Friday, October 22, 2010

Obama's Inane Ditch Analogy

Obama in Oregon yesterday continued his use of the inane "driving into a ditch" analogy:
Oregon, imagine the Republicans driving a car into the ditch.  And it’s a deep ditch. And so we decided, well, we got to go get that car out of the ditch. And so me and Wyden and Merkley and Wu and Blumenauer and the Democrats, we went down there, we put on our boots. It was muddy down there. It’s hot. There are bugs everywhere. But we knew we had to get that car out of the ditch. So we start pushing on that car. We start pushing and pushing. And every once in a while we look and the Republicans are up there, just standing there. Not lifting a finger. And we -- and we tell them, why don't you come down and help because you all got the car into the ditch? They say, no, that's all right, but you need to push harder. You're not pushing the right way. So we just kept on pushing. And finally we get this car up on level ground. Finally, it’s pointing in the right direction. It’s a little -- it’s a little banged up. It needs to go to the body shop. It needs a tune-up. But we’re pointed in the right direction. And suddenly, we get this tap on our shoulder, and we look back and who is it? It’s the Republicans. And they're saying to us, Oregon, we want the keys back. And we got to tell them, you can’t have the keys back because you don't know how to drive. You don't know
Here's a more accurate rewrite of Obama's inane analogy.
A Democratic House and a Democratic Senate were driving a car down the road and they drove it into a ditch. They knew the Republican president was very unpopular, so they quickly scrambled out of the car, pointed at the Republican president, and yelled, "Look, he's got mud on his face! It's his fault! He drove the car into the ditch! He did it!"
Meanwhile, the Democrat's nominated a shiny new presidential candidate. Barack Obama told everyone who would listen, "When I'm president, I'll reach out to the Republicans, and Republicans and Democrats will walk hand in hand down into that ditch. The air will be clearer, the oceans will part, and we'll pull that car out of the ditch together. Besides that, when I'm president we'll no longer have cars or ditches. The ditches are there because greedy Wall Street bankers and insurance companies put them there just for cars to run into. We don't even need ditches! When I'm elected, all the cars will be solar powered and ditches will be a thing of the past."

The people believed Obama's shiny promises and made him president. He took off his tie, put on his working man shirt, and headed down into the ditch with Nancy Pelosi, Harry Reid, and Paul Krugman. Paul Krugman said, "If we get the wheels spinning fast enough we'll get the car out of the ditch. Just gun it." Nancy Pelosi said, "Wait, we've wanted to polish and wax the car for the last 8 years, and the Republicans wouldn't let us. Let's do that first." Harry Reid said, "I'll go get a fresh battery in case we need one someday."

So Obama's down in the ditch, and he's climbing into the driver's seat, and there are flies everywhere, and people are starting to line up to see what's going on. Krugman yells, "Gun it!" Obama floors it, and the wheels start to spin. Mud's flyin' everywhere, and the car doesn't move. Nancy Pelosi is cheerfully waxing the car in her halter top. Harry Reid says, "Anybody know where the battery goes?"

Now up on the side of the road some of the ordinary folks are saying things like, "Why is that young fellar spinning his wheels? Doesn't he know he's just digging in deeper?" One old guy yells, "Stop spinning your wheels. You're making it worse!" Obama yells back, "Stop complaining and get down here and help!" Nancy Pelosi's halter top is getting splotched with mud.

The Republicans scramble down into the ditch eager to help, and they start trying to push the car to break it loose. Obama yells at them. "Stop that! You can't do it that way. We've got to keep spinning the wheels." Nancy Pelosi offers some of the Republicans some car wax applicators, but none of the ordinary common people standing by the ditch understand why anybody would want to wax a car while it's still getting muddier. Harry Reid asks, "Anybody need a fresh battery?"

At that point the Republicans say, "Before we get dug in any deeper, let's stop for a minute and make sure we know what we're doing." Obama replies, "We can't stop now. We've got to get this car out of the ditch before the greedy bankers, evil pharmaceutical companies, godforsaken insurance companies, and rich people who don't pay their fair share drive more cars into the ditch on top of us! If we stop now, we'll never get this car out of the ditch." People look up and down the road, and there aren't any other cars coming, but they don't argue with Obama's strange claim. A couple of the Republicans step to the side and start figuring out a different way to help.

The Republicans recruit several tow truck operators and ditch diggers, people who have actually gotten cars out of ditches before. One of the ditch diggers says, "We need to push the car and get it rocking back and forth get some traction for the drive wheels." Obama says, "No, they taught us at Harvard that all you have to do is step on the accelerator." Paul Krugman says, "On the autobahn in Germany they don't push the car. They just floor it." Harry Reid says, "How about now? Anybody need a fresh battery now?"

The Republicans watch Obama, Pelosi, Reid, and Krugman work the car deeper and deeper into the ditch. They offer to help a few more times, but every time they offer to help, Obama accuses them of trying to block all the progress he's making. Obama keeps getting sweatier and sweatier, but the car isn't moving at all. Pelosi is now wearing more mud than halter top. Harry Reid has turned his battery upside down and is sitting on it. They are so intent their tasks they've stopped paying attention to the people on the side of the road.

After awhile Obama climbs up to the side of the ditch and sits down next to Harry Reid on the spare battery. He starts takin' a break, sippin' a Slurpee, and telling everyone who will listen, "Did you see that? There's only ONE car in that ditch! We sure prevented a lot of other cars from going down that ditch, didn't we? Did you see that? Did you see all the cars that didn't go into the ditch? Did ya? And the Republicans didn't help AT ALL! Aren't we great?! Democrats rule! Yeah!"

After he finished his Slurpee, Obama stood up, rolled up his sleeves, wiped some of the mud off his face, and gave an erudite and uplifting speech about how no car had ever been stuck in a ditch before like this car was, how Nancy Pelosi had shined that car better than any car had ever been shined in the history of shiny cars, how someday soon we would all be driving solar cars that wouldn't go into ditches, and Harry Reid had done the best job of carrying a spare battery around ever.

After listening to Obama for awhile longer, the people on the side of the road begin to walk away in disgust. One of them said, "That don't look like no solar powered car to me. That looks like a car that's covered with crap." Somebody else said, "Who decided that guy should be the driver? He doesn't know what he's doing, and he won't listen to anybody either."

And while Obama was talking, a few of the ordinary people climbed down into the ditch, picked up the car keys, gave the car a good shove, and got the car out of the ditch themselves.

Obama's right about one thing. It's time to take back the car keys. Be sure to vote in November 2!

Sunday, October 17, 2010

The Flaw in the Income Inequality Argument

There have been two similar blogs/columns on income inequality in the last week:
These opinion pieces have several elements in common:

They imply that the rich don't deserve the money they've earned. Without actually stating it, both articles imply that there was something unseemly in the increase in income going to the rich. They imply that the rich didn't earn their increase in income. By continually drawing the contrast to the middle class and claiming that middle class income didn't increase, they imply that the rich benefited at the expense of the middle class.

But there is no data or analysis provided that proves that the rich obtained their riches through means that were illegal or improper. It's important to the columnists to imply that the rich somehow cheated, because they need that implication to support the conclusion of their argument, which is that the rich don't deserve the money they're earned as much as the middle class does.

They mock the rich. Along with implying the rich didn't actually earn their money, they make lots of unsubstantiated assertions about the rich "wasting" their money on 30,000 square foot mansions, expensive hair cuts, and so on. The details provided in the mocking don't support any logical; they are provided simply to undermine people's empathy for the rich and to further the impression that the rich don't really deserve their money.

As an aside, a person could reasonably ask the question, "If the rich were financially savvy enough to become rich, then how is it that, according to these columnists, they become fools when they start to spend their money?" The answer is, they don't. They were smart and disciplined in earning their money, and the cartoonish characterization of how the rich spend their money is just that -- a cartoon that has little basis in reality.

They never identify who "the rich" are. These columns refer to "the rich" as a statistical group, without actually identifying any specific members of the group. Why is that? It's because if they identified specific rich individuals the flaws in their arguments would become all too obvious.

Are they talking about Bill Gates, founder of Microsoft? He's the richest man in America. Did he somehow not deserve the money he earned? Be careful how you answer that as you read this column on your Microsoft browser, running under Microsoft Windows. Gates created thousands of millionaires in addition to himself. Does that somehow imply he doesn't deserve his money? And is Gates wasting his money on fancy haircuts? No, he's spending his money on the Bill and Melinda Gates foundation, whose mission is to eradicate disease in the third world.

Are we talking about Warren Buffet, the 2nd richest man in the US? That would be the man who had read every book on investment in his community library by the time he was 12 years old. Do you think he somehow doesn't deserve the money he's made? This would be the same Warren Buffet who has pledged to give away 98% of his inheritance to charity, and has created an initiative to encourage other billionaires to do the same.

What other billionaires might have lied, stolen, and connived their ways into earning their fortunes? How about the third richest man in the US, Larry Ellison, founder of Oracle. Be careful how you answer that question too, as you surf the internet, in which many of the most popular websites are driven by Oracle databases.

Others in the top 25 richest people. The Waltons, heirs of Sam Walton. If you think Sam Walton didn't deserve his fortune you'll have to stop shopping at Walmart.

Larry Page and Sergei Brin, founders of Google? Better not count on doing any more web searches if you think they don't deserve their money.

Jeff Bezos, founder of Amazon? I think you get the idea. The rich in America don't get to be rich based on corruption. They get to be rich based on creating value -- creating something out of nothing, something that people want and are willing to pay for. If there has been wealth transfer from the middle class to the rich it's because we the middle class have decided to vote with our dollars by buying computers running Microsoft software, searching for items we want to buy using Google, then going shopping at Walmart and The rich have accumulated their wealth because we gave them our money for things we wanted, and most of us believe the world is a better place with the products they have created than without them.

The conclusion of the columns is a non sequitur. The whole line of argument in these columns is building to a specific conclusion: "The rich don't deserve their money, and so we, the people, should take it and give it to ourselves instead."

The problem with this argument is that even if income inequality has grown steadily since WW2 because the rich are getting richer and the middle class has stayed the same, that does not imply that the right solution is to tax the rich more and just give the money to the middle class. It could imply any number of other conclusions:
  • Opportunity for the middle class needs to be increased, so that more people in the middle class can become super rich.
  • People in the middle class need to be taught better how to become super rich.
  • The standard of living for today's middle class is so comfortable that fewer people than in years past have the desire to take the risk and invest the personal effort that it takes to become rich. Hey, I've got my iPhone, my iPod, my XBox, my DirectTV, and my 50" flatscreen TV. As the columnists themselves point out when they ask "how much is enough?", maybe that's enough for most people. Most people simply don't have the desire to risk more or work more to earn more because they already have enough.
  • The fact that some people have accumulated massive wealth in their own lifetimes is a sign of strength and opportunity in our economy, not a sign of weakness. In our economy ordinary people like Bill Gates, Warren Buffet, Sam Walton, Larry Ellison and others can become fantastically rich through their own efforts in their own lifetimes.
The columns implicitly argue that the way to correct the income inequality issue is to increase taxes on the rich, and give the money to our all-knowing, all-wise, and all-powerful federal government to benevolently spend in our best interests -- the conclusoin of their argument is a non sequitur and stupid.

Friday, October 1, 2010

The Rich Paying Their Fair Share: Business Owner Perspective

I get tired of politicians including Obama talking about the rich "paying their fair share" as if the rich currently aren't paying their fair share. Obama seems to believe that the only way people get rich is by stealing the money, cheating poor people out of the money, or obtaining the money through a get rich quick scheme like hitting the lottery or unexpectedly striking pay dirt with a book (like he did).

In reality, most rich people don't become rich that way. Most people become rich by starting small businesses, sacrificing short-term gains for long-term satisfaction many times over, working long hours for many, many years, and finally getting to the point where Obama would say they are "rich." Along the way, they pay taxes, create jobs, create additional tax revenue from the people who's jobs they've created, and so on.

I am a small business owner myself. The business I created provides jobs for 18 people. These are 18 people who pay taxes and contribute to society. In this economy they might very well be on government support if I hadn't created the business that provides their jobs.

In addition to the social benefit of creating jobs, my company will pay about $130,000 in payroll taxes (social security and medicare), and my employees will pay another $130,000 in payroll taxes out of the money my business pays them. My business pays another $50,000 in state and local B&O taxes. The employees pay another $900,000 in federal income taxes and roughly $70,000 in local property taxes. In total, my business generates about $1.3 million in tax revenue, plus sales tax, vehicle taxes, and other miscellaneous taxes that we haven't counted.

This is why small business owners like myself resent Obama saying we are not paying our fair share. In my case I took on the risk of starting a business. I failed three times before I found the business that actually became successful. I put my family finances at risk when I hired my first employee. I still put my personal savings and house at risk when I sign for business loans. I put in the long hours to make the business a viable concern. Over the past 20 years I've gone through periods of a year or more four times when I drew $0 in salary, because each time I thought that was the best investment in the future of myself and my company.

My business has not been a get rich quick scheme. It has taken 20 years of focused effort and sacrifice to get to the point where I am now considered to be rich. The median household in America pays about $7000 in payroll taxes and personal income taxes combined. The business I created generates tax revenue equal to 185 average households. The business I created is in essence carrying 185 other households on its back, and I don't mind that one bit--except when Obama tells me that I'm not paying my fair share.

Richest Americans and Income Inequality

I'm thinking more about the "income inequality" issue in the U.S. What seems like it is always missing from discussions about income inequality across countries is where the baseline starts in each country. Politicians and liberal economists will say, "The rich are getting richer, and the poor are getting poorer" or "The rich are getting richer, and the middle class is stagnating."

Any statement that starts "The rich get richer ..." makes it seem unseemly that the rich are getting richer. So what? I don't care if the rich get richer as long as they aren't doing it at the expense of the poor or the middle class. I want them to get richer.

In looking at Forbes' American billionaires list, I was struck by how many people on the list are self-made. Seventeen of the top 25 have made their own fortunes. Two of the top 25 (the Koch's) massively increased the fortunes they inherited (more than 100-fold), and in that sense could be considered at least partially self-made too. Of the remaining six, four are heirs of Sam Walton (another self-made billionaire), of the others, one is the the daughter and other is a granddaughter of self-made billionaires.

The fact that so many of the richest Americans have made their own fortunes rather than inherited them speaks volumes about America being the land of opportunity. People from all around the world do not immigrate to America so that they can be the beneficiaries of tax policies that redistribute income from the super rich to the middle class. They come to America so that they can have a shot at becoming super rich themselves.

Wikipedia says this about socialism: "[Socialists] generally share the view that capitalism unfairly concentrates power and wealth within a small segment of society that controls capital and derives its wealth through a system of exploitation." Studying the list of the richest Americans shows why the socialist view of capitalism is not true.

Wealth in America is not a zero sum game in which wealth needs to be transferred from the rich to the middle class via government fiat. Seventeen of the 25 richest Americans created massive wealth in their own lifetimes. These people were not born with power and wealth. They earned it themselves. Most of them did it by creating goods and services that didn't exist before they created them. They literally created something out of nothing: Microsoft, Oracle, Google, Amazon, Dell, and Nike. Along the way they created hundreds of thousands of good jobs. In the case of the high tech companies, they helped create thousands of other millionaires. There was no system of exploitation. Quite the opposite. The goods and services they have created have served to enrich the lives of Americans across all economic classes. These people got rich in the first place because their creations made other people's lives better. Before you disagree, be sure to remove the Nike shoes you bought on Amazon using Microsoft software.

These people are American heroes. Why any politician would want to tax these people's incomes punitively or transfer their wealth by fiat to the middle class is beyond my comprehension.

Here is the list of the 25 richest Americans:

Bill Gates - self-made, Microsoft
Warren Buffet - self-made, Berkshire Hathaway
Larry Ellison - self-made, Oracle
Christy Walton - inherited, Wal-Mart
Charles Koch- inherited, Koch Industries
David Koch - inherited, Koch Industries
Jim Walton - inherited, Walmart
Alice Walton - inherited, Walmart
S. Robson Walton - inherited, Walmart
Michael Bloomberg - self-made, Bloomberg media
Larry Page - self-made, Google
Sergey Brin - self-made, Google
Sheldon Adelson - self-made, casinos
George Soros - self-made, hedge funds
Michael Dell - self-made, Dell
Steve Ballmer - self-made, Microsoft
Paul Allen - self-made, Microsoft
Jeff Bezos - self-made,
Anne Cox Chambers - Daughter of found of Cox Enterprises
John Paulson - self-made via hedge funds
Donald Bren - self-made in real estate, Marine
Abigail Johnson -  Granddaughter of founder of Fidelity
Phil Knight - self-made (Nike),
Carl Icahn - self-made via leveraged buyouts (grew up middle class)
Ron Perelman - self-made via leveraged buyouts (son of buy-out artist)

Stats on US Current Economy vs. Europe

Excellent article by Phil Gramm on US recovery vs. Europe's. He makes the point that contrary to claims by democrats that "without the Obama spending, the economy would have fallen off a cliff" that no European country's economy fell off a cliff, not even with lesser spending. And the US is lagging the average European country in its recovery (specifically focusing on jobs).