The biggest risk to democracy isn’t Trump. It’s this.

Trump is not a sickness. Trump is a symptom.  While Trump could be a symptom of many things, I’ll focus on this one big risk to democracy: we’ve become a class society with little chance for change.  And we’re risking the nation because of it.

Like many of you, I grew up being told a few things by my parents:

1. I’m middle class
2. In America, you can move up with hard work
3. If you don’t like the government, you can vote to change it. Your vote matters.

These are social stress “pressure relief valves”.  Sadly, they aren’t true anymore.  You’re stuck.  Not only are you stuck you got where you are not on your own but more because of your situation (e.g. seemingly all Nascar drivers are sons of Nascar drivers).  And you are powerless to change your lot.  This is the recipe for rebellion.

Point 1.  The middle class isn’t as well off as it used to be. The middle 33% of the US has household incomes of $30,000 to $62,500. The poverty line is $24,250 in household income. A single shock, like a health problem or a layoff, can push most middle class families into poverty.  I suspect if you are reading this, your household is in the upper third of incomes.  You and I don’t really understand the challenges of the bottom 2/3rds.  We need to start.

Point 2.  You can’t move up, your parents were just kidding when they said that.  The US is more like the UK in terms of upward mobility, and the UK is well known for it’s class system.   The US has as much upward mobility as Pakistan, and worse than Denmark, Sweden, and Japan.  These are not the first countries we think of when we think of dynamic entrepreneurs rising from poverty to success.

According to journalist Jason DeParle:

At least five large studies in recent years have found the United States to be less mobile than comparable nations. A project led by Markus Jantti, an economist at a Swedish university, found that 42 percent of American men raised in the bottom fifth of incomes stay there as adults. That shows a level of persistent disadvantage much higher than in Denmark (25 percent) and Britain (30 percent)—a country famous for its class constraints.^[27] Meanwhile, just 8 percent of American men at the bottom rose to the top fifth. That compares with 12 percent of the British and 14 percent of the Danes. Despite frequent references to the United States as a classless society, about 62 percent of Americans (male and female) raised in the top fifth of incomes stay in the top two-fifths, according to research by the Economic Mobility Project of the Pew Charitable Trusts. Similarly, 65 percent born in the bottom fifth stay in the bottom two-fifths.

The reasons for immobility, and it’s associated inequality, are policies like real estate zoning, which keep people segregated.  Zoning policies were exclusionary, and often racist, up through the Fair Housing Act of 1968.  Once segregated, all one’s friends, connections, summer internships, and schools are similarly segregated.  Legacy college admissions, where children of alumni are given preferential treatment, is an American only system to prevent changes to the cultural makeup of universities.

How can we possibly be a united nation when we don’t mingle?

Point 3.  If you don’t like it, vote for change.  Except, the voting process is a mess.  Congress has an 11% approval rating but a 96% reelection rate.   In a presidential election, New Mexico, New Hampshire, and Nevada have more than 40 times the voting power of Arkansas, Alabama, and Kentucky.  Gerrymandering makes the will of the voters matter less:

Does my vote really matter?

What we are left with is class stress that we don’t even admit.  It’s the reason that voters can ignore experts, ignore media, insult and harm people that are Americans but classified as “other”.  These voters can rationally claim “those experts/media/minorities/Americans don’t know me.  I don’t see them in my neighborhood, and if I do they are taking my job or scaring me!”

Solutions to these class problem are unattractive for people like me living above that middle 33%.  Inheritance taxes were designed to reduce class stress by reducing inter-generational wealth.  They are at their lowest levels in decades.  They could be increased.  School budgets are tied to segregated real estate values.  They could be untied, leveling educational access.

These are politically unpopular ideas.  But the alternative may be a more explosive pressure release — starting with a Trump presidency, who harnessed the anger to win election but is inept at governing — and ending with a more talented demagogue that harnesses anger and tears the system down, Constitution and all.

Wind Turbines Kill Birds – and abuse statistics

Wind turbines in the US kill 440,000 birds per year according to the US Fish and Wildlife Service. That’s appalling, say opponents of wind turbines. Maybe we should sue. This apparently green energy source is clearly bad for at least one part of the environment. Why, that’s about 1,000 birds per day. Imagine 1,000 birds piled up your  doorstep. Egad!

Well, before we get too upset, this is another misuse of data.  Don’t fall for it. 440,000 birds sounds like a lot, until we realize the following:

Cats kill 500,000,000 birds per year in the US.  That’s nearly 1,400,000 per day.  That pile on the doorstep is way bigger than the house.

Only by giving the context and the grounding for the numbers can the numbers really mean anything.  And these numbers say that we should sue cats!  They’re bad for the environment.

I’ve also seen awareness advertisements that say things like “AIDS kills one child every minute.”  That’s very sad. And it’s an attempt to make tragic AIDS deaths real to us.  I applaud the effort, but it misses the context.  We need one more piece of data to really be an informed consumer here.

And that data is that “20 children die every minute from all causes“.  That’s also sad.  In fact, half of those deaths are preventable malnutrition.  That’s one child every 6 seconds.

In our attempts to make human the ridiculous sizes of statistics, we have to also provide context.  Or as consumers of statistics, we must demand context.  For example, a stack of $100 bills to the moon represents the size of the US Debt.  That’s really useful if you are one of the 24 humans that have made that trip.  For me, the moon looks pretty darn close, especially when it’s on the horizon.

Half of Americans Pay No Taxes

Now that tax day is behind us, can anyone tell who pays what and who gets what among our neighbors?

It’s hard to tell, because in government speak things like a “10% cut” is still an increase overall because it’s a reduction in a future increase.  Right, that cleared it up.  I had to reread that sentence three times.

But here is one thing I now know:  nearly half of Americans paid no tax in 2009 (after their tax credits and deductions)

That’s right, half of Americans got handouts that at least equaled their taxes.  Clearly this is not widely known, because it seems MORE than half of Americans complain about their taxes.

Why isn’t this something that everyone knows?  Why isn’t this a big part of the public debate?

Part of the problem is that we are confused.  The way the government describes income and expense is, if not intentionally obfuscated then at least in language that only a policy wonk could love.

• A “tax credit” is not a tax or a credit.  It is technically a reduction in income to the government, just like an expense is.  Tax credits are an expense for government.
• An “itemized deduction” is also an expense for the government, even though it’s not shown that way.  The mortgage interest deduction costs the federal government $100B per year, about as much as the EPA.
• A “stimulus” is an expense, just like “The Department of Agriculture”, but a stimulus doesn’t take up two full city blocks in Washington, DC.
• A “tax” is revenue.  OK, that one seems pretty easy.

This confusing array of tricks puts expenses in both the income side and expense side of the government balance sheet.  So why not simplify the entire thing?  I’m talking Flat Tax.

People argue against the Flat Tax, which charges everyone the same amount, because the poor are taxed the same as the rich.

I have an alternative.  Combine the Flat Tax with checks issued to those that we care about or are doing things we like.  This moves all the credits, rebates, stimulus, and fluff to what they really are:  expense.

A Flat Tax plus expense checks drastically simplifies our national debate.  If the Flat Tax rate were 20% and you were in the “get back as much as you send in” half of the population, the government would write you a check every year for 20% of your income.

It’s pretty simple, still allows us to achieve social ends (like incentives for home ownership), but drastically improves our ability to understand what’s going on.  We can yell at those people that are getting big checks if we want, or applaud their largesse.

It would simplify the government processing as well, although knowing the government they wouldn’t actually reduce headcount.

And the 1040 form would look like this:

1. What is your income from all sources?_____________
2. Put .20 on Line 2                               _____________
3. Multiply Line 1 by Line 2.                   _____________
4. Send in Line 3
5. We’ll send you a check for an amount, depending on dependents, home ownership, and income.  Half of you will get at least Line 3.  Congratulations!

Budget deal done. Saves 1%. I feel like Willie Nelson

The Friday budget decision in DC led to a 1% change in the total budget.  Hurrah!  Now, let me bring the bad news.  The overall debt is still huge.  Even Paul Ryan’s interesting $6 trillion in budget cuts over 10 years leaves $400 billion in yearly deficits for as far as the eye can see.

So let me try to help you understand why Friday’s budget compromise and even Paul Ryan’s more serious proposal still leave us in a bad place.  Let’s visualize the size of the US debt.  Try this:

The US debt ($20T by the end of 2020) EQUALS

• all US currency in circulation ($3 trillion) PLUS
• all US Bank Deposits ($7 trillion) PLUS
• the value of the 500 largest companies in the US (the S&P 500 index at $10b, which includes the DJIA)

Yep, not just one of those things.  ALL of them.

Of course, if you don’t want to take all the money out of your pocket and bank plus sell the 500 largest companies in the US just to pay our debts, there is an alternative.  You can just sell every home in the US to our debt holders:

The US debt ($20T by the end of 2020) EQUALS the value of all US Housing ($20 trillion)

With the current debt at $14 trillion, even if we immediately cut every discretionary program while cutting back social security and medicare/medicaid by 1/3rd, we’d still have to sell most of our stuff to pay things off.

We should all feel a little bit like country singer Willie Nelson:

In 1990, the IRS sent Willie Nelson a bill for $16.7 million dollars in back taxes. Faced with this rather large debt, Willie decided to try and pay the IRS back by releasing a double album entitled The IRS Tapes: Who’ll Buy My Memories?

The IRS, ever helpful, sped up the process by selling nearly everything he owned. (courtesy CNN)

Tax Breaks for Angel Investors

This is a great idea to stimulate new business creation (including businesses like microfinance that both make money and solve a social problem).  I don’t say “great idea” in response to legislative efforts very often.

It’s unlikely to pass, so if you have some political contacts, some pull, or just like writing emails and letters to senators and newspapers, now would be a great time.

Sen. Bill 256, known as “The American Opportunity Act,” will provide a 25% federal income tax credit for investing in qualified small businesses, including companies in the advanced manufacturing, aerospace, biotechnology, clean energy and transportation sectors. Qualified small businesses can receive up to $2 million per year in tax credit-eligible cash equity investment, of which no more than $1 million can come from a single investor. The funding is estimated to stimulate $2 billion per year of new capital formation.

More info here.

Chinese government fail math test. 2 + 2 = 5

Economic data from China is, if not entirely wrong, then nearly fully fabricated.  For example, Hong Kong exports red table wine to China.  Strangely, though, Hong Kong exports more red table wine to China than China imports (not just from Hong Kong, but from the entire world).  The Hong Kong data is reliable, the China data is unreliable.  China is underreporting imports.  Because of this and many other examples, economists take all data from China with a grain of salt.  Really more like “with a salt mine of salt”.

That means we don’t really know whether their economy is growing as fast as we fear it is.  We don’t know unemployment.  We don’t know their imports.  We don’t know their exports.

Export data is distorted not just by Chinese fudging, but also by the method of counting.  China exports Apple iPhones at a value of about $120 per phone.  That consists of $30 of parts, many from places like Malaysia and Taiwan, $6 of assembly costs at Chinese factories, and $54 of software designed in Cupertino, California.  Only the $6 of assembly costs go to China’s corporations and workers, yet we count the full $120 as the export number.

No doubt, the Chinese economic miracle has been substantial.  It has raised more people up from poverty than all other worldwide poverty alleviation efforts combined (including microfinance, governments and charity).  The government has managed a slow transition to capitalism without masses of peasants with pitchforks coming for them.  It’s working.  All the folks in the West that were studying Japanese in the 1980s are studying Chinese today.

Critics point to problems.  FoxCon, the manufacturer of all those iPhones for Apple, experienced 17 suicides last year.  17 suicides is a lot of suicides, and these critics blame the shoddy working conditions at FoxCon as the cause.  Bad Corporation!  Bad Country!

But then again, critics play games with numbers.  17 suicides, across more than 400,000 employees at that FoxCon plant, is about half the national suicide rate.

So the economic data is terrible coming out of China.  About as terrible as the manipulations we do on data to win an argument.

Nation-building, poverty style

Has it occurred to anyone that poverty, high food prices, and unemployment have done what $1 trillion and the power of the United States military could not?  It appears that poverty has led to more regime change and nation building than war.

Depending on the outcome of the Libyan situation (and we could certainly see another military leader take over there rather than democracy), poverty is beating war 3 to 2 (Tunisia, Egypt, and Libya vs Afganistan and Iraq).  Of course, the process is incomplete in all 5 countries.

Poverty beating war.  It’s the lack of plowshares beating swords.

Fair Trade for Profit

I just realized that Fair Trade is a for profit business model.  Maybe I’m the last to know.

I’ve been touring coffee co-ops in Nicaragua.   I always thought of Fair Trade as some sort of utopian, bright-eyed, “let’s hold hands across the world” sort of charity.

Nope.  Fair trade makes money.  Here’s how.

You and I and other well off types decide that we want to feel good when we drink coffee or eat bananas.  We’re willing to pay a little extra for it, in fact.  That extra gets passed on – not to the distribution channel, but direct to the farmers.

That’s thanks to certification and auditing from folks like my friend Paul Rice at TransFair (the company behind the Fair Trade USA label, predominant in the US).

Market demand drives the whole thing.  It’s not charity, it’s good business.  It’s just taking advantage of brand preference, just as you might prefer Kraft brand macaroni and cheese instead of some store brand (I know I did when I was allowed to eat grains and dairy).

You pay more for the feeling and quality of the brand.  Fair Trade USA charges farmers for certification.  Farmers make more.  Although, when I say “farmer” I’m being too general, because right now it’s almost exclusively co-ops of farmers.

Co-ops of farmers aggregate small family farms, becoming large enough for certification, and co-ops of co-ops are large enough to become distributors and exporters.  All those co-ops make money, too, and their owners (the farmers) decide whether to get dividends with the profits, reinvest in the co-op, or provide programs like children’s scholarships to college.

Co-ops of farmers are where Fair Trade started, but it’s also the next battleground.  As fair trade demand increases from retailers like Starbucks, co-ops don’t have enough capacity, accounting for about 2% of coffee sold in the U.S.  But large industrial farms do have capacity.  That’s right, those greedy, corporate, and exploitive farming companies (so say many consumers who are paying extra for coffee).

Corporate farms could join the Fair Trade bandwagon to meet demand for Fair Trade products.  And it could help the poor.  The workers at large industrial farms like Dole or Chiquita also get terrible wages.  Those farmers and workers could gain similar advantages as co-op farmers if only Fair Trade would allow them.

But Fair Trade is resisting.  Which makes me wonder: is Fair Trade only for co-ops or also for farm workers?  Can the brand expand beyond the co-op movement?  Does corporate structure matter more than poverty?

Is Fair Trade exclusively for poor family farms or also for poor farming families?

 

It’s the businesses, stupid.

Jon’s Home is a small, start up orphanage on the far outskirts of Kampala.  When speaking with Jon Freeman (who is embarrassed that the orphanage is named after him), I was reminded that so many social problems can be solved with one thing:  jobs.

To help its orphans, Jon’s Home started providing school books.  They had to do this because the schools don’t have enough money to provide books.  Without school books, students aren’t allowed to attend.  And the reason the schools don’t have enough money?  There isn’t enough income from businesses or individuals to tax.

It’s true all over the third world.  There’s no electricity because there isn’t enough money.  There’s no healthcare because there isn’t enough money.  There are few local high schools in Nicaragua because there isn’t enough money.  The only money seems to come from things we’d prefer it didn’t, like sex trafficking.

From Kampala to Kansas, there are real similarities:

• In the US, schools don’t have enough money.  The tax base shrank when jobs were lost.

• The US budget deficit has ballooned to over $1.5 trillion per year as economic output declined (that’s $1,500,000,000,000.00 in traditional form.  The calculator I used in grade school didn’t even go up that high.)

• We develop fears of the Japanese in the 1980s or the Chinese today, not because they are a military threat but because of their economies.

In America today, we have 15 million Americans unemployed.  We’ve extended the social net to protect them.

And just like the third world, charities are not enough.  The problems are too big for good intentions alone.  Or government intervention.  Only jobs, and the taxes on them, will ultimately solve the lack of money for our social priorities in the US or in Uganda.

So, to ask a silly question:  where do jobs come from?

During a recent meeting with over 20 Congressmen, there was clear hand wringing about the lack of jobs and concern for the plight of Americans.  Our elected representatives are hard working, passionate, and intelligent people.

But during a one hour conversation on the topic, it was 35 minutes before I had to raise my hand and say:  “We’re concerned about jobs, but unless we are going to recreate the Work Progress Administration of 1930s, those jobs have to come from businesses.”

With 50% of all American jobs coming from small businesses (with 500 employees or less) I’m not speaking of the 800 large corporations in America.  They know how to work the system to their advantage.  I’m talking about small businesses – from taxi companies to technology startups.  These are hard-working people, not overpaid CEOs.  Small businesses are the long term solution to our lack of dollars for social problems.

Economies are built.  They are creations of man, not of the ether.  They have systems and rules and sometimes the mechanisms break.  Like a car.  Instead of focusing on just the passengers, let’s work on the engine.  The engine looks like this:

Successful Businesses = Good Jobs = Taxable Income = Cash for Social Priorities.  There is no other way to increase cash for social priorities.

The purpose of health insurance = expense smoothing

I recently went shopping for health insurance, and it reminded me of the reason for health insurance.  Health insurance is intended to smooth expenses.

Health insurance is identical in concept to a home mortgage, which smooths the expense of a house over 30 years.  Health insurance is identical in concept to a student loan, which spreads the costs of higher education across 10 years of (hopefully) higher income production.  Health insurance is identical in concept to savings, which can be paid into across multiple years and then used in times of need.

This is true in every country, from Bangladesh to the United States.  Expense smoothing is the purpose of insurance.

Thus, it is not realistic to expect that the cost of health insurance should be less than the cost of predicted health care.  There is no free lunch in this system.  If the last 6 months of life, on average, will cost $100,000 in hospitals, doctors, procedures, and drugs, that $100,000 needs to be paid into a health insurance system for the 30 years before that (or about $333 per month for 30 years in this example, just to pay for those end of life health care expenses).

Health insurance is NOT health care.  Speaker of the House John Boehner’s quote below is indicative of the confusion.  I suspect he is doing this on purpose:

“I hope the House will act next week to repeal the job-killing health care law so we can get started on replacing it with common-sense reforms that will reduce the cost of health insurance in America,” said Boehner.

Health insurance is driven by the costs of health care.  75% minimum of insurance premiums go to pay insurance claims, while 25% is divided between administration and profit.  Perhaps you think we could reduce those administrative costs and profit.  However, even if we removed the entire administrative costs and profit, health care inflation would get us back to current costs in just 3 years.

You wouldn’t want to eliminate all those administrative costs anyway.  Let’s pretend that you and 100 of your friends decided to form your own insurance pool.  Each of you pays $500 per month into a common account, and then you just withdraw it when you have medical needs.  That’s $50,000 per month.  Plenty of money.

But now, out of those 100 people, there will pretty much be someone sick every month.  Based on national averages, your small fund will spend about $38,000 per month on health care, leaving $12,000 per month.  I don’t know how you feel about 100 of your friends, but I would rather hire someone to keep track of 100 people’s doctor’s bills and monthly payments than rely on 100 people busy doing other things.  So that will consume some money, especially if some of your friends occasionally call up to complain.

Add one more small expense.  There is always the chance that one month a lot of your friends will get sick.  Let’s say the shrimp was off at the local Kiwanis club gathering, and a bunch of people showed up in the ER at 3am on a Sunday morning.  Our fund might have enough to pay for such an event.  Thus, we need to purchase “reinsurance” which is exactly what it sounds like.  Our little insurance fund needs insurance to cover it’s variability, or else we might not be able to make our payments at any given moment.

Insurance companies need some administration, and even some profit, to make sure they can give us the service they want.  We can’t eliminate it.

Insurance costs aren’t the problem.  Even health care isn’t the problem.  The problem is us.  It’s complex, but let’s start with the average American male is 25 pounds heavier in 2002 than in 1960.  We are the heaviest nation in the world. That brings all sorts of health issues.