Half Sigma

A dumb proposal: 401(k) plans for poor people

Tyler Cowen, of the blog Marginal Revolution, has a really dumb proposal in the New York Times. 401(k) accounts for poor people:

The core idea is simple. The federal government creates tax-free retirement accounts for lower-income Americans, supplementing private accounts where they already exist, and matching personal contributions to those accounts. The amount of the match would depend on the income of the family and how much they save.

Poor people already have a government funded retirement plan. It's called Social Security.

If poor people are going to be forbidden from withdrawing from the 401(k), then there's no effective difference from Social Security.

If they are allowed to withdraw their funds, which I think is the very basic requirement if we are going to say they "own" the funds, then they will withdraw them right away and spend the money. It's the poor's lack of future time orientation that contributes to their poverty in the first place.

The other factor which contributes to poverty is low IQ, which means the poor people aren't smart enough to make wise investment decisions.

The end result will be a lot of poor people who don't have enough money for retirement because of their bad decisions. It's easy to predict that the liberals of the future will feel sympathy for their poverty and give them free money anyway. Which means that Tyler Cowen's proposal will wind up costing the government more money than the current system.

But I'm sure the already overpaid financial industry loves this proposal. More profits for mutual fund companies and their millionaire employees.

Mathematics of the inheritance dividend

My previous post about the inheritance dividend brought forth some comments saying that it’s not possible.

The GDP of the United States is approximately $12.5 trillion, and there are approximately 220 million citizens 18 years or older. If 18% of GDP were earmarked towards paying the inheritance dividend, this would amount to an annual income of $10,200 per adult citizen.

Currently the federal government spends approximately 20% of GDP. The majority of this spending is for social services and transfer payments. If just half of current federal government spending could be eliminated on account of being made unnecessary by the inheritance dividend, than the federal government would need to spend 28% of GDP.

A 28% flat tax on all income, with no exemptions or deductions, would cover all the required spending and would in fact result in a lower tax rate than the current top rate of 35%.

* * *

I’ve renamed this the inheritance dividend because it puts a more positive and more accurate name on the concept.

It’s an inheritance because, just as some people lucky enough to be born to the right parents receive money without having to do any work, under my proposal all Americans inherit some of the wealth previously created by older generations of Americans.

It’s a dividend because, just as shareholders of a company receive dividends merely for their ownership, all Americans citizens are shareholders of America and therefore are entitled to receive dividend payments from the wealth generated by the nation.

Should everyone get a free income from the government?

I just finished reading Robert Heinlein's first novel, For Us, the Living, published posthumously in 2004. The novel is about a man from 1938 who travels to the future and sees a better utopian society.

In this society every person gets a guaranteed income from the government. Society is so wealthy, people only have to work if they want to.

I think the United States in the year 2006 has reached a level of wealth where we too can do the same thing. Give every adult an income, equivalent to the minimum wage or maybe even higher, for doing nothing at all. People would then be free to work at a job and earn more, or just be a slacker and live off the free income.

Our current welfare and social security systems are a big mess, so this could in one fell swoop replace social security, public housing, food stamps, AFDC, and everything else.

The character from 1938 didn't approve of the system. He said it was morally wrong to let lazy people live without working. But the economist from the future explained that it's no different than a rich child living off of his lucky inheritance, and in fact we are all living off an inheritance left by our ancestors, because our work today wouldn't be so financially rewarding if we were not lucky enough to be born in the United States in the 21st century. Why should only people who work get to enjoy the bounty?

Leftists probably wouldn't like the idea because it wouldn't promote egalitarianism that they like so much. Most people would still work so they can be in a higher social class, and the non-workers would still comprise an underclass.

But the free income for doing nothing model provides much better incentives, than our current social programs because (1) there is no punishment for working, you don't lose your welfare or unemployment income; (2) there's no reward for having children so this should lower the birthrate among the poor; and (3) there's no punishment for marriage--two non-working slackers can marry and combine their incomes.

FOLLOW-UP POSTS

Mathematics of the inheritance dividend

A draft? What a dumb idea.

Some guy named Paul Kane gets an op-ed piece published in the New York Times advocating a draft:

THE American public needs to be prepared for what is shaping up to be a clash of colossal proportions between the West and Iran.

President Franklin D. Roosevelt masterfully prepared Americans before the United States entered World War II by initiating a peacetime draft under the Selective Training and Service Act of 1940.

Now, President Bush and Congress should reinstitute selective service under a lottery without any deferments.

This single action will send a strong message to three constituencies in the crisis over Iran's nuclear intentions — Iran, outside powers like China and Russia and Americans at home — and perhaps lead to a peaceful resolution.

Iran's leaders and public will see that the United States is serious about ensuring that they never possess a nuclear weapon.

This has to be one of the dumbest op-ed pieces I've ever seen in the NY Times. Iran already knows we have enough firepower to demolish the country several times over, and that's without even using our nuclear arsenal. A bunch of untrained conscripts who don't want to be in the military would only get in the way of the guys who know how to fire the weapons.

Iran is banking on the assumption that we don't have the political willpower to kill massive numbers of civilians or take even the smallest amount of military losses. And of course Iran is justified in these assumptions. There is a big outpouring of angst about our losses in Iraq when in fact we've only lost 2,380 soldiers since the war began. In comparison more than 16,000 are murdered each year in the United States. Where's the outrage about that? If Iraq is a war zone, why isn't the U.S. also a war zone?

The only reason we'd need more manpower is to permanently occupy Iran, which would be an incredibly dumb idea given how bad the Iraqi occupation is going. Simply bombing them back into the stone age sounds like a much better plan. (And despite Iran's supposedly advanced research in nuclear energy, they are already pretty close to the stone age. Iran is incapable of manufacturing most of the components of a nuclear program on their own. They can't even manufacture their own aluminum tubes to make centrifuges. A country that can't manufacture aluminum tubes has no business having nuclear weapons.)

Obviously the motivation behind recommending a draft has nothing to do with Iran, but rather the left wing belief that it's unfair that well off upper middle class kids don't have to risk their lives in combat. But our army isn't designed to be fair, it's designed to be an efficient fighting force that can perform its missions with a minimum loss of American life, and I'll take that over some bogus left-wing definition of "fair" any day.

AP says college graduates are moving to cities

The Associated Press reports that college graduates are moving to cities:

College graduates are flocking to America's big cities, chasing jobs and culture and driving up home prices.

Though many of the largest cities have lost population in the past three decades, nearly all have added college graduates, an analysis by The Associated Press found.

The findings offer hope for urban areas, many of which have spent decades struggling with financial problems, job losses and high poverty rates.

However, as I wrote in my blog post on why Republicans should like cities, the cities need to fix their education problems if they want to retain families. The AP article echoes my sentiments:

But cities need good schools to keep people from fleeing to the suburbs once they become parents, said William Frey, a demographer at the Brookings Institution in Washington.

Frey pointed to Washington, a city with lagging public schools but impressive education levels among adults.

"D.C. is like a revolving door," Frey said. "These young people move in and then they move out when they want to have kids."

Why Republicans should like cities

Republicans seem to dislike cities. I believe that this is an irrational dislike based upon the fact that liberals like cities. Republicans figure that they should hate what liberals like. This is knee-jerk conservatism that is every bit as bad as knee-jerk liberalism. For example, this anti-city post at the right-wing blog Café Hayek demonstrates the right-wing irrational dislike of cities.

The reason why liberals like cities is not based on rational analysis. Liberals are pro-environment. They think that cities are better for the environment. Liberals always side with the underdog, and they think that trees are underdogs compared to humans. They think that “sprawl” causes more trees to be chopped down. They think that people have to drive more in the suburbs and the country, and all the miles being driven are causing global warming. Liberals think it’s unfair that the United States uses up more than its “fair share” of oil. They like cities because people in cities have to walk or use public transportation.

It’s not a good reason for Republicans to dislike cities just because liberals like them for dumb reasons. Real Republicans would agree that the free market is the best way to determine where people should live. If a large number of people prefer to live in cities, which is evident by the fact that people choose to live in them despite the higher cost of living in our major cities, Republicans should cheer this efficient free market allocation of capital.

Republicans are correct to note that driving from place to place in a personal automobile is a very efficient means of transportation. I previously blogged about the fact that dense cities create transportational and space inefficiencies. But I believe that cities make up for this by providing hidden economic benefits that have something to do with people living in close quarters. How else does one explain that Manhattan is an even more desirable place to live now than it was twenty years ago?

Republicans point to the fact that many people prefer to live in suburbs and take this as evidence that suburbs are superior. This, of course, ignores the fact that a large number of people also prefer to live in cities. If a free market means anything it should mean that people are free to maximize their own preferences, and one shouldn’t be criticized for preferring one type of living over the other. I personally like living in Manhattan because of the cultural attractions, the great restaurants, the vibrant atmosphere, and the close proximity to work. You don’t have to be a Hillary Clinton supporter to appreciate this stuff.

If we were to allow the free market to decide where people live, even more people would live in cities. Unfortunately, there are many government interferences in the market which cause more people to live in suburbs. The three most important ones that I can think of are explained below.

(1) Zoning. This is the biggest interference with the free market. Only as many people can live in Manhattan (or Washington DC, or San Francisco) as there are units of housing available. Zoning restrictions prohibit the construction of housing units that the market demands. This is why rents are so high in these places. There are many areas in the country where people would naturally move into denser housing if only the government would allow such housing to be built.

(2) Public education. Forced busing destroyed the quality of schools in our major cities. Smaller school districts in the suburbs resulted in districts where there were no bad neighborhoods and therefore no ghetto youth ruining the quality of education.

This has nothing to do with the amount of money spent on education. You can spend a ridiculous amount of money per student, but if all the students are from the lowest strata of society the school is going to be a lousy school. The better quality of suburban public schools has nothing to do with a natural element of suburban living, rather it’s a result of school district boundaries which are controlled by government and not the free market.

Given how expensive it is to send a child to a private school, the higher quality schools of the suburbs represents a very large financial inducement for the middle class and even the upper middle class to live in the suburbs. Assuming they have children.

The best way to fix this problem is with school vouchers, as explained by Roger Chermak in his article School vouchers can bring middle class families back to the city.

(3) Mortgage interest deduction. Because ownership of condominiums is a more abstract concept than ownership of a free standing house, people are reluctant to buy them, so people living in high rise buildings are far more likely to be renters rather than owners. The tax deduction for home mortgage interest, therefore, represents yet another government subsidy for the suburban lifestyle.

The home mortgage interest deduction should be abolished because it distorts the free market and causes an inefficient allocation of housing capital.

Republicans should be the pro-city party. Republicans should be campaigning for an end to restrictive zoning, an end to the mortgage interest deduction, and for using school vouchers to bring middle class families back to the city.

Suburbs and the free market

There is a commentary in yesterday’s Wall Street Journal entitled The War Against Suburbia. Joel Kotkin writes:

Suburbia, the preferred way of life across the advanced capitalist world, is under an unprecedented attack -- one that seeks to replace single-family residences and shopping centers with an "anti-sprawl" model beloved of planners and environmental activists.

And then the rest of the article is a much longer explanation of the same. But a lot of it is wrong.

Suburbia is not a natural creation of the free market, but rather was highly influenced by government policies. In suburbia, the local government generally prohibits the construction of dense housing, so people are given the choice of buying a single family house or living somewhere else.

The reason why cities emptied can be largely attributed to another government policy: integration of schools via forced busing. White middle class families fled the cities in the 1950s so that their children wouldn’t have to attend schools with ghetto blacks.

In the Washington, DC area where I lived until this summer, developers would have loved to build high density housing, but every community in the DC area has a NIMBY attitude towards high rise buildings. And there is an archaic federal law prohibiting the construction of tall buildings in the city of DC itself.

In the Hell’s Kitchen area of Manhattan where I live now, developers would love to tear down the old tenements and build modern high rise apartment buildings, but zoning laws prohibit this. In the article, Mr. Kotkin writes, “since 2000 ... New York City has gained less than 95,000 people while the suburban rings have added over 270,000.” He offers this as evidence that people prefer suburbs, but how can people move into the city if the city won’t allow the construction of more housing?

It seems to me that there would be less suburbanization if the free market were allowed to determine what kind of housing people live in.

Do-it-yourself homeland security

One of the biggest dangers Americans face after a catastrophe, whether natural or mandmade, is that a breakdown of the infrastructure prevents people from getting the basic necessities they need to live, such as food and water. We saw this problem in New Orleans.

With all of the billions of dollars wasted on homeland security since 9/11, you'd think that we'd be able to at least fix this problem. But no, we haven't. Every American ought to be encouraged to have a two week stockpile of basic necessities needed for survival, such as bottled water, food (maybe in the form of those MREs they keep talking about), and a radio with a decent supply of batteries. People in cold climates also need to be prepared to live for two weeks in the winter without infrastructure dependent heat.

Why isn't FEMA or DHS or whatever federal department is in charge doing something about America's unreadiness for catastrophe? Probably because the central government actually fears independent Americans who can take care of themselves.

Also, during the cold war, liberals disliked disaster readiness because they bought into the notion "mutual assured destruction." Any policy that implied we were preparing to actually "win" a nuclear exchange was discredited. This cold war liberal dislike of disaster readiness still carries over to our current day policies.

Traffic is bad? Blame the commuter

This WaPo article about commuting was published in February, but it’s still showcased on the Metro web page so the editors must think it’s really important.

The writers of the article blame the workers for their own misery.

In spite of increasingly long and frustrating commutes, the survey found that Washingtonians remain addicted to their cars. Three in four area commuters drive to work alone.

Notice the use of the word “addicted.” Implying that going to work is as evil as using crack cocaine. The writers of that article need to take a realistic look at where the office buildings and residential buildings are located in the Washington, DC metro area.

I hate traffic as much as the next person, but there is no faster way for me to get to work and back than to drive alone in my car. The nearest Metro station (Metro being the silly name for Washington, DC’s subway system) is miles from where I have to work. And my situation is hardly unique.

Whose fault is this? Certainly not the worker’s fault. The worker is a victim of where his employer happens to be and where the housing is located. And right now, commercial and residential buildings are going up like mad all over the outlying counties far removed from convenient public transportation.

Now government officials, if they chose, could zone some dense development around existing undeveloped Metro stations, thereby making it possible for people to actually use Metro to commute. But they choose not to. And the Washington Post, instead of blaming the government for the problem, blames the commuter.

Family and the city

A post at Catallarchy by Randall McElroy made me think about the topic of families leaving the city.

I think it represents a very significant and unfortunate trend that middle class families have left the city. It is now a place where only the childless, the wealthy, and the very poor live.

The two main reasons for families leaving the city are usually given as: (1) housing costs are too high in the city; and (2) schools are better in the suburbs. Liberals are responsible for both of these problems.

The high cost of housing is an issue that I’ve written about a lot. Liberal politicians like to interfere with the free market in ways that prevent new housing units from being built, and make the ones that do get built more expensive to build. One reason why suburbs have less expensive housing is because suburban voters are more Republican than urban voters, and Republican politicians take a more free market approach to residential construction and landlord-tenant law.

Liberal policies have also destroyed the education in the cities though forced integration of schools. It’s hard to explain this without being blunt, and maybe even “racist,” but the truth is that white parents don’t want to send their children to schools that are largely composed of minority students. They may say something politically correct to polltakers and journalists, but when it comes to their own precious little kids’ wellbeing, they do whey they feel is best even if what’s best is “racist.” So if they can’t find a predominately white public school in the city, they move to a school district where mostly white people live: a school district in the suburbs.

Only vouchers can bring middle class families back to the city. Vouchers will allow parents to choose a school they feel comfortable with.

Immigration is bad; response to Russell Roberts

Rusell Roberts responded to my previous post about immigration. He links to an interesting CBO report.

So let’s look at the following chart from the CBO report which shows the foreign-born population from 1850 to 2000:

What we notice is that through 1910, the foreign-born were a relatively high percentage of the population, and their numbers peak at 15% in 1910. After 1910 the percent of foreign-born begins a steady decline, bottoming out at less than 5% in 1970. But now that number is back up to an alarmingly high 12% in 2002, which is an amount at which it has not been in over 70 years.

It’s fine to say that historically a lot of immigrants moved to America, but it was way back in history. The America of the 1800s isn’t the America of today, and it’s not an America we want to go back to. We had slavery back then, for one thing.

The periods of peak immigrant population were not very good times to be a worker. The peak in the graph which occurs in 1910 is only a year before the infamous Triangle Fire of 1911 which killed 146 workers because management intentionally locked the fire exits.

Quality of life for the average American improved significantly after immigration began to decline. But rising immigration after 1970, along with globalization, is once again causing the gap between rich and poor to widen. Unless we do something to reverse the trend, social inequity will continue to increase.

The pro-immigration lobby is an unholy alliance between liberals and rich capitalists. Liberals feel guilty that they live in a rich nation while the rest of the world is poor, so they want to make America more like a third world country to redistribute the world's wealth and ease their guilt; and also liberals cynically believe they will strengthen their political position because immigrants are more likely to vote Democratic. The rich capitalists support immigration because they want cheap labor to work for them and increase their profits.

It’s the regular Americans who are being hurt by immigration, and no one is looking out for the interests of regular Americans.

Today’s Paul Krugman: low wages and safety nets

Today’s Paul Krugman column makes some valid points that shouldn’t be dismissed because he’s a crazed leftist political hack.

Paul Krugman describes the phenomenon of the shrinking middle class, which I think is a real phenomenon. Globalization is reducing the value of labor because people in third world countries are willing to work for a fraction of what Americans get paid.

Paul Krugman also writes about the inflation of CEO salaries. I don’t think there’s any justification for high CEO salaries. “It’s the free market,” say defenders of CEOs. But I own stock in many corporations and no one ever asked me for my opinion on what the CEO should be paid. It seems to me like high CEO salaries rip off the shareholders.

However, instead of proposing any real solutions to these problems, Krugman uses this as an excuse for why we need to increase our commitment to Social Security. I don’t see how it benefits the young worker who is in the shrinking segment of the middle class if old people get fatter Social Security checks.

Paul Krugman cites a Business Week article which tells us that “67% of Americans think it's a good idea to guarantee health care for all U.S. citizens.”

Although one suspects that the poll which produced that figure may be somewhat biased, I have no doubt that a large percentage of Americans like the idea of government transfer payment programs, if for no reason other than society (including the liberal media and liberal educational institutions) telling us over and over how good these programs are.

Joe public isn’t always the brightest person, so while his response to polls helps guide politicians seeking to win elections, it doesn’t tell us what policies are best for the nation.

Save money or go to jail

Alex Tabarrok of Marginal Revolution supports Social Security private accounts because Americans don’t save enough.

Although it’s true that Americans don’t save enough, I feel that people should voluntarily save money because it’s good for them. All the moral virtue that comes from saving is eviscerated when the government forces you to do it.

If our savings are too low, perhaps Congress could set an example for the American people by spending less money and making that huge budget deficit go away?

Baby boomers: the greediest generation

If ever there were a must read op-ed piece in the NY Times, it’s today’s piece by Nicholas D. Kristoff entitled The Greediest Generation.

I fear that we'll be remembered mostly for grabbing resources for ourselves, in such a way that the big losers will be America's children.

Kristoff very validly points out that as boomers get older their influence will become even greater because it’s well known that retired people are far more likely to vote than young people. And when boomers vote, it’s usually about giving themselves more at the expense of other generations. With boomers soon retiring, it’s going to be about more Social Security.

Are subdivisions bad for the soul?

There’s an article about subdivisions in today’s Washington Post.

According to the Community Associations Institute in Alexandria, four out of five U.S. homes built since 2000 have been in homeowner association-governed subdivisions, where residents pay dues to support such amenities as clubhouses and pools that usually exclude those outside.

The article (which is far too long) laments this new trend. There are interviews with the old-time pre-subdivision residents who don’t like the newcomers:

"We've been here all these years, but they're the ones who are going to benefit," he said, referring to new residents. "They're isolating us. They're penalizing us. The way they treat us now, I guess they call us white trash."

And finally a vague ominous prediction:

The very concept of local citizenship is changing, [Evan McKenzie, author of the book Privatopia] argues, as people are identifying less with such public entities as counties and more with their private developments and homeowner associations, which largely have assumed the role of governments.

"I think we're at a brave-new-world moment here," McKenzie said. "I think we're going through a major revolution in urban governance, and we won't fully understand the consequences of this for 50 years."

I am not a fan of suburban living. I do believe in free markets, and I am sure that the homebuilders are giving people what they think they want. But I believe that what people think they want and what they really want are two different things.

I think that people would be happier living in an environment where they were closer to work, where they didn’t have to drive through traffic to get anyplace, where they might even be able to walk to some places. (Yes, the environment I describe is city, not suburb.)

But people have convinced themselves that they only way they can prove they are a success is if their house has lots of square feet, even if the only way they can afford so many square feet is to move far away from where they work into a soulless subdivision, and endure long commutes.

$90,000/year too poor to be middle class?

Left wing Eschaton defines middle class:

To me, "middle class" is a 4 person two income family with health insurance who can afford a 4 bedroom suburban home in a neighborhood where there's a half-decent public school, and one car for each adult.

All along I thought I grew up middle class because my parents had a three bedroom house and a car. Now I discover I was poor because they were missing a fourth bedroom and sometimes they only owned one car.

(Eschaton’s comment is also “racist” because “decent public school” is just a codeword for “white public school,” but we’ll ignore that.)

Eschaton goes on to explain that $90,000/year isn’t enough income to be middle class, and he writes a followup post as well.

I will now be fair and say that I understand where he’s coming from, and yes, I even agree with him. In some areas, the housing costs are so high that even with what sounds like an upper middle class income, you can’t afford to buy or rent anything that might be considered middle class.

In fact, the high cost of housing is incredibly unfair to working Americans who weren’t fortunate enough to buy a house before the prices went up. Such Americans surely feel like they are forever locked out of a decent middle class life.

If either political party truly cared about working Americans, they would make lowering the cost of housing their number one priority. But neither party cares about this segment of the population. They are probably beholden to the 70% of Americans who own a home and who don’t want lower housing prices—the fortunate Americans, whether Democratic or Republican, could give a crap about the less fortunate 30%.

But let’s be clear here, it’s leftist Democratic policies that have made housing so expensive. In areas where Democrats control the local government, housing costs more. I’ve written about this topic before, see my post Blue state, red state, and housing. I told you so. If Democrats truly cared about working Americans shut out of affordable housing, then they’d start acting like Republicans when it came to zoning and approval of new residential construction projects.

Poor workers and rich retirees

I never thought it was fair that poor people earning the minimum wage have to pay FICA taxes so that rich retirees who don’t even need the money get to collect their Social Security check.

President Bush has proposed making the system fairer by reducing benefits for those with higher incomes. This progressive proposal sounds like something that the left wing would normally applaud, but because they hate Bush they can only criticize it.

For example, Kevin Drum says something about the plan being crap.

Yet the left offers no practical suggestions on how to plan for the inevitable increase in the retiree/worker ratio.

Support marijuana legalization

According to a study by Boston University professor of economics Jeffrey Miron, enforcement of marijuana prohibition costs state and local governments $7.7 billion annually. Furthermore, $6.2 billion would be collected if marijuana were taxed like alcohol and tobacco.

With the huge budget deficit we have (no thanks to the big-spending Republicans), we can certainly use an extra $13.9 billion per year.

Furthermore, I believe that there are a lot of hidden costs to marijuana prohibition that can’t be measured. Such as the cost when a kid in the ghetto thinks that becoming a drug dealer is a better occupational choice than doing something legal. Or when some college kid is convicted of marijuana possession, and he loses his financial aid, and has to drop out of college.

There is a movement, based on the study (follow the link above), to urge Congress to legalize marijuana. If you’re an economist, then I urge you to sign the letter they want to send to Congress. According to Robert Murphy, famous economist Milton Friedman is actively supporting this. (If you click the Robert Murphy link, you will note that he takes an extreme position that demonstrates how hardcore libertarians lack common sense.)

Lower the drinking age to 18

I agree with Karol who says we should lower the drinking age.

If eighteen year olds can die fighting in Iraq, then fairness dictates that they deserve the privileges of adults.

I am aware of the counterargument, which says that eighteen year olds make good soldiers but irresponsible drinkers. This may be true, but sometimes a just society requires sacrifice. A few extra alcohol related deaths each year is a small price to pay to live in a free country and give our draft-aged citizens the privileges they deserve.

The drinking age used to be eighteen in this country, and somehow we survived. The problem is the damn baby boomers. When they were young they had sex and did alcohol and drugs, but now they want to deny the same fun to their children. What hypocrites!

And also, the religious revival has increased the overall prudishness of America.

If the drinking age is ever lowered, that will be a sign that our country is moving in the right direction again.