USPS

Some time ago I got on the topic of the United States Postal Service with a liberal(American liberal). I argued that we do not need a postal service owned and operated by he government and I felt the arguments in favor of one were weak. The argument for the USPS as a government agency hinged on the idea of universal service. Basically, should a person pay the same rate to send a letter from Wyoming to Alaska as someone pays to send a letter from NYC to Chicago or from Queens to Manhattan. It probably should be more more expensive for the low traffic route from Wyoming to Alaska. I have no idea what the magnitude of this difference would be and the type of service that rural postal users would receive in a completely privatized system though. 'Fairness' is not an issue. Some goods and services simply cost more in the different parts of the country. Real estate, parking, food, or almost anything costs substantially more in New York City than in rural Illinois and there is nothing wrong with that at all. Subsidizing services in rural areas does not make it more fair. More equal yes, but if it cost structure is different prices and services should be allowed to reflect those differences.

So, why should government control the postal system? (it is allowed by the Constitution, but it is not an obligation of the government) FedEx and UPS have shown how private companies can effectively deliver practices and urgent mail. This competition has made the USPS better and more responsive. Why not end the monopoly on 1st class mail and bulk rate mail? This idea sounds radical to many, but there is no reason why it should be radical at all.

Repeat this for the Universal Service Fee on your telephone bill.

Stay Tuned

I have a few more entries in the works that I am in the process of editing and getting ready for publication on this blog.

On Ideology

White sitting around talking politics, I received the impression that some reject ideologies as such. For sure, no ideology is perfect, but that misses the point. An ideology models society and the people within a society. We need a model to comprehend the complexities of society. The hard sciences like physics can test their models in controlled conditions repeatedly. We know that the theory of general relativity is a good model as it has held up to countless tests and predict phenomenon in many situations. It is not perfect, but physicists are not about to throw away something that works in favor of nothing at all. we cannot experiment so rigorously with societies, so we have to study history and human nature.

For those who dismiss ideology all together, you are traveling without a map or direction. Usually whether one admits it or not, some sort of implicit ideology guides their voting and policy preferences. People have some approximation of the scope and role of government in society implied in their statements. John F. Kennedy said,
"What is at stake in our economic decisions today is not some grand warfare of rival ideologies which will sweep the country with passion but the practical management of a modern economy. What we need are not labels and cliche's but more basic discussion of the sophisticated and technical questions involved in keeping a great economic machinery moving ahead."

This assumes that the economy can be managed like a machine. Actual policy would embody even more ideology since it would endorse ends for the economy whether it's higher growth, a better environment, or more equality. Casually, people will say that he government needs to do x, or that y is none of the government's business. While most do not make their assumptions explicit, more people should in order to better comprehend a complex society.

Why is ideology rejected as such

• People have seen too many ideologies applied that do not fit society or human nature and cause much damage
• Exceptions to the rule are dealt with first and the whole package is discarded if it does not fit in every single case.
• People do not know what ideologies are out there and why they exist

Just making you think,

Drew

Some interesting stuff

Venture Capital Rating and Bashing (story about TheFunded.com)

VC Firm Subpoenas TheFunded.com
I suppose people we'll sue over anything. Although some VC firms may find that the truth hurts them more than it hurts TheFunded.com and its now anonymous posters.

Saakashvili: Russia controls a third of Georgia
So, what are Russia's intentions here? I should do a post about Russia. It would probably turn into a very anti-Russian rant though.

Bank analyst forecast Georgian Crisis Two Days Early

That is all for now

Famous Last Words

So often it seems an executive or government official says there is no crisis or utters some "famous last words" before everything collapses. I am sure there are countless examples. If my readers have some examples leave them in the comments.

Great Depression - Many people including President Hoover said things like "Recovery is right around the corner." With better policies, it might have been, but that's a topic for a different post.

Bear Stearns - Tells investors that two of their hedge funds lost all of their value in July 2007.

CEO Jimmy Cayne says, “Most of our businesses are beginning to rebound." - October 2007

President Alan Schwartz - “We don’t see any pressure on our liquidity, let alone a liquidity crisis.
"We are in constant dialogue with all the major dealers, and I have not been made aware of anybody not taking our credit. None of that speculation is true.” March 10, 2007

Receives a bailout from the Federal Reserve and JP Morgan March 14, 2007

Uno Pizza Grill
The pizza chain, Uno, is in serious financial trouble. They have a $7.1M interest payment due on August 15, 2008. Despite their talk otherwise, they may not even know where the money is coming from the pay the interest and certainly even less so on the next payment. They are facing the possibility of a downgrade of their bonds to D.
Psallidas(CFO) - "We have a productive active dialogue going on with our bondholders"
Read the news stories on Bloomberg.


So readers, if you have any other good examples of 'famous last words' post away.

Leaky Buckets and Doing Good With Other People's Money

Many people see government as the way to ensure a fair distribution of wealth, basically by taxing the wealthy and giving something to the poor whether it is cash transfers or aid in-kind. Right now, I won't address the moral considerations or the problems of interpersonal utility comparisons. I will address some of the inefficiencies stemming from incentives and administrative costs.

First, you need to acquire the resources by taxing from someone who makes a higher income(or wealth) to give it to someone with a lower income(or wealth). An income tax creates a disincentive for producing and the capital gains tax reduces incentives for investing. Both result in a smaller amount of production now and in the future. Just how much is a question for the econometricians.

With a complex tax code like in the United States, incentives are in the tax code to invest in one thing as opposed to another. For example, municipals bonds are tax free at the Federal level and often at the state level. While this keeps rates low for municipalities, it diverts capital away from other uses. In absence of tax incentives for municipal bonds, more corporate bonds may be bought reducing the cost of borrowing for corporations. The price of lost innovation and production is really unknown with just this one example from the tax code. With a political system like ours, the tax system is bound to stay complex. Of course, nobody wants to pay taxes. So, we must have a government agency enforcing the tax code, investigating tax payers, and dispensing penalties. None of this is done for free. While I do not know what productive use an IRS agent would have outside of government, there may be one.

On the other side, welfare programs of all kinds have administrative costs. These programs need to set conditions for who receives payments and enforce that the truly deserving and needy get these benefits. None of this comes for free. As a parallel to the taxation side, the disincentives of welfare function in similar ways. Somebody who receives benefits knows that their benefits will be reduced if they work more. For some the psychological benefit of working and producing outweighs this loss of handouts. However, at the margins it can have an effect.

We have seen that transferring from the rich to the poor does not come free and this must be taken into account in the structure of tax and welfare systems alike.

Who Owns Big Oil?

Take a guess at what percentage of the big oil companies is owned by the executives? Now, take a guess at how much is owned by pension and mutual funds? If you guessed that the fat cats owned it all, you would be wrong. 27% is held by pension funds, 14% in individual retirement accounts, and 29.5% are held by mutual funds. Pension funds provide retirement benefits for millions of ordinary workers in the United States. Individual retirement accounts are owned directly by ordinary Americans. Particularly, in the case of individual accounts we are not seeing only a few account for the ownership in oil companies since individual retirement account contributions are sharply limited by IRS tax rules. Many people that you know own shares in oil companies directly or indirectly. Management only holds 1.5% of shares outstanding. (Source) You can look at sites like Yahoo Finance that disclose the major holders in specific companies as well.

When politicians attack big oil and threaten to slap a windfall profits tax on them, they make little sense economically. They also threaten the future of American's investments for their retirement and education. There is pain for millions of people that have difficulty affording high gas prices, but a windfall profits tax is not the solution. If you believe that the oil companies will continue to make high profits, set aside some money to invest in them. Even better if you use a tax advantaged plan like an IRA or 401K.

Secular Bear Market

If you watch CNBC you see talk of a rally in the markets regularly, but the truth is the market has done basically nothing since 2000 other than stay within a fairly narrow range. You would have been better off keeping your money in treasuries. This has happened before, from 1966 to 1982, real returns on on the S&P 500 were negative. From 1982 to 2000, it was good to stay long since the market was going up dramatically. Is that the best strategy for a secular bear market like this one, 2000-????

I would say that it is not if you want to beat inflation. First, if you are going to invest in the market, remember there is more than one market. The United States is a large country, but it is far from the only market to invest in. Emerging markets such as Brazil and India have seen stellar returns from 2000-2008. Exercise caution when buying into these developing countries though. They can only maintain high levels of growth for so long and their growth is dependent on a fast pace of reforms and opening their economies to outside investment. Your portfolio needs a wide variety of asset classes and countries represented. This secular bear market is likely to persist, the average is 17 years. The idea of secular bear and bull markets raises interesting questions of what causes long term trends in valuation and growth. I suspect much of it is based on changes in technology and industrial organization. I believe that the 1982-2000 boom was largely fed by technology helped in part by economic reforms to open trade and lower taxes. What could cause the next secular bull market? Nanotechnology, advances in space travel, low cost alternative energy, something else