Libraries As Socialism

I have from time to time heard defenders of socialism use the local library as an example of socialism in practice. The building, utilities, workers and books are paid for mostly by taxes (with some additional funds from books sales and donations). 

Who can say anything bad about the library? It’s available and it’s free. In fact my library’s computer reminds me at checkout how much I have saved by not having to buy the books. 

I am a supporter and big user of my library system. Sometimes I go to the library without anything particular in mind just to pick out an interesting book to read. Sometimes I go with a particular subject in mind and browse through the available books in that section of the stacks. I usually come away with something and never have to pay. (The same can be said of movies on DVD or music, but with everyone streaming, that part of their business has probably fallen off.)

Sometimes, however, I am looking for a particular title that I’ve seen on TV or seen a reference to in my reading. I check the website and the library doesn’t have it. Somebody in charge of ordering books either was not familiar with it or didn’t feel that it should make the cut for what they spend their limited funds on. I have very little control over this centralized decision.

Sometimes when checking the website I do find the book I want, but someone else has it checked out. The computer tells me how many copies they have in the system and where I am on the waiting list should I decide to put the book on hold. I have waited as long as 8 weeks, occasionally longer, for notification that the book is available. I am given 5 days to pick it up during the 60 hours of the week they are open (prior to the shortened COVID hours). Most of those hours are when people are working and kids are in school.

I put up with these inconveniences because getting a particular book to read is not urgent or important to me. The library is fine, but it has its limitations. I can bypass these limitations using available alternatives.

If I really need the book I go the capitalist route – Amazon, for example. I can find almost any book or movie I want on the Internet. I can buy it and download it directly to my phone and begin reading. If the system is working properly, the number of copies available is driven by demand from myself and others rather than by some individual’s taste or guesswork. I can do this 24 hours a day; I never have to wait for another reader to finish and return it. I can mark it up if I choose and can take as long as I want to read it. Because it’s mine, I have that freedom.

Where other services are concerned, such inconveniences are no longer trivial. No one would want to put up with them in important areas like groceries, utilities, transportation, healthcare and many others. 

Why do people in the UK or Canada sometimes have to wait longer for medical procedures? – Because their healthcare is run on the library model. Why do we hear stories of food shortages in places like Venezuela and the former Soviet Union? – Because the food supply is run on the library model. Some central decision maker, not individual consumers voting with their dollars, controls the system. Why does public education in America lag behind so many other countries? – Because as parents become more and more disengaged, it moves closer to the library model where central decision makers dictate methods and judge outcomes.

Most areas run by the government or where the government gets involved are the the epitome of inefficiency: student loans, home mortgages, the court system, the DMV, the post office, Amtrak, and public education (where teachers keep asking to be paid more to teach fewer students with questionable results).

Healthcare in America is already too much like the library model. There is no real competition, and the consumer is separated from the provider by an insurance middleman. So everyone rightly complains about it.

I love libraries, but I wouldn’t want to depend on them or anything like them for the necessities of life. 

Flashback – (Mis)understanding Insurance

If they learn economics in journalism school, they must quickly forget everything upon graduation. Furthermore, when the facts don't make a compelling story, they resort to the usual tactic of trying to make stories fit their worldview or make things look scarier than they are. Here is a prime example I gave in December 2016.

[As I was reading the transcript of Scott Pelley’s "60 Minutes" interview with House Speaker Paul Ryan, I noticed that he seemed uninterested in hard news or in-depth information so much as he was interested in tripping up the Speaker, trying to put him in a position of disagreeing with his new boss, making one or the other of them look bad, or uncovering something potentially embarrassing.

He asked how often the two speak on the phone and who initiates the conversation. The answers were almost daily and both. No news there. How does he answer the phone? “He doesn’t say, ‘This is the president-elect?’” No. “Have you told him being president is not being CEO of the United States, that the Congress is going to have a say?” 

Instead of asking how the two got together after a contentious election, he asked, “Who apologized to whom?” It’s clear by now that Pelley has no liking or respect for Donald Trump, thinks he is a bully and a racist, and is searching for evidence to back up his views. Better yet, he would like to get Ryan to agree on any point that might make it seem he is of the same opinion.

The silliness and self-serving finally comes to a close, and Pelley asks a number of questions about policy issues. Soon he gets to the details about possible changes to Obamacare and the sniping continues. At one point Pelley says “And women will pay the same as men? That didn’t used to be the case.” This is a question designed to get an answer that will incite outrage. He is trying to get some admission of Republican bias against women, but showing in the process that he does not understand how insurance works and counting on the fact that many Americans don’t either.

Insurance usually works by assessing the risk and charging premiums accordingly. If you have homeowner’s insurance you expect a discount for having a working alarm system. Teen drivers are generally less safe than more experienced drivers, but boys have more accidents than girls. Auto insurance for a young man 16-25 is higher. There is no outrage there. It’s not unusual for companies to charge smokers more for their health insurance benefits. Owners of cars with higher repair costs pay higher premiums. Older cars are cheaper to insure due to the lower replacement cost. Those who don’t drive as many miles sometimes pay lower premiums. Costs of auto and homeowners insurance vary by what part of the country and by the size of the town or city you live in. And since women outlive men and take fewer chances, they pay less for life insurance. Older people pay more, as do those who participate in dangerous hobbies like skydiving or juggling chainsaws.

This all happens without a stir. Everyone seems to understand that certain classes of people are at a higher risk for either the frequency or the size of insurance claims. Hence they should pay more. The ones in the classes with higher premiums don’t like it, but they pay. So why would people be upset that some women, especially those of childbearing age, might have to pay more? That “used to be the case” and it didn’t have anything to do with prejudice or victimization.

Apparently the government and some group of citizens have now decided that charging women more for health insurance can be explained only by prejudice. Everyone must purchase the same insurance for the same cost or there will be an uproar. And Scott Pelley and others in his profession are more than happy to incite and later fan the flames of that uproar, because it makes their job of reporting the news so much easier. Their job is not to inform or to educate; their job is to attract views and clicks. Nothing does that better than a good demonstration or protest, even those grounded in fundamental misunderstanding.]

P.S. I have often said that problems with healthcare costs must be solved on the basis of costs, not by tinkering with health insurance, but that’s for another discussion.

Flashback – Consumer Protection Gone Crazy

Back in 2011 I explained how new legislation regarding credit cards led to the companies increasing fees and interest rates. More recently, about a year ago, I once again emphasized how well intentioned consumer protection laws often have unintended consequences. Here is that entry from August 23 of last year.

[Last time I wrote about a lawmaker introducing a bill to protect Americans from Internet addiction, a condition that has no formal definition or diagnosis. Whenever a problem or “epidemic” arises, someone in power decides that there is a government solution to change the conditions or behavior. (Even when the government was the source of the problem.)

People are not trusted to solve their own problems, often because they don't. In the end everyone loses some freedom because of the bad decisions of a few. It takes critical thinking to identify the root of the problem and personal responsibility to own the solution instead of passing it off to a higher power.

This dynamic was reinforced a few days ago when a package arrived from one of those catalogs that frequently appear in the mailbox. In the package was a gift pen, similar to those used by various companies as promotional items. It was an ordinary retractable ballpoint similar to those from a dentist’s office or a job fair but with one difference. It came in a plastic sleeve with the words, “WARNING: Cancer and Reproductive Harm” followed by a web address.

The address led to the California Proposition 65 page. “The California Office of Environmental Health Hazard Assessment is establishing this website to provide the public with information on chemicals, products and locations often associated with Proposition 65 warnings.  These warnings inform Californians about their exposures to chemicals that cause cancer, birth defects or other reproductive harm.” 

Notice that the above statement reads, “cause cancer” not “may cause cancer,” implying that they have studies to definitively prove a direct causal link. Since the list includes over 900 chemicals, that is a doubtful assertion. Looking at one random example: “The International Agency for Research on Cancer (IARC) lists coconut oil diethanolamine condensate (cocamide DEA) as an IARC Group 2B carcinogen, which identifies this chemical as possibly carcinogenic to humans."[Emphasis added] Apparently it only takes possibly to make the list. 

The full list includes a large number of arcane-sounding chemicals, e.g., Amikacin Sulfate and Zalcitabine, but it also includes alcoholic beverages, aspirin, tobacco smoke, nicotine and oral contraceptives.  

How helpful is this? Is tobacco smoke or nicotine a surprise? Why do Californians need the information and not everyone else? Coffee contains acrylamide, which is on the list, so last year a judge decided, "coffee sellers in the state should have to post cancer warnings.” But in “2016, the cancer agency of the World Health Organization moved coffee off its ‘possible carcinogen’ list.”

This isn’t science; it’s judges and lawmakers deciding what should or should not be on a list. It’s “The Boy Who Cried Wolf” gone crazy. People don’t have time to be careful about 900 chemicals and all the products they go into. I have no idea which part of the promotional pen I should worry about or how it might hurt me. Tanning beds and sunlight are not on the list only because they are not chemicals. The situation is so bad that my seven-year-old granddaughter upon returning from a vacation in San Diego commented about how silly it was seeing all the warning signs everywhere coffee was sold.

Not only is this not helpful, it adds cost. The extra warning labels and signs cost money. It is costly to reformulate products to avoid having to post warnings, or worse, to avoid the threat from lawyers, “some of whose businesses are built entirely on filing Proposition 65 lawsuits” on behalf of “straw man plaintiffs." The cost of these nuisance consequences comes back on all of us. (Economic understanding reminds us there is no magic money tree to make up the difference. It all gets passed along to the end consumer.)

Does the list ever shrink or become reasonable, or do we get to the point where everything needs a progressively more meaningless label? I’m sure many people thought this was a great idea back in 1986 not realizing that they may be creating a monster.]

Flashback – Plastic Straws

I originally called this one "How Much We Take On Faith." At the time it was clear that many information sources are not reliable, a notion reconfirmed by many experiences since then. Politicians, advocates and pundits confidently make assertions to support their agendas. We can never tell what is true, what is pure fantasy, or how much is just so much hot air. 

 

Plastic straw mandates are examples of many symbolic acts. Using bad data or no data, authorities try to fool us, and probably themselves, into believing that they are really making a difference. They want to appear caring about all the right things, then garner enough support to pass laws and regulations forcing everyone to comply.

 

Here is the piece from 2018.

[The other day I got into a discussion with a colleague about plastic, which led to a comment about the amount of plastic in the ocean and what a problem it is. My response that only about 1% of the ocean plastic comes from the United States was met with stares of disbelief. Instead of arguing the point with someone who firmly believed the opposite, I offered to send references. The next day I emailed an explanation of the situation from a number of reputable sources.

From National Geographic in a story about the large accumulation of waste in the Pacific: "Microplastics make up 94 percent of an estimated 1.8 trillion pieces of plastic in the patch. But that only amounts to eight percent of the total tonnage. As it turns out, of the 79,000 metric tons of plastic in the patch, most of it is abandoned fishing gear—not plastic bottles or packaging drawing headlines today."

My next stop was a Bloomberg article with a sub headline of: “Skipping straws may be hip. But there are much better ways to fight pollution.” They first point out that the original estimate, the one activists and news media cite with confidence, that Americans use 500 million straws per day is based on highly dubious data that came from a small survey by a nine-year-old for a grade school science project. Then it was spread without any attempt to verify it by those who wanted to emphasize the problem. "Similarly, two Australian scientists estimate that there are up to 8.3 billion plastic straws scattered on global coastlines. Yet even if all those straws were suddenly washed into the sea, they'd account for about .03 percent of the 8 million metric tons of plastics estimated to enter the oceans in a given year.” So what we have been told about straws being the problem is a gross exaggeration.

A Science report on marine pollution verifies exactly what I was saying with a table on their site,  Table 1 titled: “Waste estimates for 2010 for the top 20 countries ranked by mass of mismanaged plastic waste (in units of millions of metric tons per year).” The US is listed at the bottom of the table with a contribution of .09% – less than one percent. That same information is repeated in pie charts on other sites.

So all this fuss about banning straws is bogus. It is a feel-good exercise that grows because so few people take the time to do the research. Ocean pollution is a problem, but the advocates and politicians are misinformed and are passing along that poor information to the rest of us – and we are buying it.

This and many other trends and movements have become their own religions. They depend on blind faith. The preachers stand up and confidently make ignorant and absurd allegations about chemicals, food safety, pollution, economics and a host of other subjects. The general population takes it on faith, chanting “amen” in all the right places. This leads to poor policies and results in those responsible for poor policies being reelected on the basis of making their followers feel good about themselves, about how pure they are, about how caring they are. It’s much more about ego and self esteem than science or actually saving the planet.

In reality these policies deliver little or no benefit and may have unknown side effects or unforeseen consequences. They are at best a waste of time. Critical thinking is the answer, but no one wants to deal with facts or reality.] Feeling good is more important.

Flashback – Baby Powder

Almost exactly four years ago I wrote about the difference between how the legal system looks at the danger of baby powder vs. how science sees it. Of course, that makes no difference, as just this week I saw another class action lawsuit ad on TV. When it comes to taking money from big rich companies and giving it to poor victims (and their lawyers) juries don’t care about science. They just want to use someone else’s money to dry the tears.

But they still expect the same company to continue to make the Tylenol for their headaches while testing and producing a COVID-19 vaccine. It’s all part of some weird love/hate relationship.

From September 2016: "How Baby Powder Can Harm You?"

[Under the heading of Health, the Fox News headline read: “Research finds talc doesn't cause cancer; juries disagree.” The story tells that two juries awarded a total of $127 million dollars to two women claiming that the Johnson & Johnson baby powder gave them ovarian cancer. A second judge threw out two cases, saying there was no reliable evidence; but another 2000 women have already lined up to sue.

That’s the legal side. What does science say? “Most research finds no link or a weak one between ovarian cancer and using baby powder for feminine hygiene, a practice generations of American mothers have passed on to their daughters. Most major health groups have declared talc harmless.” The rest of the article gives more information about the research and the trials. Here is another conflict between science and the legal process, but that should come as no surprise in light of jury awards given years ago for silicon breast implants when the implants were later found to be safe.

It is very easy to understand how a jury could ignore science and award millions of dollars to a woman with ovarian cancer. They do it out of sympathy, and they do it because they can. To do otherwise seems cold and heartless.  It’s not their money and the company has plenty of money. What’s a few million dollars in the grand scheme of things when it can bring comfort?

What person would stand by and see a toddler fall and skin her knee and not immediately run over to pick her up, dust her off and give her some comfort? It is the human thing to do.

There are several similarities between the one who helps the fallen toddler and the juries who award large sums. It costs them nothing. It gives comfort to the afflicted, although it does nothing to cure the cancer or heal the skinned knee. And it makes the rescuers feel good about themselves.

There are, however a few key differences. When you comfort the toddler it truly costs you nothing, and other toddlers don’t look at the one who fell and line up to also fall down to get sympathy. (Some may independently discover that falling down is an easy way to get attention, and some of them probably grow up to be trial lawyers.)

Also, when a toddler gets sympathy, the costs of that sympathy are not spread to the rest of society.  When a jury finds for the plaintiff in this case, not only does the company (or insurance company) pay, but every other company in that industry is put on notice. They are at risk of losing a large judgment for one of their products that has been on the market for years with no ill effects. They don’t spend the money now, but must keep some in reserve to protect against such a contingency.

Likewise, all insurance companies, seeing that evidence means nothing to some juries, must save for similar outcomes. The companies making personal products slowly raise their prices to adjust for this, and the insurance companies raise their rates to cover the increased risk. This sympathetic redistribution, which is really what it is, ends up costing everyone in society. 

What’s worse is that this activity adds no value. It does not add to the GDP. It does nothing to increase the standard of living for anyone except the few women who win in court (and their lawyers – Remember personal injury lawyers are not paid for justice; they are only paid for winning.)

In the end what can Johnson & Johnson do (besides spend a lot more time and money appealing each decision)? What lesson could they learn? Should they get everyone who buys baby powder to sign a hold-harmless agreement? Why are they more at fault than the “generations of American mothers” referred to in the article? They made a product considered safe for years and suddenly they are on the hook for $127 million; and if the ratios hold true and half the next 2000 win similar amounts, it could be $127 billion! It’s “jackpot justice,” and the cost of all the winning “lottery tickets” is spread among the rest of us, including the people who served on those juries!

So how can baby powder harm you? It harms you in the same way other wasteful legal actions harm you. It takes money out of deep pockets to compensate “victims,” but the costs ultimately come back to each of us, with nothing to show for it but richer lawyers, and juries who, in some misguided way, temporarily feel satisfied that they did something to help.]

Why Is Capitalism a Failed System?

Just as one example, here is a picture of Seattle taken about 140 years ago. A caption reads, “Seattle was still a village in 1878 and contained about 3,500 people” with an average life expectancy at birth of about 42 years.

Today the city itself has a population of almost 750,000 with nearly 4 million people living in the Seattle metropolitan area. It looked like this a few years ago.

The caption from this 2015 picture says “243,995 Seattleites work downtown,” while 65,000 people live there.

Suppose someone told those 1878 residents about an economic system that, despite some problems of cheating and favoritism, would raise their standard of living by many hundreds of times. They would have cars, electric lighting and appliances, indoor plumbing, air conditioning, antibiotics, air travel, a telephone in every pocket and so many other things they could never have imagined; and the only drawback would be some income inequality. Would that seem like a fair deal?

With the typical poor person in Seattle living longer and at a higher material and health standard today than the typical person 140 years ago, why do a number of its citizens (and others around the country) think the system should be scrapped? Could it be a problem with perspective, critical thinking or economic understanding?

Speaking of Insurance

Unfortunately, I must name a particular brand to make the point. It's not meant as criticism, only as another example of how people often don’t ask the right questions about money and economics.

The example is the Allstate commercial about their accident forgiveness program. Whenever I see it I ask, “Where do people think the money is coming from – surely not some magic money tree?” But that is the impression the ad leaves. Have an accident and your rates don’t go up, even though you expect the insurance company to pay for the repairs.

If the company has some sort of accident forgiveness fund set aside in a secret vault, where does that money come from?

As always, the company’s money comes from their customers. They use it to pay their employees, pay their rent and utilities, pay the claims that come in, reward the shareholders by making a profit and pay for the production and airing of those television commercials. To make this work, they must collect more money in premiums than they pay in claims! On average every one of their customers pays them a little more than they get back; that’s true for all insurance companies – even the non-profits.

Generally, insurance companies reward good drivers by raising premiums only minimally to account for inflation and industry-wide claims experience. Drivers who have accidents are considered a higher risk and must pay more, so on the surface accident forgiveness sounds like a good deal. But beware the details. 

The program has been around for a long time. Here from Fox Business back in 2011 is one explanation of some of those details. It’s not free. “At Allstate, for example, you get accident forgiveness by upgrading to a Gold or Platinum coverage plan. Gold costs 8 percent more, and Platinum 15 percent higher than a standard policy.” To qualify for Gold coverage, “you need to go three years without a collision,” but with Platinum coverage it kicks in immediately.

So there apparently is an accident forgiveness fund, but the people who signed up for the program are the ones funding it. It’s almost like buying auto insurance and then buying more insurance against a first accident. 

It’s similar to life insurance where the company is betting, based on life expectancy tables, that you are not going to die until you have given them enough money to invest and come out ahead. For auto insurance they set rates betting you are not going to have an accident, based on your driving record so money is left over to pay for the exceptions. The added premium is a bet you make against the company to protect you against an unforeseen incident. 

The rest of the article says that this added protection might be good for some but not for others, and it’s best to talk it over very carefully with an agent. 

Several other companies also offer some form of accident forgiveness and the Allstate program may have changed since this 2011 review, but the main point remains the same: There is no magic money tree! Companies don’t reward us out of the goodness of their hearts or by lowering the CEO’s salary. They collect it from their customers; and in every transaction it’s our choice whether a purchase meets our needs and is fairly priced compared to the competition.

Acting and Reacting

Is the world getting safer or more dangerous? Data about crime, wars and accidental deaths indicate that life this century is much safer than it was in the past. These events are very noticeable and easily measured. On the other hand, we often ignore or excuse less immediate dangers that arise as our interactions with the world become more complex.

As I have been describing behavioral examples of errors in the five key dimensions over the last 10 years, it becomes clearer that much of the human race is still attacking twenty-first century problems with cave-man level of skills. Just as the hunter-gatherers required immediate reactions to survive, when they heard a rustling in the bushes that may or may not be a snake or predator, humans retained those instincts, following a course of acting first and analyzing later. 

Likewise the practice of not trusting or even attacking people from a different tribe or with a different belief system carries over today in many forms. “My god is better than your god” is not necessarily ancient grounds for confrontation. It happens in a modified form daily on social media.

These instant reactions and mini-superstitions come to us immediately, before we have a chance to engage our critical thinking. Thus critical thinking is often omitted from our decision process, used only to justify or rationalize actions after the fact.

Several recent books describe this psychological phenomenon in detail: Thinking, Fast and Slow by Daniel Kahneman; Nudge, by Thaler and Sunstein; and The Power of Habit by Charles Duhigg are among them. They tell how, as humans evolved, we developed mechanisms to be able to make quick decisions in times of panic or emergency. We react instantly, responding to emotional triggers often before we are aware of them. We are more comfortable following our established patterns of behavior. These programmed, intuitive reactions saved our ancestors, but they serve us poorly today.

That explains in part the need for COVID-19 bail out packages. According to Market Watch: “A shocking number of Americans are living paycheck to paycheck.” One survey says it’s at least half, another estimates 74%, as “one in four families making $150,000 a year or more are living paycheck-to-paycheck” and three in ten families having no emergency savings. No wonder it’s a crisis! The article says people are struggling.

This problem keeps coming up year after year, yet there is no change. 

Apparently what people need is something called financial literacy. An article in Ideas.TED from late last year asks: How financially literate are you?” and tells “3 things you should know about your money.” These three things are not close to rocket science: knowing how much money is coming in vs. how much you are spending; knowing your credit score and knowing how much credit card debt you have. Do we really need seminars and newsletters to teach people how to spend less than they earn to have a little left over at the end of the pay period or to read a credit card bill? These are third-grade skills.

Don’t blame it on credit cards or the eagerness of banks to lend customers more money than they can afford to borrow. These excuses are a cop-out. But this problem arose only in the last half-century or so. The world gets increasingly complex while we still try to cope using our cave-man instincts, act now and analyze later.

Critical thinking does not come naturally. It’s hard work and can sometimes be unpleasant. But it’s increasingly needed to keep up with the new products and services that technology throws at us at an ever-accelerating pace.

Flashback – Robbing Peter to Pay Paul

[Here, from over seven years ago, are some examples of government actions showing how failures in economic understanding lead to bad outcomes. Politicians will never change their tactics and sales pitch until voters wise up. In many cases we have to lead the people we elected  away from senseless legislation with hidden, but predictable, consequences.]

When I call for economic understanding by saying that there is no magic money tree, here is what I mean. When corporations incur added costs, whether it be shoplifting, a utility rate increase, wage increases or higher taxes, they find a way to pass the cost along to their customers, usually as higher prices. When governments decide to spend more money, they either raise taxes or borrow, leaving the taxpayers to absorb the cost directly or pay the interest now and leave the principle repayment to future generations.  No magic money tree means that the funds must come from somewhere, not out of thin air, and that somewhere is usually from our wallets, directly or indirectly.  The consumer/taxpayer is the bottom of the economic food chain.

As 2013 begins, the Affordable Care Act (ObamaCare) requires manufacturers of medical devices to pay an excise tax, 2.3% of sales. Besides the possibility of reducing costs by outsourcing to other countries and reducing development budgets, the industry also hints that the added costs will result in a price increase. As this article points out:  “Recent surveys show that medical technology executives are examining a host of other options that will have negative consequences, including passing along the added costs through price increases.” (Emphasis added) Those of us who don’t believe in a magic money tree are not at all surprised.

But look at how circular this situation becomes. The government adds a tax to help offset the cost of healthcare. The companies pay the tax by raising prices. Healthcare providers, doctors and hospitals, raise their prices to account for their now higher costs. Insurance companies raise their premiums or co-pays to account for their now higher costs. The government uses the tax money to subsidize health insurance that is now more expensive due to the tax itself! If anything, the cost of the whole system increases due to the added administration associated with paying and collecting a new tax.

In an economy such as ours, this concept of punishing greedy companies with taxes or penalties doesn’t seem to work very well, and why would we even want to punish someone who provides us with a product or service that we want or need? In general, magic-money-tree thinking leads to a host of unintended consequences.  

As citizens and voters we can solve this, but not until we stop thinking this way ourselves. This type of logic drives decisions by both parties at all levels. They tell us that most of a project will be paid for by a federal government grant, as if that's not our money too.  They try to make us believe that corporations pay taxes by just reducing their profits or paying their CEO less. They spend as if the bills will never have to be paid, as if there is some magic money tree or secret treasury to make it all right.  

No Magic Money Tree

For years I have been patiently explaining how unbelievable it is that people go through life putting their faith in some magic money tree to take care of their problems. They spend instead of save, then stress about the cost of education and retirement. They expect a lifeline to bail them out – money off some magic tree. Buy now, pay later, and don’t worry about the consequences, just continue to borrow and play the lottery.

As the government increases spending, it makes no impression on them except to feel good that some people are getting more goods and services for free. If a big business is fined or sued, people assume there is some invisible bank account to cover the expenses. (Maybe the CEO will take a pay cut.) Americans fail to see the unbreakable link, either direct or indirect, between these expenditures and their own wallets.

Here are the facts. There is NO magic money tree! The money always comes from somewhere, and that always has ramifications for every single citizen: higher prices, higher taxes, a sluggish economy or a bigger share of the National Debt. The poor are usually disproportionately hurt.

When the business gets an unexpected expense, they raise prices and pass it along to their customers. This is easy when it’s due to a new government regulation that affects the entire industry. No one has an advantage, and everyone’s prices go up to cover the added cost. If it affects only one company and raising prices makes them non-competitive, they risk going out of business or downsizing, and people lose jobs.

When the government increases spending, it comes from taxes and debt. For many years lawmakers seem to have more interest in using some combination of lower taxes and increased spending to buy votes than in acting responsibly. (In fact, they characterize a lower than expected increase as a “cut.”) This has pushed the National Debt to unimaginable levels, currently over $26 trillion. Now Congress is fighting with the President over whether to spend $3 trillion or only $1 trillion on another emergency COVID package! Where do they think that money is coming from? 

The debt, in the form of government bonds is interest-only. Payments do not lower what is owed. Growing debt leads to more interest, which holds back economic growth. Fiscal irresponsibility can lead to inflation, which also affects everyone.

Many economists tell us not to worry, despite what happened to Greece in the recent past when their debt got out of hand. In 2017, years after the initial crisis, its economy grew by only 1.4% with unemployment around 22% and one-third of the population living below the poverty line. The EU bailed them out to some degree, but there is no entity big enough to bail out the US.

It’s a simple matter of critical thinking to understand that this issue is going to become a crisis some day, but as the problem grows, no one seems concerned. Behavior has not changed. Politicians still win elections by promising more spending and programs. Even numbers in the trillions get a ho-hum response. 

Everyone must assume there is some magic money tree somewhere; but there isn’t. 

Flashback – Social Security Myths

[Here is a brief excerpt from a long rant on Facebook about how unfair the Social Security system is and looking for support. 

“This is NOT a benefit. It is OUR money, paid out of our earned income! Not only did we all contribute to Social Security but our employers did too! It totaled 15% of our income before taxes. (This should be enough for you to forward this message, If not read on.)”

Despite my posting only 6 months ago the following full explanation of why this idea is complete hogwash, the misunderstanding continues. If you pass anything along, this should be it, because it is the truth.]

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Flashback – Job Creation Basics

[Every two or four years we hear tales from federal and state candidates about who has or who is going to create the most jobs. In reality the only jobs governments create are government jobs. The best any government can do is to minimize regulations that stifle job creation and not try to micromanage the job market. 

I wrote a reminder of this in August 2011 when the job market was just recovering.]

There has been a lot of talk about jobs in the past two or three years, but I think it requires strong economic understanding and critical thinking to draw accurate conclusions.

Jobs are not created; they are purchased. You don’t work for the boss; you work for the customer. Conversely, jobs don’t go away, customers go away. My experience is that many bosses don’t understand this important concept and fail to pass it along to their workers. When a company is growing or downsizing, it is usually based on matching the number of jobs to the needs of their customers.  (Sometimes, though, they economize by passing along their work to their customers, think self-service check-outs and those irritating phone menus).

When we work at jobs, making goods or delivering services, there must be a market for those goods and services. People should say to themselves, ”Wow, this is better and cheaper than the other comparable alternatives. I’m glad I made that particular purchase.” Everyone in the organization, whether it be a single proprietor or a global corporation, is working together to make that sale successful. Then customers continue to buy and more customers arrive. By buying more products or services, they essentially create more jobs. This is the motivation for a company to focus on customer satisfaction.

When a governor decides to “create green jobs” by mandating that a portion of electricity be generated by renewable sources (wind, solar), who purchases these jobs? Since they are created, they must be additional to jobs that already existed and the additional wages for these additional jobs must come from somewhere. Because there is no magic money tree, utility customers pay more. These jobs are created not because there are voluntary customers; instead the customers are forced to buy these new jobs with money they would have spent on other things (i.e., other jobs). Then we are paying more to support a wind farm that no one asked for, with a much bigger ecological footprint than conventional generation, that requires a back-up system anyway because it is only 35% efficient as the wind blows only part of the time and more at night, when less electricity is consumed. It doesn’t improve customer satisfaction or attract new customers. It merely creates jobs by displacing other jobs.

When we hear of jobs being created, we must be very wary. GM, GE, General Mills, and Geico don’t create jobs. When they have something we want, we, as customers, create those jobs voluntarily by our buying decisions, not because of new laws or regulations, but because we believe the output of those jobs makes our lives better.

Social Security Myths

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Flashback - Letting the Media Scare Us Over and Over

[The news and entertainment cycles are so rapid that nostalgia no longer requires a long memory. What was scary or hot just a few years ago has moved on to be replaced by the latest craze, panic or breaking story. It was little more than twenty years ago that the world was stressing over Y2K – what would happen when the computers thought the year was 1900? Since then people have worried about frankenfish, the genetically engineered salmon raised on farms, and the rejection of net neutrality leading to a crisis that never happened, along with many other manufactured fears. 

Every Christmas parents stress about getting access to the “hot new” toy so their kids wouldn’t be disappointed, but where are all the Tickle Me Elmo dolls today? 

Likewise the worldwide epidemics come and go. Just a couple of years ago it was Ebola coming from Africa. Today it’s Coronavirus from China. And don't forget SARS.

One such flash-in-the-pan concern was over a product vilified by some celebrity chef as pink slime, as I wrote back in 2012.]

Now we get the case of “pink slime,” a derogatory term referring to, and gathering support against, the use of beef scraps to supplement ground beef sold in stores, a practice that has been going on for years with no ill effects. Why do people stoop to such name-calling? Either they have no valid arguments or they are trying to catch us up in an emotional reaction to promote their particular cause (or as this news article calls it, a crusade). Who thinks about the jobs lost? Why are people who speak out against waste in other areas silent on this issue? Why would Kroger and the other grocery chains buckle under the pressure of these crusades against a product that is not harmful, less expensive and less fatty, that they have been selling for the last 20 years? This hurts many and helps no one.

The uproar about the coloring ingredient in Coke and Pepsi that I addressed on March 19, [2012] had a similar dynamic - get people all riled up to rally behind a cause or complaint based on poor or sometimes even deceptive evidence. The problem is that with social media it is now far easier to start a crusade or get people fired up about an issue using an emotional appeal. Before you know it governments are banning products or ingredients or the companies that sell them are back-pedaling due to the bad press on Facebook or Twitter. Most consumers have little formal science education in such areas as human biology or experimental design, but they loudly express their “concerns” based on unreliable information on the Internet. The masses are howling, the ringleaders are name calling, and we are moving closer and closer to a kind of mob rule where we end up paying the extra costs, enduring the unintended consequences, and having our choices limited.

In this fast moving society one subject does not stay in the news long, so the following week, "concerns" arose over the use of BPA in food packaging.  At this rate we could be banning or otherwise losing access to 50 products a year based not on science but on public outcry!

Along similar lines a different article tells about how old photos were intentionally used by the press to influence public perception in the Florida shooting case that has sparked so many protests. The article suggests that this type of manipulation by selective presentation of pictures and videos has become common practice in the media. Another article sheds additional doubt on the accuracy and completeness of some news reports.

So my question is, when are we going to stop being influenced, frightened and manipulated, and start thinking for ourselves? One way leads to reasonable outcomes, the other to the consequences of chaotic, knee-jerk reactions to each new manufactured crisis or irresponsible crusade. 

Flashback - Health Insurance

[My argument back in July 2011 was that people needed to better understand how health insurance works to keep from getting fooled by advertisers and politicians. Here is the entry in full.]

A flyer in the newspaper today reminded me how naïve consumers are about understanding the economic process, business and insurance, or at least how naïve advertisers think we are.

An ad from AARP promoting their Medicare supplemental insurance plan states that Medicare pays only about 80% of Part B (non-hospital) expenses and the other 20% is up to you.  (True.)  Right below is the statement that a supplemental insurance plan could save you up to thousands of dollars in out of pocket costs. That looks like a great deal, but where do those thousands of dollars come from, the AARP magic money tree? Perhaps the insurance company, out of the goodness of its heart, is going to make up the difference? – of course not.

The insurance company is going to collect premiums from everyone.  (Since premiums are not out-of-pocket costs in insurance language, maybe they are ignored when counting up the thousands in savings.)  The first thing the insurance company must do if it intends to stay in business is to pay its expenses (including the costs of the “free” brochure and of paying for all the people who work there and of other operating costs).  They also want to make a profit.  So already the total amount paid by everyone must be more than the total amount paid back to everyone (or to their doctor).

There will be winners and losers. The (financial) winners will be the people with high medical expenses for doctor visits, tests, etc. The losers will be the healthy ones. This may fluctuate, so in some years you come out ahead and in other years you may be part of the healthy bunch subsidizing the sickies – paying more in premiums than you receive in return.  Except for people who are chronically ill, this amounts to little more than a smooth-monthly-payment program similar to the installment plans offered by some electric and gas utilities. It is often a good budgeting tool to trade unknown payments for smooth, predictable ones, but you are hardly getting thousands of dollars for nothing as the flyer suggests.

This is a common tactic. It implies that the money is coming from somewhere else - but there is no money except our money. Companies and governments handle it, allocate it, and sometimes waste it, but their only source is to get it from us. Americans must listen to advertisers, news media and politicians with this always in mind to avoid getting tricked by this common something-for-nothing sales pitch that is really a smokescreen to disguise redistribution.

[Note that two and a half years after this posted, Jonathan Gruber, a professor at MIT and an architect of Obamacare said publicly: "And basically, call it the stupidity of the American voter or whatever, but basically [an intentional lack of transparency] was really really critical to get for the thing to pass." According to Snopes, the video footage of his remarks was deleted from the Internet in an attempt to hide it.]

Are Cars Too Expensive?

It’s hard not to feel like a victim when the media keeps reminding us that we are being taken advantage of and pointing out the evildoers. This segment from CBS This Morning is fairly typical.

The question posed and answered was: “Can a middle-class budget buy a new American car? Probably not.” They begin with the fact that the average vehicle price increased by about 38% for a new car or truck compared to 10 years ago. Of course they don’t mention that more than half of that amount can be attributed to normal inflation. Some comes from required and optional safety improvements and some from added amenities. 

That situation will likely not improve in the future as GM just settled a six-week strike with 46,000 union members who will receive $11,000 ratification bonuses along with other contract improvements. This sets the level for negotiations with the other two US automakers. Economic understanding reminds us that those added costs will be passed along to the car buying public, but back to the story…

Armed with the average annual take-home pay and the recommended percentage for car payments, Tony Dokoupil visited a couple of New Jersey dealers to price a typical car. The only way he could meet his presumed budget was either with a 96-month loan or by buying a much smaller car.

Where is the problem according to CBS? “The big three auto-makers are retiring many family sedans while rolling out souped-up SUVs and trucks at premium rates that families often can't afford without taking on loans that are now larger and longer than ever” while “a record number of Americans fell behind on their car payments.”

About this time I’m yelling at the TV that automakers don’t make cars that don’t sell. The reason they are producing bigger cars is to meet the demand. They are not the bad guys.

To back this up I found a site from January 2019 headed: “39 Interesting Car Buying Statistics, Trends, & Analysis.” Two facts near the beginning of the list were: 

• “Passenger car sales dropped below 30% of the market share in August 2018 for the first month ever. (USA Today) 
• Sales of mid-size (15.6% decrease) and compact cars (13.6% decrease) fell in August 2018, while compact crossovers and SUV’s rose about 14.8% of the market share. (USA Today)”

That’s what people are buying.

Later in the list is the fact that the “top three features consumers are looking for in a new car are safety (21%), Bluetooth/USB connectivity (15%), and a spacious interior (11%). (Crimson Hexagon).”

Safety is number one. A reliable source provides the unsurprising information that “new small cars are safer than they've ever been, but new larger, heavier vehicles are still safer than small ones.” Not only does this explain the trend toward bigger vehicles, it also explains why the cost of cars may have risen more than inflation – even the smaller ones are safer than ever, plus customers are expecting more amenities.

Finally, Americans for a long time have had a love affair with larger vehicles. In 2016 we read: “With gas prices relatively low, you might be tempted to buy that SUV you’ve always wanted.” A few years earlier: “larger vehicles accounted for 63 percent of total US sales in 2013” and “88 percent of all pickups sold in the US in 2013 were full-size models” and 54% of the SUVs “were on the larger side.” 

A couple of other observations: the percent of budget given to Tony to spend was a range of 10-15%. In the story he used 10% for his examples resulting in a worst-case scenario. There was no mention of a down payment or trade in, but many Americans are underwater with the car they are driving, so this may be fair. But it also could be an indication of where the problem really lies. With cars and many other purchases, buying now to pay later has become normal. (See my last entry.)

Finally, in the story CBS included statements from GM and Chrysler explaining their decisions were based on a “customer-driven trend to larger vehicles” and “based on what the customer wants,” respectively. Much as it’s popular to blame the big corporations for problems, the real problem is the appetite and resulting behavior of consumers. Saving for a car before stepping on the lot and then not overspending seem to be ideas of the past.