Can Obama Pull a Jackson?

It was the eight of January, 1835 when officials from across the country gathered in Washington DC for a meeting presided by President Andrew Jackson when it was officially announced the United States had paid all debts to other nations for the first time in history. Not only was the country out of the hole but for the time being, we were running a national surplus.

Right from the start debt was a choice for the United States. Following the Revolutionary War, as we were founded we had the simple option to default and forget about wartime loans. All the bonds and grants to the government would be forgotten but at the cost our credit, economic stability and credibility as a state.

So the US decided to take on its debt which for the same reasons as today, wasn’t very easy to finance. The debt wasn’t expanding at quite the rate it does today but neither was it shrinking. Then along came Andrew Jackson who as a land speculator in the West had gone in the red after a deal gone bad. His experience led to a campaign oriented around economic stability and would go on to enter office despising banks and considering debt a moral failure of sorts.

And so he went to work almost immediately, and shut down the National Bank. He then began selling US assets primarily in through federally held land in the West. Further, he ruthlessly blocked spending bills, vetoing expenditure of nearly any form. Though some questioned the integrity of his practices, there no doubt that it worked. Money poured into our coffers as spending simultaneously shrunk and the miraculous result was the erasure of our remaining $58 million debt within 6 years.

 And so it was on the eight of January, 1835 when Jackson realized he had the wonderful new dilemma of what to do with his extra reserves now. There was no National Bank anymore so he decided to divide the money and grant it to states by population. And sure enough that’s when the good times ended. The states weren’t quite as cautious as Mister Jackson and began a land purchasing bubble not hugely unlike our housing bubble, which soon grew out of control. Jackson noticed this and stepped in but immediately realized he was too late. By requiring land to be purchased in gold or silver, we saw a crash causing a recession that would drag on for six years. And just like that, with the pop of a bubble we said goodbye to a year long debt-free US.

Even when accounting for inflation, the debt Jackson tackled pales in comparison to the burden we carry today. Last Wednesday, President Obama proposed a combination of long-term spending cuts particularly in national defense, tax hikes and changes to welfare programs. Personally, with my limited economic knowledge, I believe each of these is exactly what we may need. Spending as our dear old President Jackson demonstrated is the obvious and possibly most important point. Tax increases (audacious considering elections are approaching) may very well be a fact that we are just going to have to learn to live with if we ever plan on lowering our deficit. Lastly, welfare programs at the moment have already been identified as facing huge sustainability issues particularly in the case of Social Security so reform is necessary in any case.

                 If these measures were to take effect and be as successful as planned, the national debt would be reduced by $4 trillion in the next 12 years. This goal is ambitious to say the least especially considering years past, but offers the kind of hope and worthy cause America needs at the moment to handle a task as daunting as this. So though for now the debt clock continues ticking, the beginning of our journey to the end just may be in sight.

Drugs: Are We Better off Legalizing Them? (Part 1)

The fundamental point behind making drugs illegal is that in addition to law abiding citizens, those who wish to abuse anyways face high production and sale costs which in theory should decrease demand. But illegal drugs are a special case in that their price is fairly inelastic because they’re addictive. The result is that unlike most other commodities, people are always going to be willing to pay any affordable amount to get high. So making drugs illegal simply limits the number of dealers to those who can overcome legal barriers, and in the process makes them richer and spikes crime rates.

So to test this beyond the theoretical economic mind, NPR’s Planet Money talked to Freeway Ricky Ross who after became a large scale crack dealer in Los Angeles was sentenced to life in ’96 only to be released on parole 13 years later.

So the first part: making drug sales illegal drives the price up. To judge take a look at Ross’ numbers. Ross went through up to $3,000,000 a day out of which he made between 200 and 400k off each million. Of this profit he estimates that the forbidden nature of his products is responsible is responsible for approximately a thousand fold spike in their price.

                Now onto part two, that part of this money funnels into higher crime rates. Rick worked with 30-40 guys each of whom at any given moment was required to be armed. This thug and armed environment had obvious effects.

Drugs: Are We Better off Legalizing Them? (Part 2)

Money was further distributed to uphold ties between groups that bought you a free pass in the otherwise fatal streets of LA. And these guys weren’t necessarily drug dealers but included an assortment of criminals be they robbers, “jackers” etc. Other major costs ranged from reserves to pay bonds to financing lawyers to hiring the so-called small timers involved in the intricacies of running a drug operation.  To these individuals, seeing such profitable business is a huge enticement to enter this world.

But the thing that economists don’t necessarily take into consideration that Rick can point out is pretty simple if you think about it. Drug dealing is different from any other job you could ever have. High risk jobs normally demand high compensation but to starting dealers, life in gangs is a slow transition from life at home so any compensation can be seen as a lot. Furthermore, the life involved and processes becomes a culture unto its own that can be more engaging than it is dangerous. The result, even if you weren’t paid as much as Rick, even if you were broke and hunted, it was a life that some just wanted to live.

The simple solution is to legalize these substances but that would spike addiction. So the choice really is would we rather have higher crime or more people addicted to drugs? But there is a third option and that is to destroy the motivation to use or sell drugs in the first place. And that’s what Ross addresses now by talking to youth and others about the life after prison or lack thereof if you’re killed. It’s not an easy task but it may be the only option in a business that’s otherwise economically and socially irresistible.

YouTube Again plus Cricket

Hey guys I’ve blogged about cool YouTube channels and I’d like to add two more to my list. FPSRussia and EpicMealTime have gotta be the manliest, most amazing channels ever! The first is a Russian guy, and yes he has an amazing accent, who shoots guns. The second is a bunch of surprisingly healthy looking guys who make massive, ridiculously unhealthy meals using bacon, meat, bacon, other stuff and bacon and eat them. Both are pretty primordial and I’m sure not all of you will enjoy them but for everyone else, these are some awesome youtubers.

 PS INDIA WON THE CRICKET WORLD CUP in an amazing championship game!!!

Too Big to Fail!

Over the past year or so you’ve probably heard the term “too big to fail”. The term implies exactly what it says; these companies are so large and interconnected to other services in our economy that the failure of any one of them would have significant implications on the entire financial systems. In fact some people believe that any one of these corporations could destroy our economic foundation as a whole. For this reason, the phrase became the backbone of government bailouts that took billions upon billions out of a heavily indebted treasury to support these businesses.

Though these bailouts were admittedly successful and will for the most part be repaid over the years, they placed immense stress on our fiscal system and often came very close to not working. And hence recent legislation, specifically the Dodd-Frank bill. Under the law, companies titled too big to fail would have to not only create a safety blanket of reserve capital but also create a sort of will that would detail their shut down process in case. Furthermore, all of this will be subject to extra scrutiny by regulators.

I personally completely agree with this proposition as it’s the first concrete and system-wide step in the right direction. Though many of us saw the negative consequences of the recession, little has been done in the way of preventing its recurrence on a large scale. For reorganization beyond the responsibility these times have instilled in us individually, I think legislation such as this is going to prove absolutely imperative.

So now the question for Dodd-Frank is who would fall under the category of too big to fail? At this point, any bank holding over $50 billion in assets immediately makes the cut. But other companies aren’t going to be nearly as easy to judge nor will deciding how many companies will be on the list going to be easy. Right now the primary contenders are insurers like AIG, hedge funds, asset managers and extremely large corporations. As the decision process continues however, lobbying persists as companies try to get themselves off the list. I find this absolutely terrible as I’m sure many of you do. For now we can simply hope that necessary reform takes place unaffected by money or power.

Maybe You Don't Own Yourself...

As you may have noticed in previous posts, I enjoy watching 60 Minutes every Sunday on CBS and I was on their website today watching an old story about patenting genes. They began by covering the story of Myriad Laboratories, a company that has patented a couple of genes that have proven extremely significant in relation to cancer, specifically breast cancer. This patent like an invention, means that no other company can test, work with or even develop therapies towards these genes without Myriad’s consent. But this is very different from any invention because the gene in question here, can be found in any woman who has ever genetically inherited breast cancer. Essentially, Myriad didn’t invent anything; it just found something we were long looking for that thousands of women have already owned.

Today, almost 10,000 genes have been individually patented accounting to a grand total of about a third of all human genes. That’s right, companies across the world hold the write to examine and experiment with about a third of each and every one of our bodies. This reminded me of the case of corn planted on farms across the United States and elsewhere which contains patented genes that prevent disease. These patents have come to the point that farmers cannot replant seed and must buy it for each year and further, they must prevent cross pollination of the gene to the corn of farmers who haven’t bought it. If we were to extend this to humans the implications sound absolutely crazy. If a member of a couple bought a gene from Myriad for example that somehow prevented all cancer, would the couple have to pay to have children who would inherit the gene. It’s absurd but could be a very real problem in the future.

For now, these patents have been condemned for preventing advancement. For as long as Myriad has owned the genes it does, research within breast cancer has come to an effective stand still outside of the company which fiercely protects its patent. However, if such protections didn’t exist there exists the very real possibility that the economic incentive to investigate grave disease wouldn’t exist. So the question arises if our system of rewarding discovery is preventing the potential for future discovery and many would say it does. So how do we solve this problem?

Random Thought

Today after tennis, for once, I noticed the whole family was in the car. I got into the driver’s seat awaiting an explanation as to the great event that had drawn everyone out on a Wednesday night and surely enough it was (drumroll) to pick out cabinets for the basement bathroom we were finishing. OK… two things I’d like to quickly blog about concerning this event.

Does picking cabinets really excite people? I mean apparently it must, but still! I can understand being excited to say go buy a car, I can sort of understand being excited to even go buy clothes but the idea of being excited to choose the parts of your restroom remains outside my comprehension. And so I drove on, amused by the fascinations of my quaint little family.

Shortly, we arrived at the store except for it wasn’t really a store. I say this because this place, dedicated to enriching our restroom experience, was quite the fancy affair.  Upon entry we were greeted by a lady with whom we had a prescheduled appointment. She in turn stood in front of a well furnished office, a wall of color sample woods & tiles in nearly every hue known to man, and hundreds of square feet in mock kitchens featuring any and every cabinet setup. It was at this point that I arrived at my second epiphany* of sorts.

Only in our extravagant Western World do we have such exquisite boutiques dedicated to such frankly ridiculous purposes. My family comes from India and having visited the country, I’ve had the humbling experience of seeing poverty at its very worst. I don’t mean to sound dramatic but this single event capitalized on the absurdly comfortable lifestyle I’ve become so accustomed to.

So there you have it, my two odd observations of the day. I just thought I’d share; take what you want from my experience, and hopefully you’ll be a better, more appreciative person.

*I had the word on my mind after watching the prejudicial UCLA video. If you haven’t seen it, check it out. Terrible as she is it’s really kind of funny and so are the responses to it.

Should NPR be Publicly Funded? (Part 1)

NPR’s Planet Money recently did a story about the debate to cut federal funding of public radio. I know what you might be thinking that’s gotta be biased. I thought the same but nonetheless, NPR being the reputed source that it is, I thought I’d hear them out.

The key question they point out is whether or not NPR is a public good. Government spending goes to public goods which by definition are things that everyone benefits from that the private sector may not afford at the moment. So fundamentally we ask ourselves if everyone benefits from NPR. Now this question isn’t as subjective as it might seem in that it’s not really about if you like NPR as much as if it’s available to you and anyone else. And in this aspect there little dispute. Even if you don’t contribute to public radio’s fundraisers and hate it to your very core, you still have the option to at any time to turn on your radio and tune in. Furthermore, it is a non-rival commodity in that usage and external factors don’t make it more or less available to any one person or group.

So NPR is a public good but that isn’t by any means a case closed for funding. There are a lot of things that technically fall under the category of public good such as that fart that nobody paid you for but yet you so graciously released for everyone’s smelling pleasure. This is when the real question of whether that public good is worth it comes into play; would people actually potentially be willing to pay for it. This is the far more difficult question to answer. Unlike normal things, public goods receive little in the way of market feedback which is the essence of assessing demand. When people buy a car they are endorsing its value over its cost but how do you know if the same holds true for NPR?

Should NPR be Publicly Funded? (Part 2)

The other question that comes to mind is why the government funds NPR but not other radio stations or the TV etc.  In this case the answer seems to be that these other products have transformed their playing fields. Through the use of commercials, they have made us the listeners the product which the station sells to paying advertisers. In this way, by creating rivalry among businesses for our attention, such programming is not a public good. From this perspective, though NPR is founded in principles that classify it as a public good, it does receive some commercial funding. But NPR isolates this to only the money it needs (non-profit) so that the vast majority of content is publicly provided and therefore the situation becomes extremely delicate. And by publicly provided I’m not referring to the government but rather the so called economic K group. Or simply people with large purchasing power who are willing to pay for those who can’t or who exploit as “free riders”.

And some argue that this minor advertising and major K group together should exempt NPR from federal backing. As newspapers and other goods adapt to our world, a lot of their content is available for free online and they have to find new ways to earn revenue so why shouldn’t NPR. In fact some believe that public radio would receive even more money and do better if it weren’t perceived under the government. But what if radio would be even better if it could avoid fundraising drives by getting more taxpayer money.

                If nothing else, you get the point that there are a lot of ifs and buts. No one knows for sure what to do and I honestly can’t say I have an opinion on what should be done. On the one hand NPR in my opinion is extremely valuable and ought to be supported no matter what. But on the other hand, in today’s technological age, I agree that it is public radio’s responsibility to support itself and find a sustainable outlet for its content. Feel free to share your views in the comments and stay tuned as we look towards what the final verdict shall be.

Capital City: Zug, Population: 15

                60 Minutes recently reported on over $1.2 trillion that has weaseled its way out of US coffers into the hands of foreign governments.   What is this treasure trove; it’s investment, capital and primarily corporate taxes on billions in revenue from US companies whose assets have been shifted offshore to avoid our aged, outrageously high tax rates.

                To report, they traveled to a tiny unheard of town in Switzerland called Zug specifically to its economic development office. Zug in past years has worked with companies to offer a tax rate lower than Switzerland’s which itself is far less than the US. In effect, this tax haven within a tax haven allows for a mere 15-16% corporate tax rate. The result is that many companies move their corporate headquarters to Zug… well sorta. To explain let’s look at Transocean, the company involved in BP’s recent oil spill catastrophe, which moved and now claims to be internationally head quartered in Zug. Sounds like a pretty big move right? Transocean maintains about 1300 employees in Houston and less than 15 in Zug none of whom is even the CEO. In fact international headquarters comprise of a relatively small office in a rented business complex which somehow transfers the company’s citizenship to Switzerland. And this story isn’t all that uncommon.

                The obvious solution would be to impose tighter restrictions which congress did in 2004 only to see these companies relocate altogether or lawyers find new loopholes to avoid full payment. Sleazy as this may seem, companies have a very valid point in searching for low tax alternatives. Un-American as their actions may seem, these actions funnel money into the hands of shareholders many of whom are Americans.  When taxes result in about 60 to 90% lower tax rates, companies simply cannot refuse.

                However, this occurs at the cost of thousands of American jobs. In the example of Ireland, nearly 60 US companies employ over 100,000 Irish workers on a 12.5% tax rate. As they put it on 60 minutes, our treasury effectually subsidizes investment in Ireland. And it’s really not that hard in today’s world. With everything computerized and digital, moving a company is as simple as moving a folder or code or data center to another country.

                The solution quite simply is to reduce tax rates but that could mean trillions in lost revenue. This is quite obviously impractical and until a better solution can be found, the US will continue to lose business to foreign states.