Category: Political Science & Economics

How The Future Might Look

Category : Political Science & Economics
Posted on by

favela luxuryOver the past few months I’ve been forming a thesis about where the world is heading. Much of my thinking comes from seven important books. Two of the most important authors who have influenced my thinking are Nassim Nicholas Taleb and Jaron Lanier. Many of the ideas that follow are theirs. And when Taleb’s and Lanier’s ideas intersect, you get very interesting hypotheses.

I’ll be expanding on my thinking over the next few blog posts, but I’ll start with some of the important ideas  that I think are at the core of where the world is heading. Understanding these ideas will be very important  if you want to succeed in the world going forward, or if you want to try to influence or change our future.

The Taleb Distribution – 99/1 instead of 80/20

The Pareto Distribution, better known as the 80/20 rule, states that 80% of the effects come from 20% of the causes. For example, in most businesses 20% of clients will generate 80% of the income, 20% of clients will generate the most customer service requests and so on. Taleb argues that we’re moving to a 99/1 distribution, away from 80/20. This shift has profound implications for our economy and society.

Little to No Skin in the Game

Entities are using big data and big computers to create businesses that introduce risk into the system, but don’t actually take on any of the risk. Instead they radiate it out to everyone else, taking all the benefits and leaving others with the downside. Think big banks, healthcare marketplaces, Facebook, outsourcing firms.

Siren Servers

Lanier coined this term to describe companies that use strong computers to suck up data and make money solely on information asymmetry, that have no skin in the game, radiating out new risk into the system. This new business model breaks with old entrepreneurial traditions: now the winners win solely because they have the strongest, fastest and most powerful computers, not because of innovation or value add. It’s arbitrage.

Strongest servers used for control

Whether its from governments like the US and the NSA or strong, overbearing policing, or large companies like wall street or web giants, the strongest servers will use their power to exert control.

Much of this control isn’t really done by algorithms, but people believe in technology, rather than humanism. For example, online dating sites claim they have an algorithm that matches people based on compatibility. In reality the algorithm “works” because it throws lots of people who want to get married together. Marriages are bound to happen. But people believe its the computer and give up control.

De Facto Monopolies

As power and money concentrate around the most powerful computer and radiate risk away from themselves, they create de facto monopolies. For example, Amazon automatically lowers its prices if there is a lower price anywhere it can find, then raises it if there isn’t a lower price anymore. They do this because they have the best data and the most powerful servers. They are willing to take a low or no margin on an item until you go out of business.

Amazon is not stopping you from starting a competitor. But you cannot compete on price. What used to be a monopoly is now just good business and competition. It’s moving toward a de facto monopoly. I expect this to happen in other industries.

Meritocracy used to excuse pretty much anything

As things go to 99/1 and de facto monopolies arise that radiate away risk from people who have little to no skin in the game, the winners will use merit and hard work to justify their outsized rewards. Since these companies are not using traditional, overt anticompetitive practices, the winners will justify their gains by meritocracy: anyone could have done it. It will be used to justify the commoditazation of work and the elimination of traditional levees.

Non Monetary Compensation

Facebook with 0 users is worth $0. Facebook with 1.1b users is worth $122b. It needs our free data to function. Yet its controlled by one guy and only a tiny percentage actually involved get monetary compensation. The rest get the equivalent of candy. The new bread and circus.

Taken one step further, in ten years robots are doing most basic surgeries. All benefits accrue to the software company that created the software. How’d they program this software? By watching real doctors perform hundreds of thousands of surgeries. But do these doctors get any compensation from the new data driven robots that needed their data to create the program? No. This will repeat across most industries.

Shrinking Markets

In a 99/1 world, where information is free and people aren’t paid for their data inputs, and as technology, powerful servers and de facto monopolies begin to emerge, markets will begin to shrink. These technologies cut out the middle men and people needed to do work. Sounds great and it is short term, but at scale, only the powerful handful have any monetary compensation and the rest have candy and no money to live, let alone purchase the winner’s goods.

Massive Inequality

The world will look more like South America, with massive physical, emotional, economic divisions between haves and have nots. In South America the top few percent almost never come in contact with the rest of the population, besides in service jobs. They don’t have the same culture. They don’t eat the same food. Follow the same sports. Watch the same tv shows. See the same movies. It might as well be two different worlds. Without a common experience, the haves lose empathy for their fellow man.

The metafication of everything

Everything we do is now broken down into tiny data pieces, mixed up and then put in a schema. Barriers go down, but we lose context. Do we lose truth with the lost context?

I understand this post sounds bleak and is very incomplete, but I don’t think all is lost. I’ll continue expanding on these ideas over the next few weeks in additional blog posts, including some ideas on how we can get off this track, and if we can’t get off the track, what some of the best strategies might be to survive in this type of a world.

Please add to the discussion.

My Tax Plan

Category : Political Science & Economics
Posted on by

Our government is broken. I’ve written a bunch of posts on US government policy but I haven’t put forth many specifics. That’s going to change. This is the first post in a series about how I’d fix the US. Potential political career disclaimer: I reserve the right to change my opinons when presented with new evidence. That’s what smart people do. That doesn’t make them a flip-flopper.

At nearly 75,000 pages and growing, nearly everyone agrees the tax code is broken. But US taxes are one of the most controversial and yet least understood parts of our government. In order to fix our debt problem, we need to address revenue and spending. Anyone who says we can fix our problem with one or the other is just not credible. My plan would raise a bit more revenue for the government and make it more fairly distributed to US citizens. I fully understand it would never pass.

Simplify

At 75,000 pages only those with massive incomes can afford to pay lawyers and accountants to legally evade taxes. My Dad is an attorney and he struggles to make sense of his rather simple tax return. I’ve been assessed penalties by the IRS three times for honest mistakes on my business taxes.

Complexity is why people making $100m a year use offshore accounts and those making $75,000 don’t. It’s one of the reasons Warren Buffet pays a lower percentage in taxes than his secretary . Facebook can afford to take advantage of the rules to save itself money. Complexity helps the rich and sophisticated at the expense of the rest of us.

We also waste billions of dollars trying to enforce our byzantine tax code. Not to mention the millions of man hours per year.

Increase Fairness

Although nearly all of the attention gets focused on the income tax rate, it only makes up 42% of all US Federal tax revenue. We have massive fights over the income tax, but what about the other 58%? Our income tax is progressive, but most of the rest of our taxes are regressive and hurt the poor over the rich.

Promote Investment not Speculation

Our current tax code doesn’t really differentiate between speculation and investment. Our biggest problems have come from speculation at the expense of investment. My tax code gives you promotes investment in our future.

My Plan

1. Income Tax

Our 75,000 page tax code could be simplified to four sentences. Our tax return could be simplified to a post card.

My income tax would have three brackets, 5%, 25% and 35%. The first $10,000 would be free. I’d eliminate all tax deductions. Brackets would be set to get similar revenue to what we have today, plus a bit more to cover our shortfall.

2. Payroll Tax: Social Security, Medicare Tax & Self Employment Tax

I would completely eliminate the payroll tax and raise income tax rates and eliminate deductions to get more revenue from income taxes. Income taxes and reduced deductions would have to rise greatly because payroll tax accounts for 40% of federal revenue.

The payroll tax and self employment tax are two taxes taken out of our paychecks. 15.6% of our paycheck goes to the government to pay for Social Security and Medicare. If you are an employee, you pay half out of your paycheck and your employer pays the other half. If you work for yourself, you pay both halves. This tax is poorly designed for three main reasons.

First, it disincentivizes entrepreneurship and self employment.It punishes self employed people and entrepreneurs. We have to pay 15.6% of our income to the government, whereas an employee only pays half of that. Second, it discourages companies from hiring. Companies are required to pay 7.8% of an employees salary in taxes when they hire them. That’s not good for an economy fighting through high unemployment. Third, it’s incredibly regressive. It only affects the first $100,000 of income, meaning that if you make $400,000 in a year, you only pay an effective rate of about 4% while a self employed person making $40,000 pays the full 15.6%.

3. Corporate Taxes

Flat rate of 10% on all corporate income. No exceptions.

This change would lower the burden on small corporations that are currently paying 15-35% and increase the burden on the biggest companies like Facebook, GE and others who pay 0% because they’ve hired expensive attorneys and accountants to shirk their burden with tricks like the double irish.

4. Dividend income and Interest Tax

10% flat rate on all income from dividends and interest. This income generally comes from money that’s already been taxed from income or other investment taxes, so it’s not fair to tax again at a high rate. It’s also counter productive.

5. Carried Interest

Taxed as normal income.

This is the odious loophole that hedge funds and bankers use to pay 15% taxes on their billions in income each year. It should be a crime, but our government is unwilling to make changes. This is probably the most unfair tax on the books. VCs currently benefit from it, but under my plan they’d go into capital gains since they are investing.

6. Capital Gains Tax

In year one, you pay your income tax rate. In year two, it’s your rate minus 5% points. Year 3, minus 10% points. In year 5 you pay 0%.

Capital Gains are money that you make investing in stocks, companies, real estate and other things that you later sell at a higher price. The current system is you pay income tax rates in year 1, then if you wait more than a year, you pay 15%. The goal is to incentivize risk taking and investment, but holding a stock for one year is not enough. An investment is long term and you should get big benefits if you really invest for the long haul instead of speculating with an under two year time horizon.

7. Estate Tax

25% on all estates over $7.5m.

This is one of the most debated taxes right after the income tax, but it only affects 13,000 estates per year. When someone dies and their total assets (property+investments+cash) is over a certain amount, the estate must pay taxes. The goal is to eliminate family inheritance of billions that create an idle rich class. Many say it’s unfair to double tax the money because it’s already been subject to income and investment taxes while the person was living, but I don’t believe so. 25% on all assets above $10m, indexed to inflation, is fair.

Conclusion

I have not done all of the math to make sure that my rates make sense. If they are too low to get our current levels of revenue, I’d increase the income tax rates. If they are too high, which I highly doubt, I’d reduce them. The goal of this post was to create a framework that makes sense to simplify our tax code and make it more fair.

What do you think?

Taxing and Spending

Category : Political Science & Economics
Posted on by

cc: bornsquishy.com

On the first day of my freshman year of college I was 5’9 and weighed in at 150 pounds. That’s 1.75m and 68 kilos for my foreign readers. I was in really good shape. By the end of second semester, I was still 5’9, but weighed 166 pounds (75kg) and was in terrible shape. How’d that happen? Easy. I went from an active high schooler who played soccer 3 times a week, lifted weights 5 days a week, and reffed 120+ soccer games each year who ate good, healthy food at my parents house, to an inactive college kid who played soccer or racquetball once a week, reffed 50 games a year, ate pizza, “chinese food”, dorm cafeteria food, desserts and drank heavily 3+ days per week. That was freshman year. Sixteen pounds in nine months.

By the start of sophomore year, 3 months later, I’d lost it all. As soon as I got out of the dorms, I drank less, ate better and started to bike five days a week and played and reffed more soccer. During the stress of selling my first business, I gained more weight from eating poorly and not exercising. This time, I took off the weight by changing my diet, but not increasing exercise. I lost weight, but ended up weak. I wasn’t really in shape. Other times I tried to get back in shape by only doing exercise, but that never worked. I got stronger, but still was heavy. I wasn’t particularly healthy. The only thing that got me healthy was a change in diet and increased exercise in some combination.

The United States government is overweight. We got there the same way I did: eating more (increasing spending) and exercising less (cutting taxes). We have $15 trillion dollars in debt that’s expected to balloon over the next generation. But unfortunately we’re not fifteen pounds overweight, we’re more like 200 pounds heavier than we should be. We’re 5’9 and 350 pounds (1.75m and 159kg).

The Republicans say that we should go on a diet (cut spending) but keep on with our sedentary ways. If we just stopped eating so much and we won’t be fat anymore. Many Democrats say that we should just exercise more (increase taxes) and keep on eating. If we do that we’ll get in shape.

If we follow the Republican play of eating less, we’ll lose weight. But we’ll lose both fat and muscle. At the end of our diet, we’ll be weaker, but weigh less. We’ll be at our ideal weight, but we won’t be in shape. If we follow the Democratic plan of exercising more, we’ll get stronger, but we won’t lose much weight. We’ll still have too much fat along with our newfound muscle. Both plans end up with unhealthy economies. And if we cut food so much, we could starve to death. Our internal organs could shut down. But if we go into an intense exercise plan as a 350 pound 5’8 man, we could have a severe heart attack.

Just like with getting healthy, the only approach that makes sense is a change in diet and exercise in coorinated combination. We need to cut spending, reallocate our priorities and increase taxes. That’s the only way our country gets healthy again. That’s the middle way that our country needs.

The Biggest Gamble in World History

Category : Political Science & Economics
Posted on by

The Federal Reserve just announced it would continue its program of buying up US bonds and mortgage backed securities to keep rates low. They plan to buy $85b per month until it’s not needed anymore. That’s $3b per day. Or $283 per month for every man woman and child in the US. Where does that money come from? Our taxes? Borrowing from the Chinese? No.

We just create it out of thin air. We tell people we have it, add some numbers to a spreadsheet and boom, we have $85bn in new dollars! What a great idea! Then we use it to buy debt issued by the United States. This keeps interest rates artificially low because there are fewer US bonds on the open market. People who want to buy bonds compete over the only remaining bonds and drive down interest rates. It works the same way for mortgage backed securities.

Get it? If not, here’s another example. Say I want to buy a $1m house but I don’t have any money. I meet with the seller and say “I have one million dollars in my bank account, give me the house.” The guy believes me and gives me the house. On the way home, by some magical power, I decide that I have $1m in my account and create it out of thin air. Then I transfer it to the seller. That’s what the Federal Reserve is doing.

So why don’t we just print $16 trillion and pay off all of our debt at once? We could do it. But here’s the problem. If we do it, everyone with government debt would be rich and everyone without it would be poor. We’d kill anyone without government paper. And everyone without their newfound wealth would buy up everything else. In otherwords, massive, overnight inflation.

Ok, so why not $8 trillion? Same problem. $4 trillion? Still too much. $1 trillion over a year? That sounds ok. And that’s what we’re doing. $85b*12 months=$1.02 trillion in new money created each year. So we’re just creating money out of thin air, keeping interest rates low and hoping we can slowly inflate our debt away. We’ll keep increasing our money printing until we hear complaints from the rest of the world or the bond market. If nobody complains, we’ll buy $150b/month of our bonds. Then $200b.

That, I believe, is Wall Street and Washington’s master plan to get out of debt. The increased taxes and spending cuts of the fiscal cliff are a mere sideshow to distract the citizens and our investors to make us think that we’re actually serious about reform. For a myraid of reasons, we’re not. So we’ll try to avoid pain and inflate ourselves out of the problem.

Sounds great, right? Don’t really raise taxes, don’t really cut spending and make our debt worthless. Inflation in combination with real reform could be good, but unfortunately this plan destroys certain groups of people:

The poor

The poor spend a huge percentage of their income on food, housing and basic needs. These basic needs go up when we print money. Public assistance payment cost of living increases don’t keep up with inflation. Food, gas, rent increase. Inflation squeezes the poor.

The middle class

The middle class gets hit by rising food and commodity prices, but they also have savings. If they have $10,000 in a CD earning 1%, but inflation is 3%, they’re actually losing 2% each year. Creating money out of thin air erodes their savings and purchasing power.

Anyone on a fixed income

People on social security, retirees, people on disability or welfare are destroyed by persistant inflation. Each time we create $85b out of thin air, that social security check purchases less.

Savers, retirees and pretty much anyone with a net worth of less than ~$50m

These savers planned on being able to live off of their savings. But what are your savings worth when the government can just create money each month? Less and less each month.

So if creating money out of thin air hurts all of these groups, why is it happening? Because we either have to make hard choices to cut benefits and raise taxes. People want to raise taxes on the rich, but when it comes to cutting spending, if they’re affected they scream. And our government appeases us.

Our government is gambling that it can create enough money to keep interest rates low without pissing off our foreign investors or the rich who could affect the bond market. This gamble works until our investors say it doesn’t anymore. At that point, interest rates go up. Potentially from today’s 1% to 7-10% really quickly. And then the US is in trouble.

Short of seriously cutting spending and increasing taxes, this is our only hope. And it’s the hope our  government has hitched it’s wagon to. At some point in the future, our investors will call us on our persistant inflation. But if we stop and just massively cut spending, we could go into deflation like Europe. If the gamble doesn’t pay off, we’ll have a bigger bubble than we’ve ever seen in this history of the world, this time in US debt. We need to hope it does. Our third option between printing money and austerity is not any more politically feasible than it was when I wrote about it in April.