as a global superpower is over.

$4 or 40,000 lives?

2008-06-06T15:35:00.000-07:00

So now that gas has cleared $4/gallon, everybody seems to be talking about how horrible that is. For decades, cars have killed over 40,000 people per year, and nobody has been very concerned. 40,000+ people killed annually isn't a big deal, but $4/gallon for gas is an outrage?

Where are our priorities?

Costa Rican Adventures...Did somebody say adventure?

2005-02-16T16:48:00.000-08:00

Mi amigos,
First I must apologize to those of you with slow connections for the overwhelming size of this message. It’s been awhile since the last update and in the last couple weeks I’ve been to the depths of the ocean and the peaks of the highest mountains just to bring you all fun and exciting stories to read and enjoy. Well, it might have been a little fun for me, too. Might want to grab a cup of coffee for this one…

The adventure begins pretty mildly…on top of a bubbling and fuming volcano. A one-hour taxi ride with 4 other backpackers down a gravel path brought us to Rincon de la Vieja, one of the most active volcanoes in Costa Rica. Unfortunately, January-February is the windy season for this particular park, so any trip to the top would’ve been…well, pretty typical of what I’ve experienced up to this point…but also not very inspiring as the visibility at the top was pretty much nil. So I hiked around with my fellow backpackers and enjoyed a gorgeous pool at the base of a waterfall (where of course the warm sun was shining, unlike at the top) and a lot of different volcanic features like boiling mud-pits, steaming pools, and a couple "volcancitos"—mini-volcanoes that are constantly "erupting" mud and water no more than a few meters in the air. Not exactly the stuff blockbuster movies are made of, but a nice day nonetheless, capped off with pizza and ice cream with my new friends.

The next day I was off to the Pacific Ocean and Playas del Coco, where I would be embarking into a whole new world…the underwater world of Scuba. Enough people have asked why on earth I’ve come all the way to Costa Rica and hardly spent any time at the beaches that I decided to find a good reason to spend some quality time at the ocean. And once I found a company that offered pretty cheap scuba certification, I now had a reason. The first day was just some boring classroom stuff with a couple hours in the pool to practice some techniques. The other person in the class was an older woman who was just doing this because her friends all were certified and were pushing her to do it to. She was worried about absolutely everything ("What if I come up too fast?" "What if I forget to breathe?" "What if the fish start attacking me?" All actual questions.) and had me about ready to start asking my own round of stupid questions. "Couldn’t my dive watch catch on fire while I’m down there?" "What if someone replaces my air tank with a tank of arsenic?" "What if the sea floor erupts while I’m down there?" Anyway, she came down with a very unfortunate non-specific illness that kept her from continuing after the first day, which I think worked out just as well for everybody.

Day 2 was my first dive! Now I’ve jumped out of airplanes and off of bridges, I’ve slithered through 50-meter long cave passages barely wider than me, I’ve paddled down rapids that could break every bone in your body before spitting you out, and I’ve climbed and rappelled on cliffs hundreds of feet tall…I did not expect to be bothered by a little swimming with a glorified backpack. But as we descended along the rope, and the boat and surface started to fade above us, I’ve gotta admit it was pretty freaky. Something about only being able to breathe through your mouth, and having to work just a little bit harder to get that air to come, and knowing I was in a completely foreign environment in which I was completely helpless without the gear. Anyway, we got to the floor and started swimming around a bit and my nervousness started to fade. Then it was very rapidly forgotten as we started seeing all the creatures that inhabit the ocean. I’d read in a brochure, and again in the textbook we used in class, that you see more wildlife in a few minutes on the ocean floor than in an entire day hiking in the most pristine forest. I chalked it up to marketing hype myself. Turns out it was no exaggeration. All kinds of brightly colored fish were everywhere the moment we got to the floor. Within minutes we had spotted our first ray. A few minutes later we spotted another type of ray (the first was black and white, this one was brown). And then, about 15 minutes into the dive…a SHARK!! A white-tipped reef shark about 5 feet long. At first it was barely visible…visibility was kind of poor that day at only about 30 feet. But as it swam around it came closer a few times. I noticed David, my instructor, looked really happy, and then he pumped his fist. I would learn later that shark-spottings are fairly rare. In this area they were seen on maybe 10-20% of dives. It seemed to be circling us after awhile, a somewhat ominous sign. And then it started swimming towards me…like, right towards me. At about 15 feet it angled off a little bit, but it still got well within 10 feet of me before it finally turned and swam away. Up that point, I’d been pretty comfortable down there, the initial nervousness had faded. But as the shark got closer, I started wondering just how "perfectly safe & normal" these shark encounters really were. I talked to David afterward to see if my perception of distance was accurate, or if the goggles and the fact I was in an unfamiliar environment made my judgment a little off. He confirmed the shark was definitely within 10 feet of me (in fact he pointed to someone on the boat standing only 6-7 feet away and said it was about that distance) and then said he was about to grab me and make sure I wasn’t panicking, as encounters that close, particularly with the shark swimming toward a person, ARE quite rare! Eventually the shark swam away for good, and in the final minutes of the dive we spotted a couple more rays (one was pretty large) swimming together. I also entertained the following thoughts…"Damn, now I’ve got yet another expensive hobby." As well as, "So far I’ve been able to turn most of my expensive hobbies into professions, so maybe…" Turns out being a scuba Divemaster is a lot like being a raft guide…you can travel to lots of great places, show up at a place unannounced, get paid in cash, and move on to the next great location.

Anyway, the next couple days involved some more class and pool time and a total of three more dives. Now I’m an open-water certified diver and have a whole new round of questions to ask people when they talk about great travel destinations.

After Playas del Coco, I decided to get even more adventurous and join my new friends from Rincon de la Vieja in…Nicaragua! Quick history lesson: In the 1980’s the people of Nicaragua were finally emerging from decades of oppressive rule by the Sandoza family and were enjoying a rapidly rising standard of living under a democratically elected government. Only one problem…the Sandoza’s had some powerful friends in the US and eventually the US, through the CIA, began funding the Contras who eventually overthrew the government chosen by the people. Perhaps you’ve heard the term Iran-Contra Affair? This was the Contra part.

Now at this point, perhaps you’re thinking—I know I was—that maybe traveling to a nation that has been wrecked by the actions of representatives of your own nation is…a bit…what’s the word…foolish? Wreckless? Completely void of common sense? Imagine, for instance, that the French were to fund and participate in a coup that overthrew our president. I’m sure you can imagine that the French (in addition to becoming the most loved nation in the world overnight) would be less than welcome in the States. But hey, I’m here to tell the story so it couldn’t have been too bad, right? Crossing the border was an experience in itself.

[*Observation: An interesting thing about crossing the border this time was it was the first time in nearly a month that I’d been in a country with an army. Costa Rica doesn’t have one. Interestingly, two of my favorite countries in the world, CR and Switzerland, don’t have armies. Both have the highest standards of living in their regions and very desirable locations. Yet they manage to defend the homeland just fine without a single full-time soldier. Costa Rica traces its high standard of living to the decision in 1948 to abolish the army and instead spend that money on health care and education…sure makes me wonder just what the States could do with that $500,000,000,000 we spend on the military every year…]

First I was accosted by the mobs of money-changers and, being the savvy traveler that I am, chose to basically ignore them because I knew their rates would be ridiculous. (I checked online later and found out they were basically offering the current international bank exchange rate…in fact they offered a better rate than what I got from my own bank when I used the ATM. Maybe I shouldn’t be so suspicious…) While waiting in line at the first of…let me think…four checkpoints, I encountered a couple other gringos taking the plunge and we decided on safety in numbers and stuck together until we reached a hostel in Granada. The border itself was arranged along a nearly 1 km-long stretch of highway with checkpoints and vendors interwoven along the way. Every time we were asked for our passports, we’d get a little stressed. What if this person wasn’t legitimate? What happens if you lose your passport in between countries? Then you can’t get into either one. There’s no embassy you can go to. Is that why there are so many money-changers? Did they all get stuck in between the borders and have to resort to that as their only means of survival?!? Fortunately none of us had to find out the answer to those questions and we made it through with no problems. The border town was crazy like all border towns are. The ride to Granada was made interesting by the fact it was on the exact same type of school bus I rode to school as a little kid…except now my legs no longer fit in the seat. I really wish I’d engaged in more seat-graffiti as a kid, I very well might have ridden the same exact school bus at some point while I was in Nicaragua as I rode to school as a kid.

Just before reaching Granada, we had to change to a local bus, which proved another interesting bus experience. Remember how I said the Costa Rican bus drivers are friendly? Well in Nicaragua there’s a second guy whose entire job is to lean out the door shouting the destination of the bus (apparently with daily labor routes around $3 this is cheaper than a sign) and asking people if they need rides. Once the bus stops, though, or in some cases just slows down, he’s hopping off the bus to grab their luggage and usher them onto the bus as quickly as possible. Hey, even at $3/day, time is still money, you know. We reached Granada and found our way to our hostel…appropriately named Oasis. In the midst of crowded, dirty streets jam-packed with people and vendors, the hostel had a gorgeous central courtyard with quiet hammocks all over the place and even a swimming pool! There was free Internet, a free DVD library to use on one of several TVs, and even free calls to North America. And all this for $6/night. Ahh…it’s good to be a backpacker :-) I spent a couple hours that afternoon walking around town and the lakefront. Granada is located on Lago de Nicaragua (Lake Nicaragua) that I’m estimating is about the size of the Great Salt Lake…it’s enormous. Makes Tahoe look like a pond. One thing that was interesting was seeing inside the houses as I would pass them. All of the buildings in the city looked pretty basic, and usually downright ugly, on the outside. But inside, many homes had beautiful courtyards and were nicely decorated. Another interesting thing was almost all homes had a nice sitting area in the front, and in the early evening, all the people were out front, kids playing in the street, very much like what you’d think of as old-fashioned, main-street, small-town America. It was during this walk that I was finally able to relax a bit about where I was. Given the history of the place, and the fact that border crossings are just mad places where you’ve always gotta be on-guard, I was pretty suspect of everyone I’d see. Finally, as I was walking, this little girl who was playing on the sidewalk just looked up at me and smiled and waved as I walked by. It caught me off-guard and I realized I was in another community with normal people and families and everyone wasn’t out to take advantage of the gringo. It was a good feeling. Regardless, as the sun went down, I still made sure I was with a couple other people from hostel, one of whom was a rather large weight-lifter :-) We went out for a nice dinner, treating ourselves to fairly American fare before enjoying a pretty American night watching movies. We’d all been traveling for awhile and welcomed the chance to enjoy some "at home" comforts.

The next day I had to find my way to Isla de Ometepe, the island on Lake Nicaragua where I was planning to meet up with the backpackers from Rincon. This involved a bus ride from Granada, a taxi ride to the boat dock, a ferry ride across the lake, and two more bus-rides once on the island. I knew it would be about four hours to the island…what I hadn’t counted on was three more hours on gravel roads (and I use the term "gravel road" loosely) once I reached the island before I finally got to the hostel. The boat ride itself was a little more than I bargained for. When I got on, I noticed a great seat up front near the door that had plenty of legroom since there was an aisle in front of it. Thinking myself in luck, I grabbed the seat and got ready for a nice ride on a boat to the island. Turns out there was a reason the seat was empty. Once we got out of the harbor, the lake was very choppy, and the "ferry" was basically just a glorified fishing boat. We started pitching and rolling every which way, and every time the boat would pitch left, water that rushed through the openings in the doors would blast me. Fortunately, the opening was low and I just covered it with my leg so only my pant leg and shoes got soaked. Gore-tex shoes are wonderful…they were dry later that same day. Toward the end of the hour-long crossing, all of us gringos had made our way to the front deck, where some were about to hurl over the side. At least it was better than being down in the cabin. At least the last few minutes were calm and offered beautiful views of the two volcanoes that were responsible for forming the island.

After getting off the boat, and enduring three hours on school buses over rocky paths that I probably could have walked just as quickly, I finally arrived at the hostel. It should have also been named Oasis. Right on the beach with a dock. Hammocks everywhere. Three bucks a night. Another three bucks for an amazing all-you-can-eat dinner buffet (the only buffet I’ve seen in Central America). Mountain bikes. Kayaks. Trails heading literally right out the front door. Even some local kids playing baseball right down the street. I’d planned on spending one day, and wound up staying two. If I ever find myself in Nicaragua again, I’m spending at least a week.

[*Observation: Nicaragua was like the Midwest of Central America. Like the Midwest, people here don’t travel very far or very often (they don’t have the means to) and so they often are completely unaware of some of the difficulties travelers encounter. A classic example is the language barrier, and how so often people think simply saying something louder makes it easier to understand. For instance, on the bus ride to the hostel, which was in Merida, the person taking money on the bus had asked me, "May-dee-dah?" When I said I didn’t understand, he just repeated it several times. This sounded very close to a word I’d heard earlier when a person didn’t have change to give me and was asking if I had smaller bills or coins, so I assumed that was what this person was asking me. I explained that was the only bill I had, to which he simply said No, and repeated what he’d been saying, only louder. Finally, he gave me change and walked away. Only later did I realize he was asking if I was going to "Merida", but when the R is pronounced in Spanish, it often comes across more like a D sound. (Say Merida, but put the tip of your tongue on the roof of your mouth when you make the R sound and you’ll see what I mean.) All he had to do was ask where I was going, ask if I was going to Merida, or any number of similar questions that I could have understood. But I guess if you’ve never tried to learn another language, you’re not familiar with the idea that a person can know some parts of a language but not other…so the natural assumption I guess is that a person is nearly deaf.]

With limited time in Ometepe, I had to choose the best adventure, which in this case was definitely to climb the big (5000 ft) volcano behind the hostel. Because a couple of gringos went unprepared up the mountain last year, got lost, and died, there’s now a rule that nobody can climb the mountain without a local guide…I’m sure the fact it generates lots of extra revenue for locals doesn’t hurt either. Fortunately, guides are only $10/day (about triple the average daily wage, remember) and I was able to find someone else from the hostel who wanted to go, too, so it was only $5. We met our guide the night before and he told us we needed to leave at 6am. From my mountaineering experience this sounded pretty reasonable, so we made plans with the kitchen for an early breakfast, and in the morning we set off from the hostel at just after 6.

Now I wasn’t expecting an English speaking guide by any means, but I was surprised that this guy knew absolutely none whatsoever. Up to this point, anybody who dealt with tourists has at least known a few basic phrases to cover the essentials. For instance, this guy was trying to explain something about payment when we started out and we couldn’t understand it. He used the tactic of repeating the same thing louder to no avail. Eventually, we thought we understood him to be saying we pay at the hostel when we get back, said yes, we understood, and got on our way. I would think if someone dealt with a lot of tourists (most of whom speak English) he would at least want to learn how to say in English when and where to pay :-) It quickly became apparent, however, that this probably wasn’t something this guy did often.

Dan and I moved up the mountain at a fairly swift pace, but nothing near a racing pace or anything like that. Our guide had fallen far behind within the first hour. We found ourselves doing a lot of waiting on the way up…wondering why we had to hire a guide when we were finding the trail just fine on our own. We reached the rim around 8am, where we found ourselves buried in clouds. I remembered reading something about the clouds usually lifting in the early afternoon at this volcano, so I asked our guide, once he finally caught up, "Is it normally cloudy in the morning?" He said yes, so I followed that up with, "Is it normally clear later in the day?" Again he said yes. So then I asked, "When does it normally clear off?" And he replied, "about noon or one." At this point I wanted to say, "So why the %*#$ did you want us to start at 6am?!?" but I didn’t know how to say %*#$ in Spanish so I just walked away.

Inside the crater is a lake that we started walking down to. I’ve been told it’s really nice, but I never saw more than about 10 feet of it while standing on the shore so I can’t say for sure. At one point, our guide turned off the main trail and started leading us down without following a trail. For awhile, I thought our guide was actually going to be worth having…until we finally came out on a perfectly good trail that I assumed to be the same one we’d just been on. When I asked our guide if it was the same trail, he confirmed it was, but explained we had taken a short-cut. Which of course made me think, "Big freakin’ deal, we’re gonna have to be here for 4 stinkin’ hours before we’ll see anything. I’m sure we could have spent another 5 minutes getting here."

Anyway, we ate lunch at the lake, and managed to wait around until about 10:30 until finally our guide was being pretty adamant we needed to go. We kept explaining we really want to see it clear, but he insisted that would take 2 or 3 more hours (and again I’m thinking, "yeah, and whose fault is it we started so early…") so we should get going. We hiked down the other side of the volcano to a nice little organic farm & restaurant. As we enjoyed our drinks, we were treated to lovely views of the volcano that had just cleared off. The owners of the farm also offered to fill our water bottles, because by filling our water bottles at their spring rather than buying commercially bottled water we would cut down on waste and "be supporting the non-privatization of water." Of course, they did charge a fee for filling the water bottles…I guess privately controlled water is fine so long as it’s not privately controlled by a big corporation :-) This was also the point where I decided our guide was going to be the first guide I’ve ever had who didn’t get tipped.

We were already irritated with the guy, and then as we’re enjoying our drinks, and Dan is waiting for some food, he tells us we need to go. I said in a minute, and explained Dan was waiting on food. He again became adamant, saying a bus was coming at 2:00 that would take us back around the island, and the next one wasn’t until 5:00. We told him that was fine, he could go ahead, he had done his job and we were off the mountain now. He said he couldn’t do that, and at this point I was very happy to have just encountered a bilingual guy who I’d met earlier on the boat-crossing, because otherwise I wouldn’t have believed what I was hearing. I pulled the "translator" into the conversation and explained what we were trying to do and that the guide wasn’t cooperating, and maybe he could explain what we were trying to say better. So he explained the situation, and the guide gave a lengthy reply, and the translator told us the guide was required to show up back at the hostel with both of us or else he’d be in trouble. So we told our guide (through the translator) that we would be happy to send a note, with both our signatures, saying the guide had done his job, we were safely off the mountain, and we would walk back to the hostel at our leisure. The guide still refused. We explained we wanted to walk back, stopping along the beaches, taking our time, and because our guide’s knee was hurting him we didn’t want to make him do all this extra walking. Still no. Eventually the translator gave up and said he had to go, so we were stuck with this guide who wouldn’t leave and was just growing more and more irritated. So after Dan’s food had arrived and he’d eaten it, we started walking back, and met up with a bus about half way. Of course the bus ride was literally slower than walking during this stretch of road, and a lot more uncomfortable. And in the end, we felt like little children on a field trip who had to stay with the group.

But at least it was a fun field trip. I certainly don't want you to think the guide totally spoiled our time, he just provided a good story :-) The trail itself was through a lot of beautiful forest, and the clouds even gave it an extra eerie feeling that made it more fun. Toward the top everything was soaked and we found ourselves sloshing through several inches of mud and water at many points. In some area, the trail became an actual climb, where we were going straight up tangles of roots and sometimes rock using our hands as much as our feet. So even though we didn’t get the views we were hoping for, we still had a great time. That night I relaxed in a hammock as I enjoyed a cerveza and gave my body a break. And it wound up being so comfortable I just slept in the hammock all night. Perfect way to end my solid week of beach time.

The next day it was back to Costa Rica and San Jose. Of course, this meant a three-hour bus ride back to the boat dock and another bumpy boat ride. Today, however, was a very different boat ride. The cabin was very crowded, so all of us backpackers just stayed on top with the luggage. This turned out to be perfect! The day was gorgeous and sunny, the lake was quite a bit calmer than the last time, and we all made cozy lounge-chairs out of the assorted luggage and we spent the hour basking in the sun. When the ticket-taker came around, I turned to Dan, who was with me until we got safely to Costa Rica, and asked if the guy was taking drink orders. It’s moments like these, where you’re having a millionaire’s experience on a backpacker’s budget, that make trips absolutely priceless.

We caught a taxi to the border, where I ate ice cream for lunch (you’ve got to spoil yourself once in awhile, right?). Then we crossed the border and caught a motor coach for the six-hour ride to San Jose…and this thing was NICE. Not only was it air-conditioned (an absolute godsend at this point) it even had a movie! I got to watch Bruce Almighty with Spanish subtitles for the last couple hours of the journey. Finally caught a city bus to where I was staying in San Jose. For those of you scoring at home, that’s five legs of the journey and four different modes of transportation for the day…bus, ferry, taxi, motor coach (yes, that’s absolutely a different form of transportation from the bus). And six/five if you count the 1 km walk you have to do at the border crossing. Between the luxury cruise and on-board movie, though, it wasn’t nearly as rough as I’d feared.

Now I was down to my final week (or just under) and had to cram in a few more must-do activities to complete the trip. The first of these activities took me all the way to the southern end of Costa Rica on the Osa Peninsula. Getting to Osa required an absolutely miserable bus trip that didn’t even involve a good story to redeem it. The first full day there, I caught another bus at 6am to Matapalo, where I was hoping I’d find Everyday Adventures for a day of nature hiking and tree climbing. I found Matapolo easily enough, but after wandering around for a half hour or so and not seeing anything but a bunch of fancy beach houses (pretty much all owned by gringos…) I finally went up to someone on the beach and asked if he knew where the place was. He said he hadn’t heard of it, but if I just wanted to take a cool tour through the forest, go down the beach to a red swing set, and ask at that house for Andy. Andy was the same guy I’d emailed about the tour already…guess they’re just not very big on signage down there. I found the place…at about 7:30 for a tour that was supposed to start at 9:00 (only one bus runs to Matapalo every morning) and found Andy playing chess with one of his guides. He told me make myself at home, there was a big group coming around 9:00, and so I found a hammock (I’ve fallen in love with hammocks…why aren’t they more popular in the States?) and chatted with Andy & Mike for a while.

[*Observation: What passes for "shelter" is very much determined by the climate and even culture. In the States, we call four walls & a roof shelter. In Central America, a roof is all you need. Andy has this beautiful home by the beach. But other than the bug screens that enclose the part of the house with the bedroom and bathroom, it’s completely open-air…kitchen, living room, dining room, everything. Most places I’ve stayed have four walls for privacy around the rooms, but they’re completely open on top until you get to the roof set well above everything else. I even ate at one fancy restaurant that appeared totally enclosed at first, but then we noticed there was about a three-foot opening above the windows…birds were actually sitting on the edge. It’s such a perfect climate here that it doesn’t make sense to fully enclose the rooms. It’ll probably be weird to be in a fully enclosed space back in the States.]

Well 9am came and went. And then 10am. Around 11am Andy sent me off with some binoculars to see if I could spot a sloth. No luck. Finally around noon, Andy got hold of the hotel that was sending the big group we were waiting on and found out they were on there way, but it would still be a while before they got there. The problem was Mike had to teach a surf lesson that afternoon, and by time this group finished their tour, the tide would be all wrong for a surf lesson. ("Tico time" can’t change the tides unfortunately.) Well since we’d been chatting all morning, Andy knew I was a climber with plenty of group-leading experience, so he asked if I’d be comfortable being his assistant for the day…just doing some rope-work, basically. So I took Mike’s place and wound up helping "lead" a nature hike, roped tree climb, and waterfall rappel in the rainforest. It was awesome! Andy really knew his stuff during the naturalist part of the hike and had lots of cool things to point out. The tree climb was amazing. There’s a type of tree here that begins as vines growing down from a host tree. Eventually, the vines reach the ground and start to solidify and thicken. Over time, all these vines form a completely new tree with dozens or even hundreds of "trunks" that completely overwhelm the host tree. So we climbed one of these vine-trees that was about 200 feet tall. We were roped in the whole time, so near the top you had the option to just jump off and do a nice, big swing before being lowered to the ground. There were a few "main" routes up the tree, with several alternatives that more adventurous people had pioneered. Well I kept looking at routes and asking Andy if they’d been done until finally I found a route that looked doable, but hadn’t been done yet. So I climbed a new route, which joined up with an existing route called Whale’s Ribs about halfway up. As the first to climb that route, I got to name it. Belly of the Whale seemed appropriate, as it was a straight shot ("straight into the belly of the whale…") located right beneath the Ribs. So if you’re ever in Osa, take a tour with Andy at Everyday Adventures (www.everydaycostarica.com) and ask him to show you Belly of the Whale. Anyway, after that we rappelled down a "waterfall" (it was dry at the time) and started heading back.

The monkeys in this forest were absolutely everywhere. And there seemed to be more and more of them as the day went on. Howler monkey, spider monkeys, and white-faced monkeys were all easily spotted all throughout the day. Several times as people were climbing the tree, spider monkeys would go flying through just overhead, almost like they were showing off. It was amazing! And the people on the tour had no idea I’d just showed up that day; they actually thought I was Andy’s assistant. I even got tipped. I just gave Andy the tip money and we called it square, so I basically got a $100+ tour for free. Not bad for a day’s work ;-)

Finally, I headed off for my final Costa Rican adventure, and probably the most ambitious of all. I took the bus to San Gerardo, a town that serves as base for the hardy souls planning to climb Costa Rica’s highest peak, Mount Chirripo. The summit of Chirripo stands a little over 12,500’ above sea level, over 7500 vertical feet above the trailhead. The hike to the top is 20 km from the trailhead. The recommended plan is to hike to base camp (around 10,500’) on day one, summit on day 2, and return on day 3. The slightly more ambitious plan is to summit and descend all the way on day 2. Well I didn’t have two days. Nor did I have the required reservation for a bed at base camp. I just had a lot of stubbornness.

I woke up at 3:45, to the sounds of a climbing party just outside my hostel getting ready to depart. I’d made arrangements already with the super-friendly owner of the hostel to have breakfast at 4:00 instead of the customary 5:00. So he serves me this enormous breakfast that would lead to a very sluggish start at 4:30. The first hour or so was pretty slow as I was definitely feeling the effects of a very hardy breakfast. By about 5:30 or 6:00 it was starting to wear off and by 6:30 I’d hit Lamo Bonita, a shelter with bathrooms and water about halfway to base camp. I took a few minutes here, and felt really good setting off with plenty of water and still no sun out to start heating things up. I hit base camp a little after 8:00, feeling good, ready to top off my water and bag the peak. And here is where I hit a bit of a snag.

I went into base camp and asked where the water was located. The ranger behind the desk asked to see my ticket. I explained I wasn’t staying the night there, I was only going to the summit and I would return the same day. But he still needed a ticket. Uh-oh. Things were going to get interesting. I had heard rumor that they wouldn’t let you proceed past base camp without a reservation, but everything I’d read indicated reservations were needed to secure beds at the hostel. I never saw anything that said reservations were needed just to get in the park. But that’s what this ranger was saying. Of course I asked to just buy a ticket there, and that was no good. He told me I could get water, but then I needed to go back. I would have to buy a ticket at the ranger station in town, 2 km from the park, (as opposed to putting a ranger station at, say, the park entrance…) and return the next day. I walked outside, dazed. I was wondering if I just bolted for the summit, without going back for water, what would happen. Did I have enough water to make it? How stiff would the fine be when I returned? What were Costa Rican prisons like? As I stood outside, I noticed the ranger had come out to watch me. I walked back up to him to try again to plead my case, but before I said anything he said something I didn’t entirely catch, but it involved him calling the police and me being taken off the mountain. Not good. I’d always heard that when you’re in a place that speaks a foreign language, you can remember a lot more than you ever thought you could if you really need to use it to get by. Well I knew I’d better start talking or things were gonna get real bad, real fast. And all of a sudden every excuse and plea I could say in Spanish started flowing (well, tumbling clumsily is probably more accurate, but I was getting my point across) out of my mouth. I spent a good 10-15 minutes having a pretty sophisticated conversation covering the justice of not providing adequate signage for hikers at the trailhead, the necessity of limiting the number of hikers each day to conserve the region, the distances I had covered only to climb this mountain, the importance of following park policy for its preservation. Honestly, if we’d been two lawyers arguing a case before a Spanish-speaking jury, I think I held my own. Finally, I seized my opportunity when he said they only allow 40 people in the park each day, and unless you check at the park office for cancellations you can’t get in without a reservation. Aha! What if there was a cancellation today? I asked him if it was possible to check that from the base camp, and after hesitating a moment, he finally said to follow him. We went inside to the desk where he told me to wait a moment. He got on the phone and after a few minutes he came out and asked me if I was sure I could be out of the park by 5:00pm. (That’s when the park closes and everyone needs to be either at base camp or out of the park.) I said no problem, and I could be out earlier if I needed to get to the ranger station earlier to pay for my entry fee. He said 5:00 was fine. There was a cancellation in a group that arrived yesterday and leaves today. As long as I finish today, I can go ahead and summit. YES!!!

I thank him profusely, fill up my water bottle, and head on my way. I’ve lost some time so I’m hoping I can reach the summit before the clouds that typically start arriving after 10:00. With about a kilometer to go, I was starting to feel the altitude. I had just finished a steep section that led to a saddle, and from there I could see the rest of the trail…down for about a half kilometer, then a little rise, and finally the last 100-200 vertical meters ascended really fast at about a 45 degree angle. Yikes. By the end I was grabbing hold of anything I could and pulling myself as much as I could. I was really close to just dropping to my hands and knees and crawling on several occasions. But finally, at 10:15, I reach the summit. And the clouds haven’t rolled in yet. Around me is a blanket of clouds with massive peaks rising above them. In spots I can see gorgeous alpine lakes, and in a few spots the clouds give way to views all the way down to the valley floor. The views of the Pacific and Caribbean are blocked, but I think the tops of the clouds are far more impressive than the ocean would have been at that distance. I take some pictures, snack a little bit, and start heading down as I can feel the altitude headache setting in. I make pretty quick time back to base camp, hoping a rapid descent will alleviate the symptoms of high altitude sickness I’m starting to feel. At base camp, I stop in and volunteer to do my part to help the park.

Chirripo has a program where they ask visitors who have the ability to volunteer to take down some of the trash generated by the base camp (and picked up from the trails). So I offered to do my part and then they asked me how much I could carry. Well I knew the porters routinely carried 30-40 pounds in supplies…and I didn’t want to look like a total wimp…but I had just been to the summit and was carrying 10-15 pounds of my own gear…so I finally said, 15 pounds. They gave me kind of a funny look, which I presumed to mean, what a wimp. They brought me a bag of trash and said good luck. Now I was picturing something like a grocery sack of trash, maybe two—one for each hand. No, they brought me a big potato sack full of garbage. I realized why they’d given me a funny look. They were wondering what this gringo was thinking! The weight wasn’t so bad; it probably wasn’t much more than 15 pounds. But man, was it awkward to carry! I carried it in front of me, under my arms, over my shoulders, every which way I could think of. Nothing worked for more than a few hundred meters at a time. So many times I just wanted to chuck it down a steep hill and be on my way. After 25 miles roundtrip, and a total of over 9000 feet of climbing, my legs would have been absolutely spent even without this huge bag. Now my arms, shoulders, and back were all completely done as well. I reached the hotel at about 3:45, giving me 45 minutes to pack up the rest of my stuff (I wasn’t going to hike all the way to the ranger station and then turn around and come back…I’d just stay at the hotel next to the ranger station) and hike the final 3km to the ranger station. I didn’t think I was going to make it, but fortunately I was able to catch a ride in a passing pick-up truck for most of the way. When I finally reached the ranger station, they had already closed for the day (guess they closed early) but fortunately there was still someone there. I told him I had the trash from base camp, and he let me in. When he saw the bag of trash, he asked me again where it came from. I told him base camp again. Finally, he asked me in English. And again I told him, this time in English, that it was from base camp. And I told him I hadn’t paid my park entrance fee yet because I didn’t know I had to pay here, and I couldn’t pay at the top. He looked at the bag, looked at me, and said, "No worries. You don’t need to pay. Have a nice day!" I just laughed, said thanks, and stumbled next door to the hotel. I got my room, showered, ate dinner, and was in bed and asleep by 6:30. Slept for 12 hours solid.

The next couple days were pretty uneventful days of travel and packing up to leave. I'm sitting at an internet cafe near the airport, where I'll be flying out bright and early in the morning to get back to the States. Hopefully tomorrow will be smooth and not generate any more stories to tell :-) Tonight I was given a nice farewell by the sunset. No kidding, the clouds actually appeared to form a smiling face as breaks in the cloud allowed two bright patches of light (eyes) and a crease of light (mouth) to light up the sky as the sun set. It only lasted for a moment, and by time I got my camera out the eyes had started to disappear, but it was a very, very cool phenomenon for my last night here.

So there it is. From the depths of the ocean to the highest mountain (you thought I was just using a figure of speech?), from bubbling volcanoes to forests teeming with wildlife, from an impoverished country whose democratically elected government was overthrown by a wealthy foreign power to, well, that same wealthy foreign power if all goes well tomorrow…it’s been an exciting couple of weeks. And a great trip overall, despite not getting to do much of the rafting that was my motivation in coming here. Oh well, there’s plenty of good rivers in the States, and the spring river running season will be here before long. Hope you had the bandwidth for my latest adventures, and if you got this far apparently you did. See you on another journey! Devin

Costa Rican Adventures...Floods, plagues, & other tropical fantasies

2005-02-01T16:13:00.000-08:00

Hola una otra vez mis amigos (spanish speaking friends, is there a simpler way to say 'again'?), Let's see, now where were we? I think I'd just returned from some high-flying adventures in the cloud forest of Monteverde. So having spent a couple weeks in Costa Rica already, I figured why not learn a little spanish...hey maybe I can get fluent just in time to head home. Of course, as much time as I spend in California the spanish will probably do me more good back in the States than here. So I hopped on the bus to Orosi to pitch my tent for the week and enjoy one of the more off-the-beaten path destinations in Costa Rica.

*Observation: Bus drivers in Costa Rica have to be the friendliest bus drivers in the world. Or maybe they just have to meet a quota of passengers. Whatever it is, they stop for anyone, anywhere. You don't have to be at a bus station, you don't even have to be hailing the bus...they'll just slow up and ask people if they need a ride. I wouldn't be surprised to see a driver stop and go knocking on doors to see if anyone needs a ride...I'm picturing a conversation like this: "Hey, just heading into town and thought I'd see if you need a ride...No? OK, but I'm headed that way, it's really no trouble...Alright, well, can I get you anything while I'm there. I mean, I'm going there anyway...Some bananas and milk, sure. No problem, I'll just drop those off next time around."

So I arrived in Orosi Valley and I've got to say it's one of the hidden gems in Costa Rica. Beautiful valley, only about an hour's drive from San Jose, with only the town of Orosi and a few tiny towns scattered through the valley, and a population of less than 10,000. There's a river that looks perfect for rafting that runs through the middle of town (yet nobody runs it...clearly an undiscovered area...anybody want to invest in a new rafting company in Costa Rica?) and a national park way out at the end of the valley that must see almost no traffic. My first full day there I did an awesome mountain bike ride all the way out to the park, then through the park out to a dam at the very end of the road. About 60km round trip from town, stopped for three different hikes w/in the park, overall a very epic day. While I was technically on roads the entire time on my bike (remember how roads is a very loose term here?) it was still a great ride, basically dirt and rock the entire time. In fact, I would have to put it as one of my top 5 funnest rides ever...with the other 4 being in Tahoe, Colorado, West Virginia, and Austria...pretty broad sampling I think. Anyway, after all the great riding, hiking, and salivating over the river (looks like an epic class V further upstream where it runs through the park), I treated myself to a great steak in town at a bar where I was able to watch the NFL playoffs while listening to Guns N Roses and having a beer. What country am I in, again?

Anyway, the rest of the week I had classes at night, and all day to do some amazing hikes in Orosi Valley. I did a couple big loops, one on either side of the valley and both with absolutely amazing views, and took a day-trip to Vulcan Irazu, one of the highest volcanos in Costa Rica. At night I learned how to say essential phrases like "the grey cat is under the wooden table" and "no, i'm quite sure that's actually my pocket in which you have your hand" with all the proper conjugations and adjective placements. Maybe the coolest part was playing sports with the locals. Several of us from the hostel went to the park one day to toss the frisbee around. There were 5-10 local kids (probably all teenagers) playing basketball who came over and joined in. We wound up playing basketball with them...cue the harlem globetrotters music, these kids were good. I kept thinking of the scene in "Airplane" when the guy talks about joining the Peace Corps and teaching African kids how to play basketball. Fortunately, for once I actually had a size advantage in basketball and was able to use it to avoid too much embarassment. The next day we talked them into playing ultimate frisbee. Luckily there was one local guy who was fluent in english as well, so we were able to explain the rules. Now it was my turn to show off :-) Figured I´d better take advantage of it, ´cause I knew a soccer game would be coming soon. Sure enough, that embarassment came the next day. (Though I did manage, pretty much by pure luck, to get an assist!) Overall, it was an absolutely great week in Orosi. The people were totally friendly and everything felt very authentic Costa Rican, not like just another tourist destination. If you´re ever in Costa Rica, don´t miss the Orosi Valley. Montana Linda was an awesome hostel, and they also run a nice bed & breakfast for those of you with slightly more refined taste than me.

And now for the reason I came to Costa Rica...RAFTING!! And this time, I got to do the whole Pacuare River without a Class V hike just before we got to the good rapids. And I´ve gotta say, it didn´t disappoint. Between the raging river and local guides of questionable competence (I was definitely wondering why I was considered the "trainee" a few times...) I definitely had some exciting rides through the rapids. Of course, the first ride was the 5am bus ride out of San Jose just to get to the river. Ugh...I was really questioning why on earth I wanted to raft so bad when I was waking up at 4:45 in the morning. But after 3 hours in the van, an hour eating a delicious (and free!) breakfast, followed by another hour in the van, I was more than ready to go. I wound up in a boat with a spanish speaking crew, so Gato, the guide, spoke pretty much all spanish during the trip. Seemed wierd since I was supposed to be learning the river that I wasn´t even in a boat where I could learn the names of the rapids, let alone anything about the scenery we were passing through. But whatever, the scenery is secondary on the Pacuare, and there´s no time to give interpretive talks between rapids. I had my first exposure to Tico safety standards in our second class IV rapid. We were a little off-line when we entered, causing us to nearly wrap our boat, and lose a guest out of the boat as a result. Now, at this point, we´re just beginning a class IV rapid, and while it´s important to watch out for the safety of the swimmer, a guide´s first priority should be on getting the BOAT to safety, ´cause without that the guests are pretty much up the creek no matter what. Gato didn´t quite see it that way...so while he ran around in circles, throwing ropes in the water (creating another safety hazard), I tried to guide the boat through the rapid. Of course I couldn´t use the crew because they were following the guide´s lead and watching the swimmer as their boat drifted into more trouble. This inevitably resulted in us hitting a huge hole, and dumping three more people out of the boat. One of the people was me, but fortunately I was able to grab hold of the boat on the way out and climb back in in a few seconds. Not surprisingly, Gato was trying to help me in (of course, I´m the only person in the boat who doesn´t NEED help getting in) as the boat continued to drift through the rapid. The other boat on the trip wound up collecting all our swimmers at the bottom of the rapid, and soon we were on our way...as I wondered what on earth I was in for if this was how rivers are guided down here. I´ll spare you the details, but that wasn´t the last time I swam that day :-) When all was said and done, it was a great trip, and I can see why the Pacuare is regularly named one of the 5 best raft trips in the world. And the next day I ran it again, with a little less chaos. If you´re heading to Costa Rica, bring me along to guide you, ´cause I´m not recommending the Ticos until I see they know what they´re doing better than the guide I was with :-)

After two days of involuntarily drinking river water, I wound up taking a day off yesterday to deal with the pretty much inevitable stomach virus, or whatever it was I had yesterday that made eating a pretty useless exercise as my stomach wasn´t digesting anything. I tried to get hold of a raft today to take some friends from Backroads down the river (and finally guide it myself!), but didn´t have much luck getting arrangements made, and since I didn´t know if I´d still be sick or not, didn´t try real hard. Since that fell through, I headed north today to Liberia to see Rincon de la Vieja tomorrow. It sounds sort of like a Yellowstone of Costa Rica, with a lot of volcanic activity going on in the form of geysers, mud pits, hot springs, etc. But I´ll let you know. Just before getting on the bus to take a 5 hour ride up here though, I decided to eat a lunch of rice & beans. Now you´re probably thinking, if his stomach couldn´t digest anything the day before...why on earth would he eat a bunch of beans before getting on a bus for 5 hours. And as I ate it, I thought the same thing. And I was sweating bullets as I got on the bus thinking about the possibilities. Unfortunately (for you, but fortunately for me) there were no ill affects from my risky endeavor. Just thought I´d let you all know that the worst case scenario isn´t ALWAYS what happens while traveling. However, as I´ve laid the foundation for a good travel story, feel free to dream up your own ending. And on the subject of food, I´ll leave you with a final...

*Observation: Often a big part of the fun of traveling is sampling tasty cuisine that you´ve never experienced before. Though Costa Rica has a lot of things going for it, this isn´t one of them. Pretty much, Ticos just eat like college students. Which I guess is just as well for a budget traveler like myself. Basically the Tico diet is beans & rice, mixed together for breakfast, or served separately for lunch and dinner. Mmmm...variety. When you want a fancy meal, you add vegetables and/or a meat item. The best restaurants in Costa Rica serve food from other parts of the world...Italian seems popular. Of course, it´s pretty much the same in the States when you think about it. What food can we really claim as our own? Hamburgers and hotdogs is pretty much it...mmmm...let´s take all the leftover pieces of the animal, squish them together and put it on bread. How creative. Fortunately, we also have plenty of Italian restaurants.

Ciao for now, Devin

Costa Rican Adventures...Milestones & memories

2005-01-21T15:25:00.000-08:00

Buenas noches (or whatever time of day it is wherever you are)!
This round of updates includes a few very important milestones. First of all, I made my first joke in spanish!! That's a sign of true mastery of the language, right? I was talking to (well, sort of trying to talk to) some guys I'd met while out hiking, and they explained to me that one of them works in computers. I said something about him having 'mucho dinero' and one of his friends asked me if I knew the word "esposo" (spouse), so I replied "oh, his wife has all the money" in spanish. His friends found this quite amusing. Second, I got on the wrong bus and realized it was taking me somewhere i hadn't been before. I got off, asked someone how to get back to where I was trying to get to, and understood enough of the reply to find my way back on track. Full recovery without having to just get a taxi and show the driver the spanish directions to where I was staying...ok, it's not exactly having a baby, but I was still pretty proud. Now for what I've been up to since last time...

For a brief, shining moment, I thought mother nature was going to let up and allow me to do the rafting I came here to do. I actually got out on the river and we started down the Pacuare at just barely below flood stage. Unfortunately, once we were on it started dumping and we had to pull out at a midway point--before it got really challenging and fun--and hike out to the road. News flash: roads aren't as easy to come by here in Costa Rica. The hike out, with customers, was about a 3 mile slog up a steep hill (occasionally becoming a creekbed/waterfall) in mud that was ankle-deep at times. (Regardless of my feelings on his other actions, I do appreciate Donald Rumsfeld for reintroducing the word "slog" into the english language.) So after a couple hours we arrived at a road (and I use the term 'road' loosely) where ATVs were able to get some of the slower customers out to the main road (and I use the term 'main road' loosely) where a bus and cattle-truck were waiting to take us out to the highway (and I use the term 'highway' loosely) where the big busses that are normally used for customers. What's with the cattle-truck? you ask. Well, since the bus that was able to get down the road was only big enough for the customers, all of us guides got a 30-45 minute ride down nasty roads in the back of the open-air cattle truck. I've gotta say I was disappointed I didn't get to do the entire Pacuare that day, but I definitely had a class V jungle adventure at the river take-out.

Anyway, I headed back to San Jose to pick up the cash I'd had wired to me, and was planning to hang out there for a couple days until my credit card arrived. But since the river was back at flood stage and unrunnable, I wasn't about to just hang around with nothing to do in San Jose. So the next morning I was on a bus to La Fortuna to see Vulcan Arenal--the most active volcano in Costa Rica.

*Observation: OK, everyone knows the stereo-type about how aggressive & amorous latin men are, right? Well apparently the same is also true of latin women, at least the middle-aged and older ones. I found this out on the four hour bus ride to La Fortuna. As the ride went on, the 50-something woman next to me kept inching closer and closer to me. At first I thought she was just making room for all the people--the bus was packed and there were people in the aisle. But after awhile I realized she just kept squeezing into me more and more and the space between her and the people in the aisle got wider and wider. By the end of the trip, if I'd known enough spanish, I would have asked her if she had purchased a ticket, or just told the driver she'd be sharing my seat. Anyway, my theory on middle-aged latin women was later corroborated at a hostel, but at least there I was able to get up and leave :-)

So after arriving in La Fortuna, I got a bed at Gringo Pete's for a whopping $3. If ever in La Fortuna, stay at Gringo Pete's. Not only is it dirt cheap and relatively clean & nice conosidering the price, but they arrange tours for about half-price compared to what everyone else in town is asking. I did a tour that night with just two other people that included a guided two hour hike (we actually got some great, but brief, views of Vulcan Arenal when the clouds momentarily broke) and a visit to this incredible hot springs that charges an entrance fee nearly as high as what I paid for the entire tour. The place had about 10 pools of every temperature from tepid to scalding, countless waterfalls, and two swim-up bars. Unfortunately Arenal was shrouded in clouds all night because it also has amazing views of the lava flows at the peak. I was amazed they even let the hostel crowd into a place like this, let alone at whatever ridiculous discount they give Gringo Pete's.

The next day I started off on a jeep-boat-jeep adventure over to Monteverde--arranged through the hostel at about half price, of course. However, when we arrived at the lake we would have to boat across to get to Monteverde, I again ran into Backroads people. This time there was a trip going on, but the leaders told me there was plenty of space if I wanted to hop on the charter boat we had for our guests and do a little birding on the way across rather than just zoom across the fastest way possible. Hmmm...crowded public boat vs. relatively empty chartered boat...decisions, decisions. As fate would have it I hopped on the charter and joined the group in a hike on the other side of the lake. The hike was beautiful and really nice...at least until the monsoon hit. Ever seen those National Geographic expeditions where you can't hear anything but howling wind and fabric being snapped in the wind? After a few kilometers of that we all eventually wound in the van for a drive into the town of Monteverde and an amazing lunch prepared by a famous local chef exclusively for Backroads groups...and stowaways :-) Well after lunch I checked into my hostel, and after looking at my options for evening activities, I decided to hike the peak nearby that the guy at the information center said was way too difficult to do, especially in conditions like this...but hey, it was free! Ever seen those National Geographic expeditions where you can't hear anything but howling wind and fabric being snapped in the wind? After a couple hours of '3 steps forward, 2 steps back' in the mud, and seeing absolutely nothing but clouds, I decided my ego really wasn't worth attempting to come back down from the peak in the dark with these weather conditions. I arrived back in town to some hot (but not nearly hot enough) chocolate and hot (but not nearly hot enough) soup and presto! A mere 3 hours later I had feeling restored in my fingers!

*Observation: anyone who's concerned about the whole world going to one common currency, don't worry! It's already happened. Apparently even the most remote little towns of Costa Rica would rather have dollars than colones. Just about everywhere I've been quotes prices in dollars, and gives you an unfavorable exchange rate if you pay in colones.

The next morning I embraced my tourist-hood and went on one of the over-priced, over-hyped, and oh-so-much-fun canopy tours. I went on a bunch of zip-lines through the forest, which was alright and had some nice views, but not quite worth the price tag. But I really got my money's worth on the giant 'Tarzan Swing' where you start off with what looks like a 50 ft straight drop before the rope finally starts to take you in an arc away from the ground. Absolute rush! If ever in Costa Rica, Aventuras is the place to go for an exciting canopy tour. After that I had a few hours before my bus so I decided to take a little hike the 'bosque eterno de los ninos', or eternal children's rainforest. You know all that money kids collect to 'save the rainforest'? Some of us may have actually collected money ourselves. Anyway, believe it or not, that wasn't just some silly 'forward this to all your friends and microsoft will send you a fat check' scam. That money actually went somewhere...here. All the money collected has been used to buy up land here in Costa Rica. It's actually one of the largest reserves in Costa Rica...and the most pristine. There's only about 4km of trails; the remaining 99% is left completely natural. So I hiked the trails and made my donation to 'save the rainforest'. But I felt the urge to do a little more...well, maybe it wasn't an urge to do a little more, but it was definitely an urge to do something. Specifically, whatever I'd eaten for lunch was not sitting well with my American stomach. So there I was, with no idea how far to the nearest bathroom, but I knew it wasn't close, and I was about to crap my pants. Now in forest as I've always known it, I'd just hike off into the woods a little way, dig a hole, and problem solved. OK, rainforest is not like forest in North America. I found myself essentially burroing through 'pristine, virgin rainforest', which was not exactly easy to do given that my bowels were about to explode. I think I made it all of ten feet off the trail, which was more than enough to conceal me from anyone passing by (not that I had anything to worry about, I only wound up seeing one other person all day) and took care of business. Being the smart traveler I am, I even had an emergency stash of toilet paper in my bag. Of course, I neglected to bring the shovel for digging a little hole or a plastic bags to pack out my TP, so I guess I've now deflowered formerly 'virgin' rainforest.

So after my encounter with the rainforest, I waited at the bus stop for the bus back to San Jose...only to find out too late that the bus stop had changed locations a few days before. Spent another night in Monteverde and made my way this morning back to San Jose. Unfortunately, the river's are still way above flood stage, and don't look like they're coming down anytime soon, so I think next week I'm going to do a week of spanish school in Orosi Valley. Looks like a pretty cool, out of the way place where I'm gonna stand out like a sore thumb. But it's supposed to have several cheap & free hot springs, great hiking, and of course a really cheap spanish school. Hope everyone's doing great wherever you are. One final...

*Observation: playing connect the dots with insect bites is a great way to pass the time when you miss a bus and you're stuck in a town for an extra night without enough money to do anything...but it doesn't make them itch any less.

Hasta une otro vez, D

Costa Rican Adventures...Travel Karma

2005-01-15T15:22:00.000-08:00

Lest anyone be too rash in ditching their jobs to follow in my globe-trotting footsteps, I feel it necessary to send another update since my latest update. Don't worry, I won't normally send these out so often, but under the circumstances...well, I've got time and $0.70/hr internet access.

It seems the travel gods frowned upon my excessive boasting in my last update and have exacted their vengeance upon me. Yesterday I left San Jose for Turrialba, Costa Rica's whitewater capital. Just before getting on the bus, I loaded up on colones (no, not colonies, I have no plans to extend my vast empire at the moment...colones are the local currency) since I knew out here in the bush ATMs might be a little harder to come by. Leaving the ATM I quickly stuffed the equivalent of about $250 into my wallet rather than putting it in my hidden pants pocket in broad daylight. So, naturally, travel karma seized its opportunity and I was pickpocketed while I was unloading my luggage from the bus in Turrialba. I even remember the guy who distracted me by "helping" me with my luggage. I'm 99% sure as he bumped into me to grab one of my bags someone he was working with grabbed my wallet from my front pocket on the other side. As Turrialba is a very small town and I remember his face, I've already prepared myself for if I happen to run into him again ("Donde esta mi billetera, punta?" = "Where's my wallet, b*tch?") :-)

Anyway, I've been working on figuring out how to get cash, canceling my credit cards, all that fun stuff. I've made an important discovery that everybody should remember when travelling. American Express ROCKS! I was able to call them collect from CR to cancel my Amex and they offered to ship another one to CR free of charge. I then spent a long time trying to get hold of my other cards (that don't have toll-free numbers) and trying to find out what I need to do to have money wired here. I eventually called Amex back to see if they could help with any of that and they wired money to the San Jose Western Union office for pickup later today, then transferred me to US Bank (all this at international collect rates, of course) and waited on the line for at least 20 minutes to make sure everything got cleared up there and then made sure there was nothing else I needed. Unfortunately, they weren't able to arrange a massage or deliver a beer to Turrialba. Other than those minor shortcomings, I was very impressed.

Lessons I hope you've learned: 1) carry Amex 2) never travel with me. Last time I went abroad I also found myself without cash or access to it. From now on, I'm only travelling with large quantities of cash duct-taped to my inner thigh. Not the most comfortable travel arrangement, but at this point I think the rash will be well worth it.

Observations...
-no matter what state of disrepair the car is in, the horn is ALWAYS working. Ticos (Costa Ricans) apparently like to test their horns every couple of seconds. After awhile on the bus it starts to sound like a soothing lullaby.
-American addresses are so boringly uniform. Addresses like "faded brick building 200 meters south and 150 meters west of the Banco popular, across from the Public Garden and next to the yellow hotel" are so much more interesting and descriptive. Maybe someday I'll have the address "friggin' HUGE white mansion, on hillside overlooking Pacuare River, next to helicopter pad, 2 kilometers west of the beach"
-there is a tax on speaking english here. Not a direct tax of course, but there is a direct relationship between the cost of anything (hotels, restaurants, tours, etc.) and the amount of english spoken by the person providing service. I sort of expected this one and I'm working on my spanish to overcome that. For instance, I just filed a police report with someone who knew absolutely no english at all--it was free, of course.

More observations to come of course. But for now I'll close with one more way the travel gods have exacted their vengeance. I should be rafting the Pacuare River right now (my primary reason for coming to Costa Rica), but in the middle of dry season it's absolutely dumping rain here and the rivers are at flood stage and too high to run. It let up for a few days and the rivers were navigable yesterday. But, of course, when I arrived last night the rain started falling again :-)

Hasta la huega! Devin

Costa Rican Adventures...Volume 1

2005-01-13T15:19:00.000-08:00

Pura vida, mi amigos!!
Greetings family, friends, and people whose email addresses I've gathered from commercial mass-mailing sources. Welcome to the second volume of updates from abroad. (Is Central America considered "abroad"? Do you have to cross an ocean to be considered abroad?) I recently arrived in Costa Rica for about a six week stay here, and as with my European travels a few years ago, I'll be sending out an update every so often to let everyone know I'm not starving in a jungle prison for attempting to smuggle arms. In fact, this time I'll only be smuggling internal organs, and maybe a few legs, but absolutely no arms.

So I arrived in Costa Rica late Sunday night and was immediately treated to classic Tico hospitality (well, after getting taken for a ride by the currency exchange counter in the airport). In my typical fashion, I hadn't bothered to make any reservations for a place to stay even though I was arriving at 10:30 pm. So as midnight approached I found myself in a cab driving around the streets of Alajuela as the friendly driver woke up the owners of small hotels and explaining my situation to see if they had one more bed. It all worked out in the end and the next day I made my way to San Jose, which is the capital and transportation hub of Costa Rica. It also happens to be where Backroads, my employer, rents a house for leaders to stay in while working here. I'm not exactly working here, but they made room for me. And coincidentally one of the Backroads leaders was heading to the same destination as me the next day. So with great disappointment, I passed up the chance to ride a bumpy, overcrowded bus for four hours and instead was stuck in a roomy rental car for a leisurely drive to Quepos, with stops along the way at a nice little restaurant overlooking a gorgeous valley. On the way into Quepos, I was forced to stop with my co-worker and hike through a private reserve with the largest canopy bridge system in Costa Rica. Though I really wanted to pay $60 for a tour with a bunch of strangers, I had to go for free with just a guide & my co-worker at whatever pace we felt like going. The next day I took a wrong turn or something and wound up rafting through a Class IV/V section of the upper Naranjo River through an amazing jungle valley. And after an afternoon siesta I headed up to the Rafiki Safari Lodge (www.rafikisafari.com) for a going away party for one of the family members of the owners who's going off to school for several years. OK, I can't even pretend to sound like I'm not having a great time anymore. Rafiki is gorgeous, and to anyone with the time & money, or time & connections as in my case, I highly recommend a visit. So we partied all night in a secluded lodge in the middle of the jungle and woke up to a hot breakfast prepared for us by the staff of the lodge. After a couple of vehicles broke down on the way out, I finally made my way back to Quepos and caught the bus back here to San Jose. Tomorrow I head to Turrialba, rafting capital of Costa Rica and one of the premier spots in the world for whitewater. Provided the Pacuare River comes down out of flood stage, I even have work lined up as a river guide.

Anyway, I wish I'd had time to make this update more entertaining. If I can stop having such a good time here, then next time I'll put a little more effort into making my updates entertaining. Hope everybody's well. Pura vida! Devin

Beijing	13.3 million
Langfang	0.7 million
Tianjin	3.8 million
Cangzhou	0.5 million
Dezhou	0.4 million
Jinan	2 million
Taishan	0.6 million
Qufu	0.1 million
Zaozhuang	0.5 million
Xuzhou	1.8 million
Suzhou	0.2 million
Bengbu	1.1 million
Chuzhou	0.1 million
Nanjing	3 million
Zhenjiang	0.6 million
Changzhou	1 million
Wuxi	1.1 million
Suzhou	1 million
Kunshan	0.7 million
Shanghai	19 million
TOTAL=	51.5 million people
	= along 818 miles (62,958 people per route-mile)

Chicago	9.7 million
Fort Wayne	0.6 million
Toledo	0.7 million
Detroit	5.7 million
Cleveland	2.3 million
Akron-Canton	1.1 million
Youngstown-Warren	0.7 million
Pittsburgh	2.9 million
Altoona	0.1 million
Harrisburg	0.5 million
Baltimore	2.7 million
Washington DC	5.4 million
Philadelphia	5.8 million
New York	22.2 million
TOTAL =	60.4 million people
	= along 1,075 miles (56,186 people per route-mile)