Saturday, May 12, 2012

A Ubiquitous Misconception

           Currently, our nation is facing a litany of looming and eminent problems.  There has been vociferous public outcry in respect to fiscal policy, social issues, and foreign affairs.  But, as witnessed by the GOP primaries, the number one problem most Americans are complaining about is jobs, or the lack thereof.  The political buzzword “job creation” has imbued a sense of entitlement and dependence in constituents, and consequently, a new political façade of provocative rhetoric has taken root.
            This new political façade is happening in our beloved state, Virginia.  Governor Bob McDonnell anointed current Lieutenant Governor Bill Bolling “Chief Jobs Creation Officer”, the month of November is now “Job Creator Appreciation Month”, and there is a jobs creation commission in the General Assembly.  This political ethos and governmental obsession with job creation is reminiscent of the Reagan era when it was believed everyone needed to own a home.  If I am not mistaken, that misguided belief led to a sub-prime mortgage crisis that rocked the financial world because bad governmental incentives were put in place.  Time and time again, history has repeatedly shown that government intervention in the marketplace produces unintended and unforeseen consequences that are usually worse than the initial problem it was trying to solve.  Although there is a preponderance of empirical and historical evidence in respect to negative government economic action, we will, for the sake of this article, treat government job creation as a stand-alone phenomenon and delineate its theoretical apparatus and real-world consequences.
            From a definitional standpoint, “job creation” can be broken down as follows: A “job” is a contractual agreement between two parties stating that one person will perform certain tasks in exchange for a wage and other agreed upon benefits.  “Creation” is when something that did not previously exist now exists.  So put two and two together and “job creation” means a set of desirable tasks need to be performed and an employer is willing and able to pay someone new for them to be done.  The keyword in the aforementioned definition is employer and I find it funny that some people tend to forget that the government is not an employer but a collective body of taxpayers.  The word “government” is just an abstract representation used to conceptualize the needed collective services such as law enforcement, adjudication, etc.  Now I want to pose a question to the reader: How is it possible for a conceptual entity that derives revenue through coercion, i.e. taxes, able to create a sustainable job outside of its necessary duties, and moreover, without the misappropriation of capital?  Let’s put it this way: Essentially we the people are pooling our money together to pay public officials to decide what is a market “need” and they then take our money to pay someone (or subsidize something) to do a job (e.g. construction).  What is lost in this governmental practice is the private sector jobs and investment that could have been created if we were able to retain the extra tax dollars that were used to “create” these public sector jobs.  For example, let’s say person A makes $100,000 annually and person B is unemployed and seeking work.  The government listens to his pleas and taxes person A at 40% to give person B a job.  On the surface, it seems the government just transferred money from one party to another, i.e. a zero sum game, but in reality the government has destroyed potential wealth creation.  This destruction is indirect but consequential because the irrevocable monetary loss for person A, one disincentivizes his productive capacity, and two disallows him from making investments and adding more value to his job.  Thus, the government in the aforementioned situation is attempting to emulate an investment bank, through the allocation of capital, except they fail miserably.  When the government decides to manipulate aggregate demand and spend money on “creating jobs”, they are essentially taking from the productive to give to the inefficient, thereby exacerbating the economics woes.  To elucidate further, as the CEO of Euro Pacific Capital said, the government does not provide demand, the government can only provide inflation, and demand can only come from supply, i.e. you cannot consume something that is not produced.  Moreover, the money they are using to fund these expenditures, since they are so reluctant to raise taxes for political reasons, is borrowed and consequently adds an interest expense to an already overburdened balance sheet.  The real question the government needs to ask in regards to jobs and reaching the natural rate of unemployment is: what are we doing to inhibit this process? 
            My next question is more specific: Why are we paying Bill Bolling, according to his new title, to take our resources and transfer them from one group to another?  Yes, he might “save” some jobs, but think of all the jobs that are destroyed to create/save those jobs! Frederic Bastiat, a renowned French economist, illustrates this fallacious thinking of only seeing specific outcomes to specific parties rather than seeing the objective picture of the direct or indirect effects to third parties as such: A kid breaks his father’s windowpane and the father will subsequently have to pay to have it replaced.  The community onlookers analyze the situation and come to the conclusion that the destruction of the windowpane has actually stimulated the economy because the father will have to pay a repairman to replace it and the repairman, upon receiving cash he would not have received without the destruction, will spend the extra income, and thus invigorate the local economy.  This logical progression, aka the Broken Window Fallacy, has captured the minds of politicians and political pundits alike.  Unfortunately, the logic is not sound because the problem with this reasoning is that it ignores the fact that the father could have used that repair money on a capital investment, e.g. finishing his basement, and thus adding more value to his home.  The money spent of finishing the basement would go to a contractor, who would then in turn spend that money on something, and the process continues.  The difference between the two scenarios is that in the latter the father has a finished basement and his window!  Thus, the destruction of capital is never a worthy pursuit and it merely stymies productivity and the creation of wealth. 
Like I have mentioned before: All the government can do is reallocate resources – it cannot create 
any real wealth and it in fact destroys possible wealth creation.  What McDonnell, the Commonwealth, 
and our federal government are doing is toying around with disingenuous rhetoric and perpetuating an 
unsavory, ubiquitous misconception.

Sunday, April 22, 2012

Augusta National: What Controversy?

           The 2012 Masters at Augusta National was magical.  Bubba Watson, a Georgia native and UGA alumni, defeated Louis Oosthuizen in a two-hole playoff with an indelible second shot from the pine straw to capture the green jacket, a $1.4 million purse, and a sacred spot in Master’s history.   From Magnolia Lane, to the frustrating and enthralling Amen Corner, Augusta National is analogous to baseball’s Field of Dreams.  The venerable and immaculate course is one of sport’s “seven wonders” and can be appreciated by golf and general sports fans alike.  Its storied tradition and elitist brotherhood has made it one of the most sought after championships in all of sports. 
            With that being said, its elitist nature has caused a controversy, one that made its way to President Obama.  Currently, Augusta National has a male only policy, i.e. they have never offered a female membership since its founding in 1933.  Their restrictive policy was illuminated when the new CEO of IBM, Virginia Rometty, was not offered membership to the organization, as it is customary for the CEO of their longtime sponsor to receive an offer.  Consequently, instead of wearing the iconic green blazer throughout the tournament, Mrs. Rometty ironically sported a pink blazer. 
When President Obama was asked for his opinion he stated: “We're kind of long past the time when women should be excluded from anything.”  He went on to say that the club should be allowed to decide, albeit it was his personal conviction that women should be admitted.  Prima facie, Obama’s comments strike a chord in the heart of every American given our long history of inequality.  However, they are disingenuous when you look at his track record.  President Obama was quoted saying that, “we didn’t have the luxury for [Michelle] not to work,” when he was serving as a Senator and raking in $162,100 from the U.S. taxpayer.  Sadly, he is in full force election mode and it is becoming harder and harder to take his remarks at face value.  Moreover, Obama misses the point: It is not about being sexist; it is about upholding the rights stated in the First Amendment – specifically, the right to assemble.  To be fair, Obama doesn’t have an adequate understanding of the Constitution (or maybe just a wanton disregard) given his affinity for objectionable legislation (e.g. ObamaCare and the reauthorization of the Patriot Act). 
            What is truly infuriating is that this “controversial issue” is controversial.  If we were to apply the same inane logic being used against Augusta to our own university, we would have picketers in Oak Lane demanding Delta Delta Delta to let men join their private sisterhood.  Now I know you want to immediately object to my analogy because we could say that unlike Augusta, sororities have a male equivalent – fraternities – and therefore both genders have been afforded the same opportunity to participate.  But upon further examination, I think it would hard for us to contend that they are the same, thus the equal participation argument is a falsehood.  I will use sports as an example: Under Title IX, no person can be excluded from participation on the basis of sex if those activities in question are receiving federal funding assistance.  Consequently, public schools have to have an equal number of male and female sports to satisfy the Title IX participation clause.   However, notice that we do not create a women football team, i.e. the direct male equivalent, we just add a women sport such as field hockey that indirectly satisfies the clause and provides an opportunity, but not the same opportunity.  Now I will admit that men and women’s soccer is the closest to meeting the equal equivalent because it is the same sport, however, it is still not entirely equal since market and social factors distort it.  To illustrate more clearly, it would be like comparing a Ferrari with a Ford – both have four wheels, an engine, and steering wheel but more times than not, consumers will choose the Ferrari.  In summation, when we anatomize gender dichotomies we have to accept the fact that men and women are inherently different and, moreover, the social constructs we have in place for these groups have different purposes and intentions making it impossible for them to ever truly be equal. 
            With that being said, the Title IX example only illuminates one aspect of the Augusta “controversy” because it observes the problem from the public sector and Augusta, along with Delta Delta Delta, are private associations.   A private entity has the autonomy, freedom, and discretion to discriminate among potential members and if for some reason they lost this right, we would no longer have private associations because they are predicated on exclusivism.  The private group is founded on a set of values and objectives that is particular to a cause and if a potential member does not meet their requirements then they should not be accepted for the sake of inclusion.  For example, if I started a private group with the sole purpose of running marathons together, I cannot be expected to admit paraplegics because they feel left out.  More specifically, in regards to Augusta’s membership, their organization was founded on the idea to create an elite fraternity composed of golf champions and other successful men.  By accepting a woman into their ranks, they would, in effect, be disgracing their founders and tarnishing their organization’s history and accomplishments. 

Monday, March 12, 2012

Saints Bounty Scandal

           The New Orleans Saints are making headlines again and it is not because of their prolific offense, rather, it is because of their callous defense.  Allegedly, defensive players were making side bets with each other to encourage menacing tackles and blows to the opposing team throughout the game, essentially putting “bounties” on players to purposively injure them and take them out.  An NFL investigation reported that this “bounty system” was implemented in 2009 (when the Saints won the Super Bowl) under Greg Williams, the defensive coordinator, to 2011 and involved between 22 and 27 players.  Sports writers and various media commentators have characterized the actions of these players as “debasing the game”, “filthy”, and “taking the integrity out of the sport”.  The NFL commissioner, Roger Goodell, is expected to take punitive action against the team, Greg Williams, and the various players involved.  But is the backlash and incessant criticism of the Saints players and coach truly warranted?  Can you honestly say you were surprised and flabbergasted when you found out?  This is football we are talking about: It is a rendition of Roman sport, where gladiators would fight each other to give the crowd a grand spectacle.  Football has a cherished history of being a tough-guy, macho sport, but with all the new “safety” rules and counter culture influencing the game, it has been bastardized and its “integrity” will shrivel to nothing more than an imitation of two-hand touch.   
            First, let’s address why we love football.  Is it because of the camaraderie displayed on the field?  No, we see that in other less favored sports such as soccer and baseball.  Is it because the best athletes in the world play the game?  No, Michael Phelps and Usain Bolt are really talented, yet neither chose to play football.  Is it because we get to see insanely fast and strong people hit each other as hard as they can?  I think so because consider this point:  Have you ever screamed at the TV when you saw a big hit?  Have you ever watched a replay of a big hit on YouTube, e.g. Joe Theismann and Lawrence Taylor?  Have you ever watched a defensive recruit’s game film to see his big hits montage?  If you did not say yes to one of the aforementioned questions then you are not a fan of football and can stop reading this article, as it will be irrelevant to you.  But for those of you who answered yes, we must then carry on this logic and ask the next question: What are we really paying for then when we attend a football game?  We want to see big hits.  We want to see our beloved team go to battle and triumph on the field of glory.  Now that we understand our underlying desires, let’s then refocus this discussion back to the Saints and their bounty system. 
            The game of football is supposed to be played hard and instinctively.  If this mentality is forced to change, the game will change with it, and not for the better.  Although the new NFL rules regarding safety have great intentions, they are detrimental to the sport and create an ambiguous gray area regarding what is legal and what is not.  If the league truly cares about player safety, and not just mitigating defensive play so fans can see more touchdowns (think about NBA defense and offense), then they should research and develop the best equipment and train referees to throw necessary flags.  The league, however, should not pass new rules and put a stranglehold on the tenacious defense we all pay to see.  More specifically, in regards to the Saints, it would be ludicrous for us to believe that a defensive player goes onto the field with the intention to incapacitate, but simultaneously the same goes for believing that all they want to do is merely tackle the opposing player.  Just as there is a common misconception that the FBI’s lethal force doctrine is “shoot to kill” -- when it really is “eliminate the threat” -- there is a common misconception from a fan perspective when it comes to football psychology.  When a player is on the gridiron, it is 1 versus 11, and those 11 are getting paid to make sure that he does his job poorly.  Also, when you sign up to play football you know -- just like investing in the stock market -- that there are inherent risks that you should be aware of and if you are not comfortable with those risks then you should not play the game. 
In 2006, after a game against the Tennessee Volunteers, Miami tight end Kellen Winslow made exclamatory remarks when asked about his block that injured a Volunteer: “I don’t give a damn.  He would do the same thing to me…they don’t give a freaking you know what about you.  They will kill you.  They are out there to kill you…if I didn’t hurt him, he would hurt me.  They were gunning for my legs.  I’m going to come right back at them.”  Winslow’s comments and sentiments illuminate how a testosterone-filled, heavy contact sport can lead to a callous mentality, and when you are in the middle of it, survival mode automatically kicks in.  The behavior displayed by the Saints is characteristic of football’s culture, big money influence, and the nature of competition in general. 
            But yes, it was wrong for the players to make malicious side bets and I will not contend otherwise.  However, this kind of activity has plagued sports for years and will continue to do so because so much money is on the line and the fans, regardless of their ostensible objections, want their team to win at almost any cost.  This activity is displayed time and time again in the realm of college recruiting.  If a big recruit signs to your school, you can expect that he is receiving some sort of preferential treatment or was persuaded by some NCAA objectionable means.  I am not advocating that this is right, rather, I am pointing out that we are hypercritical.  We object to the methods and treatment of athletes in society, e.g. their ridiculous wages, the crimes they get away with, the lenient academic standards, yet we have developed a sports culture where superstars are transcendent and winning can erase any off the field problem.  The activities the Saints players engaged in are representative of the underlying problems a big market sport creates. 
            What the NFL should do in this situation is take pointed punitive action: Greg Williams should be banned from the league just like Pete Rose from baseball, and the players should be heavily fined.  I do not believe extraordinary actions are necessary because it is retroactive and will only make those players a “poster child” and, moreover, it would be naïve to think that these types of activities were limited to only these select few.  With that being said, future punitive measures should be raised and one possibility is a whole season suspension.  With that kind of punishment hanging over their heads, and the kind of money involved if they have to sit out all season, those malicious betting activities should be eradicated from the locker rooms.  The NFL should not use this scandal as an opportunity to adopt more “safety” rules and try to look like a moral paragon.  Rather, they should implement a policy of stare decisis or even deregulate.  As Coach Carter said: “Let the boys play.”  

Saturday, March 3, 2012

Greece: Philosophize This

          The Mediterranean Sea -- a body of water that facilitates trade between Europe, the Middle East, and Africa -- has metaphorically gone from an innocuous, inanimate, watery manifestation to an insidious, infectious, transporter of insurmountable debt and fiscal insolvency.  It has washed up on the shores on Greece, Spain, and Italy with a categorical disregard for fiscal frugality and parsimony.  It ransacked balance sheets, GDP, and moreover, the faith of constituents in the government to properly spend within their means.  But unlike Italy and Spain, Greece did not just drink the debt poison, they chugged it, and a prolonged cold turned into the bubonic plague for the progenitor of democracy and western thought. 
            In order to understand and ascertain the inscrutable sovereign debt crisis that is mutilating the continent of Europe, one must first pose the question, “Why would countries collectively band together and be monetarily united, but remain fiscally autonomous?”  The answer lies within the heart of Europe’s tumultuous history: In order to prevent another catastrophic war, countries would band together economically to thwart another prospect of war, but because of their perpetual propensity to distrust one another, they wanted to protect their own fiscal autonomy, so they compromised.  Subsequently, twenty-seven countries fused their fiat currencies into one potent currency entitled the “Euro”.  This audacious confederation was unprecedented and became a prospective template for other nations seeking to augment their own currency and economic clout. 
            Unfortunately, the archaic adage, “All good things must come to an end,” still holds true.  The fundamental problem with the quasi-union is that it was just that – it was a makeshift attempt to try and solve a problem of the human condition that outright ignored the conspicuous idiosyncrasies of the countries involved.  Furthermore, the quasi-union failed to address the inherent incentives to cheat when individual entities are asked to produce a group product.  For example, one of the reasons there are so few cartels in existence is because there is an incentive to cheat the other parties and raise output to gain extra profit.  In summation, collectivist actions exemplify the problematic disconnect between theory and reality: if it sounds too good to be true, it always is. 
            Hindsight is 20/20 and there are numerous other causal factors to consider when examining the European Union’s problems, but for brevity let’s narrow the scope of this discussion to why Greece became a ward of the international community and will inevitably default.  In addition to answering those questions, let us also establish why we should care if Greek defaults and why we should not care when they cry about it. 
            For 2011, Greece had a Debt-to-GDP ratio of 164% and the IMF believes that number will shrink down to 129% by 2020.  Our intuition would tell us that this mitigation is reasonable, but numbers without context are moot.  Currently, the world’s 8th largest economy, Italy, has a Debt-to-GDP ratio around 120% and an analyst at CNBC remarked starkly, “too big to fail, too big to save.”  So let’s put two and two together: Analysts are already having a tough time swallowing Italy’s debt problems at 120%, and Greece is only going to shrink to 129% by 2020.  That means 8 years from now, and after a series of bailouts, Greece will still be in what some call the “danger zone” and facing problems tantamount to Italy’s.  Moreover, Greece has currently been in a recession for 5 years, is facing an appalling 20.9% unemployment rate (for the ages 15-24 it is 35.6%), and their own politicians have expressed concerns about staying true to the austerity measures they signed off to in order to receive the bailout funds.  (Greek elections are scheduled to take place in April.)  Also, keep in mind that Greece still has to use an overvalued Euro relative to their economy and this will severely restrict any growth possibilities and further burden the downtrodden country.     
            Remember Lehman Brothers and Bear Stearns?  Of course you don’t, because they don’t exist anymore.  One was bought out and the other went bankrupt during our domestic financial crisis.  The difference between Greece and an investment bank is that it is a sovereign and it cannot be bought out, consequently, leaving one of two options: default or bailout.  Because Greece is a part of the European Union, neither option is preferable.  A bailout would take funds from taxpayers all over the EU and give them to a country that one does not deserve it and two that will not be able to pay it back.  The sentiments of the German people accentuate this point: 80% of Germany opposed the bailout, although the Bundestag voted 496-90 in approval.  A default, on the other hand, would trigger the unfathomable: the debt contagion would infect the world and the credit default swaps market would go sporadic.  (Credit default swaps are essentially insurance on securities incase of default.)  Our global financial system is a messy web of intertwined investments and hedges, so just as when Lehman collapsed, a Greek collapse would send pernicious vibrations throughout the market.  Thus, you should care if and when the Greeks default on their unsustainable debt.  Your parent’s pensions funds, mutual funds, etc. are all going to be affected because our domestic financial system is exposed to Greece and the peripheral debt-stricken countries.  Once one comes crashing down, expect others to follow suit.  
            In regards to the bailouts that are taking place, there are multiple problems associated with such “solutions”.  First, it leads to a slippery slope because once Greece is given funds, the other countries are going to looking for a handout as well, and there is not enough money to go around for that to happen.  Second, given the aforementioned economic conditions, giving Greece money is like handing over your portfolio to the E-Trade baby to manage – in essence, it’s a losing proposition.  To explain metaphorically, it is like a ticking time bomb with a quarter slot.  The more quarters you put in it, the more time it adds onto the timer before it explodes.  But eventually, there will be no more quarters to put in it, and the bomb will explode.  So why would be waste our money on merely delaying the inevitable?  Would we ever spend millions on a terminally ill patient?  Would we buy them life insurance?  No, and the same logic is applicable to trying to bailout Greece.
            Invariably, Greece will default and we will all be upset with the subsequent repercussions.  The Greeks themselves will be the worst off, as they will have a very difficult time trying to borrow money to finance governmental operations.  But this natural free market punishment is exactly what they need to correct their gluttonous behavior.  Examples of such wanton behavior include but are not limited to: Honesty-based machines for their state-of-the-art subway system in Athens, an incomprehensible bankrupt railroad system, wages of the public sector have doubled over the past decade, more than 600 professions are allowed to retire at age 50 (and that includes a 95% pension plan of their last year’s working salary), only 0.0004% of the country admits to earning more than 90,000 euros (since they are allowed to state their own earnings for tax purposes and it rarely, if ever, is challenged or questioned), and more than 60,000 homes in Greece are reported to have investments worth more than 1,000,000 euros.  Essentially Greece is, as one economist succinctly put it, “A poor country full of rich people.” 
            In summation, Greece was irresponsible – think along the lines of Billy Madison – and because of their disregard for fiscal frugality, deserves to temporarily suffer so they can learn from their mistakes.  No one, or for that matter no country, is impervious to paying their bills.  When you consume you, must produce and spend what you can afford in order for there to be economic equilibrium.  We know you cannot frivolously use your credit card on 5th Avenue and not expect creditors to come knocking asking for their money.  Furthermore, we understand that it is categorically egregious when someone retroactively changes a covenant so they do not have to honor their previous agreement.  (Greece coerced bondholders to take a “haircut” on their payments and only received about half of what they should have through what the Greeks called a “voluntary agreement”.)  Unfortunately, Greece cannot make a Trojan Horse this time to solve their problems.  They must pay their dues and do it with dignity.  With that being said, I also understand that not too far down the road our own debt battle will be fought and we will have to swallow down austerity with a Cheshire smile.