Investing with the Sorcerer's Apprentice

A survey on the motives for wealth building would be interesting. Some might have dynastic dreams, aggressive plans of purchases and control, but most motives would likely be defensive. Most people likely save money to protect themselves from the danger of economic instability that is created by the very people who proclaim they want to stabilize our lives.

So our crisis du jour is instigated by loose money originally aimed at stabilizing our community through broadened home ownership. The looser rules were watched over by various agencies to prevent abuse and to make sure all was stable. The economic leaders approved of the use of derivatives that emerged to hedge both sides of these purchases because these instruments broadened the economic base and stabilized the economy. When the regulatory system failed, debts went unpaid and the economy began to contract, the economy was flooded with money at low rates to stabilize the economy. The economic advisers were certainly not going to allow illiquidity to occur--as occurred in the Great Depression, the result of economic tightening initiated early in the Great Depression to stabilize the economy. The Powers-That-Be feel that looser money will stabilize the economy, as they did in the beginning of this cycle.

One must admire their confidence. They are like Xerxes whipping the waters of the Bosporus, angry and righteous, certain they are in control and dismissive of anyone who sees them as the sorcerer's apprentices.

Meanwhile the desperate citizens watch in awe, store food and buy guns and gold as they await the next self-inflicted crisis.

Snookie 3

If we agree that one purpose of taxation is to guide money into investment areas of national importance to "win the future" and if we agree that picking these areas of national importance requires a degree of expertise that is uncommon in the national community, then some people should not be taxed--or at least be taxed less--but should be allowed free rein their own money for the betterment of the nation and others should be taxed but their money should go to experts.

Now what about the other, rarely spoken, purpose of taxation: Income redistribution? What is its purpose and how does it play into our plans to "win the future?" If it is reasonable to tax on a sliding scale of productivity, is it reasonable to distribute taxes in the same way? Certainly we should be careful about the industries we subsidize to "win the future"; should we be similarly careful about the citizens and behaviors we subsidize as well?

So,redefining The Snookie Question:

Why it is assumed that "Investment" is a reasonable activity of the federal government?

If it is a reasonable activity of the federal government, is there any evidence the government does it well under the current structure? When Lyndon Johnson declared his "War on Heart Disease" it took cancer research years to recover as money was diverted from all research streams to cardiac disease. Bush ruled out any research into stem cell science with its inevitable ripple effects. Conversion of corn into ethanol as a substitute for petroleum has been a disaster environmentally, economically, agriculturally and intellectually.

If it is reasonable to take money from investors for the purpose of substituting government investing, should the investment efforts of all citizens be equally supplanted?

If it is more productive and efficient for the culture to leave investments in the hands of some citizens and not others, can the same be said for those citizens receiving federal subsidy, that some seemingly qualified citizens should be bypassed in favor of others?

The Snookie Question 2

So what are the answers to The Snookie Question?

First, the "investments" the country makes to "win the future" should not be in the hands of Snookie, or a community organizer or someone morally opposed to the internal combustion engine. Investing to "win the future" should be managed by flint-eyed professionals and one of the responsibilities of the government should be to find them. This should be difficult because successful professional money managers are rarely more than random, a fact that must emphasize how difficult charting a course to "win the future" would be for Snookie or any other amateur.

Second, we must recognize that taxpayers, like life, are diversified. Some are astute and can be relied on more than others to "win the future." Taxing a productive investor might "lose the future". One would expect that Snookie might be less likely to invest her entertainment earnings well. Consequently taking money from Steve Jobs or Apple and giving it to a government appointee to invest to "win the future" would be less reasonable than taking Snookie's money. We may not be certain that the government appointee would invest better than Snookie but we can be certain that Steve Jobs would do better than either. Consequently, to "win the future," it may not be worthwhile to take Snookie's money but it certainly is a bad idea to take Steve Jobs'. If the purpose of taxation is to "win the future" it is madness to tax indiscriminately or on the foolish graduated scale of income earned, it is much more reasonable to tax on the basis of how productive taking and redistributing that money would be. Taking money from Snookie is much more reasonable than taking it from a true and proven producer.

Third, after our investments to "win the future", what individuals should get Snookie's money? The tendency of government policy is to subsidize people who have "lost the present". Are they the same people? Is there no distinction among them? Is a man born blind to be counted the same as an otherwise healthy unemployed addict? As time progresses and living standards decline, these questions will no longer be made by bureaucrats.

The Snookie Question

Taxation is one of those notions that has survived the divine right of kings that we don't challenge much. Yes, it contains the power to destroy. Yes, free men recognize that private property is a barrier against tyranny and taxes erode that barrier. Yes, it is unlikely that a government will distribute taxes in a community better than those who are taxed would. Yes there is an astonishing graft factor that would not be tolerated anywhere else. Yes, the manipulation of taxes by both the taxed and the recipients of taxes has grown from a household industry to a gigantic lobbying monolith. Yes, taxes--their avoidance and their capture--has become a giant distortion in the economy.

But bridges must be built, roads paved, mail delivered, armies paid...fish gotta swim, birds gotta fly. While it is true that almost all the functions of government can be performed by a private effort without tax money, we seem to bump along without any deep challenge to a system that everyone sees as wasteful, inefficient, corrupt, arbitrary and often downright criminal. As the cliche states, taxes, like death, is part of our nature. We have allowed them to persist like an appendix, unchallenged, or like a galero or an atef crown, a residual of an earlier time.

We need a fresh look at this question.

It is likely the distribution process of taxes will change; less and less of government work will be done "in house." That handoff of money, so coveted by the government middleman and the avaricious recipient, is likely to decrease as the "inflation tax" and the inefficiencies of government force the rulers to divest themselves of many "projects" and put them in private hands, just as local government has. What will remain will be those wealth transfers the government uses to buy civility and support and what the government calls "investments" to "win the future." As the living standard declines from inflation and the dollar devaluation, as people are damaged more and more by inflation's impact on buying power and bracket creep, people will want a better understanding of where their money is going and why. And the inevitable question will arise: The Snookie Question.

At the base of all taxation debates--graft, inefficiency, compliance costs--lurks The Snookie Question: The indiscriminate taking and the indiscriminate distribution of someone else's money. Some are taxed more, some receive more. The justification has matured from those days of kings and princes; now the money is confiscated not because it is the king's but because the payer owes his success to someone else--presumably society, in some inexpressible way--and the recipient--again not the king--is now a business the government wants to support or the poor or the unfortunate who must receive some payment as compensation for the payers success and his lack of success. The Snookie Question asks: "Are all tax payers the same and all tax recipients the same?" Clearly they are not. Bill Gates will certainly make better decisions on where to put money that will benefit the nation than will Snookie. So should they be taxed the same? There is no evidence the government is a good investor so, while Snookie and the government are expected not to do well with money and Bill Gates is, should we take Bill Gates' money and give it to the government--or, worse, to one of Snookie's desperate friends?

Clearly there is a scale of people who can help the nation with their money and those who probably will not, those who should keep their money and those whose loss of money probably won't hurt the economy. And there is just as likely those whose receiving money will help the economy and those who will not.

Redistribution of income is not the point, it is the productive redistribution of income. Identifying the proper and productive formula sounds like a rare, reasonable task for government.

Drill, Baby, Drill as Therapy

While the left dithers over the energy problems facing the country, the right is quite firm in its opinion: Drill, Baby, Drill. The left says, strangely, that there is not enough oil to make a difference; the United States has about 2% of the world's oil reserves. More strangely, the left doesn't offer the convincing and clinching argument: There is not enough refining capacity in this country to accept new production. With usage down this year, presumably a reaction to rising costs, refining is at 85% capacity. If the maximum capacity is around 93%, refiners at full throttle would refine what we produce; they could not refine more. Consequently drilling, Baby, for more oil would not improve America's energy position at all. New production would have to be sent offshore for refining.

This speaks to the basic failure of the nation's energy policy. It takes almost as long to build a refinery as it does to build a nuclear plant. We as a nation have never approached our energy problems with any seriousness. The reason no one points to our lack of refining capacity is that it points to our lack of planning and the politicians do not want that as a part of the discussion. The Department of Energy was created by President Carter for the expressed purpose of making the country independent of hostile oil producers. Its original budget was 1.6 billion dollars. At the time we produced over half of the energy we used. The Department of Energy now has a budget of 80 billion dollars and we produce one third of our energy. Should we give them more money? Should we give them any money?


There is a ghost in this energy problem, the ghost of a suggestion that the government has a plan. The hint that things are evolving under control. The hope that the pieces are falling into place. This perception is partly a function of the government's speaking of future breakthroughs as if they were achieved now, in the present.These solutions might come but they are not here yet. Oil is going to be an important product for this country to use for the foreseeable future. Should the breakthroughs in storage and transportation come, there will still be a crucial transition period where we will need petroleum. Wind, solar and bio fuels make up 2% of our total energy use; this is not a step forward or a hint of things to come. This is insignificant in every possible way. More, it is a testimony to the inept and smug leadership that so burdens this country.

Any drilling we do now will just provide a hole in the sand to stick our head.

The Girl with the Blue Velvet Tattoo

I saw the Swedish film of The Girl with the Dragon Tattoo recently. It was clearer and more focused than the book but, distilled, was a bit less enjoyable. I was reminded of the old David Lynch film, Blue Velvet.

Blue Velvet was well cast and well done but a painful film nonetheless. It is a story about sadism, masochism, gratuitous brutality and the people who enjoy that. Worse, inherent in the story is the belief that this kind of behavior is intertwined with the American culture and stains everyone in it. A story with that viewpoint is demanding on the audience; the audience must be at least open-minded enough to accept the generality as a possibility. Most mysteries and action stories treat such criminals and perverts as criminals and perverts, a subset of the culture; such stories rarely proclaim the criminals as an integral part of the culture and the pathology as a general characteristic unless, like The Godfather, the lens is very narrow. After all, not all Germans in the Second World War were Nazis and not every frenchman is a wine snob. Unless the accusation is close to the truth the filmmaker asks the audience to be a bigot and assume the worst of the people it describes. Blue Velvet did that and so does Dragon Tattoo.

In Dragon Tattoo Sweden is awash in misogynism, bigotry and cruelty. The good guy is like as pacifist in a Viking war camp. The other good guys are too old to be dangerous. The bad guys are sometimes too horrible to watch. But, like The Godfather, as the atmosphere and culture are consistently brutal, the behavior is somehow consistent and believable. Blue Velvet failed to sell the consistency and consequently the brutality seemed without context and pornographic.

There is a moment in Dragon Tattoo where Lisa Salander revenges herself on her abuser by raping him. It is said that the movie audience response to this scene is usually cheers.

On second thought, maybe Lynch was right.

Striking a Note But Not a Chord

The release of the movie "Atlas Shrugged" might be a cynical pitch for a current political sweet spot but nonetheless again raises the interesting and unanswered question in the current political debate: What are the mutual responsibilities between the producer and the general public? In the story, John Galt, an industrialist, organizes a "producer strike", a strike by the only special group in history that has never struck. Ayn Rand, the author, is an individualist and believes the sanctity of the individual and his achievements, refined down and purified. His efforts and achievements are his only reward and his alone; derivative benefits for the nonproducers are their good fortune but nothing more. Politicians, businessmen who collude with politicians and the passive but assuming public are the real evil in the world because they take, modify and regulate what they do not and can not create for their own benefit. And their reward is grudging: As is said to the successful industrialist Hank Rearden in the novel, "You have been hated, not for your mistakes, but for your achievements."

This is a harsh philosophy and Rand is nothing if not consistent. She makes no excuses and lived this belief in her personal life. (She was an atheist, thought openly that theists were fools, hated national aggression and once told a woman she was going to seduce her husband--before she did.) While there are some intense devotees to the Rand philosophy--and the books sell well--it seems the philosophy strikes a note in peoples' minds but not a chord; the notion is too isolated and too spare in a society that seems so convoluted and intertwined. But it does strike a note.

Obama's attack on "the rich" in this country is a case in point. Why is this obvious--albeit heavy-handed--populist and demagogic appeal to envy not more successful? How can it be so debated? One reason is likely those studies that show that Americans, alone as a group in the world, do not resent gaps between themselves and others because they believe in the possibility that, with work and sacrifice, they--or their children--might well become those "others." Another reason might be cynicism. The capitalist' motives are more clear to the average guy, the politician's are not. And the producer has a history in this country of success. Indeed a big problem in America might be how to manage the success of capitalism, not its failures.

Indeed, the present problems in America are not the failures of capitalism, they are the failures of government.