We’ve Become a Nation of Takers, Not Makers

He lays out some facts about the size of government relative to the private sector, to show why so many states and the federal government are nearing the point of financial collapse. In the case of states, which cannot print money as can the federal government, such collapse occurs when the state cannot pay its bills because revenues are dwarfed by its obligations. His article provoked our thinking about the limits, if any, to the size of government.

Government continually grows bigger. But how big, ultimately, can it get? What happens if every citizen becomes a government worker? What if  government collect 100% of all private income? Under what conditions will the electorate become furious at the governments it installed and from which they enjoyed so many “free lunches”? At what point does the electorate realize the government has become dangerously large, intrusive and grasping, and no longer legitimate? In other words, is there a tipping point at which voters switch from active annoyance with their government to rage and the urge to destroy it? We believe their is such a point, and it will occur if the Government takes too much of the voters’ money.

We think there’s a way to roughly analyze when the tipping point will occur. At this point, voters will become so infuriated that they elect radical reformers or even demonstrate violently.

In the last regard, fury is clearly possible when people feel personally threatened. For example, we can see how violence is rearing its head in Wisconsin, as unionists, desperately fearful their government union monopoly and their taxpayer-paid pensions will end, are formally threatening the livelihoods of small business owners throughout the state. The threats are intended to induce the owners to post signs in their stores supporting unions. Here are two links to the news reports:

(Wisconsin Unions Get Ugly, WSJ, 1 APRIL 2011)

Are Union Boycott Threats in Wisconsin Legal?

To understand the analytical framework, we turn to empirical economics, in which stylized games are played with real people and the results measured and compared to the initial theory. In the “Ultimatum Game” (UG), there are two players and a Referee. The Referee gives a sum of money (the Amount) to Player 1 who is told he can retain all the money for himself after an amount of Player 1′s choosing is offered to Player 2 and accepted. The catch is that if Player 2 rejects the offer, both Players get nothing.

In theory, Player 2 should accept an offer of any amount, even $.01, since the amount is better than nothing. Well, that’s theory. In real life experiments, it turns out that almost all Player 2′s require between 20% and 50% of the total to be offered before Player 2 accepts. There seems to be an innate concept of fairness or ego (pride) involved.

Note that if Player 2 rejects an offer from Player 1, it means Player 2 is making himself tangibly worse off on purpose, because the offer fails to satisfy an emotional need in Player 2′s own judgment. We claim that in this case, Player 2 reached his personal tipping point, at which emotion dominates rationality.

(A good summary of this game and its research results is given in Wikipedia.)

Now, consider the game in reverse: Player 1 gets all the money initially, as before, but now Player 2 makes the offer. Player 1 can keep only the amount remaining after Player 2 takes some for himself. In this Reverse Ultimatum Game (RUG), if Player 1 decides to accept the remainder, he keeps it, but if he rejects the remainder, both players get nothing. The RUG is essentially the same as the UG. We imagine if our analysis is correct, Player 1 in the RUG would need to retain 50% to 80% of the initial Amount.

Here is the leap to our tipping point problem: Label Player 1 the Electorate, and Player 2 the Government. The Amount is the total income earned in the country. Call the portion the Government takes taxes. When the Electorate refuses to accept the remainder after the Government takes taxes, then both Players get nothing. This is the tipping Point.  We say that this Tipping Point occurs when government takes between 20% and 50% of total income. Notice in this situation, since the Electorate cannot simply avoid taxes, their only response at their tipping point may well be rage leading to very strong outcomes. No one likes the RUG pulled out from under him!

Of course, we have applied a result in a one-time game between two individuals to a composite of a game played among millions of people with a single Player 2. Yes, this is a stretch, but it does illuminate that people really have inherent limits to what they can tolerate when shares are apportioned. These limits are experienced in a specific dimension, in this case, the amount of money the Government allows them to keep.

Given the fractional requirements illustrated above, we are at the tipping point of taxation.

Economist Herb Stein famously said: “If something cannot continue forever, it will stop.” We now see many socio-economic systems in USA that cannot continue as they are forever, and which seem to be close to the point at which they could easily move into damaging and chaotic states. Let’s take a look at some of our favorites: But first, we need to roughly define a “Tipping Point”.

What’s a Tipping Point?

Every system has limits, including social systems. For every system there is some generalized boundary of system behavior and its use of resources that constrains system operation. When a system reaches its boundaries, some form of dramatic behavior can ensue. As systems approach these boundaries, they may cross their “tipping point.”

The “tipping point” is the state of the system at which catastrophic and usually unpredictable results emerge. For a simple, physical example, consider a sand pile. If you add sand by dripping handfuls on a flat plate, eventually you will have a cone and then it eventually takes only one more grain of sand to cause the whole pile to collapse. For socio-economic systems, people’s behaviors will change as the tipping point is neared. What will happen when these systems get close to their limits? We will make this general question more specific in several current socio-economic systems.

The Banking System Tipped

We have already seen a painful example of a system that tipped over its boundary: Banking. When people and corporations are unable to pay their debts (induced in large scale by government easy-borrowing policies), they default. Defaults vaporize money (the amount owed and not paid back), promoting deflation and breed wide distrust by lenders and leading to a freeze in economic transactions. Then government succumbs to the urge to stop the crisis by “bailing out” the biggest debtors. These government payments (effectively making money materialize) thus relieve the borrowers of the consequences of the risks they freely chose to take. Bailouts are examples of “moral hazard”, which is a condition in which risk-takers expect no unpleasant consequences since they expect to be indemnified by other People’s Money (OPM).

Systems Near Their Tipping Point

We have compiled a series of some of the more obvious social systems near their tipping points. We present them in tabular form, describing the system, a natural tipping point, and give some examples of what could happen once the tipping point is reached. This is the heart of the matter, and will affect almost everyone. We give a number for each system described, starting with Banking.

Financial

Demographic

Health Care System

State and Local Government

Foreign Affairs

The Biggest System: For How Long Can Government Itself Continue to Function so Incompetently?

People choose their governments for pretty basic reasons, such as maintenance of a legal system, operation of courts and enforcement of contracts, construction of shared infrastructures, protection from foreign invasions. Governments have naturally massively expanded beyond these basic roles, but one expects that whatever they do should at least be done reasonably well, even if not really in their charter. We are starting to see that governments have become so big they cannot successfully solve the problems they were elected to solve, let alone efficiently operate in their vast regulatory systems.

Government failures to competently manage recovery from natural disasters set off alarms, because one expects government to at least get that function right. Such management is one of the few things governments are actually required and expected to provide the tax payers.

Since the attacks of Sept. 11, 2001 (a failure of our expensive intelligence bureaucracy) the world has seen these catastrophic events and others:

• Tsunami in the Indian Ocean,
• Hurricane Katrina,
• Global flu pandemic,
• Global financial crisis
• Earthquake in Haiti,
• Oil spill in the Gulf of Mexico,
• Devastating floods in Australia and New Zealand.
• Earthquake in New Zealand
• Japanese earthquake, tsunami and nuclear crisis.

It seems that despite national governments having an uncontroversial mission to help its citizens recover from disasters, every government has been incompetent in trying to do so. This government incompetence seems evident even with the Japanese in their current crisis-the same Japanese who have the most disciplined society in the world, and who were famously meticulous in their preparations for earthquakes and tsunamis. Has government size reached a tipping point where it collapses under its own bureaucratic weight and becomes generally incompetent?

In many socio-economic systems in USA, this fear seems born out.

“Investing and speculating are widely confused. Investing is “to allocate capital into productive activities with the anticipation of operating profit.” Speculation is “to allocate capital in order to profit from politically caused distortions in the market place.”

If you can think of any counter-examples, please let us know!

Want to hear a real laugher? Despite the current disharmony in politics, there’s one policy on which all of Washington agrees. Republicans and Democrats, House and Senate, president and Congress all agree that after last fall’s financial crisis, the federal government has to regulate the financial industry more closely to protect our economy from risk of systemic financial collapse.

Here’s the joke. As boom- and bust-prone as high finance always has been and remains, the greatest systemic risk to our economy is not Wall Street. It’s the growing federal debt (and weakening dollar) being enacted by those Washington politicians — the ones who want to protect us from Wall Street.

The piece was written by Tony Blankley and you can read it here.

Our financial situation is breathtakingly unsustainable. You really need to pay attention to preserve and grow your capital.

]]> http://www.rocketcap.com/the-largest-systemic-risk-to-usa-economy-our-federal-debt/feed/ 0 http://www.rocketcap.com/cutting-government-spending-is-impossible-and-the-politicians-know-it/ http://www.rocketcap.com/cutting-government-spending-is-impossible-and-the-politicians-know-it/#comments Tue, 29 Sep 2009 04:06:44 +0000 admin http://www.rocketcap.com/?p=1583 Bruce Bartlett is a former Treasury Department economist. Writing in Forbes Magazine, 9-18-09 he notes:

Domestic discretionary spending amounted to $485 billion last year. With a deficit last year of $459 billion, we would have had to abolish virtually every single domestic program to have achieved budget balance. That means every penny spent on housing, education, agriculture, highway construction and maintenance, border patrols, air traffic control, the FBI, and every other thing one can think of outside of national defense, Social Security and Medicare.

This means that it is impossible to get control of spending without cutting entitlement programs. Many Republicans agree, but they never make any serious effort to do so. On the contrary, they defend entitlements when Democrats suggest cutting them. The Republican National Committee has run television ads opposing cuts in Medicare because Obama proposed using such cuts to fund health reform. Many demonstrators at right-wing tea parties were seen carrying signs demanding that the government keep its hands off Medicare.

This reality is actually old and well-known. But it’s wise to review this stark fact from time to time if you care about your long term financial future and appreciate the enormous impact in our economy by the federal government.

Geo-politics assumes two things: first, that human beings organise themselves into units larger than families and that they have a natural loyalty to the things they were born into, the people and the places; second, that the character of a nation is determined to a great extent by geography, as is the relationship between nations. We use the term “geography” broadly. It includes the physical characteristics of a location, but it goes beyond that to look at the effects of a place on individuals and communities. These are the foundation of geopolitical forecasting.

Opinion and reputation have little to do with national power. Whether the US president is loathed or admired is of some minor immediate import, but the fundamentals of power are overarching. Nor do passing events have much to do with national power, no matter how significant they appear at that moment. The recent financial crisis mattered, but it did not change the basic geometry of international power. The concept of American decline is casually tossed about, but for America to decline, some other power must surpass it. There are no candidates.

Friedman is CEO of Stratfor, Inc., a commercial intelligence operation based in Austin, TX. His article in the New Statesman on 27 AUG 09 is fascinating and  illuminating. It briefly describes how geo-political constraints can bring about a strong partnership between Poland and USA.

We also read his book, “The Next 100 Years” which gives more details and intellectual backup for his ideas. One of the more interesting claims Friedman makes is that Turkey will become a real economic powerhouse. Now, Turkey has the #17 ranked GDP, while Poland has #18. Interesting, yes? The ETF for trading Turkey’s economy is TUR. Note how it has risen over this summer….

Scenario Planning is an important component of strategic planning for any corporate or government organization that intends to prosper and succeed over time. It applies to individuals, too. Of course, it applies to investing as well.

Wired magazine published a clear, concise description of how to do Scenario Planning for yourself. The author, Peter Schwartz, is one of the pioneers in the field. He uses an example of an aerospace engineer planning for his career in quite uncertain times.

Read the Wired Magazine Article

We speculate the intelligence organs as well as the commentariat in USA and elsewhere complacently assumed the Iranian elections would be rigged. After all, every candidate was pre-approved by the boss mullah. The fact that the proletariat in Iran rose up against what everyone assumed would occur is the Black Swan Event. A BSE has the definitional properties that it has very high impact, is exceptionally unlikely and can be explained only in hindsight.

The subtlety is this: Our BSE may not be yours. You may have special insight leading you to expect my BSE. An example: John Paulson saw the credit collapse coming and massively invested his hedge fund in shorting the bank stock index. He made billions of dollars for his fund and himself…while the rest of us were running for cover.

So now we ask: were our intelligence agencies expecting this BSE? We doubt it.

Mei Gechlik (JSD, MBA) is Lecturer in Law at Stanford Law School, where she also is Microsoft Rule of Law Fellow. She is fluent in Mandarin and knows the Chinese business scene. She has generously agreed to let us publish her analysis of the recent action by China. Here it is.

By Mei Gechlik

Stanford University

18 JUNE 09

Earlier this month, China’s Ministry of Industry and Information Technology (MIIT) made available a notice dated May 19 to require that from July 1, all personal computers (PCs) sold in China be preinstalled with a program that, according to the MIIT, filters harmful information.  The notice has drawn widespread criticisms that the Chinese government attempts to invade privacy and restrict freedoms in the name of creating a “healthy and harmonious Internet environment”.  Should PC producers rush to meet the requirement by July 1?  No.

First, the MIIT’s notice is, like many other Chinese rules, vague.  It does not specify that penalties will be imposed if the “Green Dam Youth Escort” (Green Dam) software is not preinstalled by July 1.  It only provides that any failure to meet the requirement should be corrected (改正, gai zheng).  Rushing to comply with such a poorly drafted and once secretive notice sends a wrong signal to the MIIT that PC producers do whatever it takes to increase their share in China’s PC market, which sold 40 million PCs last year and is the second largest in the world.  PC producers’ speedy compliance without any attempt to seek clarifications from the MIIT would encourage the MIIT and other ministries to take more drastic steps at their whim, leading to a more challenging business environment for local and foreign enterprises.

Second, the MIIT seems to have backed off because of growing pressure inside and outside of China.  In China, many netizens have questioned the MIIT’s ulterior motives of forcing every PC user to have a program that can, according to experts, turn every PC in China into a part of a botnet, a network of hijacked computers that the hijacker can manipulate.  Even people working for government-run institutions have openly expressed their concerns.

In particular, Li Fangping, a Beijing rights defense lawyer, has formally challenged the legality of the MIIT’s notice.  His main argument is that the notice concerns vital interests of the people and the failure of the ministry to hold a public hearing on the issue violates an October 2008 directive jointly issued by a few ministries including the MIIT and approved by the State Council, China’s highest executive organ.

Li further relies on China’s rules on open government information to demand the MIIT to, among other things, make public the “financial application and approval procedure” for spending RMB41.7 million of government funds to purchase the right to use Green Dam for one year.  At issue is that the MIIT entered into a contract with Jinhui Computer System Engineering Co., the developer of Green Dam that is linked to the People’s Liberation Army, China’s military, without going through any transparent bidding process.

Li also asks the MIIT to explain whether ordering all PC producers to install the software may have violated China’s Anti-Monopoly Law.  The law prohibits administrative authorities from abusing their power to eliminate or restrict competition.  Why is Green Dam, the effectiveness of which is challenged by experts, picked when the market offers other anti-virus software that can effectively block harmful information?

Pressure outside China takes the form of not only criticisms against the Chinese government’s Internet censorship but also lawsuits against Jinhui.  Solid Oak Software Inc., a California company, has alleged that Green Dam contains components stolen from its software and vowed to stop U.S. PC producers from shipping computers with Green Dam to China.

In an attempt to alleviate concerns, the MIIT spokesman has reportedly clarified that PC users can choose to uninstall Green Dam.  It remains unclear whether the MIIT will revoke its May 19 notice.

It is not unusual for the Chinese authorities to back off from their unreasonable stances after strong public opposition builds up through the Internet and the media.  In 2003, the State Council abolished the notorious “custody and repatriation” system to stop condemnations spreading rapidly across the country after a young migrant who failed to present ID documents was beaten by the police to death when he was locked up to be repatriated to his home town.  Earlier this week, a local court decided to set free a young woman who killed an official and wounded another to defend herself from a rape attack.  The woman was first arrested for murder.  Had the incident not been extensively covered by the media and the Internet, the court decision would have been different.

Given that the MIIT is subject to such enormous pressure, PC producers inside and outside of China should seize the opportunity to add their voices.  Apart from legal arguments, they should remind Chinese leaders that a highly-controlled Internet system is not conducive to the proliferation of ideas needed if China is serious about becoming an innovative country by 2020.
Twenty years after the 1989 crackdown of the student protest at the Tiananmen Square, Beijing has yet to review the crackdown and correct its own mistakes.  Instead, it continues to restrict freedoms in the name of creating a harmonious society.  Chinese leaders should know from history that China was the strongest when its society was tolerant, not when it was harmonious.

Then president today spoke to the American Medical Association meeting in Chicago. According to the NY Times( p1, 6-15-09):

“The public option is not your enemy,” Mr. Obama said. “It is your friend, I believe.” Saying it would “keep the insurance companies honest,” the president dismissed as “illegitimate” the claims of critics that a public insurance option amounts to “a Trojan horse for a single-payer system” run by the government.

Mr. Obama twice referred to the use of such “fear tactics” about “socialized medicine” in past legislative battles, without pointing out that the A.M.A., a traditionally Republican-leaning group, was among those using the charge, as in the mid-1960s debate over creating Medicare for people 65 and older.

Let’s examine this. First, the veiled claim that the insurance companies are dishonest because they lack real competition is fantastic. There are already over 1000 competing insurers, and if there were a private monopoly, we are certain the Anti-Trust Division of the  Justice Dept. would be having a frenzy of prosecutions. Lack of competition is a non-issue.

Second, Mr. Obama has continually made statements that are direct contradictions to what he actually is doing, brilliantly packaged statements, but fully deceptive. Consider his quotes above. The reality is this: any form of goverment competition with the private sector will, as surely as the sun rises in the east, become a collector of everyone’s medical coverage, all quite voluntarily. Why? Simply because the government’s costs are already subsidized by you the taxpayer, and so it will inevitably promise more service for less premiums, luring people in. Then the private insurers will fail and only one insurer will remain. Uncle Sam.

Third, the republicans who said Medicare would become socialized medicine were right. That’s what Medicare is. The single payer is Medicare for those over 65.

We are in for some truly life-altering decisions about health care and the economy. Mr. Obama is urging fast action for a final bill, thus ensuring inadequate analysis and weakly discussed counter-proposals to his ideas. This unnecessary desire for speed to change the extraordinarily complex health care system will shut off public debate and give us an obscenely bloated set of new laws, new spending, and unintended (but fully expectable) unknown and damaging consequences…called Black Swans.

]]> http://www.rocketcap.com/is-obama-trying-backdoor-socialism/feed/ 0