The Illusive Panacea of Meritocracy

Ever wonder why certain people hate Socialism? Probably not. Ever wonder why certain people hate capitalism? Probably not. Have you ever heard the complaint that those systems are unfair? Of course. Okay, so none of this is earth shattering, but there is a common thread that creates disdain? It is the idea of "deserving."

Since the time we were five years old our parents, teachers, storybooks, literary pieces, the movies we watched and our interactions with friends in the school yard all centered around "getting what one deserved." Why do we form lines? It's not because it is the best system for each person individually regardless of their place in the line, but it compliments a system of agreed upon fairness. We believe that first come, first served is fair. That those who are first shall be served first because their timeliness shall be rewarded. They deserve it.

We just as easily could have created a system where the tallest person in line shall always go first. The problem is that if someone is really short they could be waiting for a really long time. They could theoretically be helped after people that arrived much later than them but made the line before they were helped. That just wouldn't be fair would it? The tall people didn't do anything to deserve to be helped first. In fact a system like that would become hard to enforce as short people would be likely to opt out of lines all together and base who is served next on other criteria such as violence, intimidation or "cutsies."

In fact, allowing someone to benefit for something they had no control over would be deemed in the same family as dumb luck. That sure isn't a flattering statement. Luck is receiving something by chance, something one doesn't deserve. Undeserved achievement is so unflattering that one of its recipients may say "better lucky than good," or even more austencious "people create their own luck" to deflect the resulting stigma.

So we have been taught esoteric concepts such as karma, what goes around comes around and someday we all get what we deserve. Is it true? In socialism, their is a tremendous tendency for "free riderism," where individuals can get something they do not deserve. This absolutely burns many who feel like they are getting exactly what they deserve and nothing more. How dare someone get something they don't deserve? In fact, many people are so concerned with who deserves what, that they really don't care if they are getting more than they deserve so long as no one else is. That wouldn't be fair.

In capitalism, often times people condition wealth or monetary success with how deserving the person who possess it. Self made millionaires are far higher regarded than those who inherited money. Those with inherited wealth must "do something" to make a name for themselves or else they are seen as a waste. Smart people stay poor and dumb people rich all the time. While this is not a correlation that we see to be common, it is also not an isolated incident. We all sleep better when the good ones, who deserve it, have good things happen to them. Too bad that this system isn't as correlated as we expect?

Many of the wealthy are born wealthy. They are literally starting the game ahead in the score. Some get lucky and some unlucky. At times, good "deserving" people lose wealth, jobs and stature. At times, people of poor quality gain wealth and prosperity. The reason; capitalism doesn't judge, it rewards much like the polls for an election. When a person exchanges dollars for a good, service or opportunity it is given instead of that dollar being given to another for a good, service or opportunity. It's literally voting with money. It's democracy for commerce, the winner attracts the most dollars. As such, popularity, appearance, timing, feasibility, communicability, connections, access to markets, marketing, perception and momentum are usually the factors with the most magnetic effect with dollars.

Sometimes, that recipient is also a deserving person who worked hard, showed brilliance, was ambitious and withstood great obstacles to achieve. We love these stories because like being first in line, this person used what is generally available to all to succeed- they deserved it. Sometimes, the person got very lucky and was in the right place at the right time. Not bad, but we condition their success. Sometimes, the recipient didm't earn the money used, committed none of the brain power, and achieved on the back of others. Just like the tall people and the free riders, these people are scorned. The deserved, the lucky and the undeserving all get the same result in the accumulation of societal claim checks (or currency), but we don't have the same feeling.

That is why the meritocracy looks so great. In a meritocracy everyone gets exactly what one deserves. However, who is to decide what we deserve? How do we create such a system? What criteria would we use? I guess the root of our frustrations are easy to identify, but beyond our ability to rectify. The humerous part is how something so inherent in our nature is so difficult to attain.

The When, Where and Why of Government Involvement in Commerce

When Republicans are in power, the cry of the people is that the government is denying us our freedom and interfering by playing favorites. When the Democrats are in power, the cry of the people is that the government is denying us our freedom and interfering by playing favorites.  While neither party will constructively work  along side the party in power in fear that good government will lead to the reelection of their nemesis,  American citizens drown in rhetoric and double speak from both parties about what good government looks like. Regardless of one's political affiliation, this blog attempts to engage readers with the logical, not partisan, discussion of what is necessary government involvement in commerce.

First, let us start with an irrefutable fact of the order of operations.  Government is the first step in economic activity.  Government is necessary to provide at a bare minimum: property rights, police protection, infrastructure and recognized mediums of exchange, or currency.  Yes, I am aware that many anti-establishment Locke Liberals and libertarians would argue against the last two, but in our current developed state these two are enough established to be considered necessities of commerce (i.e. roads, electricity, water, etc.)  They are essential because without any of them, commerce would subside as a matter of natural progression from its current state. 

What levels of commerce would we have if one could take property from another by force?  If there were no roads?  If the electricity was not delivered? If agreements were not binding or valid? If we had to barter with goods to make a purchase?  Certainly not an economy the size, strength and complexity as ours.  Whether it is good or bad, it's where we are at. 

So, the right question is not where government involvement should or should not be, but rather how far should government go?   In a credit based economy, like ours, the government speaks for and develops the value of the assets in our economy (i.e. the government borrows notes from the Federal Reserve, or dollars, at a rate if interest in exchange for true "dollars" that the Fed holds as collateral along with all assets held within the Country).  Oh by the way, for those of you conspiracy theorists, the same is done by many States with Motor Vehicles ( A state takes a manufacturers' "statement of origin" from the maker of the vehicle and in exchange delivers a "title," or license for use, and the ability of that vehicle to be used within that State through the process of registration.  As a result, that State then issues a Driver's License so that it has jurisdiction over the driving patterns of the user thereby controlling the licensee, or "owner," to use that " registered motor vehicle" on their publicly owned streets and highways.  But I digress.

The simple answer is that the proper role of government in commerce is the amount necessary for commerce to "work."  By work, I mean that citizens can effectively participate in the money multiplier and achieve, or reasonably believe that they can achieve, their personal goals and happiness.  This ability, or  at a minimum the belief in this ability, allows the society to function in a peaceful manner as its citizens have an outlet to achieve there desires, or work.  After all, and I recognize people who quote the Declaration of Independence as an authoritative document are annoying, the point of America is the right to "Life, Liberty and Pursuit of Happiness," right.  The key is for people to have the freedom of the pursuit, that's right THE PURSUIT, of happiness.

In closing, I recognize that the Declaration of Independence is not authoritative in nature.  That said it carries persuasive authority into the intent of our Founders.  Government's role in commerce is the creation and maintenance of channels for commerce so that Citizens can access and thrive in that system.  The government is there to provide and maintain the artery, so that the heart, or private commerce, can pump blood and that blood can freely flow without blockage or interference.  The artery must be maintained though, to maintain its shape so that blood doesn't spurt every where thereby killing the body; as well as, ensuring clear passage.  Further, the artery is to be for the benefit of one's own body.  Should the artery be ruptured, by outside attack or internal disruption, its integrity must be put back in tact to ensure survival of the being.  That said, at no time shall the artery be altered outside its purpose of a conduit and shall never alter the course of which platelets cross its path.  

Now that it is defined in theory, I let you decide the application of this framework in practice.  

It's Over When "They" Say It's Over

The current depression is over as soon as the financial institutions decide it's over.  In a credit based economy where banks decide how many employees a business has, how much our homes are worth, how much inventory a business can stock, whether one can buy a car, attend college, open a business, create IPOs, complete mergers and acquisitions, the current misery is over when those lending institutions say it is.

If a bank owns 8% of the homes on a street, holds the mortgage on another 12% of the mortgages, maintains the deposits of 15% of those homeowners and is one of the few options that an interested purchaser has to buy a home currently for sale on that street, what decision are the citizens really making?  If that bank is willing to loan $300k to the prospective buyer to purchase a home, than the value of their bank owned homes are $300k and the "home-owners" with mortgages with that bank may be offered an equity line on that home if they owe less than $300k.  If one of those "home owners" owed $150k, they could take a loan against their home for $150k and start a business, invest in stocks or purchase goods, services or additional assets.

Until the stumbling incoherence financial institutions consider to be reliable computer based risk models are scrapped for the favor of common sense and rational human judgement, these banks will continue to wound themselves and have the citizens as a whole suffer.  If any intelligent person owned a home and was in the business of loaning money, that person would loan as much as a willing and credit worthy buyer could reasonably afford to pay.  Loan to value would be without regard, as payment to income would be the "trump card."  This would certainly be the case if that same person had more homes for sale and currently had balances owed to them against homes purchased from them as the values of those assets would appreciate.  In essence, a home's value is substantiated by the incomes of the people who wish to purchase them.   

 

Sound simple?  Well it's not for massively inefficient corporations, or as I like to call them governments of shareholders. Common sense and rational judgement are just the types of intangible variables that will get a person fired.  Follow the model is the cry of executives, upper middle management, middle management, branch managers and credit analysts (glorified bank tellers) alike.  After all, the model is quantifiable and predictable.  Follow the model or find new employment.  Never mind that the model rewards loaning as values appreciate creating inflated valuations that will invariably correct in a massive fashion every one to two decades when lending institutions decide that they no longer wish to outrun losses. Never mind that the model shall exacerbate the correction by magnifying price declines as the model reduces loan to value requirements in a race against price declines creating a fury of crashing prices.  Never mind that this article is exactly on point and almost all loan officers and credit analysts could not refute it with candor.  

Follow the model, follow the model- least we be without the ability to make a decision or decide on what criteria to lend.   Thank goodness that when these banking models fail again, and they will, we will have the only organization less efficient than large corporations, the Federal Government, to rebuild them and remind them through massive tax payer waste and societal loss of wealth that they are the sole solution to their self created problem.  

A Waste is a Waste: Straight Talk on Health Care

Arguments about health care are quite contrived as the true victims, the citizens, are but a pawn in this epic power struggle.  Private health care is broken and without salvation.  Big business, drug companies, HMO patient mills, unscrupulous doctors, greedy trial attorneys, weak willed patients, profiteers, government regulation, associations and insurance companies so big only the supernatural could deter them have proven that purely acting in self-interest is not the solution to the health of an entire nation.  Government care is not the answer.  Insurance companies are not the answer.   Best medical practices and forced procedures based on limiting liability make health care a one size fits all solution, that fits few and satisfies even less.  

Our incentive structure awards drug dealing, surgery, and treatment.  Prevention is a profit killer.  The sicker we as a nation get, the better the doctors, drug companies and suppliers get paid.  That said, the insurance business is so cash strapped due to high competition and failure of the healthy,  the tough and those who cannot afford insurance to insure, that denying legitimate claims is a best practice to remain solvent.  

If markets work, why does this one not?  It doesn't work because the interests of the parties are not transparently aligned with respect to one another to create efficient equilibriums.  For instance, auto insurance works because there is no party that "wants" to get into an accident.  In medicine, the patients wants to be healthy, the insurance company wants the patient healthy, the doctor profits more as a patient's health negatively progresses, but the suppliers and drug companies only are rewarded when a patient is sick.  Now, once someone actually becomes sick, the patient benefits from the best care, the doctor profits from the most severe procedure, the insurance company benefits from the least expensive fix possible ( with "no fix" being the most beneficial) and the drug company only benefits with  a drug induced treatment. 

 As a result no solution can be derived in addressing the individual participants.  The solution must result from creating strategies and tactics that result from consistent adherence to a common goal.

Here is the goal of our Nation's health care: a healthy population, who has the opportunity to eat preservative-free and unaltered foods, drink clean water, breathe clean air, who exercises and takes care of themselves and rarely reaches a level of sickness where a doctor is necessary.   

Our goal is broad, sweeping and unapologetically in stone.  All strategies and tactics that serve to fill our goal shall address the smaller issues underneath our goal, but never contradict our goal.  Now that we have a goal we ALL can agree on, let us write our strategies to reach that goal and fill in those strategies with our tactics.  Simple stuff when you remove ideology and special interests, huh?  

Oil above $70? Making sense of the nonsense

High unemployment, excess supply and reduced demand for oil, gas and all the byproducts would lead one to believe oil must be around $35/barrel right?

Actually, oil prices have risen over 70% this year without a gasp or pull-back. Sound strange? Sound manipulated? Who is to blame?

Instead of placing blame or using the proverbial bazooka to kill a fly, a simple rule change could bring a market based solution to the inability of the oil trade to align itself with the "true" market for oil, gas, and all the byproducts. If one doesn't believe me that the current market for oil doesn't reflect true economics simply read the stories perpetuated about why prices have increased. "The economy is showing signs of recovery," "Concerns over policies in the middle east geared to reduce supply," "Dollar weakness," are all nonsensical parodies to deflect a reasonable person from understanding the true nature of these remarks.

Such remarks are signals between the world of speculators, traders and market manipulators to validate why prices change. This is not signaling in the sinister sense of the word, at least I hope not, but rather agreed upon inferences about price increases. Since these stories tend to be correlated to price increases, traders, speculators and market manipulators perpetuate that reality by buying in unison making them de facto causal. The only causal connection between any of these "stories" is that the purchasers of oil futures contracts understand them to mean something. It's literally "Morris Code" for the market.

The stories aren't "causing" anything, the traders, speculators and market manipulators are causing the change. The world has more oil than it can process on ships currently anchored at sea, demand is nearly nonexistent, except it may possibly be shrinking, and the economy has made no significant change. Also, the dollar has little to no impact on the price of oil in a "true" sense as in the last oil crisis of 2008 oil had appreciated against the Euro by 245% that same year. Like the other stories, the dollar rationale exists because the market participants make it exist (either by electronically linking oil and dollars inversely or in some other similar transaction)

The simple fact is: The price of oil increases when more individuals or entities purchase the futures contract for that commodity than individuals and entities that sold it. That's the only, absolute only, 100% factual conclusion one can scientifically deduce from an increase in the price of oil. The stories are fuel to the fire and are collateral to the scientific proof.

MARKET BASED SOLUTION:

If you buy it, you own it.

The oil market is a small market comparatively to the NYSE or NASDAQ in total capitalization. In fact, it is so small that many publicly traded companies have a larger market capitalization than the oil market. As such, it is a breeding ground for speculators, traders, and market manipulators, as well as, investors as they can effectively move the price. Also, the oil market, like all commodity markets, is different from other financial markets because it contains users, or individuals and entities that need it for a business input or consumption. More specifically, because oil is a necessity for sustaining life as we know it, it is quite inelastic in price (at least its most fundamental volumes) and thereby users are further pigeon holed. The combination of these facets creates a dangerous situation where disinterested parties can hold prices hostage because they know the users must purchase and the market is restrictively small.

Users would like to buy oil for as cheaply as possible, and then be able to buy it again and over again as cheaply as possible. Sellers of oil would like to sell it for as much as possible and then be able to sell it again and over again for as much as possible. BUT, speculators, market manipulators and traders want to do both and within the same offering. In other words, nonuser purchasers, or nonusers, will buy or sell oil on credit for a fraction of the closing price to enter and exit their position before the offering for a future contract closes. They are able to enter the market on terms that allow them to bid prices up with no obligation to buy and a very small, five percent (5%) of their total commitment, amount of capital at risk. The issue is that users have to buy a certain quantity regardless and have additional costs to factor, while nonusers act without recourse, restriction or quota.

The fix is to require nonuser purchasers of oil to incur the same costs of transportation, holding, warehousing etc. as users, to create a true market. A bid to purchase oil should include a duty to receive that oil, and hold that barrel of oil for a minimum of 45 days prior to that purchaser being given the lawful right to resell that barrel. Further, as oil is a necessity for the benefit of human kind, stored oil by both users and nonusers shall be callable by a any bona fide end user at the current market rate, but not to exceed the price paid by the holder plus an increase of Libor, in the case of a shortage. This second criteria ensures that users and nonusers alike do not starve the market by hoarding oil.

This concise framework would allow a true market to exist without barring the liquidity that investors offer. Don't buy it, unless you are willing to accept delivery and pay in full. Let users and sellers find an equilibrium based on market facts (consumption, demand, and supply), instead of signaling between non users and supply and demand for contracts. Finally, let prices reflect reality. This policy has a use it or lose it flavor, while encouraging those who have no business buying oil (hedge funds, retirees, college endowments) to put their capital to use in a productive, rather than destructive investment.

Bringing California into Equilibrium

While California's elected officials debate a massive tax increase and spending caps in Sacramento on the Proposition 1a-f measures, neither party is happy with the course of action proposed. This blog was sent to every elected official in the State upon the first round of proposed tax hikes under the headline "Fixing California is easy, Fixing Sacramento is Not," and without fail not a single response. While the legislators are free to ignore reason, the fact that a new budget shortfall exists, even after they increased sales, car and income taxes earlier this year, was predicted in this blog and those emails almost exactly. The legislators of the State of California must learn to embrace the reality that they don't have a tax problem, they have a revenue problem. Now, one may argue, "but doesn't taxes lead to greater revenue?" The answer is yes and no. If nothing else is certain, taxes never earn a dollar for dollar increase in revenue to the State. Behavior is changed, psychological aversion is built, and distrust of government is spawned-none of which is healthy for an economy.

Raising Revenue

Raising revenue is not as simple of a concept as the majority of people think. In fact, many politicians believe that increasing taxes will increase revenue to the State. While this seems intuitive, it is not reality. In fact, such a belief is the equivalent of suggesting a business raise prices to increase its revenue. The reality is that life isn't that simple. According to proven economic principles, raising taxes beyond a certain point, just as a business raising prices beyond a certain level, actually has an inverse effect on revenue as people no longer have the ability or the apatite to pay such taxes or prices. Therefore, there are certain scenarios where actually lowering taxes will lead to greater revenue realized.

This economic certainty, as developed by Arthur Laffer and proved by successful U.S. policy in the 1960s and early 1980s, is unchallenged in theory by any economist despite its critics disputing where the maximum revenue point is in relation to tax rate. In essence, Laffer surmised that the amount of revenue the government collects is a function of the tax rate. In building his model, named the Laffer Curve, Arthur Laffer concluded that a State can raise revenue by raising taxes only to a certain point, at which, any further increase in taxes will actually lead to a fall in total revenue. As a result, there is a point between a tax rate of 0% and 100% where a given tax rate equates to maximum revenue. The debate has always ensued as to where that point actually exists.

While I would argue that the tax rate to generate maximum revenue actually moves depending on the psychology of the market and the position of the economy in the business cycle, few would disagree that temporary identifiable reduction in the price of any good, will cause an increase in sales if the public believes that price reduction is both significant and temporary. If one will indulge that taxes, such as sales tax, are a function of the price paid for goods, then why wouldn't a temporary reduction in sales tax lead to greater sales and more total tax dollars collected?

Especially and more so than before, a reduction in the sales tax would provide the short term boost necessary to carry the 2009 State expenditures until some point in the future when more normalcy exists in the market place. In fact, right now, the legislators want to raise down the road taxes to borrow against today to fund the shortfall that raising taxes didn't cover! With greater sales, the State would receive more total revenue dollars and greater income tax as businesses would encounter more revenue. This doubling of total tax revenue would be substantially greater than an increase in that tax which will discourage spending and dilute the effect of the raised tax. For a perfect example one should research the massive improvement in sales for emergency preparedness in Florida during that State's "sales tax holidays" throughout any given year.

As a result, the first prong to the solution to the budget in the short run is to identify a fixed window, maybe seven months, where purchasers will pay a reduction in sales tax of 1.5%. If this is advertised as significant and is promised as temporary, sales tax total revenue will increase. This principle is tried and true, just ask any retailer about increased revenue during an effective sale. The State also will enjoy the secondary effect of higher employment, and greater income tax revenue during this period.

Spending

While it is true some spending cuts should be made to balance the budget, the State should not cut its nose off despite its face. Spending that is directly converted into income for an individual is the worst place for the State to cut. Why? First, the worker pays taxes on those wages. Second, the worker spends those wages leading to sales tax receipts to the State. Finally, the purchases that those workers make, as a result of the government spending to them in the form of wages, leads to revenues in the general economy that leads to profits, that are taxed, and job creation, that also generate tax. In essence, don't cut spending that leads to revenue.

The State must cut spending that is least effectively turned into personal consumption, at least in the short run. Therefore, immediately the State should forgo any spending that is material intensive. A majority of such spending will be lost in commodity costs rather than spent into the economy with a multiplier. Next, the State in the short run should not expend energy, or spending, on any type of regulation, environmental or otherwise, that inhibits job creation, business creation, and economic growth. The State can always reinstall such efforts when its citizens are in a healthier situation. After all, anyone who states that a two year hiatus from cumbersome State regulation will have a significant effect on the landscape of the State in the long run is simple and short sighted.

Conclusion
There it is, a concise framework for a healthy budget in the short run. This fix will buy legislators time to build a long term sustainable path to prosperity in the State. In the long run, I believe that a strong emphasis should be on revenue creation through economic development and building an attractive landscape of low corporate tax rates and simplified State regulation to attract and maintain employers, manufacturers and business innovation. As the State already has a competitive advantage in living standards, weather and natural beauty, a favorable business environment would create a sustainable and growing tax base.

The funny thing is that the short run fix to the budget imbalance is contrary to the beliefs of both parties, Democrats to increase taxes and Republicans to hatchet spending. I am sure that it is no surprise to the citizens that the political parties have improperly framed the arguments of how to resolve the budget crisis, after all they stopped representing citizens in favor of well funded special interests many years ago. That said if we can accomplish the difficult part, convincing the elected officials to act in compliance with proven and established proofs of economics, a solution is literally before us.

Common Cents: National Security and Balancing the Current Account Deficit

Common Cents: National Security and Balancing the Current Account Deficit