Philip Greenspun’s Weblog

Taxes are being debated this month on Capitol Hill and one factor in the debate is the question of whether the government’s appetite for funds (approximately 45 percent of GDP; why it should require nearly half a country’s GDP to maintain roads, defend against invasion, etc. is a separate issue) can be satisfied by soaking the rich with higher tax rates. Economists generally argue against high tax rates because they reduce the efficiency of an economy. Rising income inequality in the U.S., however, has given a lot of ammunition to those who would ignore conventional economics wisdom.

Let’s look at the source of the increased income inequality, though. A lot of researchers (sample) have found that much can be attributed to a single industry: financial services, i.e., Wall Street. We’ve set up a system where a lot of money managers place bets on behalf of pension funds and other large investors. The winners get to keep 20 percent of the winnings on these multi-billion-dollar bets. The losers get paid 2 percent of the total fund size (actually so do the winners, as whipped cream on top of the 20 percent ice cream!). If the bets are placed randomly and there is a reasonable amount of volatility in the market, basic probability ensures that this system will result in enormous salaries for tens of thousands of workers.

Corporate management for public companies is set up the same way. Managers place bets on behalf of the shareholders. If the bets work out well, the manager takes home hundreds of millions of dollars. If the bets don’t pay off, the manager sticks the shareholders with the losses and contents him or herself with merely tens of millions of dollars in compensation (see Carly Fiorina, for example, or Robert Nardelli, who took approximately $500 million from Home Depot shareholders, or Stan O’Neal, who bankrupted Merrill Lynch after siphoning off hundreds of millions for himself). [Shareholders have little control over public company boards or management, due to SEC regulations and are more or less powerless to stop a CEO and board from looting out the enterprise that they nominally own.]

Voters and politicians look at Carly Fiorina, Robert Nardelli, and Stan O’Neal and say “these folks didn’t create anything, but benefited from a system set up by the government; they should pay more taxes to support the government that enabled them to become rich at shareholder expense.” The most direct example of this comes from England, where the government installed a 50 percent tax on financial industry bonuses (story).

Unfortunately, the clamor for higher taxes on these folks who took no personal risk, destroyed a lot of jobs, and shrunk the U.S. economy inevitably ensnares America’s entrepreneurs. Just as the TSA cannot distinguish between an 85-year-old Minnesota-born grandmother and a 23-year-old Islamic Jihadist whose own father had ratted him out to the CIA, the IRS has no way of charging Stan O’Neal, a guy who came into a 100-year-old company and destroyed it, a different tax rate from Ken Olsen, who founded Digital Equipment and created tens of thousands of jobs and a massive stream of exports that helped the U.S. economy grow from 1957 through the early 1990s when minicomputers succumbed to the PC.

The U.S. political system moves very slowly, especially now that Congress and the White House are no longer both controlled by one party. So we don’t yet know what changes to the tax code and other policies will ensue from the average voter watching his own wealth shrink while Wall Streeters and public company executives get richer. But I’m wondering if the result will be that the U.S. becomes uncompetitive as a place to set up new companies. Given a democracy, could it be that having a very successful financial services sector inevitably means a poisoned environment for entrepreneurs? England provides us with an example of a mature economy in which it is great to be a banker, but entrepreneurs are better off emigrating. (I compared the U.S. to the U.K. on October 1, 2008 and January 28, 2009, supplemented by a Mancur Olson piece on March 16, 2009.)

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I recently finished Ian McEwan’s latest novel, Solar,which would make a great Christmas gift for anyone in academia or science. The protagonist is a Nobel laureate physicist with a surfeit of ex-wives and a dearth of recent research. The novel accurately captures the selfish pursuit of academic fame and priority and will also serve as a good chronicle of a peculiar time in history when governments were using tax dollars to enrich solar energy charlatans.

I would say more, but I don’t want to spoil the book.

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Folks:

We have a lot of aerial photographers who charter our helicopters and lately they’ve been capturing video as well. We’ve had limited success in the past with using a Kenyon gyro to stabilize the video. Now I’m wondering if digital magic post-processing has progressed to the point that we could improve the video quality on a desktop computer. I found one command within Adobe After Effects called “Animate->Stabilize Motion” and it does not seem useful. You have to pick a point in the scene that you want to remain fixed. I don’t see how this could work with video that is taken from a moving helicopter since the scene is constantly changing.

Does anyone know of a tool that you simply feed a video and walk away while it crunches?

Thanks,

Philip

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We taught a helicopter ground school today at East Coast Aero Club. One of the students was a recent graduate in mechanical engineering from Northeastern University. He was unable to understand or work with the concepts of potential and kinetic energy, achieving the lowest score on the final exam out of the 15 or so people present (folks who’d majored in political science achieved near-perfect scores, for example). His score was slightly better than chance, which put him above a Boston University engineering graduate last spring. A remarkable number of U.S. science and engineering graduates seem to have missed the entire “big picture” of science and engineering.

“The Shadow Scholar”, an article by a guy who writes term papers, makes me wonder if the schools in question can be exonerated for granting bachelor’s degrees to those who are almost entirely ignorant and unskilled. The 105th comment on the article is interesting: “Mandatory math, statistics, physics, and chemistry courses are my bread-and-butter. Online grading and test taking allow me to earn a good living. I have done this for students ranging from secondary school to medical school. For me, business has exploded with online courses and the poor economy. Overburdened faculty try to find the most efficient way to administer exmas and they have opened up a surprisingly lucrative business area.”

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Folks:

I’d appreciate comments on this interview with a recent helicopter student graduate.

Thanks.

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Here’s an article from New Delhi about an American’s three-day trip to India. Some highlights:

• the U.S. Navy is sending “a fleet of 34 warships, including an aircraft carrier”
• “800 rooms have been booked for the President and his entourage in Taj Hotel and Hyatt”
• “13 heavy-lift aircraft with high-tech equipment, three helicopters and 500 US security personnel have arrived in India ahead of Obama’s visit”

[Thanks, Kishore, for sending me this link.]

A better illustrated and more nuanced account of the visit is available from The Daily Mail.

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Catching up on news after a few days in Southern California, I noticed this article about Barack Obama visiting a mosque in Jakarta then”criticizing Israel”, a tiny country 5400 miles away from his audience. Had he not said anything about the Jewish state, it seems that reporters would have had to look hard for something newsworthy to say about our president.

It reminded me of Jimmy Carter. After people concluded that he didn’t have any wisdom to offer on the subject of how to support economic growth, Carter mostly faded into obscurity until he began complaining about Israel (see Wikipedia).

Unless we Americans manage to rebuild our economy, the remaining years of the Obama Administration could be rather rough on Israel (which is itself in remarkably good economic shape, with a growth forecast of 4 percent for 2010 and an unemployment rate of about 6 percent; the U.S. economy is growing about 2 percent (source) annually, with unemployment between 9 and 17 percent depending on the counting of discouraged workers).

I guess Jews can be grateful that George W. Bush, presumably also discredited as a source of advice to governments looking to foster sustainable economic growth, has apparently refrained in his recent memoir (excerpts) from blaming Israel for the world’s ills.

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Some work as a software expert witness (on a case regarding a massively parallel database management system patent) took me out to Southern California this week. Here are a few random thoughts occasioned by the trip…

Getting to San Diego is no longer a simple proposition. The shrinking domestic private economy has resulted in a lot of schedule cuts at airlines. Government and health care workers don’t need to travel much; Wall Streeters don’t need to fly out of Boston. Out of all the airlines, there is only one non-stop per day and that left in the morning ($600/seat on JetBlue!), so I connected via Salt Lake City on a couple of Delta flights on Monday afternoon.

I endured two nights at the W Hotel in San Diego, which is notable for its cramped dark overfurnished rooms. I hadn’t taken a close look at the telecommunications charges at the place before, but they struck me this time: $15/day for Internet and about $20 for a five-minute phone call back to Massachusetts (I had brought a Sprint 4G AMOLED Samsung Galaxy S Android phone (very nice device, and I think all phones should have an AMOLED display, but 3X the battery capacity would have been nice), so did not have to contemplate paying these fees). I’m wondering if our inefficient telecommunications infrastructure, particularly in hotels, is impairing economic growth. In 2001 in Singapore I stayed in a hotel with free Internet and calls to the U.S. were just a few cents per minute.

After doing some work in Orange County I wanted to fly back from the John Wayne airport (SNA), but schedule reductions meant that it simply wasn’t possible to get back to Boston without an all-night layover somewhere. Even getting home from LAX would be tough as there was only one nonstop redeye (JetBlue, $600, only middle seats remaining). I rented a Ford car for the one-hour drive to LAX. As with other rentals, this $25,000 product of U.S. industry had no navigation system. Fortunately the Samsung phone was ready with a navigation system that calculated a route to my cousin’s house in Los Angeles. At first it said that the drive would take about one hour, but after checking for traffic corrected that to three hours (I left Orange County around 6:15 pm). I pushed the traffic icon and heard the sad words “no faster route found”.

It actually did take nearly three hours to get to my destination, by which time I was so worn out that I decided to stay overnight in LA ($200 expense at the Sheraton Gateway LAX). After enduring what I assume is typical LA weekday evening traffic I wondered who would want to invest in LA. The traffic makes life there almost as miserable as in a lot of Third World cities (and maybe even as miserable as life in Boston in February), but the potential returns on investment are much lower.

The legacy carriers seem to have given up on the LAX/BOS route, which meant that my choices were Virgin America and JetBlue. Virgin America was much cheaper and had an earlier flight, so I tried it out for the first time. The staff are very friendly and in some small ways it might be better than JetBlue (e.g., I was able to improve my mind by watching The Kids are Alright and The Other Guys (hysterical) on demand). We landed in Boston at the very worst possible time for driving out to the suburbs from the city center (leaving about 5 pm), but there were no delays on the Boston highways. The Border Collie was happy to see me.

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The U.S. has some systems in place that virtually guarantee fiscal trouble in the event of an economic downturn. A lot of government expenses, e.g., Social Security and public employee pensions, are adjusted for inflation, which is no longer necessarily related to the ability of American workers to pay higher taxes.

A few decades ago, when a smaller percentage of the U.S. economy was exposed to the world market, the current system of CPI adjustment might have made sense. It was tough for prices to rise without U.S. wages to rise since almost everything that we were buying came from within the U.S.

Today, however, prices for a lot of important items are determined by worldwide demand. For example, oil can become much more expensive and boost the cost of living even if Americans aren’t consuming more oil. The products we buy may get more or less expensive depending on the prices of labor and materials in China.

The ability to pay for programs such as Social Security and pensions for retired government workers depends on the level of private sector wages as well as the number of private sector workers. Why not therefore add some built-in stability to the system by adjusting pensions and Social Security to median private sector hourly wages rather than inflation? If typical working Americans are able to pull ahead of inflation, non-working citizens can share in the fruits of their success. If typical working Americans slip behind inflation due to worldwide economic forces beyond our control, non-working citizens will suffer a comparable reduction in lifestyle.

Right now an external inflation shock, such as a rise in oil prices, has a destabilizing effect on the U.S. economy because a lot of government expenses are automatically increased while the tax base to pay for those expenses may actually be shrinking.

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The folks at ThirdWay.org have come up with a sales receipt visualization of federal government spending:

• for a taxpayer earning the median income
• for taxpayers earning $200,000 (working) and $100,000 (retired)

I wonder if we checked out of the mall with a receipt like this how we would feel about the value received!

[Of course, this misses state income tax, state sales tax, local property tax, and other state and local taxes, so it doesn’t tell us where about half of our total tax dollars are going. I think the visualization also misses federal taxes on air transportation, fuel, imports, etc.]

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