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Archive for September, 2017

Tax cuts, growth, and wealth

The allure of economic growth

I was listening to NPR on the way home from work, and they were talking about tax reform. Now that Trump and the Democrats have cut a deal on protecting DACA people (those people who were illegally brought to the United States by their parents), the president is moving on to tax reform.

Oh, boy, here we go again.

President Trump is trying to drop the corporate tax rate from 35% to 15%. The idea is that because big corporations are holding so much overseas because of the high tax rate, they’ll be incentivized to bring it back if they only lose 15% instead of 35%. And when they bring all that money back, they’ll invest it into the economy and create more jobs, or at least increase the wages of their workers.

Tax cuts for corporations aren’t that popular among Democrats, but I guess the idea is that since Trump gave the Democrats protection for DACA recipients (including no building or funding of a giant [idiotic] wall on the border), they’ll reciprocate and give him some tax cuts which are always popular with Democrats.


But will it even work?

I wrote about how tax cuts don’t deliver the intended returns people think they do compared to a tax cut. TL;DR: they don’t expand the consumer class. Yet in the interviews with various officials in government leadership, people have asked how a drop in revenue in taxes from corporations and also people (you don’t get tax cuts from Republicans unless they go to wealthy people) will not increase the federal budget deficit.

And once again, the myth of economic growth comes into play. “We can afford tax cuts because it’ll grow the economy, from 2% to 3%. The tax cuts will pay for themselves; growth covers a multitude of sins. And if we can grow from 2% to 4%, wow! It’ll cover every sin!”

The problem, of course, is tax cuts don’t deliver the economic growth promised. To get that kind of growth, productivity would have to increase by 50%. Furthermore, in the past, when the corporate tax rate was temporarily lowered, companies didn’t bring back the money and use it to expand their businesses (thereby boosting productivity), they use it to pay dividends to their investors, or buy back stock (which decreases supply of the stock in the market, thereby boosting demand and increasing its price). In neither case are they increasing production, but instead giving money back to the shareholders.

 
How it affects me, and how it can affect others

As someone who has a good chunk of money in stocks and receives money in dividends, this is good for me. But I am under no illusion that this will increase the economy. Instead, it will increase the deficit and in order to maintain services, the government will have to borrow more money, which will cause the Federal Reserve to print more money, which will lead to inflation. Inflation helps the wealthy, particularly those owning real estate, but it degrades the buying power of the working and middle class if wages don’t keep pace with inflation.

The counter-argument is “Lots of Americans own homes! Inflation will help drive up their personal wealth!”

To which I say “Poppycock!”

Your home going up in value only helps you if want to sell it, otherwise it just increases your property taxes. And if you sell, it only helps you if you move to someplace cheaper and pocket the money. Most adults have to move into bigger places as their family expands, and it just costs more to maintain a bigger place. It only helps you if you want to downsize, and most people only downsize as they get older and their family moves out. But by that time they are spending more on healthcare costs.

Furthermore, growth in real estate isn’t that big a deal for most people. Unless you live in a city that has high rates of property appreciation like Seattle, Los Angeles, San Francisco, New York, Boston, and a handful of other urban areas, real estate as an investment is a pretty lousy one. It returns perhaps 0.2% per year after inflation. But inflation does erode your buying power if wages aren’t keeping up.

But wait! Wages will go up thanks to inflation!

This is also incorrect. Wages go up when there is a shortage of workers. And where is there a shortage of workers? In places where companies need them, and that’s in cities. And it’s mostly in cities that have high real estate costs like Seattle, Los Angeles, San Francisco, New York, Boston, and a handful of other urban areas. These are the places where wages are keeping place with inflation, or even exceeding them. But it’s also what’s driving up the price of real estate.

What compounds this problem is that the working and lower middle classes cannot afford the price of real estate so they have to move out from the cities – the ones where all the growth is taking place – to more rural or smaller urban areas. They then start overwhelming those markets with additional labor. Yet there isn’t enough demand for these additional workers. The result of more supply (labor) than demand (open job vacancies) is downward pressure on wages. That is, people leaving the high-cost cities can’t make as much in lower cost areas either, because there’s not enough demand for their skills and employers don’t need to pay as much because there’s so much to choose from.

So, growth doesn’t cover a multitude of sins. It goes towards those who are already doing pretty well, and leaves out the ones who weren’t. And the ones that weren’t are the very ones that voted for Trump, and his tax cut policy will hurt them more than it will help them. The whole point behind tax cuts is that it motivates wealthy people to save and invest more, but they’re already saving a large chunk of their income – around 30%. If they aren’t investing now, a few more percentage points won’t increase that. And if companies simply return their overseas money back to investors in the way of dividends and stock buybacks, this doesn’t increase productivity either. While companies can certainly choose to do this, as an economic policy it doesn’t make sense.


Now what?

Growth covers a multitude of sins if it is spread out evenly throughout the economy and expands the consumer class. Tax cuts don’t do this. Instead, it makes far more sense for the government to invest in education and job training for workers to boost their productivity in order to do more with less.

This is doubly impacted by the United States’s current administration is on the warpath to reduce immigration. The US’s population growth rate isn’t enough to sustain constant economic expansion. Even if you did boost productivity, you need someone to buy the products you produce. Without enough domestic consumption, you need to export to the rest of the world with economies where the consumer base is expanding. This is primarily China and other emerging economies.

I’m going to cut this blog post short because it gets more complicated from here. The pursuing of growth is a noble goal, but it’s inefficient and won’t deliver the results that the Trump administration and the rest of the Republican leadership is hoping for.

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The wife and I have done a ton of renovations to real estate this year:

  • The wife replaced the bathtub walls and counter in her rental condo
  • I replaced the tub and tub-walls in my rental condo
  • We replaced the master bedroom’s bathroom in the house where we are living
  • The wife’s parents sold a house and the wife is acting as the power of attorney, and had to oversee a whole bunch of required upgrades before we could sell
  • I am on the Board of my condo association, so not only do I manage my own property but help manage the entire complex
  • We are looking to do some more renovation work of the main bathroom in the house where are living, not mention fixing up some drainage issues (and not to mention taking care of another drainage problem earlier this year, as well as adding insulation to the undercarriage of the house)

Whew. That’s a lot of work.

However, what I’ve found is that I’ve gotten good at noticing when something is done well and when it’s done cheaply, and not been impressed with expensive housing.

Across the street from Microsoft, there’s a $1.7 million house for sale. It sold last year, and the wife and I went to look at it. At the time, we were like “Wow! This is a nice place! We’ll never afford it of course, it’s way too much money.”

But this year it was up for sale again. The previous owner who bought the year before had to move back to the east coast, and put it on the market for $100k above last year’s price. The wife and I went to check it out again.

We were not impressed.

While some parts of the house were nice, the walls had been drawn on by kids and it wasn’t totally cleaned up. The master bathroom was nice, but it gigantic. It was the size of a large bedroom, and the walk-in closet the size of a small bedroom. I said to myself “What a waste of space.”

But it’s not just that, the other bathrooms had cheap plastic tubs installed. The counters were okay, but just… okay. Indeed, most of the house was adequate, but for $1.7 million I expected way more. We remodeled our own bathroom this year and were trying to keep costs down, and all bathrooms in this $1.7 million house – except the main one – were no nicer than our new one.

Even now when the wife and I go snooping in open houses during the summer or fall, we’ve started getting pretty good at seeing if something is well-built or not. And there’s a lot of overpriced junk out there. It’s pretty clear that real estate prices are driven primarily by location, and not by quality. This is doubly true in Seattle where houses go for even more than they do on the east side of the lake.

I feel like if I wanted to go into real estate development, I could be pretty good at it since I have some experience at it now. For sure, I’d need to get a lot more training under my belt, but if I’ve gotten this far just doing it haphazardly, I could become a real expert if I did it full time.

Of course, if I get a degree in diplomacy, when exactly when I have time for that?

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This is something that’s been in my head for a while now. I’ve been hearing that Donald Trump is the first post-modern President, and that some of his supports in the media (e.g., cartoonist Scott Adams, of Dilbert fame) are essentially pushing post-modernism.

I’d been familiar with the term, but all I understood about it was its belief that “all beliefs are equal”. This is usually in a religious context.

I decided to do some research, and one of the funny explanations is bartender Moe’s to explain the art on his wall after remodeling, that postmodern art is “weird for the sake of weird.”

PostmodernArt.PNG

I hope that this is postmodern art, it’s what I could find on a Bing image search.

So what is postmodernism? Is it really “weird for the sake of weird”?

I did some research a few months ago, and to understand post-modernism you need to understand what came before it.

During the 17th – 19th centuries, there were a handful of intellectual movements. The most prominent one was the Enlightenment which sought to explain the word using science and reason. This was followed by a counter-movement of Romanticism which tried to find the beauty in the world in more abstract terms that could not be explained using science and logic. Romanticism’s co-writer during this time was Nationalism, which defined a set of people bound together by ethnic ties or national boundaries. It’s during the late 1800’s that Germany unified from a bunch of diverse states to a single state, becoming the strongest country in Europe (a problem that would rear its ugly head in World War 1 and World War 2).

You can find these all reflected in classical art (created during the Enlightenment), pairing itself with classical music. I don’t understand the rules of classical music, but I understand that they exist. Romantic era music is best exemplified by Beethoven’s 5th symphony (ba ba ba BOOM!), and also by John Williams’ theme to Star Wars.

But around the turn of the 19th century, early in the 20th, science underwent a major revolution. Modern physics was discovered. This is when Einstein discovered the theory of relativity (E=mc2 [squared]), which says that the speed of light is the same in all frames of reference. That is, suppose you are a bystander and you see a car drive by you at 100 mph, you can measure it’s speed. But, if you were in a truck driving at 55 mph and the other car drove by you at the same speed (100 mph), it would appear to you to be moving at 100-55 = 55 mph. Einstein’s theory of relativity says that if you were standing still, a photon of light would zip by you at the speed of light (186,000 mph). And, if you were moving at 10,000 mph, the photon would zip by you not at 186,000 – 10,000 = 176,000 mph, but at the speed of light – the same as if you were standing still. Huh? I know, it makes no sense.

This is the same era that Heisenberg established his Uncertainty Principle which says that you cannot simultaneously know both the speed and position of an electron at the same time. Whereas that same car you could know where it was (on the road) and how fast it was going (100 mph), you could not know both at the same time for an electron. Trying to do so is a divide-by-zero error.

Thus, there is an element of uncertainty for Heisenberg, and counter-intuitiveness for Einstein.

This is what is known as Modern Physics, and at it shook the scientific community. But it was also reflected in modern art that moved away from realistic(ish) paintings to more abstract paintings, but still paintings that mean something. Early 20th century art movements like expressionism are from the modern period.

ModernEraArt.PNG

This is more impressionist, not really expressionist, but the point is that it’s from the “modern” era

Modern-era intellectual movements could be understood (to me) as “I know that things don’t make sense on the surface, but there’s still a reasonable explanation under the surface.” Thus, even though modern physics is hard to wrap your head around relative to Newtonian physics, there is still an underlying order there.

Unfortunately, other scientific movements springing out the modern era were abused. Both Marxist-Leninist though in the Soviet Union, and Hitler’s belief in a master race (a misinterpretation and misapplication of Darwin’s theory of evolution), combined with the hangover of World War 1 led to World War 2 – the most destructive manmade disaster in history.

World War 2 shocked the entire world, and led the to the post-war world order that is in place today (unless President Trump destroys it). But it also sparked the counterintellectual movement of postmodernism.

Whereas the Enlightenment, Romantic, and Nationalist era were built on observations of the world, and the Modern era asserted that underneath it all there was an underlying order, Postmodernism cynically rejected all of this. Postmodernism would say “Look at the fruits of all your precious intellectual beliefs. Two massive world wars. The attempted extinction of a race of people. Famines. What, exactly, has trying to organize the world actually gotten you? Nothing, that’s what.”

Thus, postmodernism rejected all previous beliefs; it’s not that all beliefs are equally valid, but that they are all equally bad. Furthermore, any attempt to try to organize the world into a coherent set of beliefs will only lead to more misery and death. Just look at what previous movements produced, you can expect that to be the pattern in the future.

You can see this in the 60’s cultural counter-revolution, “Don’t trust anyone over 30!” I’ve often heard that Generation X was cynical, and this explains why. It’s because of postmodernism and its skepticism of organized intellectual movements.

HomerSimpsonHippie

That’s the way I understand postmodernism. It’s hard to find a coherent explanation of it on the web.

When I look at myself, I do see parts of it reflected in my own thought patterns. I am skeptical of a lot of modern institutions like politics, various corporations, and various religions. I don’t entirely trust the Koolaid they’re asking me to swallow.

Yet the cynicism I find in some Gen X’ers that are about 10-20 years old than I am entirely absent. I do have core values, and I do think that trying to come up with a core set of beliefs is possible that explains some things; yet I am also aware that humanity hasn’t done a good job of respecting human rights.

I find this especially true in my disdain for Scott Adams’ valiant defenses of President Trump’s antics. Adams’ main argument is that the content of Trump’s speech and actions doesn’t matter, what only matters is that it works. Thus, when Trump made extreme speech towards, well, everyone but white people, Adams would defend that as saying the content of the speech didn’t matter, what mattered is that Trump clinched the nomination and got elected.

I see that argument as dripping with postmodernism. That the content doesn’t matter is so clearly wrong that I find it hard to type on this keyboard. I think content does matter, and that Trump’s rhetoric alienated so many people because people do make value judgments, as I did. It’s likely Trump permanently alienated me as a potential supporter, as I will never swing to his side no matter what he does (although I feel like he is incapable making a series of decisions for which I would find common ground, and therefore find his presidency intellectually tenable).

I’m not sure what category of thought characterizes me, but I know it’s not postmodernism.

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