Review of Jim Rogers' Investment Autobiography, Street Smarts

credit: sg.asiatatler.com

Famed investor Jim Rogers has published a book that is part autobiography, part geopolitics, and part investment wisdom. Street Smarts: Adventures on the Road and in the Markets (Crown Publishing, 2013) gives his views on investing, which countries are growing more powerful and which are declining, what America must do to reform its society, and the value of raising children. Despite its wide scope, the book does not meander. Rogers engaged me throughout with his ideas about television (like me, he avoids it), politicians, ethics, and what it takes to succeed.

As an autobiography, the book reveals that Rogers single mindedly tried to understand how markets worked and struggled without pause to do so. He enjoyed learning how the world works, so he was motivated to understand markets as well as wanting not to lose money. He worked on holidays and through weekends. He had few distractions as none of his earlier marriages lasted long or produced children. The picture on the left shows Rogers with his third wife, Paige. He now has two Mandarin-speaking daughters as well. Rogers insists that he was successful because of his ability to think independently and willingness to travel and look at  information sources himself.

The two main themes of the book are the transition to Asia as the economic powerhouse as American leadership declines and "a cyclical shift away from financial firms as a source of prosperity" (P. 5) in favor of producers of real goods, especially foodstuffs. (As an aside, brick and mortar education may be replaced by distance learning, and Rogers predicts many of today's elite universities will go bankrupt.)

Rogers states that the United States needs to do five things to be saved: change the tax system, change the education system, institute health-care and litigation reform, and bring the troops home" (P. 241), but he is doubtful that these reforms will occur because of the power of special interests. He suggests that the legislative branch  no longer meet in Washington, D.C., and instead the representatives and senators should in their local areas and meet virtually, avoiding the power of the special interest groups.

Since Rogers conducts his business dealings ethically and believes his good name is invaluable, I found it interesting that he glosses over human rights violations in many of the leading Asian countries, comparing these problems to those in early America:  lack of real democracy in the early years of the American Republic and the existence of a late 19th-century plutocracy. In other words, according to Rogers the United States committed many of the same sins now found in Asia. I find this comparison unfair as our government has committed crimes of omission (because the Constitution limits its powers) rather than commission, such as throwing people in prison because of their beliefs. Rogers' unwillingness to come to terms with Asian oppression is the weakness of this book. He feels that China, Myanmar, and North Korea will eventually change for the better. So invest today! Despite this flaw, the book is well worth reading.

I have previously recommended Rogers' Investment Biker book to my economics students and will add this book to my list of recommended books as well.

See my previous blogs about North Korea here and food prices here and here.

Child Care--When is it Good or Bad for Children?

Child care is a helpful option for adults. It lets them, especially mothers, have more possibilities after choosing to have a child--free time to work or to get a respite away from children. However, under what conditions is child care good or bad for the children? When do children in pre-kindergarten child care have outcomes as good as those raised by a parent or other primary caretaker?  The Study of Early Child Care and Youth Development (link here) by the National Institute of Child Health and Human Development (NICHD) gives complex answers to these two questions.

Why look at another government study? "The NICHD Study of Early Child Care and Youth Development (SECCYD), is the most comprehensive study to date of children and the many environments in which they develop" (P. 6). This longitudinal (16-year), national project studied more than 1,000 children from one-month of age.What are the findings?

On the one hand the NICHD study finds that children "who were cared for exclusively by their mothers did not develop differently than those who were also cared for by others" (P.5). On the other hand, "children with higher quantity (total combined number of hours) of experience in non-maternal child care showed somewhat more behavior problems in child care and in kindergarten classrooms than those who had experienced fewer hours" (ibid.) How can we reconcile both statements? One may conclude from this study that longer hours of child care was correlated with children behaving slightly worse--less socialized and less ready for the rules of the classroom. But parent characteristics, that is, whether the parents were emotionally supportive and created a cognitively enriched environment, whether parents had higher education and family income, whether both parents were together and raising the child, and, and whether the parents were psychologically well-adjusted and sensitive to the child's needs (P.25) were more important than the child care (P.5).

If parent characteristics are most important and if middle class families are, in the aggregate, less chaotic than disadvantaged families, child care quality becomes critical primarily for disadvantaged, chaotic households if one takes the research to its logical conclusions. The NICHD study does not support this conclusion (P.15), but other studies do, especially the longitudinal Abecedarian project, which showed cognitive improvements in disadvantaged children up to young adulthood. These disadvantaged kids also developed better health habits, were more likely to go to college and make more money, and were less likely to end up in trouble. The Abecedarian study also positively affected the behaviors of the teenage mothers of these children, making it more likely they would finish their schooling and be self-supporting.

Yet, how many disadvantaged mothers are able to take advantage of high-quality child care such as that offered by the Abecedarian project? Most disadvantaged parents do not have access to high-quality child care, using instead a relative or friend down the street. This care is not as bad as that of Uncle Ernie (in The Who's rock opera, Tommy), but unlicensed and unregulated care by relatives or friends is often poor quality, and, of course, unlicensed and unregulated care at centers is often poor quality as well. The NICHD authors admit that most child care is not high quality (P. 1 5). Low-quality care and low-quality parenting can be poor combination.

Children were somewhat more likely to be insecurely attached to their mothers if they were in lower quality care, but only if their mothers were also lower in sensitivity during interactions with their children (P.13).

These effects were less strong in the NICHD study, stronger in other studies. Insecurely attached children have increased stress and coping problems (Spangler 1993) and are less equipped to handle the rigors of public school. I will give more data on the dangers of low-quality care below.

Now let us leave the world of research and enter the even more murky universe of psychological theory. John Bowlby, founder of attachment theory, wrote that children belong with their mothers. Here is a summation of his famous book, Child Care and the Growth of Love:

• Maternal deprivation is a key cause of mental ill-health.
• Mothers are central to a child’s development with fathers and extended family members providing a supporting role.
• Any maternal separation will adversely affect a child to some degree.
• Efforts should be made to avoid family failure but even state support may not be enough where the fundamental problem is failing parents.
• Adoption should be undertaken as soon as possible.
• Where possible, the mothers of illegitimate children should be given the support to care for their children.
• Fostering, if possible with the extended family or neighbors, should be used for short term emergencies.
• Group care should be confined to treatment, the care of adolescents or the short-term care of younger children and sibling groups.
• In both fostering and group care parental contact should be encouraged.
• Treatment, whether for physical or mental illnesses, should if possible be provided in the child’s natural home and otherwise in homes close enough for parental contact.

NICHD researchers do not find differences in attachment security between kids in day care or at home, but Bowlby, interviewed well after his WWII orphanage observations that were the crux of his theory, was not a proponent of center-based care! And it is a stretch to imagine either Bowlby or (famous attachment researcher) Mary Ainsworth approving of center-based care where the child's primary (love) object can change day-to-day.

As a son and brother of academic researchers, I trust the scientific method over theory or other forms of evidence in determining the efficacy of child care. However, the most vociferous criticisms against child care come from heavily emotional personal stories. Conservative writer Karl Zinsmeister supplies plenty of anecdotal fodder in his article, The Problem with Day Care (The American Enterprise, May/June 1998). Much of it bemoans the lack of ANY high-quality child care.

Author Linda Burton is another person who has described in detail what she came across while scouring her hometown (the Washington, D.C. area) for day care:

In one instance, I found the "absolutely marvelous" family day care provider, recommended by trusted friends, sleeping on her sofa while 11 children (she had informed me that she only cared for five) wandered aimlessly around in front of the blaring TV. Another time, on an unannounced visit, I found that the "highly recommended" licensed day care provider confined seven preschoolers to her tiny dining room. I found them huddled together, leaning over a barricade to watch a TV program showing in the adjacent room.

These are not isolated anecdotes. Anyone investigating the world of full-time day care quickly amasses files of such testimony. A few years ago the Metropolitan Toronto Social Planning Council investigated a sample of 281 day care homes. They reported that a small number were genuinely stimulating, and another small number were out-and-out abusive. The large majority, however, provided care that was merely indifferent. Only a few of the caregivers studied were able to make themselves genuinely interested in each of their individual enrollees. In a significant minority of cases, youngsters were simply ignored most of the time.

Despite the doubts of Bowlby, despite how children cared by multiple caregivers would be a unrecommended practice according to attachment theory, and despite anecdotal evidence, NICHD research has shown few negative attachment effects on children in child care. By 2005, the American Academy of Pediatrics had revised its policy. Based on the NICHD and Abecedarian studies, it's publication, Quality Early Education and Child Care from Birth to Kindergarten (Volume 115, No. 1, January 1) stated a change in favor of child care but only high-quality care (or parenting).

When care is consistent, developmentally sound, and emotionally supportive, there is a positive effect on the child and the family.^8–21 Children exposed to a poor-quality environment, whether at home or outside the home, are less likely to be prepared for school demands and more likely to have their socioemotional development derailed.^8–21 The inadequate outcomes of children in poor-quality care often cannot be fully remedied in the formal structure of the K-12 educational system because of the need for noneducational services such as mental and behavioral health care.

As seen in the Abecedarian study above, lasting positive affects were seen when low-income children experience high-quality care. However, as noted by NICHD researchers, the authors of Quality Early Education and Child Care from Birth to Kindergarten write, "most child care centers in the United States are rated poor to mediocre in quality, with almost half meeting less than minimal standards" (ibid.).

Until child care improves in quality, low-income children will continue to suffer. Economically disadvantaged but "good-enough" parents (as Winnicott would say) may get better outcomes by avoiding low-quality child care if they have an economic choice.

Energy Consumption Continues to Increase

David Owen's New Yorker article (December 20, 2010), The Efficiency Dilemma should be required reading  (link here) for anyone interested in energy consumption. Owen analyzes Jevons' Paradox: the more the efficiency, the greater the consumption. Owens writes, "The problem with efficiency gains is that we inevitably reinvest them in additional consumption." Refrigerators, computers, dishwashers, driers, automobiles, and air conditioning units are all much more efficient than before. However, we use more of them and total energy use (and greenhouse emissions) has climbed.

Owen writes about his family's experience with home air conditioning, 60 years ago a rare luxury. Today air conditioning is found in most homes in the Midwest and South as well as  in most office buildings and new cars. The costs are less than before so people don't hesitate to use air conditioning day and night.

Owen concludes that efficiency will not bring about lowered energy consumption. Like anything else, making energy more costly will create incentives to use less of it.

Can Government Spend Us Into Prosperity--Evaluating Keynes

New Yorker magazine economics writer John Cassidy defends the father of orthodox macroeconomics, John Maynard Keynes, in The Demand Doctor, (The New Yorker, October 10, 2011, link here). As an AP Macroeconomics teacher, I can confidently state that I and all other AP Macroecon instructors teach Keynesian theory. That is, we show how society benefits from creating "aggregate demand." Governments manufacture aggregate demand by cobbling together large public works projects or, less directly and less powerfully, giving money back to the people in the manner of tax cuts. Despite my or perhaps because of my familiarity with the theory of aggregate demand, a month before Cassidy's article was published I predicted Obama's Keynesian stimulus would fail (link here). Keynes' method of attacking unemployment through public works projects is more controversial than ever. Conservatives blame the Obama stimulus for the worst stretch of unemployment since the Great Depression: 54 months of unemployment at 7.5% or worse (link here), and only 47% of Americans have full-time jobs.

If today the same proportion of Americans worked as just a decade ago, there would be almost 9 million more people working. Just in the last year, almost 2 million Americans have left the labor force. With a majority of the population not holding a full-time job, it isn't surprising that economic growth has been so weak.  In June, the number of Americans who wanted to work full-time, but were forced into part-time jobs because of the economy, jumped 352,000 to over 8 million.(Mike Flynn, Breitbart.com, link here)

Liberals argue that Obama's stimulus was a success. If the government had not intervened, we would have entered another Great Depression. This argument fails to persuade me, since it can never be proven one way or another. We cannot go back in time and try a laissez-faire policy, though an uninterested federal government allowed the economy to work itself right out of depressions (or "panics" as they were called) throughout the 19th century. Liberals and Keynesians employ a much better argument by examining the size of the stimulus package. Cassidy writes

He would also have noted that the stimulus was—especially compared with the devastation it meant to address—rather small: equivalent to less than two per cent of G.D.P. a year for three years. Even this overstates its magnitude, given that much of the increase in federal spending was offset by budget cuts at the state and local levels. In its totality, government spending didn’t increase much at all. Between 2007 and the first half of this year [2011], it rose by about three per cent in real dollars.

In other words, the biggest Keynesian spending project ever, worth $825 billion, was too small. We should have spent more than a trillion dollars. Economist Larry Summers calls for another trillion on infrastructure (source here). I wonder if those that advocate for such things figure what might happen if we had a national debt that was even bigger than $16 trillion and what that might do to the economy. According to writer Bill Bonner, even "if America taxed 100 percent of all household wealth, it would not be enough to put its balance sheet in the black" (link here). (Well, never mind; an extra trillion dollar stimulus didn't happen and probably won't any time soon.)

Economist Larry Summers worries about unemployment. If only the stimulus of 2009 was bigger or he could do it twice

Source: New York Times

.

What else went wrong?Cassidy also argues that the government needed to solve the banking and housing problems. "Following the crisis of 2008, both the Bush and the Obama Administrations moved promptly to shore up the banking system, but they neglected to deal with the housing debacle."

I think these excuses are poor, and the culprit can be found elsewhere. The Obama stimulus failed. (The president promised six percent unemployment by 2012 and a reduction of poverty.)  Why didn't it work? The answer may have more to do with a faulty tenet of Keynesian theory--the multiplier. Cassidy writes

a recent working paper published by the National Bureau of Economic Research looked at data going back to 1980 and found that government investments in infrastructure and civic projects had a multiplier of 1.8—pretty close to Keynes’s estimate [of two].

Well, maybe not. Cassidy discards the research of Robert Barro, saying his work doesn't apply in a recession.

Echoing the arguments that Keynes’s opponents at the Treasury made during the nineteen-thirties, conservative economists like Robert Barro, at Harvard, argue that it [the muiltiplier] is close to zero: for every dollar the government borrows and spends, spending elsewhere in the economy falls by almost the same amount. Whenever individuals see the government boosting spending or cutting taxes on a temporary basis, Barro maintains, they figure that these policies will eventually have to be paid for in the form of higher taxes. As a result, they set aside extra money in savings, which cancels out the stimulus.

Equally powerful is the work of  Stanford and German professors Cogan et al (link here) in their article New Keynesian versus Old Keynesian Government Spending Multipliers, which argues that old Keynsian  models used multipliers that were six times too high. Spending projects lower unemployment much less than was previously believed.

Obama's $9/hour Minimum Wage

The American people can assess the political merits of Obama's proposed $9 minimum wage easily enough--the rights of employers (liberty) versus societal responsibilities to the workforce (equity). Obama does not trust business, big or small, and believes that government must intervene to protect workers. One will agree or disagree with the president depending on ones political leanings. Liberals and a few moderates will support raising the minimum wage, but most citizens, conservatives and the majority of moderates, will not.

Evaluating the minimum wage controversy from an economic perspective is even more clear. The diagram (left) of a minimum wage, a type of price floor, shows that without government intervention, level Qf workers are employed. After the government mandates a price floor above the free market equilibrium point, a minimum wage, the amount of workers employed drops to Qd. In other words, according to economic theory, the minimum wage increases unemployment. How much? The unemployment (the surplus) is the difference between Qs and Qd. (The supply line is the supply of available workers at different price levels and the demand line is the demand that employers have for those workers at different price levels.)

The higher wage brings out a greater supply of workers. In this case, more teenagers will flood the job market, looking for that $9/hour instead of going to summer camp or on a trip. However, the demand for these workers falls because much entry level labor is not worth $9. Thus there is a surplus of workers and greater unemployment than before.

That is the theory. Cal professor David Card, interviewed in the UC Berkeley alumni magazine disagrees, but only partially. Here is part of the interview:

In 1994 you published a study with Alan Krueger that found that raising the minimum wage would not create higher unemployment. Given the more recent economy and the growing number of fast food and retail workers demanding a $15 per hour wage, do you believe your findings from 20 years ago still apply?
David Card: Currently the federal minimum wage is $7.25. So a rise to $15 would be more than a 100 percent increase in the minimum. Our New Jersey-Pennsylvania study focused on a 19 percent rise in the minimum wage (from $4.25 to $5.05). I don’t think one can extrapolate from a 19 percent rise to a 107 percent rise. In fact, faced with a $15 minimum wage, I suspect that employers in many low-wage areas of the country would simply refuse to comply. Realistically there is not much chance of more than a 25 or 30 percent rise in the minimum. For that range of increase I think our results would still be relevant. In fact, a number of studies since our work have confirmed our finding that the employment losses associated with a modest rise in the minimum wage are barely detectable.

On the other hand, tying increases of the minimum wage to inflation, a "never-ending escalator" of cost increases for business, has disasterous potential. See the study here.

Will the minimum wage help the few workers that get entry level jobs? Yes, but not much. A full time worker making $9 an hour earns $18,000 per year, well below the poverty line.  Nations do not become wealthy by enacting price floors. Instead, countries enrich their citizens by increasing productivity. The best way to do that is to better American education and increase research and development.

Food Stamps in Antiquity and Today

Augustus, Wikipedia

Food stamps are not a new idea. Taxes earmarked for religious upkeep and gleanings for the poor date back to the Biblical record, thousands of years ago. Somewhat later, near the end of the Roman Republic, politicians instituted handouts of grain for the poor of Rome. Citizens still had to get the grain milled, but they were assured of a monthly supply of food. (Gregory Aldrete in The Roman City: Rome, Pompeii, and Ostia claims the monthly handout was enough for two people.)

Imperial Rome was no different. Here, in Suetonius' words (tr. by Robert Graves) are emperor Augustus' remarks on the free grain distribution:

I had a good mind to discontinue permanently the supply of grain to the City, reliance on which had discouraged Italian agriculture; but refrained because some politician would be bound one day to revive the dole as a means of ingratiating himself with the people (The Twelve Caesars, Section 42).

Augustus realized that Italian farmers could not compete against "free" grain, brought over from Egypt, and the image of the small, self-reliant Republican farmer had become a mere myth. He also saw the danger of demagogues using free grain as a means of gaining power. Similarly, Abraham Lincoln felt that homesteaders could not compete against slave labor and came out against slavery for, at first, economic reasons. In our time, African farmers are ruined by the free grain the United States gives to their countries, and food stamp programs alter the turnout of American elections.

from Agora Financial

During the last four years the number of Americans receiving food stamps has skyrocketed, while the number of Americans supporting the program has diminished. If this was a temporary situation and there was a quick jobs recovery, employment would rise and food stamp participation would fall. The blue and red lines on the graph on the left would intersect, and we would congratulate ourselves for supporting the poor while on the road to economic growth and prosperity. But there is little evidence that employment is roaring back. We have not had a good jobs report (more than 200,000 jobs created/month) in a long time. Unlike Rome, we are not (I hope) going to take over another country and steal its grain. We will be forced to cut other programs and/or raise taxes, which may slow our economy further.

How Well Did I Predict the Future? Ten Political and Economic Predictions for Year 2012

12/27/2012
A year ago I made ten predictions in economics and politics. How did I do? I'm disappointed--six out of ten correct. This is good enough to win in investing but I expected better. I give myself a grade of passing. Please see the links analyzing the results below.

12/31/2011
Each of these predictions will be graded a year from now as correct or incorrect. No hedging is allowed. I will grade the list next year as 60 percent, passing; 70 percent, fair; 80 percent, good; and 90 percent excellent. You may or may not like the predicted outcomes. This is how I read the trends.

1. California will pass a ballot measure that raises taxes. CORRECT: prop 31 passed
2. White flight out of California will accelerate. CORRECT link 1 2 3
3.  Liberals will decry corporate control of politics, but neither Barack Obama nor the Republican nominee will seek public financing for the 2012 general election, in order to avoid fundraising limits. CORRECT
4. Inflation will rise over 2011 levels. No, the economy slowed.
5. Obama's health care bill will be ruled unconstitutional by the Supreme Court. No, shockingly SCOTUS ruled that Obamacare is a tax and therefore legal..
6. Participation in food stamps and long term unemployment will decrease only slightly, by one percent or less. CORRECT Food stamp participation continues to skyrocket. link 1 2 3
7. A rating agency will further downgrade U.S. debt. CORRECT link
8. The House of Representatives will remain in Republican hands. CORRECT
9. The Republicans will capture the Senate.No. The Republican turnout was poor.
10. Gold will go down to $1400 per ounce. No. Gold is up again!

Europe Needs Creative Destruction

Adam Davidson, in the article The Crisis You Don't Know (link here), shows that the United States' per capital GDP is in much higher than Europe's. I was surprised to find this article in the New York Times Magazine (January 8, 2012), since the paper prefers reporting about the evils of income inequality and Europe has less of that. Kudos to the Times for printing Davidson's piece. It shows that in the long run, economic growth through free markets works better than socialism in promoting the most good for the most people.

According to investopedia, creative destruction is

A term coined by Joseph Schumpeter in his work entitled "Capitalism, Socialism and Democracy" (1942) to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

America is the land of creative destruction, willing to let the withering die to allow capital and labor to be available for new and more profitable and efficient enterprises..

Davidson argues that Europe is unable to compete on global stage. Its economies lack the flexibility to fire workers when their industries are no longer viable. Thus those workers and the capital maintaining them are not available to move on. Instead, Europe is left with a "permanently unemployed underclass" and inability to stay competitive. The adoption of the euro ossifies the economy of the Continent even further, since the poorer countries can't devalue their currency.

Davidson concludes that Europe is headed for a two-tiered society, the older enjoying generous benefits and the younger stuck with low-wage, short-term work in stagnant industries.

The Real Reason Why Obama Rejected the Canada-Texas Oil Pipeline

Alaska Oil Pipeline

President Obama "declared it was in the national interest" to nix a proposed oil pipeline from Canada to Texas refineries. See the article here. More specifically he

on Wednesday [January 18th] rejected plans for a massive oil pipeline through the heart of the United States, ruling there was not enough time for a fair review before a looming deadline forced on him by Republicans. 

Don't let the thought that there "was not enough time" enter your mind. Obama's decision involved a political calculation. Instead of pulling toward the center, Obama is trying to energize his liberal base, taking the side of the Occupiers in speeches, adopting a populists stance on taxes, and now, by halting the pipeline, giving a nice gift to the environmentalists.

Bill McKibben, an environmental activist who led opposition to the pipeline, praised Obama's decision to stand up to what he called a "naked political threat from Big Oil." 

The pipeline rejection is a red meat issue for conservatives. Republicans were enraged, which will delight the liberal base still further. Politically it made short-term sense for Obama to oppose the pipeline--it will help him hold onto majorities in blue states such as New York, Minnesota, and California. He doesn't care if he loses votes in Texas. Long-term, however, Obama made a poor decision. We have soured our relations with our biggest trading partner, Canada, who may decide to sell their oil to more accommodating Chinese rivals.

Canadian Prime Minister Stephen Harper has said Canada is serious about building a pipeline to its West Coast, where oil could be shipped to China and other Asian markets. Harper on Wednesday told Obama he was profoundly disappointed that Obama turned down the pipeline, Harper's office said.

See also Canada pledges to sell oil to Asia after Obama rejects keystone pipeline.

Economically, Obama's decision makes even less sense. We have to buy oil. The United States does not have enough domestic supply even if we double our conservation efforts. Should we buy oil from Canada or from Saudi Arabia? Saudi oil money supports Wahhabi Islam, an extremist and militant form of Islam, throughout the world. I think we can say that buying Saudi instead of Canadian oil works against American interests. "Canada accounts for more than 90 percent of all proven reserves outside the Organization of Petroleum Exporting Countries, according to data compiled in the BP Statistical Review of World Energy" (above link).

Social Studies Teaching Resources on the Web

Use this resource, and you can put together a wonderful interactive lesson plan on most history and social studies subjects. The links have been checked (November 13, 2011) and are presented in no particular order. Just click the purple links!

The home page of Mike Spinrad's blog http://mikespinrad.blogspot.com

Bibliographic records of education literature, plus a growing collection of full text http://www.eric.ed.gov/

High school teacher Paul Ippolito's wonderful collection of PowerPoints on AP Economics and other subjects http://137.164.143.46/pippolito/main.html

A collection of primary resources for educators http://www.calisphere.universityofcalifornia.edu/

Library of Congress digital collections--a primary source bonanza--print, pictorial and audio-visual collections and other digital services http://www.loc.gov/library/libarch-digital.html

More than 220 history PowerPoints http://pptpalooza.net/

History lesson plans written by Mike Spinrad and others http://www.sonoma.edu/tah/lessons.html

National Archives database http://aad.archives.gov/aad/

Center for Civic Education lesson plans http://new.civiced.org/resources/curriculum/lesson-plans

Bill of Rights in Action http://www.crf-usa.org/bill-of-rights-in-action/blog.html

First Amendment Schools lesson plans http://www.firstamendmentschools.org/resources/lessonplans.aspx

California Learning Resource Network: links, reviews, digital textbooks, video, online courses http://www.clrn.org/home/#3

Social studies lesson plans and resources collected by Marty Levine https://www.csun.edu/~hcedu013/

American Field Guide. PBS teacher resources http://www.pbs.org/americanfieldguide/teachers/

Council for Economic Education Economics and personal finance lesson plans
http://www.econedlink.org/lessons/economic-lesson-search.php


Educational Communications Board: searches for websites, video and more http://www.ecb.org/

Digital History Reader for US and European history http://www.dhr.history.vt.edu/

Digital History Classroom-tested lesson plans created by master teachers

http://www.digitalhistory.uh.edu/historyonline/lesson_pl.cfm

Fairness versus Prosperity: The Flat Tax

Americans must choose--fairness or prosperity. Certainly we can mitigate income inequality and increase levels of GDP by limiting the most egregious excesses of corporate remuneration. See my post on corporate boards acting on behalf of shareholders and limiting poorly performing CEO salaries here. However, the country must choose, as a matter of policy, high GDP growth and job creation or progressive taxation. You can't have both.

When tax rates were very progressive, in the 1950s, GDP growth was steady if unspectacular. (Source information here.) GDP really took off in the 1960s, after the top marginal tax rates went down from 92 percent to 77 percent in the 1960s. The Reagan boom was also fueled by marginal tax rate cuts, the top earners paying 50 percent. Lower tax rates also lead to greater resources for government. As the Laffer curve (below) demonstrates, when marginal tax rates are too high, people use tax avoidance (or illegal tax evasion) strategies to shield income from the IRS.

Ironically, those that want increased government spending on social programs should not be in favor of confiscatory marginal tax rates on the rich. Setting rates back up to 90 percent will put less money in government coffers.


What would happen if we did away with our ridiculously unwieldy, complicated, and wasteful progressive income tax, and replaced it with a flat tax? (See this.) Both Herman Cain and Rick Perry favor a form of flat tax. The New York Times, predictably, hates the idea. Robert Frank writes in The Problem with Flat-Tax Fever (link here) that the flat tax can be just as cumbersome as our current system if it all the usual tricks are needed to compute adjusted gross income, and the flat tax is unfair because the rich would be taxed less and the poor more. These criticisms can be easily refuted. A good flat tax is a simple tax. Add up all ones income and multiply it by a percentage, say 20 percent. There are no deductions are complications. The calculations can be completed on a postcard. Each American saves hours of time and hundreds of dollars (or more) in lost revenue computing their taxes.

Is the flat tax regressive? No, the rich pay the same percent as everyone else but they still pay more. The woman who made a million dollars pays $200,000 with a 20 percent tax rate. Joe Six Pack, bringing home $40,000, pays $8,000. The rich will still pay the lion's share of IRS inflows.

Most importantly, will the flat tax turn our economy around? Wikipedia has an excellent analysis of the pros and cons of the flat tax. (See the article here.) The article shows how the Russian Federation, Estonia, Latvia, Lithuania, Ukraine, Slovakia, Romania, Hungary, Macedonia, Albania, and Bulgaria have implemented a variation of the flat tax in order to stimulate growth. Lithuania has boasted of strong growth, though it is hard to say if the flat tax alone is most responsible. Many more countries are considering the flat tax. Should the United States give it a try? Arthur Laffer writes that the flat tax is a recipe for growth, proposed (quite ironically) by the current Democratic governor of California, Jerry Brown, in 1992. (See editorial here.)

Will the flat tax increase income inequality? Perhaps, but with unemployment stuck at high levels, our economy needs a shot of strong medicine to grow GDP and create jobs. Recessions lower inequality but also throw many of the poor out of work.Those who have been without a job for months will be hired only when expanding businesses need workers. Extreme poverty has increased in the last year. (See article here.) Our current taxation system is not working well, and the flat tax is worth a try.

Why Don’t We See More Employee-Owned Corporations?

I am enjoying the dated but wide-ranging Bill Moyers: A World of Ideas: Conversations with Thoughtful Men and Women About American Life Today and the Ideas Shaping Our Future.

The book was finished in 1989 and most of the intellectuals interviewed grapple with the Reagan revolution one way or another. Moyers interviews 41 famous American intellectuals, and I was especially taken by his interview with iconoclast Noam Chomsky (pp. 38-58).

As part of his critique of American society of the 1980s, Chomsky stated that corporations should not be run by their shareholders—private owners or public stockholders. Instead corporations should be run by their employees [what we used to call, “the workers” --MS] because employees would get more share in how the corporation should be managed. Otherwise, a few wealthy shareholders that own most of the stock make the decisions on how the company is run. Chomsky stated that shareholder ownership is anti-democratic because the wealthy own more shares and thus control more votes. The poor are shut out of corporate governance. Chomsky’s argument, radical sounding as it may be, is not a Marxist argument—workers’ labor exploited by the capitalists. Rather, he complains that the workers (or employees) don’t control the corporations that they run. The corporate world is completely controlled by the rich, and corporations act in ways that favor that class and only that class.

Fortunately, employee-owned “cooperatives” do exist, so we can analyze them as an alternative to the traditional corporate structure of outside ownership.

Perhaps the most famous of the San Francisco Bay Area cooperatives, the Cheese Board Collective makes and sells pizza, breads and pastries, and cheese. It has operated in (the People’s Republic of) Berkeley, California as a “worker-owned collective since 1967” (website). Both the products and pizza restaurant are successful—lines stretch around the block every day at lunch and dinner—for good reason. The pizza is very good. The fresh ingredients are organic, local and vegetarian except for the cheese and given to you right out of the oven. The Berkeley community also wants to support the Cheese Board for political reasons (it closes every May 1st), and the Cheese Board donates to non-profit community projects. The Cheese Board’s employment application contains a brief description of their philosophy and how it works. (See also the Cheese Board’s self description)

The Cheese Board Pizza Collective is an independently operated adjunct to the larger Cheese Board Collective. Currently, we are a collective of sixteen people. Everyone who works at the Cheese Board Pizza is a member of the collective with equal decision-making power. There is no boss, manager, or employees—it is worker-owned. Everyone makes the same hourly wage, currently $21 per hour. We receive paid time off, medical and dental benefits. (http://www.cheeseboardcollective.coop/uploads/Pizza_Application.doc)

San Francisco Bay Area cooperatives try to support each other and the Israeli kibbutz movement was the inspiration for the Cheese Board Collective. Sheirin Iravantchi writes in the Daily Californian that the cooperatives share a philosophy: employee satisfaction and ownership are most important.

More specifically, by “giving members more freedom of choice and more conducive work environments, these cooperatives attempt to increase employee satisfaction rather than profit margins…”(Daily Cal, December 7, 2000)

Why are cooperatives so rare in the corporate world? Why don’t we any cooperatives among the larger corporations? I believe that there are a number of reasons. First the cooperative structure does not allow enough flexibility for rapid growth. A growing business must take risks, often taking on debt or a increased monetary investment from its owners or venture capitalists in order to expand. Members of a collective would be less likely to take entrepreneurial risk and unlikely to take money from outside investors.

Secondly, cooperatives hire new employees quite carefully if not painstakingly. Each new employee must serve as a generalist, not a specialist, and must work with everyone, not just within a small department. The cooperative’s employment style slows down the pace of hiring.

Third, only those in the bottom half of the labor pool would be interested in accepting a San Francisco Bay Area job for $21/hour with no possibility of promotion. It’s nice not to have a boss, but it’s also nice to be a boss. It is nearly impossible to buy a house in Berkeley or afford the finer things in life at $21/hour, even if $21 is a generous and superior wage for a food-industry job. The most talented in the labor pool may pass if that’s the best they can do.

The above three explanations show the inflexibility of cooperative labor. Ironically, some investors claim that many corporations are run for the benefit and enrichment of top management, not the shareholders, and CEO pay has reached astronomic levels. Stockholders elect a board of directors, and that board is supposed to monitor management expenses, so if there is a problem with executives grabbing too much of the company cash, it is the stockholders’ fault.

Let’s step back and compare the structure of for-profit corporations with cooperatives. Most corporations respond to the concerns of their owners, shareholders, which are, in order of importance, profitability (passed onto the shareholders through dividends and capital gains in share price), good citizenship and community. Profitability is necessary but is less emphasized in a cooperative. Cheese Board pizzas may be characterized as gourmet pizzas, the restaurant bakes only one type every day and the pizzas are not price competitive. The cooperative is less efficient than for-profit companies and its prices will be higher. (In the words of economists, the cooperative is inferior to the for-profit firm in both productive and allocative efficiency.) In a nutshell, the cooperative produces fewer goods and its prices are higher. Consumers spend more and receive less. Cooperatives have their place, but Chomsky is wrong. For-profit corporations do a better job raising consumers’ standard of living.

Postscript: Shaila Dewan's March 30, 2004 NYT article, Lose the Boss is worth reading for an update on co-ops and inequality.Jonathan Kauffman's August 9, 2015 San Francisco Chronicle article, Food Co-op Survivor Thriving for 40 Years gives the history and management structure of co-op Rainbow Grocery in San Francisco. Could it have thrived anywhere else?