October – December Post Archive

Friends, I had to delete my blog and re-upload it because of a failed WordPress automatic update. I apologize for the confusion. I was able to salvage the posts I made between October (when the blog again came live) and December 14.

They’re after the jump

With all of my available free time, I have been doing a lot of reading. I just finished Stephen Levy’s “In the Plex” which is a book about Google. It was interesting to read, and maybe some day I’ll blog aboutwhy I read it.
Now, I am back to the book “The Rational Optimist.” One line early on in the book struck me, given its applicability to the whole “Occupy Wall Street” thing on the news.
The book talks about King Louis XIV, and how he had lavish dinners all of the time. Since those dinners were funded by tax dollars of the French, author Matt Ridley concludes by saying:  “So it is not hard to conclude that Louis XIV was rich because others were poor.”
Earlier in the chapter, Ridley was talking about his computer. Who made it? Thousands of people from the folks in the Arab Peninsula drilling for the oil for plastic, to the South Americans who mined the copper that served as a conduit between the keyboard and the Korean-made processor. His point is that global trade has the world better off, which only an ignoramus can deny with a straight face.
That line got me thinking. Are Bill Gates, the Koch brothers, or Warren Buffett rich because others were poor? No, not at all. Each person I listed, who is either a genius or a villain (or both) to most peoples’ viewpoints is wealthy because they created or added value to a good or service.
In the example of a King taxing his people to live lavishly, of course he is using their privately created wealth to live in the way he so desires, making the public poorer in the process. Taxation is taking of privately created wealth.
But that’s not the same when talking about Gates/Koch/Buffett. Each of those men is rich because they ran a company that got workers to voluntarily trade their talents/labor for a certain wage. In a sense, they traded their way to prosperity. You might remember an episode of The Office where they have a flea market, and Dwight sees if he can trade his way to the top. Except that he gets intrigued by some “magic beans” Jim Halpert is selling, and trades for those. It’s very similar, albeit a fictional television show. People aren’t forced to trade their money, time or labor — they do so willingly.
The point to focus in on is that sometimes people value different things. Things we might find stupid. (i.e. can you believe he spent all that $$$ on a new car? he doesn’t make that much in the first place and the car already lost like 20% of its value driving it off the lot!) or (can you believe that she bought a pair of those $1000 boots?) or (can you believe he bought that original arcade Pac-Man for $20k?) Bottom line is everybody’s values are different, and they trade willingly.
Similarly, nobody is obligated to work anywhere. Some might argue that’s false, and they would be wrong. People are pretty much always free to do any other jobs (except for those who have non-compete clauses).
That’s what Occupy has gotten so wrong. The wealthiest in American society did not get rich at the expense of the poor.
In another column, we’ll examine how the converse is true: the wealthy have made the poorest among us in America, better off.

Yeah, you heard me right. Aldi is where the non-trendy shop, and hopefully it won’t be ruined by hipsters anytime soon. But did you know this: Aldi is the parent company of Trader Joe’s.
Horror might be a first reaction of some. It’s like Old Navy owning the Gap, when the inverse is actually true.
If you’ve ever been to an Aldi, this makes sense. 95% of the things they sell aren’t brand names, and they charge you for bags. Trader Joe’s is pretty much the exact same.
I frequent the only Aldi in the Alexandria area, which is down Route 1 by Mount Vernon. At a time when grocers are boosting private labeled products, since consumer purchases of those goods has increaseddramatically (try 8.7% of grocery products in 2009 jumping to 31.4% in 2011.)
Aldi really isn’t into big-name labels. It’s food.
So when consumers are trading down to private label brands, why not try shopping at a store that only has private labels? As a kid, I loved it when my parents took me to the Aldi near Naples, Florida where we vacationed. I loved that you had to put a quarter in to get a shopping cart.
It’s like a rental cart deposit
As a kid I thought they did that so homeless people wouldn’t steal the carts. Now I am not so naive, since any person in need of a cart to steal wouldn’t likely be deterred by putting a quarter in that cart. However, now I know they do it so you have to put the cart back, where they want you to (up front) to get your 25 cents back. You’d be surprised by how many people will do it to get their quarter back. (However, it has created a niche market for kids and homeless folks offering to take your cart back for you). The NY Times article I will link to later on completely misses this point.
It is a brilliant ploy to reduce labor costs, lower prices and also get higher profits. Aldi also makes you bag your own stuff, sort of like Shop and Save (my favorite grocery chain in St. Louis). Like Wal-Mart, Aldi is non-union which delivers huge savings. They say it right up front on their little “boards of value” that is the lead picture of this post.
“ALDI TRIMS OVERHEAD TO LEAVE MORE MONEY IN YOUR WALLET.”
Consider me sold on that. Also, because Aldi’s store is almost entirely their private labels, they don’t accept coupons, and why would they?

Aldi is usually a very clean, minimalist store

From a recent NY Times article:

About 95 percent of its goods bear an obscure private label. For example, rather than Skippy, Jiffy, natural, and jam-swirled peanut butter, Aldi sells one kind, which it commissions itself. (It’s similar to the higher-end Trader Joe’s, which is owned by an Albrecht family trust.)

“We carry 1,500 of the most popular grocery items out there,” [The US Aldi representative] said. “You won’t find some exotic spice or exotic produce items in our stores; you won’t find every flavor of every items. When you look at the large supermarkets that may have 20- to 30,000 items, or superstores, with over 100,000 items, it’s surprising to the customers how much of the shopping list we’re able to fit into our smaller store.”

While I love grocery stores, especially Shoppers, Wal-Mart, and Wegman’s (one of which is coming to Alexandria in 2012) — I definitely recommend adding Aldi to your grocery circuit. Their food is great, and the price is hard to beat. Get on their mailing list at: http://www.aldi.us. You’ll be glad to you did.
23 Items for $50 — only 9 cost more than $.99
NOTE: This article was written by an individual not affiliated with or compensated by Aldi Supermarkets.

Pujols

posted by jim on december 08, 2011
Missouri, St. Louis / No Comments
Not an hour goes by without a friend of mine adding their commentary about the Albert Pujols free agency, so here’s mine:
As a Clevelander, I say this with respect: Albert Pujols is not the LeBron James of Saint Louis. I facebooked about this earlier, and got some good comments.
Thoughts, in random order:

  • Albert negotiated, but could not come to terms with the Cardinals. He put on his hat, played hard, and helped win a World Series.
  • He has not been a publicity seeker about his free agency whatsoever.
  • He has not been an asshole.
  • He does not call himself “The King” or any variation of that.
  • To my knowledge, he’s never promised to stay in St. Louis or stay until he brings a championship.
  • He has not (at the time of this writing) scheduled an ESPN special called “The Decision” to tell fans where he is going.

And, he’s brought two championships to St. Louis. Rings are something LeBron lacks. In short, the Pujols situation is not St. Louis’s version of ‘The Decision.’ Could it be? Yes. Is it now? No.
I will be sad if Albert leaves. I like him. But, unless you’re camping in Zucotti Park, you’ll agree that his best interest is his best interest. Sure, people make mistakes. Maybe leaving a town like St. Louis is a mistake! But, they’re free to make those decisions.
And until Albert Pujols acts like a jackass, I wish him well in whatever decision he makes.

Protected: TIF Financing is a Band-Aid for Saint Louis’s Economic Woes

posted by jim on december 09, 2011
Cleveland, Economics, Missouri, St. Louis, Weekly Column
Recently, STL Today (the webpage of the St. Louis Post-Dispatch) asked the following question on its website:
Now, I don’t even care what this project is. It could be a factory that makes labradoodle Build-A-Bears or one that offers a cure for meth addiction (a big problem for Missouri and Illinois.) It could be condos, apartments, a thriving artisan district. I don’t care what it is: taxpayer-funded incentives for development are never a good idea. But I think those entities should be allowed to make those mistakes.
Earlier in the day a friend of mine called me “insane” for positing that people calling Albert Pujols greedy should never take a job that offers them substantially more money at the risk of being hypocritical. So, maybe today is one of those days for me.
But back to Tax Increment Financing, or TIFs. These are common in virtually all states, and states, cities, and counties also often have separate programs that do very similar things: mainly give a benefit to an individual, group, or company for doing a certain thing. In short, TIFs are a form of incentives borne by taxpayers either directly or indirectly. They are subsidies, and they distort markets.
Example: Ohio Governor John Kasich worked out a deal to keep American Greetings in Northeast Ohio. The city of Brooklyn, Ohio raised its city income tax, which was a factor in American Greetings seeking alternate opportunities. So, Ohio will spend (or forgo in revenues) nearly $100 million over 15 years to keep the company in Ohio.
From the Cleveland Plain Dealer:

Advocates of a regional approach to economic development were thrilled that American Greetings will stay in the area. But they said competitive courting of the company could hurt the region’s economy.

“We are pitted against ourselves,” said Hudson Mayor William Currin, who is active with the Regional Prosperity Initiative, a 4-year-old group dedicated to regional land-use planning, revenue sharing and cooperation among cities.

Wrong. Wrong. Wrong. Competition is a good thing. Regional planning has gotten Cleveland, well, nowhere. Cuyahoga County and Cleveland City have lost a lot of people since 1990. The wrong answer is saying “competitive courting” (i.e. competition) hurts the region and having the state come in to have the entire state’s taxpayers foot the bill or give a discount to one company (American Greetings) over thousands of other companies to stay.
If American Greetings wants to leave Cleveland, Brooklyn, or Ohio all together. Who cares? Why is it people in downstate Ohio’s responsibility to provide incentives for people closer to Canada than they are Kentucky? Or any Ohioan for that matter?
Same goes for Missouri. I read a while back about two suburbs in a sort of feud because Wal-Mart got incentives to locate in city “X.” The incentives expired. Wal- Mart noticed there were 4 other suburbs down the way lacking a Wal-Mart. “Hey! Wouldn’t you like some commerce and jobs? Why not hook us up with some tax incentives and we’ll move down the street!” And that’s what they did. City “Y” got the new Wal-Mart and City “X” now has a vacant lot.
Now, I’m all for allowing companies to accept these handouts and for government to make these stupid decisions. A society is not free if people don’t have the right to make mistakes. But I think they’re malarkey. And yes, state vs. state TIF battles are indeed competition, but they’re inefficient competition that does not provide long-term growth in the aggregate economy.
A city, state, or county, only has a finite amount of tax revenue it can either give or forgo to attract commerce. That makes sense because if a small suburb’s budget outlays are $20 million and their revenues are $22 million, clearly they cannot offer $20 million in loans or forgone tax revenue.
My biggest problem with such incentives is that they are the very definition of picking winners and losers. So, Ohio gives benefits to American Greetings — but what about all of the other businesses? Later on, they’ll give other incentives to bring in other companies, but when American Greetings’ incentives expire or other companies are offered such deals in other places, how will those communities in NE Ohio be able to offer similar deals to keep them? They won’t always be able to do that. And, at some point, they’ll have to raise tax rates to offset their previous follies.
The merry-go-round of taxpayer-funded incentives works in theory, but it is not the most economically efficient method for sustainable growth. And we’re only discussing a small part of the picture here. The federal government offers a variety of such incentives, too, dispersed sporadically throughout the tax code.
The best solution, in my view, is to offer companies this: a stable tax rate and regulatory climate. Brooklyn, Ohio raised its city tax (which is an intrinsically bad idea, if you ask me) and American Greetings around that time decided to leave. It’s a vicious cycle. However, there are many cities that just say “no special benefits, we are what we are and that’s not going to change.” Those cities may achieve slower growth rates than some places that go TIF or incentive crazy, but they are more likely to have sustainable tax rates and do a better job of retaining jobs because of it. Nothing is more disconcerting to a CFO than a region that is volatile, offers crazy amounts of incentives, and then has to kill their local economy with painful tax increases to pay for their previous mistakes. Businesses like certainty more than they like crony capitalism, as hard as it may be to believe. The biggest companies can play this game best, since relocating is easier.
If all cities, counties, and states didn’t play the incentive handout game, the competition would be centered around tax rates and regulatory and zoning burdens. The most efficient cities at providing public services at lowest cost and highest benefit (and those with propitious climates for agriculture, yadda yadda) would benefit. The markets would do what they do best: allocate resources in the most efficient possible manner. Subsidies only distort those markets, which is why I think they’re never the right solution, even if they produce Build-A-Bear Labradoodles that everybody loves.
(Note: I don’t think Build-A-Bear actually makes Labradoodles.)

Basic Tenets of Economics, Part 2

posted by jim on november 14, 2011

Basic Tenets Series, Economics / No Comments

Friends, I hope you enjoyed the first post.

The second topic for the series is:

Individuals choose purposefully — they try to get the most from their limited resources.

Say you have $3.50 and you have to decide how to use it for a meal on the road. You could go to McDonalds and maybe get some Mc Nuggets and two double cheeseburgers. Or, you could go across the street to White Castle and get six slyders. For most people, the choice is obvious. For me, I’d go to White Castle 6 times a week and twice on Sunday. However, if you had to choose between McDonalds, Taco Bell, White Castle, and Wendy’s the matter becomes more difficult.

Now, unless one has no good taste, clearly most individuals will have stated preferences if their resources are scarce and their options limited. But, while everyone might like to spring for the delicious Wendy’s burger they might decide that Taco Bell or White Castle are more economical choices. That is to say that (most often times) individuals deliberately think through these decisions of having to choose which path best suits their needs. If an individual values all choices equally, then they will tend to pick the cheapest option. If all options are equally cheap, they tend to pick the item they like best.

This is called “economizing behavior” and usually represents the intersection of greatest utility at least cost.

Utility, like the infielder, is replaceable with alternatives, but as we talked about earlier, those alternatives have trade-offs. And utility varies wildly. If I decide to spend my $3.50 all at White Castle (I would) people who do not like White Castle would think I am an idiot. However, I might not agree with what they buy at other restaurants, but each of our trade-offs are individual and specific. People must weigh the benefits with the costs and decide for themselves.

Thus, you can see why I am skeptical of government-mandated “one size fits all” policies. In politics, unfortunately, there is always a desire to “do something.” This is flawed. Sometimes the best decision is to do nothing at all and let markets correct themselves. Yet, attacking “doing nothing” has great rewards for challengers, since everybody expects something to be done — largely because economic understanding is not something widely known among voters. (See: Myth of the Rational Voter, Caplan).

But when the incentives for “doing something” (ANYTHING) outweigh the costs of doing nothing and letting things sort themselves out, you begin to deal with unintended second and third order effects. Start regulating overdraft fees and the interchange fees charged to merchants for use of a debit/credit card, and wouldn’t you know it? Free checking disappears. But people get mad at banks, not the folks who voted or supported the policies that led to that result.

Encourage people to destroy perfectly good cars (clunkers) in order to encourage them to buy new ones? Well, if you’re on a fixed income or have bad credit, guess what? Used cars just got more expensive for you. But who do people blame? Greedy used car salesmen, not the government.

Government increases student loan subsidies and tuition rises? Blame those evil for-profit schools, not government policies.

I often liken the debate that is had daily in Washington to this scene from I.O.USA:

Since we’re borrowing vast sums of money (and have been since the Bush presidency, though Obama’s “solution” has tended to cost a lot more and few people dispute that) we need to think “is this something that we can afford?”

Our financial resources as a government are pretty much some of the most scarce they have ever been. Every dollar we borrow is a dollar that could have been invested or spent elsewhere. Yes, governments can print more money — devaluing it — but that ability is not infinite. When thinking about what is the best path forward, we must consider that we don’t have the money to do 75% of what we’re doing now.

People often take their frustration out on the wrong people, when those people are making entirely rational economic decisions. However, until we as a society think more economically (not everybody does) we will continue to have this vicious cycle of bad policies that ultimately do more harm than good.

Basic Tenets of Economics, Part 1

posted by jim on november 10, 2011

Basic Tenets Series, Economics / 3 Comments

In the near future, I will publish a list of good economic books that I think you should own or read.UPDATE: You can access that here.

I wanted to spend some time reflecting on these 8 tenets or “guideposts for economic thinking” from this economics text book: Economics: Private and Public Choice, | Gwartney, Stroup, Sobel, Macpherson. Now, at SLU one of the professors wrote his own econ text books so we didn’t use this one. A colleague of mine asked me to get a copy for reference once and I started reading it on my own and bought a copy. It is a great textbook to understand economics. Similarly, the author wrote “Commonsense Economics” which is much lighter reading on the topic.

In my life I have worked in the private sector in retail, sales, manufacturing, I’ve been self employed twice, unemployed, and have worked for city governments, and more recently in the federal government in Congress for almost 5 years. I’ve worked on political campaigns as well. I have had interesting experiences and seen how economic principles have guided decisions in each of those areas. If I get NGO experience, a lobbying job and a position in State government, I think I get some sort of utility player gold star or something.

Seriously though, I wanted to do an 8 part series on these tenets and how I have observed them applied (or not applied) in real life. Now, I won’t be using examples from the places I have worked because I like every place I have been and want to be employable in the future. So if you’re looking for a “tell-all” series with digs and inside scoops, look elsewhere.

Tenet 1: The use of scarce resources is costly; trade-offs must always be made.

This premise seems simple enough, there isn’t an unlimited reservoir of resources. Whether it’s the plastic components from my time as an injection molder or the paper the Sun Press used to make the papers I delivered growing up, these resources are limited. Similarly, labor is a limited resource since not everyone can do every job. Education and acquiring knowledge is costly, and another tenet we will get to later. Things like land or capital are also limited. There always is less of something that we would like to have. Especially time.

These things break down into one of two categories: 1. Scare goods or 2. Limited Resources. Either way, they are not infinite.

When going about your day, you have a limited amount of time. During that time you have to complete the tasks of your job, and that job pays you limited financial resources that you have to make decisions. Time and money are interconnected, as you can learn more about here. Opportunity costs, which we will discuss later, are ever present in daily life.

Balancing work and life with scarce time and limited money forces you to make decisions. Everybody goes about this differently, which makes government’s attempts to “play God” with the economy largely futile.

Let’s say you work in Washington, D.C. and there is a fire drill. At first you are happy you are outside because it is a nice day, but then reality sets in. All of the “things” you had to do aren’t happening, and you can’t do them. Why, you think, did the schmucks at my work schedule a fire drill today? Don’t they know how busy I am? Of course they did, but since we’ve been doing fire drills since grade school (and involuntary fire drills in college — you people know who you are) shouldn’t everyone know how to do a fire drill? You’d be surprised.

The people who run your building or place of employment made a decision, weighed the options, and chose a trade-off. An hour of your time a few times a year to minimize the panic and loss that would result from a group of people freaking out and potentially dying in a fire. To the decision makers, a few hours of lost productivity is worth mitigating the potential loss of a portion of their educated and trained workforce.

Politicians at all levels have to make trade-offs when they decide how our government runs based on the fact that resources are scarce. (Though, these days you’d think that money grows on trees at the federal level.)

Consider one of the two candidates I could have voted for for Fairfax County School Board. Abe Lincoln look alike Dan Storck, who I’m told is not my political twin, says the following on his webpage:

“Pupil-Teacher Ratio: I support its further overall reduction, but recognize the trade-offs that this investment requires will make that difficult to achieve.”

Rarely are politicians this forthright. Who doesn’t want more teachers? Whether more teachers or a lower pupil-teacher ratio improves academic performance and life preparedness is debatable, but one thing is for sure — parents want assurances that their kid will get more attention and they feel that less students in the classroom will accomplish this goal. In the early days of the country, kids were largely educated in one-room schoolhouses. Now, spending has gone up on education astronomically since that time, but not all communities can afford the same amount of pupil-teacher ratios. Some parents want it to be 10:1, others think 15:1 or even 20:1 are acceptable. Politicians must weigh the pros and cons, knowing there are unreasonable people on both sides of the spectrum who shout loudly and also deal with special interests (teachers’ unions, taxpayer groups, PTA, and so on) and make a decision or series of decisions. Some communities can’t justify adding more teachers because it would drain their already dwindling tax base, like the city of Cleveland, Ohio.

Some look at research and decide that the expense of lowering that ratio from 25:1 to 20:1 isn’t worth the expense. Others think that considering the circumstances, it is worth the expense.  This is an example of opportunity costs, which are the most/highest valued alternative that loses out because of somebody’s choice. A school district might determine that 5 less students per class would be great, but the money needed to accomplish that could be better used in bus upkeep or whatever else. Other districts might say they can’t afford the expense at all, while others can just pay the costs. In the end, it doesn’t matter how good your teachers are if your kids can’t get to school. A classic trade-off.

At a State level, politicians must decide how to allocate state taxpayer dollars to schools. Do they use that money to equalize in districts that don’t have the tax base that others do? Or do they focus that money on where it will have the greatest effect? It all depends on the State and its population, regional economies, and its school systems. Some states largely divert that money to the poorest areas, while others have less poor areas to divert and come up with merit-based systems to award funds to districts that perform. Each way of allocating these scarce resources has trade-offs, and each decision leaves fewer and fewer resources.

But one thing is clear, you cannot have your cake and eat it too. If you look at student intelligence on a bell curve, most students are average. However, there are some students who are the so-called “gifted” and others due to circumstances beyond their control are “special needs.” Both groups have organized parents who wants more money to be allocated to their children, which is normal. Gifted parents think that budget constraints shouldn’t “dumb down” their children and the parents of special needs students don’t think their kids should be on the receiving end of increases in pupil to student ratios. Both make salient points, but how does one make everyone happy?

In short, you can’t make everyone happy. Especially now in times like these. Resources are even more limited than in boom times, and decisions have trade-offs that impact people. These are tough decisions.

Now at the federal level, you may have seen your elected officials voting for/calling for bills to “save teachers’ jobs.” As an aside, this is not a responsibility of the federal government in any way shape or form. Education is something not mentioned in the Constitution and has been a State’s right but that seems to be changing, which is unfortunate.  Regardless, federal officials gave States money to “save” teachers’ jobs in the 2009 stimulus law. Yet, now in 2011, they are calling for another round of funding. Education is not isolated from the laws of economics and that 2009 money delayed the day of reckoning for many teachers school districts could no longer afford to pay. Some time, the bill comes do. There is no free lunch.

So what did the federal government do? They borrowed billions of dollars for this from China and other countries and citizens buying Treasury bonds. This borrowed money has trade offs that were more than not but considered in haste. More borrowing leaves less capital to do other things (like foreign direct investment) that creates jobs.

In any economy, the scarcity of a good or resource makes rationing necessary.

Surely, not every school district can have everything they want, and teachers can seek alternate employment as teachers or in other fields. They in effect, can choose to go elsewhere for more money or more free time. Now unions cloud this topic to the nth degree, and we won’t go into detail except to say that unionization bastardizes economic theory and is destructive. When teachers need to be let go in a unionized work place, rationing takes place under union rules, not cost/benefit rules that you or I may impose when choosing to do something. Unions have their own cost/benefit rules and new teachers typically lose out first to more senior teachers, kids and school districts be damned.

But absent the fantasy world that Unions have created in many workplaces that strangle out innovation and efficient markets, the main method of rationing is price. The scarce things go to those who choose to pay the market price for them. Now, Thomas Sowell famously remarked:

“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

In casual and polite conversation, people go nuts when I bring up the concept of scarcity, trade-offs, and opportunity costs. Nobody likes to think of their favorite topic, or even their children’s education in such callous terms. Ambrose Bierce was attributed to the notion that cynics had “faulty vision” and “see things as they are, not as they ought to be.” Most people think this way about economists. While I ultimately didn’t vote for the Abraham Lincoln look alike for school board this time around, I appreciate his candor in these matters. In politics as in life, we need to be honest with each other about the hard decisions that come from trade-offs, otherwise we will inefficiently use those scarce resources in a way that makes the world worse off.

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