Paid to Be Rich

The Grand Subsidy

noreply@blogger.com (Carl M.) — Wed, 12 Aug 2020 22:47:00 +0000

The rich have money to lend. Borrowers find this useful; they are willing to pay for this "money rental" service. As a result, even the unproductive rich can collect an income indefinitely as long as spending is less than interest - inflation. (Spending needs to include taxes, BTW.) Many find the arrangement to be unfair. But fear not! Our government is one of the borrowers, adding over a trillion dollars on the demand side for money rental services. Deficit spending is a subsidy for the rich!

And that, dear readers is the big takeaway for this blog. For all the welfare programs, social insurance, progressive taxes, and regulations, we have a honkin big "secret" subsidy hiding in broad daylight: deficit spending.

Feedback -- The Real Secret of the Super Rich Part 5

noreply@blogger.com (Carl M.) — Tue, 01 Jul 2014 17:17:00 +0000

It takes money to make money. Carpenters need tools. Programmers need computers, and enough ramen noodles to live on while coding their masterpieces. Car makers need hundreds of millions of dollars to design their product and build an assembly line.

Money: if you don’t have it, you have to borrow it from someone who does. Or sell shares in your enterprise. Or simply work for someone else.

Money: those who have it can lend it, for interest. In other words, if you have money, you can get paid for having money. If you have a lot of money, you get paid for being rich. This is great work if you can get it.

To get rich you have to be more productive (or criminal) than the rest of us – unless you have the right parents. But once you are rich it’s smooth sailing as long as you don’t get too greedy. This strikes many as unfair. Thomas Piketty has a best seller out on the subject; I have a copy on order myself.

I, for one, am not on the bandwagon for completely snuffing out the rewards of riches. Old money has its uses. And simply taking care of existing wealth is useful. The only member of the Big 3 car manufacturers to survive without a bailout is the family business: Ford.

But I can go for a damper on such incomes. When the rich get paid too much for just being rich, the wealth gap widens beyond that which can support a free republic. The United States is due to oscillate between oligarchy and socialism, just like our neighbors to the south. I find that prospect unpleasant.

Joining the Rich

In theory, interest and passive profits are mere multipliers. If everyone saved the same fraction of their income and got the same returns on investments, the existence of interest and profits would have no effect on the wealth gap. Piketty’s r > g would simply reflect how we take care of retirees.

But in general the well off save more. When the house is comfortable, the car shiny, and vacations sufficiently relaxing, the basic appetites are sated. Avoid ostentation, hedonism, or going into politics and the temptation to spend all you earn is blunted. Those who have pile up more.

There are exceptions. Some hardcore environmentalists who live like eco hippies while earning a professional income can go from college graduation to retirement in a few years. And there is a growing movement of educated folks saving for early retirement on a less austere budget. Interest and passive profits favor their lifestyles.

If the rest of the working class would be partly follow their lead, the wealth gap would stop widening so much. To that end, I have crafted The Ideal IRA, a savings plan simple enough that the middle classes can use it without hiring expensive financial advisors. Check it out, and if you like it, tell your congresscritter about the idea. This should be a bipartisan issue.

A similar savings rate is not necessarily enough to stop the widening of the wealth gap. If the rich get a better ROI on their savings, the gap will continue to widen.

Do they? Not at first. For today’s typical middle class saver, there are plenty of high ROI investments to be made: pay off debts, get more education, add energy saving features to your home, etc. But as these options are saturated, there may be an edge for the rich. The Fed has pushed interest rates on ordinary bank savings accounts down to negative levels in real terms. Sarbanes-Oxley has made fast growing companies stay private longer, limiting these juicy gains to angels, institutions, and accredited (well off) investors.

This is sad, and I want to turn the tide. To this end I have been doing most of my writing at a new web site, Finance and Freedom, devoted to alternatives to Sarbanes-Oxley and other burdensome regulations. There are alternative ways to keep the Wall St. crooks at bay, ways which allow The People to do capitalism.

Workable Demands for Wall St. Occupiers

noreply@blogger.com (Carl M.) — Thu, 08 Dec 2011 04:42:00 +0000

Attention all Occupiers: you have America’s attention. It’s time to turn that attention in to workable action. Keep on merely protesting and nothing will change. Fox News and similar media are vilifying you. The usual liberal suspects are busy trying to co-opt you. Trends indicate that your hard efforts will result in a minor glitch in the usual left-right battle, and some stories to tell your grandchildren. If you want a more lasting impact you need to move from protest to policy.

I was protesting on Wall St. before it was cool.

No, I am not playing the muddled message meme here. A quick check on Wikipedia yields a concise set of demands: getting corporations out of politics, more jobs, re-regulating the financial system, doing something about the wealth gap, etc. That’s a pretty coherent political platform. Rather less muddled than many Republican presidential candidates. Just what did W stand for other than incompetence, crony capitalism and water boarding? What does Mitt Romney stand for besides executive hair? What will Newt Gingrich stand for next month? Your message is less muddled than many political platforms.

But platforms are not policy. Behind the talking points, sound bites, and grin-like-a-monkey-at-the-camera video clips, each major party has an army of staffers, think tanks, friendly lobbyists, and professionals ready to work in the executive branch. They craft the actual policies. If you want your ideas enacted, you likewise need someone to convert your values and policies into concrete proposals that can be written into law. The usual liberal suspects are eager to perform this service. Allow me to offer some alternatives. Pick which you like best.

Let’s take “getting corporations out of politics.” How would you legislate it? Do you forbid corporate executives from making political statements? What of their free speech rights? Do you forbid corporations from publishing political tracts and/or videos? What of the New York Times? It is published by a corporation. MSNBC and CNN are also corporate owned. Do you forbid newspapers and news channels from having editorials? If so, how do you reconcile such a policy with freedom of the press, as enshrined in the Bill of Rights? The press has always involved money. Do you want to modify the Constitution?

Corporate influence on our legislators and regulators is indeed excessive. I’m not dissing your demand. I’m demanding sound policy to fulfill what you are crying out for. Here are some possibilities:

1. Public funding of all incumbent lawmakers. While you are a challenger, you can solicit money for your cause. Once in office, you work for The People. For this to work The People will pay you, including re-election expenses. I suggest that public funding should equal half of what the biggest spending challenger spent the last go-around. (Fundraising is expensive. Nearly half the money raised is used to raise the money, so a factor of ½ is fair.) I don’t support public funding for challengers because that puts the government in the position of deciding who a valid challenger is. Give money to all declared challengers and the kooks will come out of the woodwork demanding money. “Objective criteria,” such as money in proportion to prior performance can lead to positive feedback. Vladimir Putin used such a public funding algorithm to give his party overwhelming power.

2. Pay retired legislators a pension on the condition they don’t double-dip. Our government is too big, and elections too expensive for us to have old-fashioned citizen legislators. So let us pay our legislators, even upon retirement after a short term of office provided they don’t milk that office for private payments. Cut book deals, get paid enormous amounts for “consulting” or get paid enormous honoraria for speaking and no more pension for you. Ditto for high level regulators.

3. No securities trading by federal legislators or high level executives. Representatives, Senators, President, Vice President and Cabinet Secretaries should have to divest their private holdings and put them into government bonds (or perhaps land) while holding office. No blind trusts. What a joke! If you know what went into a trust, you know the effects of your policies on that trust’s value. And no private pensions either. You want to lead? You work for The People.

More Jobs

More jobs at good wages is not a policy, it is a goal. To achieve the goal we need to legislate policies which lead to the goal. To achieve the goal, you need to encourage those with money to spend it on domestic labor, vs. capital, foreign labor, or natural resources. Some examples:

Simplify payroll tax computations. When I was briefly an employer, I had to compute eight different taxes for each paycheck: federal and state income taxes, employer and employee FICA taxes, employer and employee Medicare taxes, federal and state unemployment insurance. I had to know the employee’s state and federal exemptions to do the computations/table lookup. This was a royal headache. Here is an alternative: just set federal withholding at a flat rate, say 20%. Each month let the federal government send a check to those who had too much withheld and a bill to those who had too little withheld. The bill/check can provide the itemized list of what taxes are due/paid. I pay Universal Service Fund to the phone company every month, yet I have no idea how to calculate it. Ditto for all the other nitnoid fees. Let the federal government do the same and save millions of employers major headaches.

Separate employment from health insurance. The unemployed need health insurance more than the employed. So why do we tax health insurance unless an employer buys it? Note how the arrangement discriminates against those who change jobs often. Note how group rates for businesses discourage hiring older employees. This should stop. Either socialize health insurance or replace the tax exemption for employer-provided coverage with government health insurance vouchers for all citizens. I favor the latter, and the latter option plays better at tea parties. (Not a trivial factor, as you, the Occupiers do not represent the 99% politically.)

Separate retirement savings from employment. Eliminate 401(k) plans and discourage pensions. Encourage savings by individuals. Increase the amount that individuals can put into personal savings plans tax deferred. Let employers focus on making money and employees focus on getting their fair share of said money.

Do defer taxes on deferred income. While I don’t like pensions, I do like shorter term deferred income to workers. Business income often comes in months or years after the work is done. If all wages are immediate, said wages must be based on pessimistic projections and availability of working capital to meet payroll. Many a computer programmer became a millionaire without benefit of union representation because startups paid partially in stock options instead of cash. Conversely, if the traders who destroyed the economy had their bonuses deferred until their positions cleared, they wouldn’t have been paid to destroy the financial system. With deferred bonuses, you can eliminate “heads I win, tails the company/nation loses.”

Replace unemployment insurance with free money. Some lost jobs aren’t coming back. Many laid off workers need to take up inferior jobs until they get their careers on new tracks. Bummer. But better to get started now. But rather than the Republican “work or starve” ethic, let us have the gentler “work or live like a hippie.” With unconditional money it pays to work, but if waiting for a better job is the better option, you can afford to wait if you are frugal.

Lower the corporate income tax rate to 20%. Huh!? How can Occupiers support that?? Answer: raise the capital gains tax up to the ordinary income rate at the same time. The result is a wash for founders of new businesses. It is a tax cut for Grandma: for both her pension fund and her personal holdings. The corporate income tax rightfully makes corporations pay more tax than less protected businesses like partnerships and sole proprietorships. But a corporation is more than its executives and large shareholders. A corporation is also small shareholders, customers and line employees. If you want a progressive income tax, make the progressive rates on individuals not corporations. Besides, multinational corporations can easily move profits to the country with the lowest rates. Jobs get moved in the process sometimes. The Laffer Curve maximum is lower for multinationals than for smaller businesses and individuals.

Reining in the 1%

I’m pushing 1400 words and I still haven’t said much about that gap between the 99% and the 1%. Increasing the capital gains rate to the ordinary income rate is a start. So are having better middle class jobs. We can do far more, and we don’t need socialism or even big government to do it. But my bedtime draws nigh, and you have enough to chew on for now. The 1% can wait until a future post. Tell me what you think of what I have proposed so far in the comments or by email. What am I missing? Which of the above are unacceptable and why? Let’s get a productive discussion going.

Thresholds -- the Real Secret of the Super Rich Part 4

noreply@blogger.com (Carl M.) — Fri, 31 Dec 2010 15:00:00 +0000

As we have seen in this series, the real secret of the super rich is neither positive thinking nor dark forces at work. It is nonlinearity. The basic bell curve distribution comes from adding assorted random variables together, and as we have seen, there is no way to map such a bell curve distribution to the actual wealth distribution of the United States (or probably any other nation). The underlying logic of the bell curve doesn’t even make sense if you think about it. If Bill Gates was a poor programmer or a poor businessman, he would be simply half as rich. He would not be rich at all. (Or at least not rich as a software entrepreneur.) These factors multiplied each other.

I modeled the effect of multiplying abilities/drives/luck factors together in Part 3. To review, here is the graph I get when I take five random factors, multiply them together and normalize to match median household income and a standard deviation which divides the bottom two quintiles properly.

We get a nice bulge near the median and a tail off to the right, but we still don’t get any super rich people. My model estimated only 56 people barely breaking a half million people per year. (This estimate is quite noisy; only one dice roll out of a million landed in this bin.)

Let’s think back to our Bill Gates model. If he was half as good a programmer, he wouldn’t simply have had half as good a business; he wouldn’t have gotten into writing interpreters and operating systems at all. If his parents had been half as well off, he wouldn’t have had half the practice writing software as a child. He would have had none at all. If he had too little interest/ability in business, he would have stayed in Harvard and probably became an academic or high paid programmer working for someone else. For many of the factors which went into making Bill Gates rich, there is a threshold value below which his life would have followed a very different trajectory.

And above the thresholds, the difference between good and great were still enormous. Had he and his friends done a less good job writing BASIC interpreters, Microsoft would have been just another flash in the pan software house. Gates and company abstracted out the hardware dependent portions of their interpreter so they could have a new interpreter ready for each new machine faster than any competitor or in-house programmers could. Microsoft got big because they were very competent – combined with a willingness to compromise quality in order to make computing affordable.

Since dealing with multiple operating systems is quite a bother for both customers and software designers, operating system design is a winner-take-all business. The difference between best and second best is huge, and the difference between best the fourth best is truly enormous. Similar economies apply to radio and pre-cable television. Ditto for sports. When the number of niches is few, those who win win big.

To model these dynamics simply, I took the code from my previous experiment and squared the rolls for the individual factors. That is, for each factor I rolled 5 twenty-sided dice, added the results together and squared the total. Then these factors were multiplied together as before and the results renormalized to match the target median and standard deviation. The result was:

Now we are getting somewhere: heavy clustering around the middle with a tail off to the right. When I look at the underlying chart, my top nonzero bin is now at 1.5 million dollars per year, and I have four bins breaking a million dollar income with an estimated 500 people per bin. This is still too low, however, so I then tried cubing the factors to get:

This gets me a top bin of around four million dollars per year, but only 50 people in that bin. The model is better, but still doesn’t fully account for the super rich. I could get more aggressive yet (worth doing for winner-take-all economics) or play with more input factors (talents, drive, luck,etc.) but I have another nonlinearity to cover in the next post.

Also, the two curves above don’t go down far enough. We get some rich at the cost of losing the working poor. A higher-fidelity model would take into account the fact that there are two economies: one with high barriers to entry and winner-take-all economics and another where gain is linear or less with effort; i.e., the ordinary wage and Main St. economy.

Applying the Secret

This post is running long, so I’ll leave it primarily as a meditation for the reader to figure out how to apply the knowledge above. Here are a few hints.

If you want to get really rich, look for barriers to entry and cross them. In other words, don’t look for the free money making opportunities. Those lead to mediocre incomes unless you happen to be lucky enough to get in early. Low barrier to entry income can be good for seed money and gaining experience, but the real bucks must come from beating out some real competition.

If you don’t like the enormous wealth gap we have today, you have two ideas you can apply. First, look to lower barriers to entry. This requires going against the modern liberal impulse to craft complex legislation that only an expensive lawyer can understand. If going into a business requires expensive legal and/or engineering consultants, only people who can afford these expensive professionals will be able to compete. Second, look to divide up the economy into more independent niches. For example, federalizing intrastate commerce law gives economies of scale to multi-state corporations such as Wal Mart. Having different laws in each state gives smaller operations a fighting chance.

But neither of these paths will bring the wealth gap down to liberal targets unless we deal with the final nonlinearity: the rich get paid just for being rich. I’ll explain more in the next post.

Abilities Chosen -- Effects on Wealth Distribution

noreply@blogger.com (Carl M.) — Mon, 13 Dec 2010 00:01:00 +0000

I'm baaaack! Sorry it took so long. I've interrupted my study of the super rich to work on a project to efficiently get free money to the poor. (Our current welfare system is inefficient and encourages bad behavior.)

Anyway, in part 3 of my series on the secret of the super rich, commenter Paul suggested I look at the effect of selecting which abilities to employ. That is, Bill Gates did not employ his atheletic abilities to build Microsoft. In fact, limits to athletic ability may have helped since he wasn't distracted in high school by playing football and chasing cheerleaders. True, if he had been severely handicapped athletically, a la Stephen Hawking, he might have had less success. But otherwise, this ability did not particularly factor in.

But it has factored in for many other successful people.

So, maybe it's just a matter of choosing several strengths to put together in order to become a member of the super rich. To test this hypothesis, I looked at multiplying together the best of several distributions. That is, in the previous post I looked at multiplying five abilities together, which each ability was a distribution generated by 5 20 sided dice. The result was:

(This time around I have rescaled my graphs by the bin size, creating proper distributions. The units are population per $1000 income range.)

Now, let's take our five best abilities from among ten abilities rolled with the same distribution. The result is:
Unless I made a programming error, allowing people to pick a subset of available abilities to multiply together reduces the outliers to the right. Yes, when I take the raw numbers, I get more high rolls, but once scaled to population, median income and standard deviation, I end up with a gentler slope on the left side of the curve. The right tail is a bit fatter, but doesn't go out as far.

In other words, abilities chosen, even when multiplied, produces a curve that fits intuitive notions of a meritocracy and not the huge outliers to the right that we see in real life.

Of course, not everyone chooses their best abilities. If the super rich do choose to exercise their best abilities while others allow the whims of fate to set their careers, this might explain some of the wealth gap. But I think other factors are at work. Hopefully, I'll get around to explaining them in a timely fashion.

Abilities Multiplied -- The Real Secret of the Super Rich Part 3

noreply@blogger.com (Carl M.) — Thu, 07 Jan 2010 23:38:00 +0000

(This is Part 3 of The Real Secret of the Super Rich.)
In Part 2 we saw that bell curve distributions arise when we add several independent random variables together. They can be coin flips, dice rolls, or the luck factors or choice factors which arise in real life. When we tried to map some computer generated experiments based on this model with the real world wealth distribution in the U.S. we came up short. There were no incomes which could lead to billionaire status in one lifetime.

Perhaps the model is wrong; perhaps we shouldn't expect a bell curve income distribution. Consider Bill Gates. He was very intelligent, interested in computers, and interested in business. He had access to computers as a child when very few others did, and he had a well-off family to support him when he launched his business; he did not have to sell off parts of the company early on. I could list more abilities, circumstances and personal choices which led to his billionaire status, but let's just stick to these five. Do they add up?

Do they add at all? Could a stupid person interested in computers write a BASIC interpreter? Would a brilliant person uninterested in computers write a BASIC interpreter? Even if that brilliant individual was interested in becoming a billionaire, would he go into programming with a vengeance years before there was real money to be made? Lacking either intellect or interest in computers, Mr. Gates could or would not have taken the paths he did. Overwhelming amounts of either quality could not make up for lack of the other. The abilities multiplied.

Excellence in four out of the five factors did work for some of the early microcomputer pioneers. (See Accidental Empires by Robert X. Cringely.) Many of the early pioneers in the personal computer industry were more interested in computers than business. Since the field was so open, competition was weak -- save for Microsoft, which ate many of the other companies for lunch. But even these relatively uninterested in business players were interested enough in business to start businesses vs. work for the government or academia. They just didn't play as cutthroat as Bill Gates. So the multiplier model still applies.
I extended the program I used for Part 2 to allow multiplying distributions together. Let each of the five qualities for Bill Gates be modeled by five twenty-sided dice. (I went for dice instead of coins because when multiplying, zero values have a huge impact. If we get zero for any quality, then the product is zero.) Then for each round, we roll the five dice, add the result and do so again four more times and multiply each result together. Do so a million times and you get this:

Rescale to the median and standard deviation of the U.S. income distribution and we get the following. (The y value scales to the bin size I used, which is much smaller than what I used for Part 2. I should go from bar chart to proper probability distribution, but I'm too lazy.)

Aha! we are getting somewhere! Many people are clumped near the median income, but we have a "fat tail" off to the right: more six figure incomes than a Gaussian distribution would give us. But still, no multi-million dollar incomes. The maximum income for this experiment was $550,000.

Maybe we need to consider more than five factors. Let's try ten:

You cannot tell from the graph, but looking at the raw numbers, we do a bit better. This experiment gave us 116 families making $940,000 per year. Still nowhere near Bill Gates levels of income. Also, the model starts breaking down at the low end: I don't get anyone making less than $18000/year. (Then again, when you factor in welfare benefits, this might be a decent model...)

Applying the Secret

Our model so far is imperfect, but it significantly improves on the additive model which led to a bell curve. We can apply this multiplier model to both personal performance and policy. So if you are trying to get rich or you're trying to keep the uber-rich from dominating the country excessively, I now have something you can use.

The first thing to take away from the above experiment is that I didn't use every useful human capability, strategy or circumstance to model Bill Gates. I didn't include charm, good looks, political connections, or physical strength. Not all qualities are relevant to all success paths. But most success paths do require more than one quality. Pick a success path which uses several qualities in which you excel and you are on your way.

Here is something to excite the ambitious: consider a success path that is a function of 5 qualities. What happens if through sacrifice and hard work you manage an across the board doubling? Do you double your output? No, you increase your output by a factor of 32! (2 to the 5th power). Keep this in mind when some guru says just focus on your strengths or your passions. If any of your weaknesses come into play in your chosen career path, it still profits you to work on them. Consider the case of the testerone-filled talented athlete from a rough neighborhood. Such an athlete may have a weakness in the anger-management/self-control area. But since jail time or league expulsion can be very expensive for a superstar athlete, effort in this area is still profitable.

That said, it does pay to work on your natural talents first. If you double your performance at any link in the chain, you get a doubling overall. Early on, it is far easier to enhance your natural abilities through practice and study than it is to remedy your weaknesses. However, as time grows on, you will saturate a bit. In absolute terms your greatest opportunities may still be your natural strengths, but in relative terms, working on (relevant) weaknesses becomes more profitable. Fortunately, after your strengths have been developed, the payback for relative improvement in relevant weaknesses goes up, so even if such efforts are still unpleasant, the rewards have gone up.

Many a startup business leader started with a passion for the field he or she worked in. Only after success in developing a product or service did the finer aspects of business management, marketing, etc. become truly interesting. You don't have to go to business school to become a tycoon. Get far enough in a business your are talented and passionate about, you will gain the interest in what they teach in business school -- along with employees/partners from same.

There, I taught those of you who came to this site looking for get rich quick schemes far more than you'll learn from reading The Secret or many other mind-game guru books. Now, for those interested in public policy.

Our public schools were meant to equalize opportunity, to help those children whose parents either cannot afford education or are uninterested in providing it for their children. Any improvement in the public schools is a chance to equalize up, to make the poor richer vs. making the rich poorer.

Now consider the public schools in the light of our success model. Relative improvement in any of the factors leading to success multiplies overall success. Relative improvement is easiest to achieve early on for those areas where the student is naturally interested and/or talented. Only after these areas have been saturated does it really pay to work on weaknesses.

So what do our schools do? They hold back students to the learning rate of their weaknesses. If you excel in math but poor in language, you get held back overall to match your language learning ability. If you are potentially brilliant artist, you still have to wait until high school to take a real art class. (This may not hold for the better schools.) If you are a natural athlete but poor academically, you aren't allowed to play on the varsity squad.

The power-nerd math genius should be taking advanced calculus in high school even as he is still mastering basic social skills and writing. The poet should be taking college level creative writing even as she struggles with basic algebra. The athlete from the ghetto might well take remedial public speaking and finance during the off season during his career years, after dropping out of college to make a multi-million dollar salary.

This doesn't mean the schools should allow children to focus only on their strengths. It means don't spend more time on the weaknesses than the strengths. It means let the talented leap forward in their particular skill areas while they muddle along in their areas of weakness.

Finally a personal application: promoting this very web site. Readership is a function of how many people find it times how interesting it is to them once they get here. Some Internet marketing experts write that I should spend more time promoting the site, getting links and the like, than producing the content itself. And they are right to first order. If I were to write articles elsewhere pointing to this site, commenting on other blogs, etc. readership would be much higher here than by my writing lengthy quality posts based on research and experiment. But I don't like link-building. So I write what I hope is good content (and the repeat visitor stats indicate someone likes this stuff), and spend less time promoting it. Eventually, there will be enough content to make it worth promoting even for me.

But I'm hoping for a higher order effect. If the quality is good enough, some of the visitors will do the linking for me. And if enough do so link, the search engines will bring in yet more visitors. Traffic will snowball. And this, my dear readers, points to two other important nonlinearties. We have more yet to explore regarding the real secret of the rich. Stay tuned.

The Origins of the Bell Curve -- The Real Secret of the Super Rich Part 2

noreply@blogger.com (Carl M.) — Fri, 25 Dec 2009 17:12:00 +0000

This is Part 2 of The Real Secret of the Super Rich. In Part 1 I demonstrated how the super rich are outside any (Gaussian) bell curve fit of the measured wealth distribution of the rest of us. At the end I gave a one word hint -- nonlinearity -- as to the real secret, how the super wealthy dwell outside the bell curve, as if they were a different sort of being than the rest of us. Finally, after much delay, I shall add flesh that that explanation, by explaining the linear case, where the bell curve comes from and why statisticians expect to find them for diverse phenomena. Then, we'll have a look at where the assumptions underlying the bell curve break down when it comes to income and wealth.

Bell curves arise when we add up multiple independent random variables. Instead of working through a hairy mathematical proof, let's do some simple experiments to demonstrate the idea. Consider the following simple game: Flip four quarters at the same time; add up the value of all those which come up heads; that's your score. Multiply by $100,000 and that's your annual family income. Think of this as a very primitive competitor to Milton Bradley's Life game.

Now consider many people playing this game. If we record their scores we get a wealth distribution. You can generate such a wealth distribution at home. Just get a sheet of 1/4 inch graph paper and write the possible values ($.0, $.25, $.50, $.75, $1.00) in a row. Then flip the quarters again and again. After each flip fill in a square above the number corresponding to the score. With around 100 flips you should see something like this:

By the way, I cheated. I didn't actually flip physical coins. I wrote a C# program to flip virtual coins using a random number generator and then plot the results. I had a good reason: the next experiments are more complicated and involve more flips. A physical flipping session would take too much time. (As it was, writing the C# code took some time, since I am a C++ programmer by day. I used this exercise as an excuse to play with C#, and that's one reason why it took me so long to get this post up.)

Your results -- if you did your homework -- should similar but not identical to mine. I can say this with confidence even though I don't have your quarters. Yes, you could have a distribution where most of the flips are $.00 or $1.00, but this is very unlikely. There is only one way to score $.00: TTTT. There is only one way to score $1.00: HHHH. Meanwhile, there are four ways to score $.25: HTTT, THTT, TTHT, and TTTH. Similarly, there are four ways to score $.75: THHH, HTHH, HHTH, and HHHT. Finally, there are six ways to score $.50: HHTT, HTHT, HTTH, THHT, THTH, and TTHH.

This is a general principle. With multiple independent random variables you get more possible flips/rolls. And as we increase the number of independent random variables, we get a smoother bell shaped curve. For example, let's replace the four quarters with 10 dimes:

Or replace the four quarters with 20 nickels:

Note that I went up to 1000 rolls in order to get a good statistical sampling. With the computer doing the rolling for me, why not? Diligent readers can perform these experiments with graph paper and watch the distribution evolve.

No rule says that all the random variables have to be the same size, nor do they all have to be binary. We could replace one quarter with 5 nickels, two quarters with 5 dimes and one quarter (approximately) with two 12 sided dice. The result:

Note how the hump narrows as we use smaller coin denominations. To map these experiments with the national income distribution, we'll need to scale by standard deviation and shift to match median values. Our four quarter experiment so rescaled gives us:

Our 20 nickel experiment gives us:

By now many of you are thinking, "So what? What do all these coin flips and dice rolls have to do with the super rich?" The answer: let's consider each of the original quarters as a factor which leads to income. Let one quarter represent intelligence. Let another represent health. Let the third represent ambition and the fourth represent startup capital; that is, family wealth or connections which come from growing up in the right neighborhood. Our first experiment crudely models these four factors as "you either have it or you don't." The 20 nickel experiment can be thought of as replacing each quarter by 5 nickels, giving us a rough bell distribution for each factor. We could get smoother yet by replacing each quarter with 25 pennies, as below:

But even this 100 penny experiment gives us a mere $425,000/year maximum income when scaled to the census figures -- and no one got that much even after 100,000 rolls! With 100,000 rolls the highest income was $215,000/year and I only rolled that once (which scales to 1160 people having that income). Where are the Bill Gateses and Sam Waltons? We could stretch our distribution further by using more coins/dice. Income is a function of more than four factors. For example Bill Gates is intelligent, from a well-off family, very interested in computers (vs. yoga, philosophy, or politics), very interested in business and making money (unlike his early competitors), had access to computer time back when it was very expensive (thus getting in on the ground floor of an industry), and perhaps a bit lucky. Yet even with more factors the factors still don't add up to give us Bill Gates income.

But should we be adding? Does computer skill = intelligence plus interest plus access to computers? Maybe we should be multiplying some of these factors! We'll look at some experiments with multiplied random variables in the next post, and then meditate on the consequences.

The Real Secret of the Super Rich (Part 1)

noreply@blogger.com (Carl M.) — Fri, 11 Sep 2009 16:37:00 +0000

The super rich are different from the rest of us – way different. According to the numbers, they are of a different kind, a different species even. Back in the old days this was common “knowledge.” The upper classes declared themselves a different lot, and mere commoners bowed before them, addressing them as “lord” “lady” and similar distinguishing honorifics. In this more enlightened age, we know better. We have examples of men working their way from rags to riches, or (think Bill Gates) from upper middle class to owning more than many sovereign nations. Then again, maybe Bill Gates is a mutant; he rather looks like one…

Perhaps the super rich are not mutant superbeings. Maybe the super rich simply exploit a secret. At meetings of Skull and Bones, the Council on Foreign Relations, and the Bilderbergers, the Insiders chant special words of Power, invoking dark forces which allow them dominate mere mortals, and dwell on this earth in imperial luxury at the cost of their immortal souls – and their ability to correctly read CIA reports.

Maybe not. The real secret of the super rich is a bit more mundane, but it is important. While we cannot all fully use of this secret – someone needs to take out the garbage – we can all learn much from it. We can use it to better use our own abilities and become better off. This country can and should have a much larger upper class – more rich people, but a much smaller gap between rich and super rich. Some of you reading this blog may well join this broader upper class by applying the secret I am going to reveal.

While I started off silly, I was quite serious about the super rich being different. The super rich are not merely the upper end of the bell curve in money making ability. The numbers say otherwise.

Back in 1994 Charles Murray and Richard Herrnstein created a firestorm with their book The Bell Curve[1]. They had the temerity to suggest that intelligence accounts heavily for class differences, and that intelligence is hereditary to a significant degree. The politically correct were aghast; how dare anyone suggest that class differences were natural? How dare they suggest that genetics affects class!

The politically correct were wrong to vilify the authors, especially Charles Murray. Murray is no right wing extremist. He advocates for a rather large citizen’s dividend, an unconditional government check for all. (See In Our Hands: A Plan to Replace the Welfare State.[2]) Charles Murray is more progressive than the late Ted Kennedy. The idea of a bell curve is progressive. Wealth and income following a bell curve (a normal distribution) would be a socialist utopia compared to what we have today!

The super rich are outside the bell curve. That’s why my intro riffed on mutants and dark forces. To see this, let’s plot a crude bell curve to fit the rest of us. I don’t need to be precise to make my argument clear. To start with, let’s review what a bell curve is, and why statisticians look for it. I’m going to hand wave through a bit of math. For those not mathematically inclined, you can skip to the charts. For those who don’t like hand-waving, you can go to Wikipedia for more, or better yet, get a statistics book. (Maybe I’ll write a future post with an intuitive derivation.) The central limit theorem theorem states that when some variable (such as household income) is the sum of many independent random variables, said variable approximately follows a Gaussian distribution:

where

and

Now, all we need are a few data points to set the average and standard deviation, and we will have a probability distribution for any income range – assuming that income does follow a normal distribution. Wikipedia has a nice page on household income in the United States. I’m going to yank some numbers off this page and fit a curve. Once again, the numbers do not have to be exact to make my point. According to this page, median household income is about $50,000, with 116 million households in the U.S. Let’s use $50,000 for our average income. (This is incorrect in reality, but would be true if income followed a normal distribution.) Scrolling down, I see that the bottom quintile (the bottom 20%) makes less than $18,500.

Pulling out my handy dandy CRC Standard Mathematical Tables, I see that the integral of the tail end of the bell curve is .2 (i.e., 20%) when x is .84 standard deviations below the norm. So we can now solve for the standard deviation.

We can view this below graphically. The red area represents those in the bottom quintile.

Now let’s look at the quite well off, those making $150,000 or more. These families make $100,000 more than the median, or 2.66 standard deviations. I colored them blue in the graph below. According to the CRC tables, we should expect .36% of the population 418,000 families at this level or higher.

Now, let’s look at those making serious money, ONE MILLION DOLLARS per year. That’s 25.33 standard deviations from the norm. The CRC tables don’t go that high. Neither does Excel. Breaking out some more heavy duty math software[3], I come up with 7e-142! That 7 times 10 to the negative 142 power! Multiply that by a 116 million and you get 8.6 times 10 to the negative 134 families making a million dollars in one year. The probability of even a single million dollar a year income is infinitesimal! The probability of elves and fairies is higher. Hollywood is indeed a fairyland!

Let’s drop down to $250,000. According to the normal distribution, there should only be 5 to 6 families making more than $250,000 per year! Go up to $300,000 and the number drops to a fraction: .0015 families. Where did all the high-power lawyers go? What about the specialized doctors?

OK, so I may be off in some of these calculations. Perhaps the standard deviation should be higher. Let’s say I’m off by a factor of two. That means we still only have 5 families making over half a million dollars. We still have no 7 figure incomes. CEOs and celebrities are still as improbable as an invasion of the flying saucer men next Wednesday.

The super rich defy the bell curve. They are way outside the norm. The tabloid readers worship and socialists seethe with envy. I, a scientist and liberator, shall debunk both The Secret and socialism. The real secret of the super rich is…nonlinearity.

I will explain further in my next post. Stay tuned.

Notes
[1] Full disclosure: I have not read The Bell Curve. I have only read the backwash.

[2] I haven’t read this book either, but I did listen to a talk by Murray on this subject.

[3] MATLAB or any MATLAB clone (such as Octave) does the trick. Here is my code:



mu = 50000;
sigma = 37500;
income = 300000;
sdev = (income - mu) / sigma;
x = sdev / sqrt(2);
y = .5 * erfc(x);
nRich = 116000000 * y;

The Super Rich Use “The Secret”…to Dupe the Masses

noreply@blogger.com (Carl M.) — Thu, 27 Aug 2009 23:25:00 +0000

Attention all paranoids: you can put away your tin foil hats now. The Orbital Mind Control Radar has been out of commission for years (yet another legacy of the failed Bush Administration). Besides, the Insiders have found a much more powerful mind control tool: New Age gurus. Who needs public school, the FBI, the CIA, or the Orbital Mind Control Radar when New Age gurus can dupe the disgruntled into believing they are already rich and blaming their problems on their own stray thoughts. The elite can rest easy while the hapless masses waste their time – and their sanity – applying The Secret.

I have been wading my way through The Secret video for the last few nights, and I must give the creators credit: they do know how to stretch out a few simple ideas into an interminably long movie. But at least those ideas are wrong – for the most part.

The Secret begins with the same sort of conspiratorial silliness that I began with in the first paragraph, except they are serious. In their version the rich elite have been hiding The Secret from the masses throughout history – apparently solipsism, superstition, and wishful thinking were the tools of the rich and powerful throughout the centuries while the rest of humanity were duped into believing in physical reality. This is why the masses slave away learning science, engineering, economics, accounting, and other worthless disciplines while the Insiders happily visualize positive outcomes, follow hunches, and buy winning lottery tickets. That’s why you can find the world’s most rich and powerful people hanging out at the convenience store on Friday afternoons chatting about their fabulous weekend plans while playing Scratch and Win.

Or maybe not.

The writers of The Secret even had the gall to invoke the authority of history’s most enlightened thinkers – the very people who got us out of superstitious “New Age” thinking and into the very successful empirical mindset which dominates the West today. The Secret pulls their quotations out of context, most dishonestly. For example, Einstein was big on imagination, but Einstein was not wasting his time imagining what it would be like to be a great physicist! Einstein was imagining possible mechanisms to explain real physical phenomena. (Speaking of physics, I have forgotten way more quantum mechanics that all the so-called “quantum physicists” interviewed in the movie combined.)

This is not to say that The Secret contains nothing but falsehood. That wouldn’t fly. As C.S. Lewis noted decades ago, effective evil is goodness bent, not goodness broken. Lenin and Stalin were incredibly deadly because they mixed some good intentions toward the working class with their envy, hatred and bad economic theories. Adolph Hitler was dangerous because he mixed a good intention – the defeat of communism – with his anti-Semitism and fascism.

Visualization works as a way to motivate yourself, not to modify the universe. If you spend more time visualizing your goals instead of complaining about your problems, you are more likely to do something useful to make good things happen – at least, as long as you don’t expect your goals to simply manifest themselves while you kick back in your Lazy Boy.

“Manifestation” also appears to happen if you practice visualization. Scientific fact: the brain filters out most of what the senses receive well before the signals reach your conscious mind. This is why camouflage works. This is why many optical illusions work. You may have received several of these illusions as an email from a friend; they go around like chain letters. Visualization can help program your subconscious filters to bring different objective facts to your attention. “Manifestation” happens because your mind is not infinitely powerful. It has limited storage and processing power; it cannot handle all the data from your five senses, much less rearrange reality to your liking.

Speaking of low-level thought processes, positive statements of goals do work better than negative statements for programming reflexes and habits. “Remember your car keys” works better than “Don’t forget your car keys” if you want avoid getting locked out of your car. “Eat more raw veggies and dry tuna” works better than “Don’t eat donuts” if you are trying to lose weight. Statements in the negative require more processing. Negative thinking is great for contemplation, strategic planning and creative thought. It just works poorly for fast reactions. This is why nerds rarely make the varsity basketball squad.

Positive thinking, as in believing you will succeed, also has its uses. (Believing you already have when you don’t is pure silliness, however.) If you believe you will fail, you will not try, or you will put in a mediocre effort while focusing most of your energies on your fallback position. If you truly believe you will succeed, you can ditch your fallback position and other expensive insurance. This increases your chance of success. But it also increases the price of failure! Worse yet, if you are too positive, you can underestimate the work required. Excess positive thinking demotivates! I’ve seen it happen hundreds of times. (Just go to a typical college campus and note the parties. Things quiet down right before exams.)

Study the truly successful. Bill Gates is a multi-billionaire in large part because of his pessimism. He worried about potential competitors and took action early and aggressively. Andrew Grove, former CEO of a little company called Intel, has a book out titled Only the Paranoid Survive. Warren Buffet, a rather successful investor, buys companies on the assumption that the financial markets could collapse at any time, that he may find no buyer for years.

So, if you want to make more money, learn to make money. Get an MBA or at least read The Portable MBA. Master a useful skill and how to market it. Read a make money website which has actionable information instead of feel-good fluff.

But if you want to understand the super rich, those whose wealth defies the bell curve and boggles the imagination, come back here in a bit. I’m working on a series of posts that will expose the real secret of the super rich. Be forewarned: this series won’t be feel-good fluff; it will have graphs and even mathematics. If you want to grow rich, you might need to actually think.

Obama Unveils Massive New Subsidies for the Rich

noreply@blogger.com (Carl M.) — Mon, 18 May 2009 08:00:00 +0000

On Thursday, May 7, President Obama unveiled his budget proposals for the rest of FY 2009 and for FY 2010. He described his priorities as: better health coverage for healthy young adults, more high voltage power lines to decorate the American landscape, record amounts of pork without using earmarks, and massive new subsidies for America’s super rich.

When questioned by an astounded press corps, Obama improvised, “After eight years of horrible ineptitude by the Bush Administration, I wondered why we still have so many Republicans remaining in the Senate. Why didn’t Al Franken win in a landslide? How could a Republican even come close – in Minnesota??

“Then I raised up my eyes and gazed heroically across our once-misgoverned land, searching for those who did not yet accept my message of ‘Change.’ And I beheld Billionaires for Bush marching the streets. My advisors told me it was impossible for us to convert America’s billionaires to the Democratic Party. I rebuked them, shouting, ‘YES, WE CAN!’

“No, it won’t be easy. Billionaires are different from the rest of us. Mere hundred million dollar pork barrel project barely register on their consciousness. That is why I am calling for 1.8 trillion dollars of direct subsidies for the rich in fiscal year 2009 and 1.2 trillion for fiscal year 2010.”

Later, Secretary of Health and Human Services, Kathleen Sebelius, took the podium and explained further, “America’s rich lost the most in the Bush financial crisis; they had the most to lose, after all. And our old money rich have been traumatized most of all: they lack the skills and drive necessary to recover on their own; there lives are purely driven by circumstances, ranging from their large inheritances to the recent financial catastrophe. To expect them to risk what they have left in a volatile financial market would be needlessly cruel.”

Secretary of the Treasury, Timothy Geithner, explained the details of the plan, “America’s old money rich need to be sheltered from today’s harsh realities as rapidly as possible. That is why we have set up the Rich Idiot Proof Online Financial Fund. We have made it easier than ever for trust fund babies to move their wealth out of stocks, corporate bonds and other risky assets and into 100% safe U.S. government debt. And with today’s record high deficits, there’s plenty to go around.”

Fictional Dialog, Real Subsidies

OK, the above press conference is fictional, but the economic implications are real. Deficit spending is regressive. High deficits provide brain-dead guaranteed income for the super rich – especially valuable to the unproductive super-rich. High deficits mean lower wages and higher trade deficits as well. (More details in future posts.)

I’m picking on Obama because he’s the one in power now. That, and it made more sense for Bush to run high deficits; after all, high deficits are a subsidy to the country club wing of the Republican Party. With record high deficits the current administration is betraying its working class base.

So, my sincere message to any liberals left in the audience: please tell your leader to stop subsidizing the unproductive rich and soaking the working class. Tell him you want the truly progressive balanced budgets of the Clinton years.

Wall Street Millionaires Take Up Panhandling

noreply@blogger.com (Carl M.) — Wed, 01 Oct 2008 13:36:00 +0000

Well, that business of insuring subprime loans was a bit of a bust. Time to take up something more profitable: panhandling.

(Click images to magnify.)

Oh, the indignity! This is really cutting into my yacht time. Pardon me, sir, can you spare a grand?

Yes, I am one of you. Just having a spot of bother with the Bentley payments. What? You are strapped too?

Hmmmm, let's try taking it to the people. I hear they like a good smile. It works on the television... Oh, a quarter! A few million of those and I'll make up for yesterday's losses

Very well. I hear the federal government has more money to spare. $700 billion ought to take care of me and all the lads at the club. Do be kind and ask your Congressman to get on with it.

And now for the punchline: even if the $700 billion dollar bailout goes through, this subsidy to the already rich will be less than the implicit subdies given out every year! I'll get to those subsidies in a future post. But first we'll need a couple of simple economics lessons for background. Stay tuned.

Paid to BE Rich

noreply@blogger.com (Carl M.) — Sun, 28 Sep 2008 19:48:00 +0000

Republicans like to complain about welfare handouts: how they make people lazy, how they break down the family, how they lead to criminal behavior. Fair enough.

But what about the old money rich? They get checks in the mail without working as well: dividends, rent, interest, capital gains, trust fund stipends… You don’t much hear Republican activists complaining about such “unearned” income – unless the recipient happens to be married to the Democratic Party presidential nominee (Teresa Heinz Kerry).

Instead, Republicans tend to celebrate passive income. They complain of “death taxes” and “double taxation.” They often call for cuts or the repeal of the corporate income tax and capital gains taxes. According to many Republican politicians and advocates, you shouldn’t pay taxes on your income unless you had to work for it!

In all fairness to said Republicans, some of their arguments have merit. The U.S. savings rate is too low, and robbing those who make passive income would make it lower. Socking mourners with a huge tax bill is mean-spirited; an entire industry revolves around skirting death taxes. And yes, old money aristocrats do play an important role in a healthy society.

But old money aristocrats don’t need welfare from the government! Such is the core theme of this blog. The rich are subsidized for being rich. Well over a trillion dollars each year is diverted by the federal government towards boosting the rate of return for those who have money to invest. And that’s above and beyond so-called corporate welfare. States and localities raise this subsidy figure even higher. In other words, the rich receive at least as much largesse as the poor.

If you want to know what ails the middle class, you have come to the right place. Over the course of the next few months I’ll reveal the gigantic indirect subsidies to the old money rich. These subsidies come at the expense of wage earners and entrepreneurs alike. I’ll expose:

How the U.S. federal government directly subsidizes those with money to lend – to the tune of nearly a half trillion dollars so far in the current fiscal year.

A social welfare program that protects the old money rich from competition, to the tune of nearly $800 billion so far this fiscal year.

How state and local government subsidize old money investors and how the federal government encourages the practice.

How the federal government encourages debt servitude by the middle class, providing billions more for the money-lending class.

Some extremely easy ways to simplify the tax code while making it more progressive.

The ultimate tax reform; how the government would collect taxes if it were a fee for service business.

The useful functions performed by the old money rich, why simplistic soak-the-rich policies backfire.

The parasitic functions performed by the very rich, where soaking the rich can actually improve the economy.

And if I get enough readership to this blog, I might just throw in some more goodies such as:

How to turn the tide away from wage serfdom.

How to productively reduce the U.S. trade deficit.

How to tame the frantic consumer society, so we can all get a taste of the relaxed lifestyle of the old money rich.

How more people can get rich.

That last one might have surprised you. This is not your typical socialist or progressive blog. This is a liberal blog, in the oldest sense of the word. It is a blog for liberty and against aristocracy. Too many people forget that Adam Smith was a liberal, both in the sense of liberty and in the modern sense of being progressive. He wrote on how to reduce the rate of profit and increase wage rates. Most modern liberals have forgotten these lessons, and today unwittingly side with the modern aristocrats. I hope to clear up this confusion and help create a society that is neither socialist nor capitalist in the current sense.

I want to help create a society where it is easier to get rich, but harder to stay rich.

Privacy Policy

noreply@blogger.com (Carl M.) — Thu, 25 Sep 2008 20:21:00 +0000

Time to get the legalese out of the way. (If you are looking for content, skip this article. If you like reading privacy policies, read on.)

The Internet affords a certain amount of privacy, but it is not complete. All web servers note your IP address, and thus server logs can infer that person x saw y set of pages. While this IP address does not by itself identify an individual, it does identify the city that individual’s service provider (ISP) is located. Also, the HTTP protocol includes the link that brought you to a particular page, so I can tell which page contained the hyperlink person x came from, but not what x browsed before.

In these days of big services (like Blogger, Google, etc.) and third party widgets (contextual ads, etc.), certain third parties can significant information could be gathered about your browsing habits across many web sites. I’ll link below to the relevant third parties below.

So, herein I describe what I do with such information and I’ll point you to the services I use so you can read their respective privacy policies.

Email Policy:

I hate spam as much as you do. If you send me an email (csm.blogs@gmail.com), then I’ll do my best to guard your address. I won’t sell or rent it, and I’ll endeavor to avoid cc’ing you to strangers (but accidents do happen). I don’t have any newsletters at the moment, so email traffic back from me should be light and personal. Should I start a newsletter in the future, you might get an invite, but you will have to actively opt in to be subscribed. I publicize my gmail address here because of gmail’s spam filtering ability. If you email me, you might get a reply from one of my other addresses (@holisticpolitics.org or @quiz2d.com). Rest assured, such an email would be from me, no leak occurred. It’s just that I’m not a big fan of web email except for its superior spam fighting capability.

Gmail’s privacy policy is
here
.

StatCounter:

Like many bloggers, I like to see what kind of traffic I am getting, and where it comes from. I use
StatCounter
for this purpose. Go to their site to see what kind of information I get to see. I’ll summarize: I get to see how many pages served, where people are coming from, what cities their ISPs are in, and what pages are read by the same person. StatCounter does use cookies when allowed.

I use this information mainly to see how many pages are being read, where I am getting links from, and which keyword phrases bring people to this site. Once in a while I do look at the recent visitor activity; it’s nice to see when someone likes my writings enough to stay and read multiple pages. In general I cannot link such data to a particular person, but if you send me an email right after reading a bunch of pages, I might put 2 and 2 together. Whoop tee do. I might correctly guess which hyperlink brought you to this site and which pages you read before wrote me. I doubt such information will be embarrassing. And I’ll likely forget the info pretty quickly anyway as I’m a busy man.

If such things give you qualms, don’t read blogs. Or use a proxy server, block the DNS addresses and cookies of the various statistics services, or whatnot. Bloggers write to be read, so they tend to look at their stats.

StatCounter’s privacy policy can be found
here
.

Blogger

This blog is hosted by blogger. Blogger’s privacy policy can be found
here
.

Feedburner

I use Feedburner to manage feeds and provide some other widgets (Digg this, etc.). Feedburner’s privacy policy can be found
here
.

Contextual Ads

I don’t have contextual ads…yet. Should I add them, the ad server will also have orts of information about your IP address’ browsing habits. I intend to add a link to the ad service’s privacy policy here. (On the off chance I forget, it should be an easy lookup for you.)

Update (April 2009)! Google has now implemented
"interest-based advertising."
That is, Google is now tracking your path across the web through the cookies placed by Adsense (and possibly other services). This allows Google to serve ads based on your interests vs. just the info on the page you are looking at. If this disturbs you, you can opt out of this and other similar ad tracking systems.

The Rich Get Richer…

noreply@blogger.com (Carl M.) — Mon, 01 Sep 2008 13:45:00 +0000

And the poor demand more welfare.

Come to think of it, the middle class wants more welfare too. Many are calling for universal healthcare, a graduated tax code, and more.

And so the United States waddles towards fascism. Or maybe socialism. It depends on which party is in power. Either way, the prospects are bleak for lovers of liberty, until we fix the underlying dynamic.

More Liberty Requires More Equality!

Liberty, oligarchy and democracy are mutually exclusive. You might have two out of three, but not all three at once.

You can have oligarchy and democracy at the same time – if the government gives out enough largesse to keep the plebeians happy. It’s happening now in the United States. Government has ballooned during the past century. In other First World nations, the process is further along. In Western Europe, everyone is a welfare recipient.

You can have oligarchy and economic freedom at the same time – if you dispense with democracy. Lichenstein and Dubai come to mind. Another example would be Hong Kong when it was ruled by the British. The United States managed to have small government and democracy at the same time because: 1. The right to vote was limited to property owners. 2. We had an open frontier so ambitious wage serfs could become property owners. Once suffrage was extended to the poor and the frontier closed, government ballooned.

Actually, I was a bit too optimistic in the previous two paragraphs. While Western Europe is still theoretically democratic, the European Union bureaucracy is taking over. And while small principalities sometimes flirt with market economies, they often do not. Furthermore, civil liberty and oligarchy do not mix. Protection of a wide wealth gap requires a police state.

Liberty requires equality. Not complete equality, for we are all different. But liberty requires a wealth gap that is somewhat proportionate to our relative abilities and ambitions. In most countries the wealth gap is far larger. Ability and ambition produce wealth, and once wealthy, the rich get paid further for being rich. Differences magnify. Envy expands. Theft ensues.

When the party of The People gets in power, the government does the stealing. The legislature levies steeply progressive taxes, and doles it out as it sees fit. The poor get paid to be poor. The middle class loses its independence by living on entitlements.

When the party of the productive gets in power, the government cracks down on the poor. We get outrageously long jail terms, Three Strikes laws, drug wars. And we get yet more police state fun, such as that taste of totalitarianism you experience at the airport – unless you can afford our own private jet.

With bipartisanship, we get a contradictory mess. The income tax gets riddled with loopholes. The tort system hammers the productive and acts as a lottery for the lucky poor while at the same time the legal system is too expensive for the poor to use unless the stakes are high enough to justify contingency payments. The government pays the rich and punishes the rich.

In all scenarios, government grows.

The Secret Subsidy

Those who love liberty must first pursue equality. Either that, or they must dispense with democracy and hope for well-behaved dictatorships or private protection corporations.

This seems a contradictory strategy. Socialists were the chief enemies of liberty during the past century, after all. Their pursuit of equality at any price led to police states, gulags, and mass starvation.

We who love liberty can do better. The formula for more equality can be found in Adam Smith’s book. Mercantilism still lives. The rich may be taxed, but they are also subsidized – heavily. I am not talking about “corporate welfare” here; that’s small potatoes. Each year the government redirects a trillion dollars towards those who already have money.

A trillion dollars, every year!

This is a gigantic subsidy, and hardly anyone talks about it. About the only ones who talk about this subsidy are the conspiracy theorists, who pin the blame for this subsidy on robber baron families, the British crown and/or Jewish bankers.

Piffle!

This gigantic subsidy is supported by millions: Democrats, Republicans, liberals, conservatives, college professors, union members, soccer moms, and more. Maybe the old money super-rich have secret meetings to keep the gravy train going, or maybe not. It doesn’t matter. They could be easily out-voted. The real “conspiracy” is a “conspiracy of ignorance.” The victims vote for welfare for the rich.

Over the next few months I will expose this gigantic subsidy. I will also point out smaller subsidies for the rich, and ways by which the government holds down the poor. Fix these and we will have true meritocracy, true equality of opportunity. And we will have liberty in the process.

Stay tuned.