Simple ShadowStats Smell Test

People who worry about inflation tend to point to shadowstats.com as a truer measure of inflation. They likely don't do this simple test to see how valid it is:

What was my income X years ago, what it is now, and is my standard of living reduced as much as this inflation measure says it should be?

I didn't move to the U.S. until 2003, and from a higher tax nation, so I'm going to start there. At that time my household income was about 100,000. Eyeballing the chart here, I can see what our income should be to keep up with the alternate inflation measure.

2003, 100,000
2004, +7.5%, 107,500
2005, +9.5%, 117,712
2006, +11%, 130,660
2007, +11%, 145,032
2008, +10%, 159,535
2009, +5.5%, 161,979
2010, +10%, 178,176
2011, +11%, 197,775

Our household income is much less than $197,775, which is what shadowstats claims we need just to keep up with inflation. Yet miraculously we feel much better off than we felt in 2003. That includes now having 2 kids we have to spend money on, and a larger house! Weird.

Incidentally, regular CPI says we need $123,309.24 a year to have roughly the same standard of living as in 2003. That seems more reasonable to me...

I'm The 99 and The 53 (part 1)

I'm the 99:
- Income inequality reflects a problem. Government granted monopolies in the form of licensing, copyrights, and patents have a specific purpose: to overcome the large capital costs involved with creating a new product or work. When huge technological leaps are made to make the creation of media or products cheaper and easier, it's time to RELAX these government protections ("rents"). Rent seeking accounts for a huge amount of income inequality.
- Equality of opportunity needs a safety net and redistribution of consumption is the best way to pay for it.
- Hating government in the abstract is not a good way get streamlined, efficient government.
- Suffering in the name of "personal responsibility" is necessary, but it can be excessive enough to be counter-productive in a laissez-faire system.

I'm the 53:
- I will never feel sorry for someone who willingly entered a contract that they had perfectly reasonable alternatives for and then complained about the outcome. You have to take responsibility for your own bad decision, lack of action, or dumb behavior.
- Bailouts that prevent you from gaining the wisdom that comes from learning from your mistakes will hinder you. Bad decisions need to have bad outcomes.
- 99ers should read "The Millionaire Next Door". When I did, I recognized that life needs to include SOME hardship or less people will choose to be exceptional out of necessity.

VAT and Flat Taxes are Not Equivalent

In the long run they are, but if immediately enacted, old capital is treated much differently. When a VAT is enacted and a saver switches to consumption, he still pays tax. In a flat tax, realized capital that is used for consumption is not taxed.

There are some "fairness" issues that are different depending on the version. For example, is it fair that a retiree who saved after tax income is now double taxed with a VAT? Is it fair that a trust fund kid pays 0 tax even if all he does is consume under a flat tax?

Inflation Protection

My neighbor asked me a few years ago what he should do with his money. He's a hardcore right-wing talk radio listener and I knew he just wanted me to say "gold". I thought then, and still think now that gold is a horrible idea, but I didn't have any better ideas either. I'm starting to come up with some now though:

- Invest in companies with large economic moats. That is, companies with the best ability to simply pass higher prices on to consumers. The most obvious of these are oil and basic materials companies who own quality wells and mines. As of today it seems some inflation is already priced in to these companies, but there will likely still be some buying opportunities ahead.

- Get Fixed Rate Debt / Pay off high interest debt. If you are carrying variable interest rate debt now is the time to get rid of it, if you can. Either pay it off or refinance to fixed rate debt.

- Become a landlord. This is counter-intuitive, I know. The thing is though, rents have not seen nearly the same decrease as property values (in fact they've been increasing), and rent vs. own ratios are very good in many cities. Remember that inflation cannot last without increases in wages. Wages won't increase until quality employees can no longer be picked up on the cheap. Multi-family properties are not being built, which will contribute to a shortage if inflation picks up. Once people are hired and getting raises I expect rental properties to be able to keep up with inflation.

I don't expect any significant inflation for a few years. It will be especially hard to register much inflation in 2012 where gas prices have to be significantly higher than $4 a gallon to match the change from 2010 to 2011. I also don't see the Fed doing what I see as the best recommendation which would immediately boost demand driven inflation. Instead what I predict is small spurts of growth when oil prices are low, followed by a general slowing as speculation pushes oil prices higher. In essence, energy prices will function as our monetary policy lever.

Student Loan Forgiveness Is a Bad Idea

Eli Leher gets to half of the problem here:

This would amount to an open-ended subsidy that would benefit many of America’s largest corporations (the universities themselves) forever.

The other half was addressed in Josh Barro's post:

Consumers are not imposing discipline on the market in the way I would expect—they fail to shop around for the best education value, and sometimes they buy education products that are worth less than their cost.

Forgiving student loans prevents what needs to inevitably happen: We need to start getting our money's worth out of education.

Romney Has The Best Tax Plan For Me

Actually I'd do better under 9-9-9, but I'm not under any illusion that it could pass. Romney's plan eliminates taxes on capital gains and dividends for the middle class. The chief "complaint" is that the middle class realize very little of these types of income. This is actually a feature of the plan. People would shift their saving habits given the new incentive and it would cost the government very little in lost revenue for them to do so.

The problem with the analysis is that the middle class has alternatives (Retirement and Education accounts) that eat up most of their savings. Given the alternative Romney offers, I'd expect shifts from these specialized accounts to general investment accounts, all at very little cost to the government.

I would certainly ditch my 401k with it's ridiculous 2-3% expense ratios in favor of an account I could run myself for under 1%.

Student Loans For "Useless" Degrees

One of my favorite right of center pundits, Josh Barro says:

These are not people who got screwed. These are people who have gainful employment available to them and made follow-your-dreams life choices that reduce their incomes. That’s their prerogative; it’s not anybody else’s problem.

This is true, but the "following your dreams" part is not the bad part. Everyone who is capable of making money doing what they love and are best at should do that. What's dumb is to go into a huge amount of debt for an advanced degree that doesn't result in a suitably large change in income over a more basic or general degree.

Would Occupy Wall Street Protesters Understand What They Want?

To put it succinctly, I think they want policy that is not so supportive of rentiers. This means reduced copyright and patent protection, reduced licensing, and elimination regulations and tariffs that only serve to reduce competition and enrich the few. In addition they should ask for monetary policy that is not so afraid of inflation. These things would increase employment and decrease income inequality.

What they'll get instead is populist lip service on higher taxes for the 1% and "getting money out of politics".

Fire Your Bank: OMG Edition

Some time ago I fired my bank, Wells Fargo. The reason was twofold:

1) TARP - Instead of complaining about cronyism and the moral hazard of FDIC and bailouts, I decided to put my money in a bank that did not need a bailout.

2)The Fee Dance - I managed to avoid (most) fees by carefully paying attention to account types, minimums and add-ons. My father, who lives in Canada, decided to open a U.S. account to link to Paypal and did not pay attention to these details. They charged fees for "services" that cleaned out his initial 150 dollar deposit in less than 6 months, before he even had a chance to look at the account balance. Instead of whining about fees and carefully maintaining balances and watching for fee hikes, I just went to a bank with no fees on an interest bearing checking account, oddly enough there are plenty of these around.

When I see this story, the part that makes me sick is not the fact that he said they have a "right to make a profit". It's the part about "populist rage". The solution to this fee problem is easy: take your business elsewhere!

Stop being a doorstop for giant banks that assume you're too lazy to fire them. Search for "fire your bank" for more info and to get started on finding a better bank near you.