But Now You Know

The search for truth in human action

What If Car Insurance Were Like Health Insurance?


Insurance is supposed to be something you hope to never, ever use.
Not even once.

That’s how, for example, car insurance works. If you’re careful and lucky, you’ll “waste” money on it your whole life, and never need to make a claim. You are just pooling a risk with everyone else, and only a few of you should need to cash it in, per year.

But imagine if we all had car “insurance” that covered routine things we expect to need, like oil changes and gasoline.

Since we, and the insurance company, know we will be paying for these things regularly; our insurance cost will go up by the full amount of what we’d have paid anyway, plus the extra overhead for their bureaucratic costs and profit.

You Pay Extra for “Free” Stuff

If you think gasoline is expensive now, wait until you see what it costs when it's free.

If you think gasoline is expensive now, wait until you see what it costs when it's free.

If your car insurance now costs $800/year, and you spend another $800/year on gas/oil, for a total of $1,600/year, the price of your insurance will probably go up to well over that. For example, with a mere 10% profit margin, plus another 10% in bureaucratic costs, the extra $800 would cost you $160 on top of itself.

So you’d pay $1,760 to have “full coverage”, instead of $1,600 to have normal insurance and buy your own gasoline and oil changes.

But, worse, since we’re not actually paying for each gallon and pint out of pocket, demand for gasoline and oil changes will go up, which will increase the price. It will increase it a lot.

Think of how much people changed behavior because gas prices were high in 2008. It dramatically cut demand. People bought more economical cars, moved closer to work, didn’t drive on distant vacations as often, et cetera. And this helped cut the cost of gas back in half, because the price is set by, in part, a combination of supply and demand.

With gasoline costing “nothing”, people would feel free to buy cars that get worse gas mileage. They would feel better about living farther from work. They could go on road trips as often and far as they pleased.

So the price of gasoline would skyrocket.

But since most people would have “full coverage” insurance, they wouldn’t even notice that.

What we all would notice is the price of car insurance going through the roof.

If car insurance covered normal and minor costs, its price would expand out of control

If car insurance covered normal and minor costs, its price would expand out of control

Let’s say the price of gasoline only doubles, back to its 2008 prices. Now people are using $1,600 in gasoline per year…except they’re also driving more. Let’s say only 25% more…that’s $2,000 in gasoline. Including the profit margin and bureaucratic cost, that means the price of “full coverage” goes from $1,760 per year to $3,200 per year.

But it doesn’t stop there…the insurance company doesn’t really have the same incentive, nor power, to hold down prices that consumers do.

Oh, pundits imagine they do, because they’re big companies and all that…but they lack the power of the actual consumer: They can’t make people stop driving and getting oil changes. So the oil and gas providers are able to start raising prices, as long as they can justify it…and when money’s involved, people can justify a lot. For example, now the gas stations and quick lube joints have to pay a whole second staff just to handle the “insurance” paperwork, in order to get paid for the gasoline and oil changes we buy.

So the price of gas and oil will go up even more than supply and demand would require…which means that $3,200/year for “full coverage” car insurance is only the start. If we add a mere 10% on that for the oil/gas companies’ insurance compliance staff, plus another 10% for padding they can get away with because the insurance company can’t make its customers stop going in response to high prices, then $3,840 per year.

The Uninsured Suffer

Of course, one group will feel the pinch of gasoline and oil change prices going up:

We who are smart enough not to waste our money on “full coverage”, but buy our gasoline and oil out of pocket, saving the twenty percent overhead on the insurance. But now we’re paying insanely high prices for these things, either way.

In fact, soon nobody without “full coverage” car insurance will feel like they can afford to drive, because gasoline and oil changes are so expensive.

Next step: Rationing of gasoline

Next step: Rationing of gasoline

Inevitably, this would all balloon into a:

Car Care Crisis

Media and Liberal politicians would be demanding that government insure all Americans who are not already covered, and that they “control car care costs”, which would be expanding to cripple the economy.

They would, surely, try to nationalize automotive care…they already hate that we drive so much, they say so all the time. Instead of trying specific, reasonable things, of course, they’d demand that we put all eggs in one basket with a single, gigantic, hurried bill passed into law, all or nothing.

This, of course, will end up making things worse, as such brute-force government interventions always do.

All because people were foolish enough to start buying “insurance” for predictable, regular needs, instead of only for catastrophes they hope will never happen anyway.

Health Insurance = Car Insurance

This is what is happening, now, in the health care industry.

We are paying up to $8,000 per year for a family of five, in order to get “full coverage” that pays for our normal checkups, our doctor’s visits for colds, the flu, emergency room visits for skinned knees and sprained ankles…and then we are paying for ALL of that minor, predictable stuff, plus profit and bureaucratic costs, and increased paperwork costs from health care providers, and padding of costs handed off to insurance companies…through skyrocketing health insurance prices.

Before government stepped in, health insurance was only for rare emergencies. It cost a tiny fraction of what it does today, even considering inflation. But then government took over half of health care spending with the socialized Medicare/Medicaid programs, and forced employers to offer “full coverage” health insurance, hiding the cost you pay by deducting it from what they would offer you in the first place.

The crisis this created is exactly what we should expect to happen. The problem is simply that we’re paying middleman, for no reason whatsoever, and getting exactly what we deserve.

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September 10, 2009 Posted by | Economy, Family, Health, Politics | , , , , , , , , , , , , , , | 16 Comments

Cash for Clunkers Causes Pollution and Poverty


This was going to be an article about how the Obama administration’s “Cash for Clunkers” campaign is an assault on the poor — which it is, because it breaks the flow of newer used cars to poorer people — but, in gathering facts for it, I came to realize that another of the unintended consequences of this self-destructive law is that it, literally, will increase pollution.

Why?

Ultimately, both of these side-effects are caused by the bizarre, authority-obsessed requirement that the cars traded in be destroyed, not sold to owners of even older cars.

Cash for Clunkers Pollutes

This is because the older a car, the worse its gas mileage. Not only in general, but also because cars tend to perform worse as they age.

But Now You Know is getting GREAT mileage out of this picture of the wind-powered Aerius, that charges its own hybrid battery while driving, in defiance of the laws of thermodynamics

But Now You Know is getting GREAT mileage out of this picture of the wind-powered Aerius, that charges its own hybrid battery while driving, in defiance of the laws of thermodynamics

Cash for Clunkers only rewards people for buying new cars, not for simply buying any car that got better gas mileage, regardless of its age. And it destroys the cars traded in, regardless of their own gas mileage.

This means that only more-prosperous people, who can afford new cars, are able to use the C4C program. They are, therefore, often trading in relatively nice, fuel-efficient cars. Often, they are even buying cars only a couple of miles per gallon more efficient.

Meanwhile, what about the people with older cars, which are much less fuel efficient?

Simple: They are having the nicer, more efficient used cars they WOULD have bought destroyed. Leaving them in a pollutive car longer than if the C4C never happened in the first place.

Since the older the car, the more pollutive, this has the net effect of WORSE pollution, not better.

Someone buys a new car that gets two miles per gallon better. His used car is destroyed, instead of going to someone who owns an older car that gets TEN miles per gallon worse. The net result is an LOSS of 8 MPG.

Take this real-life example:

  • Dude A has a 16 MPG truck
  • Trades it in for an 18 MPG truck, Obama gives him $3500 to save 2 MPG
  • Dude B has a Chevrolet 1500, that gets 9 MPG
  • Dude B finds he cannot afford to buy to buy a 16 MPG truck, because prices have gone up so much.
  • He keeps his old truck.

Net result? The Obama plan gets credit for a whole 2 MPG increase, but actually produced a 7 MPG decrease.

“But this isn’t a good example”, some greenie shouts, “people were trading in SUVs for compact cars!”

While that would be a good example of the program increasing traffic deaths, it’s not actually true in this case.

This is because the initial stats claiming it were a contextual lie.

The actual numbers, in fact, show that the most people traded their vehicles in for SUVs and trucks.

But that’s not all…there is a large “carbon footprint” around manufacturing a new car. Statistically, it should be impossible for the above +2 MPG truck to save enough, in pollution, to make up for being built, over keeping the used truck. Same with non-carbon pollution, manufacturing versus microscopically worse gas mileage. Keeping an older car can actually reduce pollution.

Of course that wasn’t the original point of this article:

…and Causes Poverty

In their attack on consumer choice, the Obama administration attacked consumerism itself, which is a very politically-correct thing to do. But the fact is that consumerism makes our economy more efficient, and benefits the poor.

As the best-off consumers buy better things, items out of favor — whether used or just old models — become less expensive, allowing poorer people to buy progressively better stuff for the same prices.

In the case of cash for clunkers, the Obama administration broke this:

  • Nice used cars will now be in shorter supply, which will raise the relative prices of the remaining nice used cars.
  • This will make it harder for poorer people to afford to upgrade.
  • This will trickle all the way down to the very poorest, who will soon find that their ability to buy some minimal car AT ALL, is affected.
  • That can mean the difference between getting to a job, and getting out of poverty, or being trapped indefinitely.

So aside from the many other unintended consequences of this program, and there are many, the program has actually set the scene for poor people to have an even harder time affording cars, a vital tool for earning more money.

What’s more, most of the sales are ones that would have happened, anyway.

Didn’t Even Help

The net result of Cash for Clunkers will be more depressing effect on our economy. Government is often credited with the famous Reverse Midas Touch: Everything it touches turns to crap

The net result of Cash for Clunkers will be more depressing effect on our economy. Government is often credited with the famous Reverse Midas Touch: Everything it touches turns to crap

Speaking of poverty, the program did not actually stimulate car buying, to help the economy, especially did not help the American car companies (who did not deserve it, anyway), and did not even get those new buyers to save gas mileage!

Why?

Because most of the buying was just what economists call “front loading”; the choice to buy a car was simply moved ahead…once the plan ends, car purchasing will decline to an abnormal low from where it would have been, as most people who could have anticipated buying a car in the next year or two will have simply bought ahead, at taxpayer expense.

The net result, therefore, will be the same amount of economic activity, but crammed hastily into a shorter period of time, and with the economy-damaging side-effect of government spending having required government debt or taxpayer burden.

“Hasty” seems to be a government motto, of late.

Oh, and the “helping American car companies”? The people who took advantage of Cash for Clunkers mostly bought Japanese cars.

In all, these factors mean that even this most feel-good of big government programs, Cash for Clunkers, has had the overall effect of increasing pollution and harming the poor, by removing perfectly good, modern used cars from the road, trapping poorer people in much older cars, for longer…while either increasing pollution through manufacturing more new cars, or just causing future economic turmoil by using economy-depressing public finance to encourage people to simply buy their cars a few months early, all at one time.

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August 14, 2009 Posted by | Economy, environment, Politics, Society | , , , , , , , , , , , , | 22 Comments

It’s OK if it Kills People


(caption: Standing by a compact car, crushed in a test against a mere mid-sized car: "The laws of physics can't be repealed. Even with modern safety features like multiple air bags, people in small, light cars are always at a disadvantage in crashes." -- Russ Rader, Insurance Institute for Highway Safety)

(caption: Standing by a minicar, crushed in a test against a mere mid-sized car: "The laws of physics can't be repealed. Even with modern safety features like multiple air bags, people in small, light cars are always at a disadvantage in crashes." -- Russ Rader, Insurance Institute for Highway Safety (click picture to see video))

It’s bad enough that new gas mileage standards will cost the already-struggling US automakers at least $21,000,000,000 per year, which they will pass on to YOU, either in as consumers or taxpayers, but they also can TRIPLE the chance of your family dying in a car crash.

The new CAFE standards require automakers to have a much higher average gas mileage within a few years.  But since automakers can’t force people to buy smaller cars, this means they must stop making larger cars, in order to force the “average” bought to be more efficient.

GM, for example, is going to literally stop selling the Caprice, one of its most popular and longest-made cars, to regular people…because it’s large. It will only offer those to “fleet” buyers, like police, taxi, and limo companies. Each company will also make the cars it does offer smaller and lighter. You will have no choice but to buy these, if you want a new car.

And, of course, you will be forced to finance this change through your taxes, with the new Cash for Clunkers law, while Cap and Trade (if you let it pass) will cause more car shrinkage and insane tax burden on you than CAFE and Cash for Clunkers combined.

Forced Green = Death

(caption: You're three times as likely to die in a small vehicle than a large one)

(caption: You're three times more likely to die in a small vehicle than a large one)

Yet no expert seriously denies that smaller cars are far more dangerous than large cars. They may refuse to use those exact words, but crash test results like this are not just normal, but a question of physics.

When a car hits something, its size, weight, and the materials out of which it’s made decide how much harm will come to its passengers. This is true even when an immobile object like a fence or tree…but it’s most true when hitting a moveable object, like a deer or another vehicle. These factors determine how much of the energy goes to moving the object you hit, and how much to crushing your body.

Even if your car has a rigid steel frame (Smart cars) and crumple zones (European cars), the change in speed from hitting a heavier object will snap your body around and kill you.

So when Barak Obama and John McCain attempt to force through standards that will effectively ban the building of larger vehicles for families, they are condemning many people to death. But, they say, this is worthwhile in order to force greater fuel economy on regular people.

Efficiency is more important than human life.

In 2004, a study by Dynamic Research, Inc. found a a 20% change in the weight difference between two vehicles in a collision produced a 15% change in mortality. The motivation, of course, was to show that people needed to be forced to drive lighter vehicles; punish SUV owners by reducing the side of their vehicles…but a more rational way to look at it is that, since large vehicles (and deer, and trees) will not cease to exist, a 20% reduction in the weight of new cars means a 15% increase in the death of families riding in them.

Your Death: A Risk They’re Willing to Take

(caption: Barak will remain safe in his gas-hogging limosine)

(caption: Never fear; Barak will remain safe in his gas-hogging limosine)

Not only will there continue to be industrial vehicles, tractor-trailor rigs, and other necessary vehicles on the road to hit your shrinking family car, and not only will the deer you hit not be on a corrresponding diet, but bear in mind that the “fleet vehicles” the politicians use are effectively exempted. So Obama, McCain, government officials, and their loved ones will still be safe in their gigantic limosines, massive taxis, and ponderous police cars, to collide with and crush we mere mortals.

Statistically, you are twice as likely to die in a small car than a larger one, during a crash…THREE times as likely, if it’s a single-car crash. That’s right; you don’t have to hit an SUV to die from driving a small car: The more your car weighs, the more it can push back against the object it’s hitting, reducing the speed at which your body is jerked in an accident.

In fact, in a recent test by the Insurance Institute for Highway Safety, smaller vehicles even proved doomsday devices in crash tests against mere mid-level vehicles. It’s not just that a smart car will kill you if it collides with an SUV, but even a normal sedan…and when the new laws are in effect, the normal sedans being made then will be death traps against one made today.

So if a Cap and Trade politician’s limosine crashes into your family car, a few years from now, you (not he) will be far more likely to die than today…but that’s ok, it’s a chance he’s willing to take.

The Mid-sized sedan is slowed moderately by the impact, but the minicar reverses direction in a fraction of the distance. Outcome: Sedan's driver; pissed off, smartcar's driver; dead

The Mid-sized sedan is slowed moderately by the impact, but the minicar reverses direction in a fraction of the distance. Outcome: Sedan's driver; pissed off, smartcar's driver; dead

July 20, 2009 Posted by | environment, Politics, Society | , , , , , , , , , , , , , , , , , | 3 Comments

Hypocritical Car Dealers’ Whining…


This car dealer whines about how an automaker should not be allowed to lay him off, and then talks about how HE laid off 35 employees

(caption: This car dealer whines about how a car company should not be allowed to lay him off, and then talks about how he laid off 35 employees)

Oh no, the bankrupt automobile manufacturers are ending their association with two thousand car dealerships!

This is unacceptable, because bankrupt companies should never cut costs, nor do anything else to become efficient and remain in business. They should keep all of their employees, business associations, et cetera, even if it means continuing to lose money and vanish entirely within the year.

On the other hand, why are these hypocrite car dealers not doing the same thing?

The ones pandering to a grandstanding Congressional panel today complained that they — the dealers themselves — had to lay off dozens of employees.

One of them said something like “I have been turned into a glorified used car dealer, which…[sob]…cost thirty-five of our loyal employees their jobs! [whimper]”

But…but…why on earth did he not simply keep all 35 of those employees, the way he’s demanding the automaker be forced to keep his dealership?

Every single explanation he might give, if asked this, would translate into an argument for why the automaker needed to get rid of extra dealerships.

Of course, the automakers could have kept more dealerships, if the Obama administration were not undermining their ability to get out of insane contracts with the UAW monopoly.

But, either way, the automakers are SUPPOSED to cut costs, at the cost of jobs and associations.

Or else the car dealerships should not be laying off employees, just because they lost their new car contracts.

And now we see another consequence of the Bush/Obama nationalization of industries...

And now we see another consequence of the Bush/Obama nationalization of industries...

June 12, 2009 Posted by | Economy, Politics, Society | , , , , , , , , , , , | Leave a comment

Fowl-Weather Conservatives?


Beware the Republicans in Name Only, who adopt Conservative jargon only when safely out of power

Beware the Republicans in Name Only, who adopt Conservative jargon only when safely out of power, but believe in socialism.

Listening to all the “Obama is a socialist, someone save us from the fascist state” hubbub going on now from the neocon pundits and politicians, you wouldn’t guess that, for six to eight years, the Liberal/Neocon wing of the Republican party controlled all important aspects of government, and acted almost exactly like Obama is now…if anything, worse.

Where were these frauds, when Bush was the one nationalizing banks, passing huge bailouts, expanding regulations to record size, socializing health care, et cetera?

Why are fake Republican pundits suddenly talking Conservative now, when they were talking Liberal then?

Because now they’re out of power. Impotent, they feel safe arguing for the liberty they despise, simply to get back into power…at which point, history says, they would simply expand government faster than the Democrats.

This happened when Nixon replaced Lyndon Johnson. He signed more Great Society bills into law than his predecessor.

The same thing happened with Bush following Clinton; he expanded domestic spending more in any ONE YEAR than Clinton did in an entire four-year term.

His solution to the Katrina disaster?  Throw money at the problem, even when the corrupt Louisiana and New Orleans governments had already been given, for a decade, more Corps of Engineers money per year than the rest of the nation, combined.

When recession hit, or years later depression, both times their “stimulus” packages were Keynesian socialism, even the fake “tax cuts” mostly being socialist tax credits and semi-annual welfare payments disguised as meaningless “rebates” that did not change economic behavior at all.

When Bush crippled our economy with huge new regulatory schemes in health care, shipping, and insurance, these faux-Conservative talking heads were silent, defended him, or even bragged on it.

When he expanded socialized health care more than ever before in US history, with the prescription drug “coverage” that inevitably caused the price of prescription drugs to explode, why were they not screaming “socialism”?

When Bush said that he was banning guns in occupied Baghdad NOT to repress the resistance fighters, but only to “reduce violent crime”, parroting Liberal gun control freaks’ excuses, why did they not scream in horror? Obama has actually spoken more in DEFENSE of the second amendment than either Bush or McCain, and yet they claim he’s trying to confiscate all guns.

Let’s face it, the neocon Liberals in the Republican party leadership, and much of the “Conservative Media”, including talk shows and Fox News, don’t believe a word of what they are now saying. They are, if anything, worse than the Liberal Media…their advocacy expanded government and attacked liberty far more successfully than the Democrats have.

Let’s not get sucked in by their “rebranding” scam.

Like super-Liberal RiNO Bob Dole said, when opposed by all true Conservatives in his 1996 run for the presidency, “if you want a Reagan, Bob Dole can be a Reagan”…to them, it’s all a game of packaging and playing at what true Conservative supporters of  liberty believe.

June 4, 2009 Posted by | Economy, Politics | , , , , , , , , , , | 5 Comments

Thank Liberalism for the SUV…again


(caption: You can't ban powerful vehicles, any more realistically than you can ban stupidity.)

(caption: You can't ban powerful vehicles, any more realistically than you can ban stupidity.)

 

Years ago, busybodies decided to violate the limits to the powers of the Federal government, by setting gas mileage standards (and many other harmful regulations) on automobiles.

As is always the case with the Law of Unintended Consequences, this actually produced the opposite of the intended results.

It created the green-hated SUV boom.

This is because there are legitimate uses for large engines, and large vehicles. You can’t just declare that everything has to get X miles per gallon. Obviously, trash trucks cannot. The tractor-trailer rigs that deliver most of our goods cannot. Vehicles that actually are needed to drive somewhere on the road and then go off-road to do work cannot. 

There are, in fact, many sporting or work activities that require the power or weight that make high gas mileage impossible.

So the bureaucrats were forced to create special exceptions…for example, a Sports-Utility Vehicle class.

But arrogant, ivory-tower civil rulers cannot anticipate all needs. OK, let’s face it, they are actually incompetent at anticipating the needs of real people. 

So it didn’t occur to them that regular families need large vehicles, for many reasons. Nor that the regulations on minivans would make them too underpowered and, well, ugly, for most people to find tolerable.

So, in fact, the typical family was faced with an artificial division between the “efficient” vehicles, and those even more powerful than they need.

They were, therefore, actually driven (no pun intended) to buying from the latter class. Stuck between feeble, dangerous, ugly cars with good mileage, and inefficient, powerful, good-looking ones, they chose the latter. As they should.

It’s the environmentalists’ own fault.

And now they’re at it again:

The Obama/Pelosi administration have announced a McCain-like plan to FORCE Americans to drive even weaker, uglier, more fuel-efficient cars. This will not only increase poverty, by hugely raising the price of cars and therefore pricing people out of transportation, but will surely have many other unintended consequences, in the long run. More automaker bankruptcy, as they’re forced to make cars we won’t buy? Even crazier automotive trends, as we try to find a way to get what we actually need, instead of what they want us to have?

Have fun finding out what they’ll be.

May 25, 2009 Posted by | Economy, environment, Politics | , , , , , , , , , , , , | 2 Comments

Unemployment Benefits INCREASE Unemployment


The recent increases in unemployment benefits, rather than helping fight unemployment, have actually increased unemployment dramatically 

 

The recent increases in unemployment benefits, rather than helping fight unemployment, have actually increased unemployment dramatically

Subsidies Cause Surplus

If you wanted to have too many apples, you could simply get the government to pay billions of dollars to apple growers. You can do this with almost anything; it’s called a subsidy.

Aside from the many problems intentional subsidies always cause, there are many “unintentional” subsidies. Perhaps the worst of these is the unemployment subsidy.

When you give people money for each apple you grow, more people choose to grow apples, and apple growers choose to make more. It creates an imbalance, producing more apples than the society really finds worthwhile.

When you give people money based on how unemployed they are, you likewise cause more people to be unemployed, and people to be unemployed longer. I don’t even need to go into how that creates an imbalance, as (unlike apples) more unemployment is obviously, universally, bad.

Some people, mostly those who have little real-life experience (like a Kennedy or Bush family member) might say “But nobody would CHOOSE to stay unemployed, just for benefits”.

Second, they’re wrong…but I’ll get back to that.

First

FIRST, it doesn’t matter if nobody does it on purpose. When the Fed raises interest rates just 0.25%, fewer people buy houses. Not one human being actually says “I am not buying this house, because the Fed raised rates by a fraction of one percent”.  It isn’t even raising home loan rates (it has no control over those), just the rate at which it lends to banks. Yet the trickle-down effect is fewer homes bought, in part because home loan rates creep up a tiny bit.

The same is true of unemployment. There is a trickle-down impact, over the span of 300,000,000 people, where some stay unemployed longer, and more BECOME unemployed, because unemployment is subsidized. As even a tiny increase in home loan interest rates invisibly pushes a few people over to the side of not buying a house, an increase in unemployment subsidy pushes a few people over into being unemployed.

Over the span of hundreds of millions of people, that is dramatic, in both cases.

And now we can get back to “second”:

Second

The ivory tower “nobody would choose to stay unemployed” people are wrong.

People DO choose not to work because they know they have an unemployment buffer.

They choose not to work as hard or otherwise volunteer to be the one laid off, choose not search as hard, pass up jobs they would otherwise take, and even actively stay unemployed, because of the unemployment benefits.

We who have real-life experience probably ALL, right now, know people who are doing this. Many of you, in fact, probably have done it. I am a consultant, so I don’t get unemployment benefits, but I’m sure it would influence me if I did.

I certainly have friends who actively cite the unemployment benefits as allowing them to take their time working. I even know someone who says they are glad the benefits have been extended, as they will be able to go for a year without looking for a job, now.

Sure, most states have some sort of fake attempt to require people to look for and take jobs. But there’s no way to actually make this work. It would cost more than unemployment benefits provide, to actually verify all the claims people make on their “looked for a job” forms. And any cheaper means of proving it would be draconian against all the people who were honest.

The Unemployment Subsidy

So yes, that’s exactly what the Liberals’ unemployment extension has done:

Increase unemployment, by subsidizing it.

We will have higher unemployment rates, and suffer this depression longer, because of the benefit increases. Yet another example of government’s coercive “help” making the problems they attack worse, instead of better.

April 3, 2009 Posted by | Economy, Family, Politics, Society | , , , , , , , , | 7 Comments

Golden Parachutes, Explained


It sounds outrageous, that some companies end up filing for bankruptcy restructuring, or even vanishing entirely, while their presidents and CEOs leave the companies with bonus severance packages of millions of dollars, a “golden parachute“.

It seems unfair to the workers, who are out of jobs, the investors and stock holders, and everyone else who gets nothing.

Why should an executive, who obviously failed everyone, whose very competence as a manager is in question, get enough money to retire on, while everyone else has to struggle a disastrous end to the venture?

It sounds terrible, that executives get huge bonuses when a company goes under, but this clause actually saves many companies in the first place.

It sounds terrible, that executives get huge bonuses when a company goes under, but this clause actually saves many companies in the first place.

 

 

Why on earth do companies offer them, in the first place? Especially the ones that are already struggling…shouldn’t they refuse to offer a big severance package when they’re likely to go under, anyway?

Well, in fact, the struggling companies don’t want to offer those packages.

What happens is that the company does know it’s struggling, and so it is looking for the best CEO it can find, someone who can save it when its last managers obviously were just making things worse. But when they call the best guy available, they run into two problems:

  • First, they can’t afford him, because they’re struggling. The money for his high salary could bankrupt them.
  • Second, he doesn’t want to risk his reputation. If the company turns out to be too far gone, he will definitely get blamed, even if he did all that was possible.

Fortunately, they can  solve both of these in one :

They can offer a lower salary now…what they and the executive agree they can afford, plus a huge severance package.

If the company is saved, then he’s earned it.

If the company goes under despite his great skill, then he gets compensated for his damaged reputation, and the pay cut he took during the time he worked there.

This means that a struggling company can hire a better executive, therefore increasing the company’s chances of surviving, if it offers a golden parachute. 

So it’s actually better for the workers, shareholders, investors, and customers if a company does offer a golden parachute. Not just struggling companies, either…because it can always improve the executive a company can hire, therefore improving the company’s future.

Now there are other, obvious benefits to having golden parachutes.

Golden parachutes also help protect companies from hostile takeovers, because the executives of the taken-over company, inevitably all fired, will cost millions to the devouring company. 

Really, any way you look at it, companies being able to offer golden parachutes is good for all involved. Including the regular employees.

December 18, 2008 Posted by | Economy, Politics | , , , , , , , | 3 Comments

Why Deflation is Bad…for You, Private Property, and Capitalism


Politicians and journalists are worried, right now, about a downward spiral of deflation, of the type that normally comes in an economic depression.

They are pointing to two signs we are having bad deflation…first, the falling price of commodities like oil, and the disappearance of money in this economic failure causing demand to plunge. One of those is actually good, the other is very bad.

When prices go down naturally, because of an increase in efficiency or improvement in technology, it is good for everyone. 

For example:

  • Improved efficiency makes the manufacture of computers cheaper, while more advanced computers make the old versions cost less.
  • Food used to take up most of humanity’s effort, therefore most of  a family’s cost of living, but has declined to third or fourth place as technology and efficiency allowed us to grow more with less.

The decline in oil prices, returning to only double their normal level, will cause a good kind of global price decline, because most prices are effected by the cost of the energy required to create and deliver products and services.

But, again, those specific cost reductions are not deflation.

What Are Real Deflation and Inflation?

When money deflates, people choose to just hold onto it, starving the marketplace and causing a spiral of ever more deflation

When money deflates, people choose to just hold onto it, starving the marketplace and causing a spiral of ever more deflation

In real economic terms, inflation and deflation happen when the ratio of money to economic wealth changes. If the amount of money becomes greater, in comparison to the economy, then you get inflation. Because the most common result of this is for prices to increase, we confuse the terms and call general price increases “inflation”, but actually it’s the change in ratio that is inflation.

The eleven trillion-plus dollars of capital that have purportedly vanished in the past few months represent a huge decline in money supply, causing actual deflation. This failure was caused by the inability of central authority to manage money any better in the US than it could provide shoes and food in the Soviet Union.

Prices Can Increase Without Inflation, Too

Prices can actually increase for other reasons, and that’s not really inflation. For example, when oil increased 600% in price, it drove up the cost of production, without regard for the number of dollars in the economy. This general price increase was NOT inflation.

And when prices decrease for other reasons, it’s not deflation.

Inflation is Harmful

We all know that when the ratio of money to wealth increases, causing inflation, it is bad for the economy, and especially for the poor and middle classes. This is because it usually drives up prices, and the poorer you are, the more of your wealth and well-being is in cash.

Poorer people depend on cash they have in a bank, or other savings. They are paid by employers who give them only a set rate, plus raises for special reasons like increased skill.

Wealthier people tend to have more of their wealth in assets like, stocks and real estate, that will simply increase in price, sheltering them from some of the effect if inflation. They get cost of living increases in salary every year, on top of any other raises.

Deflation is Harmful, too

But the opposite kind of damage occurs if you have deflation, and is compounded by a new problem.

First, deflation artificially drives down prices. To a person with no real assets or investments, this sounds good, because “stuff costs less”.

But it comes at a horrible price.

Deflation punishes investments that can raise people from poverty, both personal investments, and business growth

Deflation punishes investments that can raise people from poverty, both personal investments, and business growth

For example, the decline in prices includes wages. Deflation is universal, with a shortage of money everywhere, so that your income will decline, along with the price you pay for things. What good is cheaper stuff, if you also have less money?

So people with fewer assets and no investments will more or less end up breaking even. But they still lose out in the end, because they become blocked from gaining assets, trapping them in relative poverty.

For example:
 

How Deflation Traps the Poor and Middle Class

Imagine you’re buying a house. Not on a sub-prime loan, but one where your income is perfectly fit for the home you’re getting.

It’s probably a thirty year loan. So you’re going to be stuck paying on the original price of your house, for thirty years, at the original size of house payment.

Now remember that your income (in dollars) is getting smaller every year. That’s deflation.

And the price of your house, too. Each year, its is worth fewer dollars, yet your original debt is the same. And so are your payments.

Within just a few years, you are making far less money, but are stuck with the same size house payment you always had.

While you still have to pay the same percentage of of your paycheck income for food, electricity, and so on, your house payment takes up a higher percentage of that money every year.

Soon, your income has shrunken to the point where you cannot make your house payment at all. Not even if you paid your whole check to the bank every week.

And worse, you can’t simply sell his house to get out of it. The price of your house has also declined every year. Selling it now that the payment is too high won’t even pay off your remaining house debt.

Of course people would quickly learn this, and that they simply cannot buy houses, unless they are so incredibly wealthy that they can save up enough to pay cash. 

But even those wealthy people who can pay cash for a house now face the situation where buying a house is a horrible investment, because the house’s value will decline, in dollars.

It would actually be better to leave the money in a vault, and rent monthly, even for a billionaire, because the money’s value increases, while the house’s price declines. One thousand dollars will be worth more next year, if you simply stick it in your mattress, than one thousand dollars worth of house will be worth in that same year.

In fact, owning land becomes a losing proposition. With even the wealthy better-off renting, who’s going to actually be the landlord?

Deflation Attacks Economic Freedom

In fact, ALL property ownership becomes punished!

With deflation, anything you buy does not just depreciate with use and age, but declines in value every year with prices, compared to if you’d simply kept the money.

Today, you could buy that console game, or car, or collectible, and then sell it on eBay a few years from now and recoup part of the cost. But with deflation, the price you recoup is even farther from if you’d kept the cash in the first place.

Deflation Destroys Capitalism

Deflation punishes investment and property ownership, attacking capitalism at its roots

Deflation punishes investment and property ownership, attacking capitalism at its roots

In fact (and this is where the entire economy implodes from deflation), simply holding on to your money is rewarded versus ANY investment, in a deflationary economy. If you put your money in a big ol’ vault, removing it from the economy entirely, it grows in value every year. But if, instead, you buy stocks, or invest in commodities, then your money is gone, replaced with an asset that becomes worth less every year, in dollar terms.

The growth of every business, in fact, would be undone by the rate of deflation. Now from the company’s standpoint, that is fine, because its expenses decline every year by the same amount.

But from an investor’s standpoint, a company growing at 2% per year during 3% deflation would mean you lose 1% over just stuffing your money in a safe. And yet you also risk, when investing money.

Why bother investing even in a company you think might grow at 5%, when you could have a 100% safe 3% investment in a vault under your mattress? So, really, the company facing deflation is NOT fine, because it discovers that it’s far harder to get investors. In fact, the entrepreneur who would have started that company is 3% punished each year for the effort, making him that much less likely to even bother.

With investors discouraged because of deflation, it becomes harder to create wealth. Capitalism, in fact, becomes almost impossible:

  • An entrepreneur can’t get investors for his new project.
  • There’s less reason to buy stocks, so companies can’t raise capital.
  • You can’t get a loan to start a business, because your company’s income would decline every year, yet the loan payment would stay as large as ever.

With deflation, the very engines of capitalism all die out.

Speculation Defines Capitalism

It is the uncertain investment on the wild new idea that makes capitalism superior to central planning. Anyone can decide to invest in a “sure thing”: if that were good enough, socialism would work, because a government bureaucrat could declare money for the obvious solution. It’s diverse people choosing to risk money on many different wild ideas that lets the best solutions rise to the top.

But that very kind of capital investment, in a deflationary economy, is punished, because you get such a good deal by not investing in anything at all, but holding your money in a vault.

All of this, by the way, is aside from the additional destruction caused by the lack of downward price elasticity on many commodities and time-based investments. That’s much more arcane, but a key source of economic depression, that I’ll get into some other time.

For now, it’s enough to realize that prices being FORCED downward by deflation includes your pay, and the value of any investments you make, so that private property ownership, borrowing, and investing, in fact all capitalism, is crippled under deflation.

December 16, 2008 Posted by | Economy | , , , , , , , , , , , , | 10 Comments

Trickle-Down Taxation


2. A heavy progressive or graduated income tax.

Item #2 of the Communist Manifesto: "A heavy progressive or graduated income tax". What isn't mentioned is that this was a way Marx could make the poor even poorer and weaker, not the rich. Marx gained power from the strife caused by poverty.

One of the best-sounding of the freebies that Obama is offering to hand out (if it’s not just another politician’s empty campaign promise) is exempting everyone who makes under $200K from the income tax. This one even tempts me. Lower taxes are good for the economy, for economic freedom, and of course for everyone who earns less than that amount of money.

But there’s a serious down-side to this. How do we fund all of the other freebies he is giving out, if we are going to cut government tax revenue with this one?

Of course the answer is simple: We are going to tax the people who make OVER $200K so much more that it makes up for the loss. Obama says it’s only fair, to “spread the wealth around”.

Now this may not be quite as bad as it sounds:

  • First, people who make over $100K or so pay most of the taxes, already. Unfortunately, Bush’s tax cuts were not really all that “for the rich”, and “wealthy” people already pay almost all of the taxes. It was pointed out today that there are some companies, in fact, that are forced to pay more taxes per year, individually, than 66% of all families. It’s famous that the top two percent of earners pay something like 60% of the taxes.
  • Second, tax cuts boost the economy, which increases tax revenue. Both Reagan and Kennedy both demonstrated this, cutting and simplifying taxes, and having tax revenue increase.

Unfortunately, those two things aren’t enough. The billions paid by people who earn less than $200K still adds up…and tax cuts don’t all work equally well.

For example, tax cuts that favor one group over another help the economy less, while ones that spread the burden evenly help everyone more. In fact, simply spreading the burden evenly, with NO tax cut, would boost the economy more than cutting taxes for some people, while raising it for others.

Especially when the taxes (as they already, are, and will now be more) are designed to punish hard work, success, and contribution to society.

Just as a slight increase in interest rates, so small it certainly doesn’t change any one person’s mind, has a large nation-wide impact on how much people borrow, so a tax that increases as you earn more money has a nation-wide impact on how much people earn, depressing income growth.

But there’s something involved, that’s more important than ALL of that:

WHEN Barak Obama raises taxes on people who earn more money, the wealthy will not pay a penny of it.

You will.

The counterpart to trickle-down economics (which points out that wealthy people who earn more money spend and invest more, allowing all of society to become more wealthy) is…

Trickle Down Taxes

When you raise taxes on the rich, they ALWAYS respond to defend their wealth. The more money and power they have, the better they can do this. They can give themselves raises, pay accountants to shelter their income, or otherwise make up for the new tax.

But where do they get the new money, to pay themselves enough to make up for the taxes?

From you.

Wealthy people and companies can, for example, raise prices to pay themselves enough extra to make up for the taxes. Guess who pays the higher prices.

They can also cut jobs or pay among their employees, in order to make enough to pay themselves more. Guess who the employees are.

Along with those two tools of passing along higher taxes, the rich and powerful can cut quality of products, again to save for themselves. Ice cream that was once two quarts is now 1.5 quarts, and the same price. Check Edy’s and Breyer’s, next time you’re shopping. Guess who ends up paying for all the reduced-quality/quantity food. Not the rich guys…the can afford to pay a premium for consistent quality.

Ultimately, ALL costs the government imposes on the wealthy, they pass down to you.

Oh, but the tax trickling isn’t done, yet.

If They Lose, You Lose More

Let’s say you, somehow, manage to force the wealthy and powerful to pay for their own taxes.

You are now shutting thousands of people out of jobs, and, causing more hunger and poverty.

Why?

Because the wealthy don’t put their money in giant Scrooge McDuck vaults, to play in while they cackle wickedly. Instead, they either spend or invest it. Spending it creates jobs directly. If they buy a car, someone built it, someone shipped it, someone sold it, people repair it, people clean it…maybe someone even drives it as their job. The less money ANYONE spends, the less work there is. But, let’s face is, the wealthy have more money, per person, than other people, and therefore supply more jobs with money.

Poor people have to mow their own lawns (if they have them). Middle class people may be able to pay someone to mow their lawn for them. A few dozen families might, between them, manage to keep one lawncare guy employed. But one wealthy dude may employ a half dozen lawn guys, all by himself. 

Take away his money, and the rich guy may have to lay off his lawn people…perhaps one hundred times the job impact of a middle class person having to stop hiring a lawn guy.

But most of a wealthy guy’s money is not spent, so it doesn’t make jobs.

Well, not directly.

Investment Creates Jobs

Instead, it gets invested. Invested money, of course, goes directly to creating wealth. That’s the whole function of investment…the reason that the investor gets more money back. The creation of wealth actually creates MORE jobs than spending money directly. This, in fact, is what actually drives employment, in general. Without investment, we really would “run out of jobs”. The economy would stagnate, and we’d end up like Communist China was, before they went “capitalist”.

The “capital” in capitalism is investment.

Rich people and companies are the reason most new jobs ever get created at all, because it requires investment to build the factory, or store, or restaurant, whatever it is. Even when poorer people start their own successful business out of pocket (something pretty rare, because of government regulation and taxes), they only create large numbers of jobs as they become successful and rich.

One of the many reasons the economy is so weak, now, is because investment is so rare, thanks to punishment of investment through taxes, regulation, deflation, and the preference for stagnating money shelters like bonds and treasury notes, over the stocks to which government has proven to be so hostile.

If we are to get back on the road to economic growth, we must first get on the road to economic freedom for all, including the wealthy, who just happen to pass on ALL effects we try to have on them, good or bad.

December 3, 2008 Posted by | Economy, Politics | , , , , , , , , , , | Leave a comment

   

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