The problem with progressive taxes

With job security running low, the recently unemployed are going to get struck with an irony. Despite the good intentions of progressive taxation--have the rich help out the poor--it's going to slap the middle class with a painful lesson at the worst possible time.

Basically, progressive taxation only works if people have stable incomes. Take two people, one makes $30,000 per year, one makes $60,000 every other year. At the end of every two years, the two will have the same net income, but former will have been taxed (Federal income tax) $8,165 while the latter was taxed $11,187 because he looked richer than he really is. Ordinarily, this isn't a problem--jobs are fairly stable and my example was contrived--but in a deep recession, people will find themselves with unemployment and juicy severance packages one year, but almost nothing the next, and they'll pay more taxes than they ever have at a time when they can afford it the least.

This isn't the first time wealth redistribution programs have backfired. As cutoffs for the Alternative Minimum Tax crept effectively lower, people not ordinarily considered rich started to be affected. At the end of the dot-com boom of the late '90's, many in the Silicon Valley middle class found themselves rich on paper. Through a few bad trades and a tumbling NASDAQ, some not only saw their money disappear, but a high tax bill because the money they never really had made them technically rich.

None of this happens with a flat tax. Every dollar made is taxed the same, regardless of when it was made or how many dollars came before it.

Pitching a startup

A friend sent me a link with five steps to selling a product Billy Mays style, but they seemed to apply to more than just infomercial wares; they were all great for pitching startups.

1. It must solve a problem.
2. It must have mass appeal.
3. It must be unique.
4. It must offer instant gratification.
5. It must be demonstrable.

When you pitch a startup, you're pitching both an investment and a product. If you can't quickly convince people of its value as both, you're on your own.

Regressive taxes

Progressive taxes have been criticized for punishing success--taking disproportionally more from the successful while providing them less. What if, instead, taxes were regressive--baseline taxes were assessed for government services (health inspections, defense, infrastructure), while the remainder of taxes were based not an ability to pay, but an ability to provide?

If people who made less than some amount were taxed at 100%, but given health care, basic shelter, rationed food and utilities, they'd have incentive to look for work (if not just out of boredom), eventually earning a small paycheck--enough for a TV, computer, or car.

Such a tax system would essentially vary the level of socialism based on ability to provide and not punish people who are successful. What's especially clever is that during a recession, as paychecks shrink, increased taxes force people to cut back, providing a safety net like an insurance company would--based on risk.

A regressive tax might sound unfair, but if it's unethical to tax a couple's second paycheck higher than the first, and it's unethical to let poor people die of starvation, the only compromise is a regressive tax that imposes a command economy on those that refuse to participate in the free one.

Variable paycheck

Companies are clever.  When times get tough, they start cutting pay...except for actual pay.  That's disheartening and sends a sign that times aren't just tough, they're coming to an end.  Instead, they have clever alternatives that employees hardly notice.

Stock options

Stock options are great for employers.  They're great for attracting workers, give the workers an incentive to say (they call them golden handcuffs for a reason), just don't pay that much.  When the bear starts wandering down Wall Street, they get better.  As they drop in value, companies see fewer options exercised for less money.  Thanks to Sarbox, they see a drop in expenses, all while employees blame themselves for not exercising at the peak.

Bonuses

Kiss these goodbye!  Big companies use complex equations with more factors than factorial to set bonuses.  Lucky for them, the factors are easy to manipulate, so despite your perfect performance, a 3% drop in company-wide customer satisfaction drops bonus pay into a lower tier.

Perks

Even the Silicon Valley entitlement of free bottled water can be on the chopping block when it's time to make cuts.  Expect cutbacks in the breakroom, supply cabinet, and cafeterias, and don't be surprised when your subsidized ride to work gets thrown under the bus.

Offsites

Not only do these cost money, they take you away from work.  Team building works best when the bulls are running.  Fear works best in a bear market.

Catering

Not the lavish executive meal catering, but sandwiches or pizza at mandatory lunch meetings.

Parties

Nothing says "Merry Christmas" in a depression like a pot luck sans luck.  December layoffs are practically verboten, anyway, so might as well cut what fat (and oh, what good frosting it was) they can.

Pay cuts vs. layoffs

These days, there's a lot of talk about layoffs at big companies (and small companies), but there's a lot less talk about pay cuts, although notably, HP announced that regular employees will see a 5% cut in their income.  It might seem bad, but the effects are probably better than a 5% layoff, and here's why.

The labor market has been flooded for a while, now.  Even during the good times of the mid-2000s, it was an employer's market.  Qualified applicants had to apply for many positions, maybe got a few interviews, but just one job offer.  College students fought over internships to the point where industries took advantage of the scarcity of internships and made the positions unpaid, claiming the experience was pay enough.  When the economy declined, even more people entered the labor market due to layoffs, fewer openings for recent graduates, etc., but not only did the supply of labor go up, the demand went down.  Given typical supply and demand curves, the price of labor should fall, but it hasn't.

Part of this is due to government protection of workers through support of labor union monopolies and rights favoring workers.  During the Great Depression, a change in the Supreme Court, along with pro-labor policies and laws from congress, led to the rise of unions, in part because the plight of workers was more sympathetic than businesses.  The price floor the unions created limited the number of jobs available, despite a demand for labor the market would otherwise price cheaper.

Not only do liberal (as in free) labor policies lessen unemployment, they lessen recessions.  Given the threat of layoffs, people will prepare for the worst case, not the average case; think of it as employment terrorism.  Purchases of items are put off until they're either needed or the labor market is improving.  Pay cuts distribute the risk--a very socialist goal--through very free-market capitalist mechanisms, supply and demand.  Instead of an entire workforce preparing for the worst, a pay cut obligatorily prepares them for the expected, reducing a hoarding/layoff cascade through economy.

This doesn't work for every sector.  The velocity of money decreases in a recession, and any manufacturer needs to cut back to avoid a large, growing inventory.  Still, while more might not be a good option, better might be, and with cheap labor, a recession is a great time for a company with a solid balance sheet to develop next-generation products at a bargain basement price.

Goodbye Iraq, hello Afghanistan: why Obama can't bring the troops home

In a word: jobs.  President Obama's latest goal of creating or saving 4 million jobs can't stand to lose the jobs created by the Iraq war.  At recent count, there are 144,000 U.S. troops in Iraq and 190,000 independent contractors.   Given that one third of a million people working in Iraq, between reservists, troops in training, troops currently rotated out of Iraq, defense contractors not working abroad, and 44,000 troops in Afghanistan, wars in the Middle East are easily employing 1 million people.

These jobs are essentially off the table.  The administration can't claim to be saving jobs by not eliminating them, itself; the saved and created jobs need to be in the private sector--something it can't directly control--hence the focus on things like clean energy and infrastructure projects.  It's between a rock and a campaign promise.  Essentially, continued spending and shuffling troops is easier than adding 1 million to the already-tall order of 4 million jobs.

The financial crisis of 2008 explained for art students and engineers

Ever since 1995, stocks have been historically expensive. In 1996, Alan Greenspan famously described the market conditions as "irrational exuberance." Since then, the market, even after the dot com bubble, has been propped up by financial engineering. Everything that's happening right now is the result of the last decade being built on a house of financial cards.

Don't think of what's happening as a crash. It's just the hangover from a great party. You were looking at you account's value through beer goggles.

About the chart (for the engineers): the trend line was chosen so that prior to 1995, roughly as much was below it as above it. No reasonable trend line makes even 2002 look like a 20 year bargain. The chart is on a log scale, so consistent, growth, e.g 10% annually, would be a line. This is the least scary chart. Linear and logarithmic charts of the Dow following 1970 are a lot more depressing.

The shaded areas represent the following recessions:

• The Great Depression
• The Recession of 1953
• The Recession of 1957
• 1973 Oil Crisis
• Early 1980s Recession
• Early 1990s Recession
• Early 2000s Recession