Miscellaneous (G)

European Bank Stress Tests

I have proposed the alternative of share economy to our present banking
and debt system. And Ann Pettifor showed how the finance system
is a parasite creating money in a leverage.
And Nassim Taleb, of "Black Swan" fame, decries debt.

The Europeans, and similarly the United States of America Government,
is having "stress tests" of the banks.
After the financial crisis, many governments go through this exercise to
prove that their financial system is sound.
Unfortunately the Europeans use rather bland assumptions for
these allegedly
worst case scenarios:

1. 
   What if the United States Dollar falls eleven percent
   
2. 
   What if theEuropean unemployment goes up a mere 0.5 per cent to 10.5 percent.
   
3. 
   if stocks drop 15 percent
   
4. 
   gdp goes down a mere 0.4 percent
   

and specifically they don't consider that even a single European country might default on its debts.

And banks include assumptions over how much revenue their "trading desks" would generate.

Source: Page C1 and C2, Wall Street Journal July 14th 2011, "Late Stress Over Tests". Volume CCLVIII Number Eleven

Arab Unemployment

I pointed out in June 12th's Miscellaneous category the unemployment among educated Arabs. The IEEE Spectrum pointed out this issue. Sixty percent of college graduates do not find jobs in their fields. Engineers still face bleek prospectsd, but fortunately Egyptian Engineers are doing better, particularly electrical engineers. ("What Young Engineers Want Out of the Revolutions" Prachi Patel, June 2011, Pages 11 and 12, Volume 48, Number Six)

The Bond Market

"James Carville, Bill Clinton's political adviser, once said he wanted to be reincarnated as the bond market so that he could 'intimidate everybody.'"

Global Markets: A Wild Ride, The Economist January 26th 2008, page 70, Volume 386 Number 8564

We are now so accustomed to governments running up billions of dollars in deficits every year that we take it as normal, even to people outside the country. "But it is insane to think that a country can run up such debts for years and not have it affect their fiscal autonomy." (Will Kymlicka, "Citienship in an era of Globalizstion: commentary on Held" Page 112 to 126, Democracy's Edges, edited by Ian Shaipro & Casiano Hacker-Cordon Cambridge University Press 1999.

Dr. Kymlicka went on to say that when Canada, which he discusses in the article, will soon be running a surplus and this will test whether it has more power.

But a share economy would deal with this appropriately--one would sell the bonds not at an interest rate but as a share of the income or tax revenue or imports or exports of the country. (I would argue that a country would be better to make it a share of imports so as toimprove its international competitiveness.)

And to be explicit, a bond holder gets a vote proportional to the amount of their share. So if two percent of the country's GDP is contracted away in lieu of interest. Then, the Currently the United States Public debt interest cost is 1.6 percent of GNP of 212 billion per year.

I propose to replace that by a share of the GDP instead of bonds. But the new debt would also include a vote--thus bond holders would together have voting power equivalent to 2% of the population.

In a share economy, the interests of the bondholders would be pretty much aligned with that of the citizens, although perhaps with a some difference in time preferences, but neither would really want to sacrifice long-term growth for a larger payment now.

In the United States, we talk about not saddling our unborn children or children with these debts. Make our bonds payable at a certain percentage of the income of all people who were of voting edge at the time the debt was contracted. The debt gets retired naturally as these individuals die off.

More on the Financial Crisis

Michael Hudson on Democracy Now stated that at the time of the financial crisis and bail out:

1. 
   There was enough money in the banks to pay the ordinary depositors. That is
   the FDIC could liquidate the banks and pay the individuals. What there
   was not money to pay is the "gambles" in derivatives and trading and exotic
   financial instruments where the losing counterparty was broke.
   
2. 
   Money is created on a keyboard, the FED did it, and the banks do it.
   This echoes my review of Ann Pettifor's book
   

patents and patent trolls

On the pay everyone what they earned theory, I suggested that each individual and business pay a tax for intellectual property. They can then allocate this to the intellectual property they consider worthwhile, whether it be a drug, the result of scientific research, music, tv/memovies and services and content agregators like google npr or MSNBC, or the reporters who actually get the news. We would select a median amount to pay by a median process. Each person can then distribute their share to whichever intellectual providers THEY feel made the most contributions, whether it be Einstein, a researcher finding a great medicine, the latest Startrek movie, or google that provides a wonderful search engine.

When we have intellectual property or a public good as private property, one has problems. The most severe is determining who has worthy intellectual property. The worst of this is patent trolls, people who get me-too patents on obvious things. One example of the disfunctional system: someone in 2000 got a patent on toast. And the featured patent Chris Crawford for setting up internet backup or software refreshening softwares. There is a patent suit about the mouse bringing up a popup when it hovers over something. 30% of all U. S. patents are for things that were already known. And eighty percent of software engineers said that the patent system hinders innovation.

Intellectual Ventures, described as a largest patent troll, brought in two billion dollars. Nortels old patent collection sold for 4.5 billion dollars.

Unfortunately, it is difficult to define "Patent Trolls." using conventional statutes. "Under some definitions, the legendary independent inventor toiling in his garage could be a troll. Under other defnitions, well-known productive companies could sometimes be deemed to be polls, if they sue over a patent which covers a product the company does not currently sell." (Mechanical Engioneering, page 35 to 36, August 2011 Volume 133 Number Eight

The patent statute punishes companies who mark their item with a patent number, but the patent has expired or has been judged invalid. If a company marks their object with a patent number, then all companies are non notice about the patent. Otherwise, the company has to send a "cease and desist letter" to the infringer.

This kind of problem happens when a manufacturer still has usable molds, except that they have a patent number on them which is no longer appropriate. Do they make a new mold, or save money on molds but risk a lawsuit under the rule that one cannot put a misleading patent number on one's products.

All these things can be handled by sortiton juries.

ExpertLens

An online method that can use both experts and individuals to determine difficult policy questions. It uses some crowdsourcing and feedback between the group's answers and seeing if people changed. This is a type of deliberative polling. (Source, Mechanical Engineering August 2011, Page 21-22. Volume 133 Number Eight.

Weird Results

Undergraduates were asked to rate five personality traits of Chief Executives of Fortune 1000 firms solely on the basis of their photograph. And found that these were correlated with the firm's profits. By the way, another set of researchers tried to look at actual chief executive personality. They found no correlation between that and how well the company did. (Perhaps more profitable firms are able to get chief executives that look competent, dominant and who have "facial maturity," i. e., not "baby-faced.")

"Face Value" The Economist Page 78, January 26th 2008, Volume 386, Number 8564.

Safety First

The proposed design for a product included a particular safety features. Marketing wanted it removed to save money. The three engineers involved inthe design and a recognize testing laboratory stated that the safety device should be included (but no standard mandated the requirement). Marketing prevailed, but Eventually all the items had to be recalled because of the fire risk. It was of course much more expensive to do the recall than to have done it right the same time.

"Serving Two Masters" Brian porter, Mechanical Engineering August 2011, Volume 133 Number Eight

Predictions

Freakonomics Radio just had a good show on Predictions. Tetlock did a twenty year study of political experts predicting political events. Most did somewhat better than chance, but no better than regression. The predictors who were dogmatic were not effective. And the predictors who might make the big prediction, say the person in 2006 or 2007 who predicted the financial meltdown, did worse on average than others.

Michael Hudson on Democracy Now pointed out tht the bond rating agencies do not want to be liable to their "opinions." Thus, those who bought AAA-rated mortgage banked securities that turned out to be "junk" could not sue the rating agency that gave it an AAA-rating Dodd-Frank made the rating agencies liable. Michael Hudson proferred that the rating agencies are threatening to downgrade the United States debt if they don't repeal these provisions of Dodd-Frank.

The Freakanomics radio programs began with a new Romanian law that made "witches" liable for their bad opinions with criminal fines and jail sentences. But Romanian politicians were not liable for their bad predictions. We need to track each predictor's predictions over a lifetime. Right now, predictors have an incentive to make wild predictions because they can trumpet that "they predicted the big one." There is nobody to day that 90% of that experts predictions were wrong. In my clawback tax and the "pay when we really know" proposals, we should only
pay people much later than the predictions and hopefully their lifetime
record will determine people's rewards.

Miscellaneous

Obviously, I dropped the ball on this blog. I anticipate preparing
five or six more "Thoughtful Thursdays" over the next year. And sending out
more of these miscellaneous postings.
I have been focusing my
writing energies this semester on the complete Requirements Document for the
Constitutional Construction Kit
The next Thoughtful Thursday is from that effort.

Hack for Egypt

The Hack For Egypt , as part of Cloud Camp 2011, has proposed
a "crowdsourcing" project for the new Egyptian Constitution.
They are looking in the future at a crowdsourcing for the Bill of Rights in
that Constitution.
This is a much less ambitious proposal than the one I am working on. one needs
a simulation component where the Egyptians.
The Egyptian unemployment
is concentrated among the young, as it is in
many other countries including the Arab world.
And 50 percent of educated of
men
and ninety percent of young female
college graduates are unemployed.
So there is a resource of time to work on the Constitution.

Climate Change

I talked about using sortition-based consumption taxes to address
climate change. The Wall Street Journal
had a special issue on Energy and the first article, which frankly
is an editorial, on Climate Change. They say that emissions cuts,
raising energy costs with taxes, cuts economic
activity. Countries do not want
to do this. By putting the tax at the consumption side, this attacks
imports, and tends to get people to consume in ways
that are not energy-intensive.
They may not buy a computer-they may use an internet cafe.
Imports get taxed based on the embodied energy.
They may buy a smaller and more energy efficient house, use public transportation instead of a car.
The article suggest that governments should push for innovations that produce
less costly energy.
Wall Street Journal, November 29th 2010, Page R1

United States Health Insurance Mandate

As I assume all readers of this blog know, the United States has
mandated that all people purchase health insurance. However, there
is some question whether that is constitutional. The famous "necessary
and proper" clause of the United States Constitution gives the
United States Congress the power to make laws "necessary and proper" to
exercising its enumerated powers.
Does mandating that everyone buy health insurance fall within the
"necessary and proper" clause? One District Court has said no!
And it appears that a Florida judge will rule the same way.
However two lower courts said yes, they did.
I made a proposal that would resolve this. Make individuals tax rate
dependent upon their financial responsibility. We already have deductions
for contributing to IRA and for some education items. Individuals who are
purchasing disability insurance, health insurance, education should pay
lower taxes than those who are not.
There are people who cannot be expected
to have money for
health insurance, the single mom putting
herself through Nursing School. However, those who have money
for a flat panel TV or internet, should spend or invest
it some other way such as health insurance.
The New England Journal of Medicine article,
"Can Congress Make you Buy Broccoli? and Why
That's a Hard Question" by Wendy K. Mariner J.D. M.P.H.,
George J. Annas, J.D. M. P. H. and Leonard H. Glantz J.D.
said that Congress had two goals in passing the health reform
it did:

1. 
   provide a way for all Americans to gain health care
2. 
   preserve the private, commercial health industry

Obviously, it is not reasonable to require the health insurance companies to insure anyone regardless of sick they are and let people wait until they are in the proverbial ambulance to buy health insurance.
When a person wants insurance and has a "preexisting condition," we need to distinguish between those who simply waited until they got sick and those that had good reasons for not purchasing health insurance. A bureaucracy cannot. A sortition jury can.
Judge Vinson asked "If the government decides that everyone needs to eat broccoli, can Congress require everyone to buy Brocolli." If Congress chose to expand Medicare or Medicaid to cover everyone, they could have. Congress could then raise everyone's taxes to do so.
I believe at tax time, everyone should compete to show how responsible they are, buying and eating their broccolli, and saving, whether for retirement or their health needs.

Bronte Capital Management Blog

I met Mr. Hammond on the plane to New York City, and then by luck as I walking near 42nd Street in Manhattan. The first article I turned to, was the one on the Australian financial system. There is concern about one of the strategic funds in Australia. More importantly, he discusses the risks with privatized social security of fraud.
There are many other articles there, often very insightfully showing the numbers in investments and securities, from Chinese bus adverts and alcohol sales to Australian Real Estate near the iron ore mining boon.

Benefits Schemes

A gentleman who won two million dollars from the lottery is still collecting food stamps. The food stamp program uses income and lottery winnings is not considered income. State of Michigan is talking about getting a special waiver from the Federal government. (Ron French, Detroit News)
This is why all benefit recipients should go before a sortition jury to eliminate those who don't deserve them, even though they may qualify under the rules.

State Income Taxes

Wall Street Journal, Volume CCLVII Number 70, Page C1 and C2, March 26th to 27th, "The Price of Taxing the Rich" Robert Frank
Million dollar a year incomes pay 45 percent of California's Income Tax receipts. Similarly percentages for Connecticut and New Jersey. The problem with this is that these individuals incomes are erratic. Of course, when the market is up, these people "take their profits." And they have to pay their taxes on the capital gains, and tax revenue goes up. (We saw that when the federal government was briefly in surplus around the turn of this century. But some of this was due to "hundreds of millions in unanticipated tax revenues from taxes on capital gains.") In one year, the top one percent of the taxpayer's income dropped sixteen percent. In 2006, California anticipated a six billion change, either direction, from year to year on a regular basis. In the dot com bust, revenue from capital gains changed from seventeen billion to five billion.
Of course, states can protect themselves with "rainy day" funds. But state governments, like people in general, do not have the discipline to do this.
This blog has long called for salaries and other expenses to be a share of their revenue. Thus States would make goverment salaries and pensions a percentage of revenue. (Note that under the full share economy, government workers and retirees would set their mortgage, rent, etc. as a percentage of this amount. Thus, if this varied fifteen percent a year, they would not be between this decrease and an expense that does not change. Their discretionary income for day-to-day purchases would go up or down by the same percentage as the state's revenues.) And their "borrowing" would be the same way. Thus, rather than selling a three percent bond due in thirty years, they would sell a perpetual bond that paid out nnn percent of the revenue. I earlier called for a "clawback" tax to deal with, among other things, those earning high pensions.
A consumption-based sortition "badness tax" could have firms competing to avoid the taxes necessary to fund the state government.
And with individuals having a share of the income of the companies in which
they invest, there would be less variability of income. Individuals
earn money as the company does, not by selling the shares.

deflation, bring it on

Fix the money supply--this causes at least a mild deflation, as technology improves and population increases. It causes a rally in your currency, To be both specific and chauvinistic I will speak in terms of dollars. Mr. Kessler talked in terms of reducing leverage to one in five instead of one in ten giving oil back down to fifty dollars a barrell. My proposal might see oil dropping back to the single digits.

By fixing the money supply, that means each dollar is numbered and tracked in the global electronic fund transfer scomputer system. Thus, it cannot be created by people or individuals or the computer system itself, as done in Heinlein's Moon is a Harsh Mistress. I talked about a global XML EContracting and fund tracking system in my DailyKos blog.

What does this have to do with this blog:

1. Deflation is bad for those who owe debts denominated in a fixed amount of money per month or year and which have to be paid back. Thus, don't do that! When one "borrows" morrow, one gives back a share of income, whether one is an individual or a corporation. If all prices go down, the amount given back to the lender goes down but it would have the same purchasing power. Of course, Dr. Weitzman proposed that workers be paid as a share of the companies gross reenues. Thus, we don't have to worry about the problem that it is hard to cut nominal wages.
2. There are many people who wish to save, particularly for a short term goal. They don't want to be an investor, determining which individuals and business enterprises would succeed. Now we have a financial services industry to put these two together, so people can put their money in a bank, earn a modest short term return, e.g. money market account, and then spend the money. I propose they would simply hold the money as cash. (Not as dollar bills under the mattress, but a computer record that they owned dollars serial-numbered 123463412, 1345632345, 13423455, and 7824563124.)

If there is a real problem with people holding on to cash, simply give sortition juries the right to require individuals or businesses with cash balances to either spend the money or invest the money. (since all money is in one system, one can't hide one's dollars in one bank account or another or in one's mattress--if the dollar is not on the system, it simply does not exist.) They could consider if one's goals or reasons for holding on to the cash for a short term goal are legitimate. If the person refuses, the sortition jury would have the right to simply do it for them--perhaps considering social impact of the investment more than the person would.

Would it not be great if fifty years from now, when senior citizens are talking -- "when I was a youth, a subway ride was two dollars, now I pay twenty cents."

Miscellaneous from NPR

Buchanan identified studies that most taxpayers don't know how much tax they truly are paying. Here is an estimate. Payroll taxes are 18.7% of income and other taxes such as the add-on to one's telephone bill work out to be 5.4% income. Thus, taxes are about a quarter of one's bill.

________________

I have long believed that college student loans should be replaced by a share of the income after college. A group is doing just that. Although I don't understand why they end after ten years, an arbitary period. If the graduate goes into teaching for the first ten years and then becomes an investment banker versus the reverse. I more see a middle-aged person paying for, or contributing to, a young person's college education. They would pay ten percent of their income for as long as that person lived, funding their retirement. The Tell Me More scenario was someone who started teaching in Mississippi at $31,000.00, who would then pay ten percent of their income for ten years.

___________

Sadly, although Egyptians are often blogging and tweeting about the problems in the country and fifteen million out of seventy-eight million have access to the web, the government remains autocratic. Some cases, they have helped and gotten international attention, in many cases other wise.

_______________________

I blogged about the role of share holders in a modern corporation, sadly often none. Companies would send out a proxy ballot with just one candidate for each position. Now, big share holders who have held three percent of the company for three years will have access. Of course, that is far short of what I advocated.

Miscellaneous

The Wall Street Journal February 4, 2010, A19 CCLV Number 28 "A Short History of American Populism"

Andrew Jackson -- libertarianism as populism. Government programs gave money to the rich. He is of course known for killing the Central Bank. In 1835, was the last time that the United States was debt free. And he opposed road/canal projects. After the Civil war, the Republicans sponsored aid to railroads. As I wrote earlier, the 1850's to 1890's where United States government sponsored the corporate form. The 1890's populism, William Jenning Bryan gave his Cross of Gold speech, because of the rampant deflation which was giving farmers who owed money a problem. But William Jenning Bryan ran several times for president, never winning and getting smaller and smaller percentages of the vote.

Andy Kessler, "Bernanke's Exit Strategy, Tighter Reserve Requirements" same issue

I wrote a lot about the system where banks can loan more money than their deposits. Currently, banks can loan ten dollars for every dollar they have on deposit. And in some cases more Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns all loaned out twenty times their capital. No wonder they have so much money for bonuses. Should the depositors all run on the bank, the FDIC is there to back the bank.

My Intermediate macroeconomics professor explained how this works, including how having multiple banks has the same effect as having one big bank. I asked him a simple question. Do the banks make profit on the difference between the interest on the deposits and the interest they change to the lender or the interest on all their loans. He said the latter. So if a bank charges an average of ten percent and pays five per cent to its depositors (a rate structure similar to the eighty's), it is earning 75% interest on every dollar deposited. No wonder, they are so willing to give away a free toaster to those who deposit in their accounts or bear the costs of processing checks for the free checking account with $1,000 minimum balance.

Mr. Kessler said this system caused all sixteen panics since 1812. The gold standard is neither necessary nor sufficient--Elizabeth gold smiths would write more gold receipts than gold they received. And in the first half of the 1800's, American State banks would do the same thing. I recall from Galbraith's Money that the Medici's did the same thing.

Stephen Greenhouse, "More Workers Face Pay Cuts, Not Furloughs" The New York Times New York Wednesday August Fourth 2010 Page A1 and A3

L. Weitzman's share economy is based upon the idea of avoiding layoffs by having one's salary be the gross revenue divided by the number of workers. A corrolary of that is a firm cutting pay during a recession or having a policy of no lay-offs. State and local governments are cutting salaries, in some case with agreement from Union. One report says that 22 percent of municipalities cut "some pay and benefits." On the business side, we have: Westin Hotel cutting wages twenty per cent, Sub-Zero, a Refrigerator Manufacturer, is asking for the same thing, threatening to move to another state, ABF Freight Systems asking Teamsters to agree to a fifteen percent cut and St. Louis Post-dispatch, Seattle Symphony and Newsday making about five percent cuts. Reed Smith, a large law firm, lowered first-year associate salaries to $130,000 from $160,000.

From NPR, on the Mortgage Crisis

I blogged several times about using the share economy idea to make mortgages payments a share of one's income. As I assume most know Freddie and Fannie have a major role in the mortgage market. They own or guarantee half of Federal mortgages 5.5 trilliion worth of mortgages. Our Federal Government guarantees them, at first implicitly , now explicitly but does not put this on the budget. Raj Date said that Fannie and Freddie accelerated the sub-prime meltdown by guaranteeing mortgages for lower-priced houses thus causing their value to inflate to bubble-proportions. These government sponsored entities represent a subsidy to "middle and upper middle income home owners." And, perhaps, we should go away from home ownership. Individuals move around much more than in the 1950's, so one has the problem of selling the house when one has to relocate for job reasons. Or in telling words, Americans should not buy an "illiquid, very large, concentrated, leveraged asset."

One of the problems is that a renter has no guarantee of being able to stay in the property long term. Personally, I was fortunate enough to negotiate a permanent lease in 1994, until either I changed jobs, had my parents come join me and we bought a house together, or on their side they remoddelled the place into something not compatible with residential living. It ended up in court when the landlord sold at a fire-sale basis. I tried to negotiate a similar deal with businesses and landlords in the area but was unsuccessful. More on that in a different blog.

Also, of course, there is also status in owning a home.

Happiness

NPR has had two series on happiness. Jiangyin in China is actively trying to make itself conducive to happiness. Xu Dongqing, the Communist party Committee's head of propaganda, said "they are trying to further use people's wisdom and suggestions to help the government do better," not provide "Western multiparty democracy." Research in the United States found that daily mood improves as one's income goes up to $75,000 per year. It does not go up as people increase their income. The famous Marmot Whitehall study found that people at the top of a hierarchy have a better health than those at the bottom, and it is a strict does-response. And those at the top of the hierarchy generally make more.

Share Economy--how it might work.

The third posting here, I proposed share economy. A firm or enterprise or government does not have debts. When it does not have enough cash or fungible product to purchase something it needs, it grants a share of its income. (In this article, I limit myself to discussing shares that last forever.)

It is now 2060. Nurse Joan Smith owns a one percent share in an apartment building. She is free, so she marked on her mobile device that she is available for her investments. She's a night owl--she is up. There is a leak in one of the line B apartments in that building. It is starting to create a flood. The tenant calls the super who is in the apartment now and he video's the situation and clicks the button to contact all share owners for approval. He wants to call the plumber, $200.00 for an emergency house call. Joan along with five other investors gets the call. Their mobile's calculate the cost of this expense based on their share. In Joan's case, it is two dollars. She certainly feels comfortable. Since, it was marked an emergency and not everyone would have an opportunity to weigh in, 80% consent is required under the bylaws. However, Janet, a plumber living 500 miles aways, asks about shutting off the water to the entire line. They discuss that this means that the six tenants in the line won't have water in the morning. However, they decide to do that since Janet won't consent to her share of the expense on an emergency basis. The alternative would be for fourty percent of the group to vote to bother everyone and wake them up, as well as have approval of one employee, in this case the super. (This is all programmed into the bylaws of the corporation and those procedures are automatically enabled.) They all the hold the line while the super makes sure that he really can shut the water off. He does so, and the group do vote to give the plumber fourty dollars for going quickly, shutting the water and helping the tenant mop it up. They also set up the procedure for everyone to be contacted for an eight AM meeting to decide the permanent fix for the leak.

A few days later, unrelatedly, Apartment 2C became vacant. A young medical student presents wanting to rent the apartment. He had no current income but he did offer a one percernt life time share of his medical income in exchange for his rent. He presented his grades from Undergraduate School and recommendations, as well as video record of his study time during his undergraduate days for their perusal. He estimated his medical income from the Bureau of Labor Statistics data, and it certainly would have been attractive. But they won't get any money until he starts practicing, seven or eight years away--depending upon what residency he picks. This was not an emergency, so a random sample of share owners was convened. They each got votes proportional to their share; some on the call to discuss this thus have a higher percentage and some had a lower percentage. Based on the estimate, the bylaw computer estimated for Ms. Jones would get thirteen dollars every year he practiced. However, the others wanted more current income and she was outvoted.

However, Ms. Jones found his prospects attractive, and maybe him as well, so he send him a message that she would talk to some of her friends at the hospital. Several of the other nurses reviewed the records, they all had a surplus of income over expenses that needed to be invested. So they sponsored him, authorizing a share of their current income in exchange for his share of his medical income. With that, he went to an apartment complex down the street and the owners there took a share of the nurses income while he was in medical school and he signed over at the e-notary, one percent of his medical income. (A comment on any subsequent romantic involvement between Ms. Jones and the future doctor is beyond the scope of this posting!)

After the second "Great Recession" in 2025, the United States shifted to a share economy. Ms. Jones' grandfather, a construction worker, joined the team to build the apartment complex above and he got a six percent share but no money since the apartment complex was built on spec. He had rented a house to live in on 1/3 share of his income. So two percent of the apartment complex income went to the original owner of that house. When he passed on, each of his four grand children got one quarter of his assets, he had accumulated several other shares over the years. And so that is how Ms. Jones ended up with one share of the apartment complex.

And as our young doctor went off and practiced, he remembered the help that he got that day and many others. And sometimes a young college student would need medical care, and they would exchange a 0.1 share of their income for his professional practice. And each of our six nurses then ended up with a 0.002% percent share in each of their life incomes.

I talk about corporations and how larger corporations would run in the share economy in August Fifth's Thoughtful Thursday.

Thoughtful Thursday, Robert A Dahl, Democracy, Liberty and Equality

Robert A. Dahl, Democracy, Liberty and Equality, Norwegian University Press, 1986

Worker Democracy

Worker democracy can work. Would workers take all revenue as pay or would they invest as needed The Mondragon cooperative was owned by workers--increased at 8.5 percent year and improved market share from one to ten percent. They invested four times the average rate for firms and cooperatives voted to increase their capital contributions. Mondragon also educated its own employees so they could become managers. Each cooperative decides on the ratio of pay between executives and workers. And Dahl observed that the worker-managed cooperatives of Yugloslavia. But in contrast producer cooperatives were short lived in the late nineteenth century, giving this idea a bad name.

Our proposal here is not socialism, but that workers and investors share revenue and control. Organizations such as library and universities spend eighty percent of their income or government funds on the employee salaries and benefits. (I just read in Queens Gazette that the Queens Public Library spends eighty per cent on employees. My University is a little bit more than eighty percent.) On the other hand, chemical processing plants pay only ten to fifteen percent in wages. Midway, Neogenomics that tests for Cancer has fifty percent of its revenue going to workers. Capital intensive industries would of course have most of the revenue going to the investors on a share basis, so it is neither socialist nor on the other hand advocate firm owner control. (This is an issue raised by Benjamin Ward in his book on Socialism and article on "Illyria" loosely based upon Yugoslavian experience. I recall he was concerned that a worker-managed firm wasting the capital. I will put out a Thoughtful Thursday when I get some books out of storage after I was forced to move.)

And the socialists in Denmark proposed a payroll tax was invested back into the employee's firm giving them a vote but limited to fifty percent to protect he conventional owner. He reports that worker-managed firms are more productive than conventional managed firms.

But not all socialists believe in workers. There is a contrast between the Fabian socialists and the old Labor Party of Britain and the Syndicalist. In the 1920s, the webbs said that each nationalized firm should be appointed by a mixture of workers, the administrators and the consumer community. But by 1932, the British Trade Union Congress called for business to be run by Government appointees. Advisory Boards would represents interests of both consumers.

federalism

True federalism is different from delegation. A political subunit or school district may have total autonomy to handle education matters with the larger commonweal having upper categories. If this is in the constitution and considered a right like free speech, then it is true federalism as opposed to administrative convenience of delegating responsibility. Citizens are represented in all fields, at the local level for education, at the national level for everything else.

What Dr. Dahl ignores is that federalism is not clear cut. Yes the Constitution might declare local control for education? And national or federal control for such things as foreign policy. What happens if the National Government signs a treaty that limits educational autonomy? The United States has concern over Madrasah's in Pakistan and Pakistan created an education board--so this is not far fetched. And, of course, the United States Federal Government has forcefully integrated American schools.

So, in setting up a government, what rights should individuals or schools or states be given? This is a difficult problem for constitutional courts, and one that might be abused either way. I propose a 100% rule. A law that affects a local area requires approval by x%+y% = 100 where x is the pass rate at the local level and y% is the pass rate at the federal government. When there is a conflict between the federal and state or local aegis, the percentage at the higher level voting down the law as repugnant, e. g. the federal government saying this "education" is religious indoctrination must be larger than the percentage that passed it. Thus if a locality votes 99% that its education should do t would need at least a 99% vote at the national level, or the sortition jury hearing the case in the national court, to overturn it.

Note

This is another book I borrowed from the Columbia University Library. Dr. Dahl proposed at the descriptive level that there are many elites that control government rather than just a narrow one at the top. Wikipedia article on him used the term "dean of American political scientists"

Taleb on debt and risk and short termism

I wrote about Dr. Taleb and his hatred of debt, the author of Black Swan. He is in the news for two new video interviews. He would seem to be sympathetic with the ideas and proposals here. Replace debt with equity--although I give a share to the workers We want to be in a society where it protects against adverse events--again the share economy. And we are rewarding short-termism. Let's hold up people's pay and reward and incentives for a long time to see if they are truly acting in the long term best interest of whomever they are supposed to be working for, the students, the nation, the stakeholders or shareholders in the broad sense of the firm.

Energy, Growth and Sustainability, Thoughtful Thursday

SPRU Electronic Working Paper Number 185, ENERGY, GROWTH AND SUSTAINABILITY: FIVE PROPOSITIONS, Steve Sorrell, March 2010

The modern financial system means that most of the money supply is interest-bearing debt. This article cites several references, which I list below for follow up where people proposed one hundred percent reserve banking. It is a theme that Anne Pettifor spoke in her book. And it would also re resolved under a share economy. Because of the reserve-banking-based economy, the developed world cannot shift to a low-consumption pattern without financial crises. This issue was taken up in several comments to Gail the Actuaries post in the Oil Drum this May Eigth about the debt rate, where one comment said if "wipe out all debt" would "wipe all money" if we ever have a jubilee. In the old days, whoever possesed the money at the time of the jubilee would keep it and would then have purchasing power to reprime the pump. Is this true when so much of the money is based upon the fractional reserves banking system?. It seems that if one has lots of bankruptcies or a Jubilee-approach or liquidations of companies, a participatory-democracy case-by-case approach needs to be taken to ensure that the person who lied about their income on their mortgage application, engaged in unproductive financial engineering, does not get left with a totally unfair share of the purchasing poewr. And we protect the person who worked hard for a pension or the person of modest income who scrimped and saved a million dollars over a life time, a la Millionaire Next Door.

One would think when our engineers develop better ways to use energy, efficiency, our economy will use less energy. That is, if an automobile has better miles per gallon, less gasoline is consumed. However, some indivdiuals may find more money in their pocket, which will lead to more spending. A little bit of it is a direct rebound effect--it costs less to drive so we drive more, but probably, this is not elastic. But the global effects are different. The Bessmer Steel process used less energy than the alternative--more rails and more transportation and all the economic goods that come from economic productivity. Similar things happened with motors, the steam energy making it more efficient to mine coal, which meant that more coal was available. The latter was observed in 1865 by Jevons--hence the name, Jevons paradox.

California sets energy efficiency requirements for new television sets. But it does not do anything to get consumers to purchase a smaller Television and save energy that way. Their web site says "Consumers will always have the freedom to buy any size or style TV they like." Compare and contrast the sortition-based consumption-based badness tax.

And this article confirmed something I cited earlier in the United States. Britain reduced its carbon emissions at home, but this at the same time that it imported products that were made by burning lots of coal elsewhere.

To follow up on future Thoughtful Thursdays

1. Fisher I (1936) 100% Money New York Adelphi
2. Fisher I The debt-deflation theory of great depressions" Econometrica October 1933
3. Friedman M. (1960) A Programme for Monetary Stability New York, Fordham University Press
4. Jackson T. (2000() "Prosperity without growth? The transition to a sustainable economy" Sustainable Development Commission
5. Douthwaite, R. The Ecology of Money Dublin Ireland: Theo Foundation of Economics of Stability (FEASTA)
6. Simons H. (1948) Economic Policy for a Free Society Chicago: Univerity of Chicago Press
7. Soddy F, 1926, Wealth, Virtual Wealth and Debt London George Aleln and UNW

On the rebound effect and energy efficiency:

1. Rosenberg N. (1989) Energy Efficient Technologyies: Past, Present and Future Perspectives How Far can the World Get on Energy Efiicnecy Alone Oak Ridge National Labs.
2. Sanne C. (2000) "Dealing with Environmental Savings in a Dynamical Economy How to Stop Chasiong YOur Tail in the Pursuit of Sutainability" Energy Policy 28 6 to 7 487 to 95
3. Sanne C. (2002) Willing Consumers or Locked in? Policies for Sustainable Consumption" Ecological Ecoomics 47 273 to 287.
4. Saunders H. D. (2000) "A view from the Macro Side: Rebound, backfire, and Khazzoom-Brookes." Energy Poicy 286 t to 7 439 to 49, 2000
5. Sorrell S. (2007) "The Rebound Effect: An Assessment of the Evidence for Economy-Wide Energy Saviongs from Improved Energy Efficiency"
6. Sorrell, S. and J. Dimitropoulous (2007a) "The Rebound effect: Definitions, Limitations and Extensions" Ecological Economics 65 to 3 636 to 649
7. Victor, P. A. (2008) Managing without Growth: Slower by Design, Not Disaster Edward Elgar

Edmunds Brave New Wealthy World

John C. Edmunds, Brave New Wealthy World: Winning the Struggle for World Prosperity Prentice Hall Financial Times Press, 2003

Edmunds has precisely the opposite philosophy of this blogger--asset sales are good, the problems in the Third World are due to the fact that their assets are not worth enough, securitization and selling assets is good. In Costa Rica, a car that would be worth $2500 would sell for $500.00 and a house renting for $700.00 would sell for $15,000.00, a coffee farm of 300 acres sold for $4,000 in Nicaragua. But then he described the lack of good title on the farm.

But he described booms in Cambridge, Madrid and Argentina. The last was an internet boom funded by venture capital. The middle one was fueled by asset speculation when Spain joined the European Common Market. Edmunds described the chexck out in a department store where people were buying so many "fancy tools," "ornate light fixutres" that they "could barely carryt heir purchases." "Some of the items were competely frivolous and way overpriced."

"Financial assets pile up more quickly than the phyiscal assets and the output that collateralize them," Financial assets are simply a document (or a computer blip) that one receives when one invests. Historically, they were illiquid, but now they sell. He looks forward to the date when borrowers don't deal with financial institutions, they put their application on the market, and people invest in it directly. Where Dr. Edmund and this blog differ, is that they should not trade. The borrower keeps the financial asset and receives the income represented buy that investor, say a share of a physicians income for their life, when they invest in a medical student's education, or a share in the revenue for the railroad to which they contributed money to build, repair or reconstruct.

He had a straightforward excellent of financial engineering was the government selling an airport. There probably isn't anyone who is both rich enough to buy a whole airport and who would have the interest in managing it. Thus, we need to break down the item into securities. They would have to rely on trusted management, auditors and lawyers. And these little bits of the cost of the airport would be held by savers around the world. But where we differ is that the airport should not be sold. And the municipality would not be able to spend the windfall from the airport wisely--instead they would trade shares of the revenue from the airport which presumably would last a long time the airport for a share of the saver's income for a shorter time, perhaps for the duration of the resurfacing project.

Of course, with an airport there is a part of the expected revenue that one is confident to receive, even if we have another September 11th 2001 incident or an economic slowdown, and there is additional revenue that would come in boom times or if the country gets to host the Olympics. What financial engineering is, is splitting the bond holders get the first part and the stock owners make a profit only when the second part comes in. Individuals needing secure investments buy the bonds and individuals wanting to take a risk buy the stocks. The latter would see the value of their stocks drop close to zero after a second September 11th while the bond holders still get paid--if the financial engineer model holds up and airplane travel doesn't go down still further.

Instead, what do we do, is simply share the revenue directly. The stereotypical retirement investor starts out accepting risks and then sells their investments thirty years later investing it in secure bonds. I see that investor investing early in their life on relative long shots. When some of they morph into revenue generators, e. g. Google that gets twenty three billion in revenues, the investors will take their share and invest it in a more secure firm, e. g. a utility, or lending it to a government in a stable country whose revenue is less likely to gyrate. Those Googles who are still willing to take risks might plow it back into google, assuming its revenues amounts are more volatile.

And we encourage people who deal with airports, e. g. pilots, workers at other airports, to invest a little bit of their retirement savings in this investment. That way, they get to be on the sortition juries when the airport managers have to take a decision.

Samuelson calculated that a countries total financial assets could be two to five times their annual GDP. The United States is at about that level while the emerging market is much smaller. Thus, the financial engineers should securitize assets and investments in the emerging bmarket (for example building This will product tremendous capital gains for the savers in the first world, and a few in the emerging markets, which will finance their retirement. The globalization critics say this is companies relinquishing "their economic sovereignty" so that 300 million retirement investors could passively earn tremendous capital gains.

And the poor people would have their standard of living raised to form a new middle class, earn money, want to invest it for their retirements and buy the securities owned by the aging first world middle class. Financial Planning is not relying on the market in which to sell assets, but accumulating revenues from the real investment.

John Edmunds recognizes that financial systems where banks lend to their friends or family or the Central Bank lends to the dictator's friends are corrupt, don't serve any purpose to the countrie's development, and waste valuable capital and savings! This is obvious. And he illustrates this by reporting many half-finished sky-scrapers in citries such as Manila, Peru and Caracas--politically connected members get loans below the cost of inflation, they half-build a building and then wait for the need for the building before finishing it, earning a profit on the fact that construction costs were more than what they were lent and paid out in interest. And there was the totally fraudulent flour mill in Nicaragua paid for by a loan to the Interamerican Development Bank--and even if the flour mill was built, there was little need as Nicaragua does not produce flour and it ground flour costs about the same as wheat which needs to be milled. But getting rid of corruption is critical, regardless of whether one has capitalism and finance as we have it now, the share economy proposed here, or a strictly socialist or communist regime!

More on Strategic Defaults on mortgages

Seventeen percent of mortgage defaults are strategic defaults. and is going up to a third Mortgage defaults and mortgage squeezes is exactly what the share economy is good for.

Thanks to Rick Ungar and his policy page for linking to the new article from the Los Angeles Times.

General Growth Inc. and why we need a share economy

General Growth, a mall owner and operator, declared bankruptcy--because its bonds and mortgages were for five years and they simply came due. This is why we should not have bonds with fixed maturity dates, only a share continuous stream. This avoids manufactured crises that have nothing to do with fundamentals.

General Growth declared bankruptcy. A bunch of speculators bought their bonds at three cents on the dollar. Those same bonds are selling above par and the speculators made a dramatic profit.

Mortgage Crises, Share Economy

The Tarp Watchdog, Neil Barofsky, is concerned abuot that ninety percent of mortgage loans are backed by Fannie Mae, Fredie Mac and the Federal Housing Administration. This has increased the risk of another housing bubble. Millions of home owners have refinanced.

A long term solution is extending the idea of the share economy. An MIT Economist, Martin Weitzman proposed the Share Economy as a solution to stagflation. Companies would pay their workers a fixed percentage of their gross revenue rather than a fixed monthly wage. That way, when recession hits, the company would not have to lay people off.

Extending the idea, mortgage payments would be a percentage of the wages. The investments based upon them would not be fixed-rate instruments, but a simple percentage of the payments received from the mortages on which they are based. For example, twenty individual with $100,000 to invest might contribute $5,000.00 to each of twenty mortgages for a total of $100,000.00. Each borrower would agree to pay thirty percent of their take-home pay to the mortgage. Thus each investor would receive 1.5% of each worker's gross revenue. Should one borrower suffer a medical setback or a layoff, this would get propagated to the mortgagors. Of course, other borrowers might do better than expected, so with good diversification and "the law of large numbers," it would approximately balance out. Should one of these investors themselves have a mortgage, the changes in their income would be propagated to the investors funding same, so they would not be squeezed. And this idea works well with commercial mortgages such as for hotels and shopping centers. The hotelier would pay a percentage of the room rents they received, and the shopping center would pay a percentage of the rents, which often are a percentage of what the stores sell. Thus commercial real estate trusts would not go bankrupt unless they couldn't pay basic upkeep; then, they would cease paying revenue when the buildings crumble and the ultimate investors would get the appropriate share of the value of the raw land.

Yogi Berra said that "It is difficult to make predictions, especially when they concern the future." Weitzman's share economy means that when a business owner predicts higher demand or better prices for the firm's products, the workers don't suffer layoffs. We should extend this idea to mortgages and for those receiving income from real estate or securitized mortgages. This means that homeowners don't suffer foreclosures and financial institutions don't fail just because someone is more optimistic than the reality turns out to be. There is already precedent for this, one can convert some types of student loan to an agreement one pays up to twenty percent of one's income rather than a fixed payment.

This idea of extending the share economy to segments of the financial industry is certainly not new. As Hyman Minsky pointed out in 1995, using speculative assets can lead to a cash shortage and a collapse. A long term solution is extending the idea of the share economy. An MIT Economist, Martin Weitzman proposed the Share Economy as a solution to stagflation. Companies would pay their workers a fixed percentage of their gross revenue rather than a fixed monthly wage. That way, when recession hits, the company would not have to lay people off.

Extending the idea, mortgage payments would be a percentage of the wages. The investments based upon them would not be fixed-rate instruments, but a simple percentage of the payments received from the mortages on which they are based. For example, twenty individual with $100,000 to invest might contribute $5,000.00 to each of twenty mortgages for a total of $100,000.00. Each borrower would agree to pay thirty percent of their take-home pay to the mortgage. Thus each investor would receive 1.5% of each worker's gross revenue. Should one borrower suffer a medical setback or a layoff, this would get propagated to the mortgagors. Of course, other borrowers might do better than expected, so with good diversification and "the law of large numbers," it would approximately balance out. Should one of these investors themselves have a mortgage, the changes in their income would be propagated to the investors funding same, so they would not be squeezed. And this idea works well with commercial mortgages such as for hotels and shopping centers. The hotelier would pay a percentage of the room rents they received, and the shopping center would pay a percentage of the rents, which often are a percentage of what the stores sell. Thus commercial real estate trusts would not go bankrupt unless they couldn't pay basic upkeep; then, they would cease paying revenue when the buildings crumble and the ultimate investors would get the appropriate share of the value of the raw land.

Yogi Berra said that "It is difficult to make predictions, especially when they concern the future." Weitzman's share economy means that when a business owner predicts higher demand or better prices for the firm's products, the workers don't suffer layoffs. We should extend this idea to mortgages and for those receiving income from real estate or securitized mortgages. This means that homeowners don't suffer foreclosures and financial institutions don't fail just because someone is more optimistic than the reality turns out to be. There is already precedent for this, one can convert some types of student loan to an agreement one pays up to twenty percent of one's income rather than a fixed payment.

This idea of extending the share economy to segments of the financial industry is certainly not new. As Minsky pointed out in 1995, using debt to create physical assets and the the hedge finance of our modern capitalist system can (and obviously has) evolved into speculative bubbles, like we see in real estate.

Underwater Mortgages and the Share Economy

Twenty five percent are "underwater" on their mortgage or twenty-three percent according to the Core Logic report, which shows that in Arizona and Nevada, it is reaching levels of half the mortgagees. That is the home owner owes more than the house is worth, often having buying with no money down. They are walking away from their mortgage. Seventeen percent of defaults are strategic defaults. Share economy mortgage is the answer, the mortgage is a fixed per cent of their income.

What happens when they sell "under water." Let's say they purchased for $400,000. They agree to pay 25% of their income for the mortgae. They sell for $300,000.00. They pay $75,000 to the bank, keep $225,000.00, but continue paying the 25% of their income to the bank.

This evens the moral playing field between those who do what might financially best for them, and those who feel a moral obligation to continue paying their mortgage.

Deflation

We have heard much about the evils of deflation. By far the most important issue is that those who have fixed debts find them increasingly burdensome. The share economy And I have heard that the main nation for deflation is Japan. Deflation continues in that country.

Fed and the Financial System

THE FED does not know when to pop "asset bubbles" and its only weapon seems to be rates. The best answer is to control the buying and selling directly, and have people exchange shares in income, whether it be a house or a business. And interest rates at zero are encouraging inflation and complaints that U. S. monetary policy might be contributing to bubbles abroad. And I reviewed Ann Pettifor's book whose prime point is saying that the creation of money should be done to further the public good rather than led banks and others draw the profits.

Ludwig von Mises

The Wall Street Journal had an opinion piece by Mark Pitznagel on Ludwig von Mises, I remember trying to read him as a child or teenager when I was on a libertarian phase. He argued that half baked investments will liquidate in a free economy, but if the government creates cheap credit, one is likely to have a banking collapse. And, he like, Taleb says the banking system is then dramatically likely to have errors. That is why we should have a share economy.

Ludwig von Mises turned down a "lucrative job offer from the Viennesse bank Kreditanstalt" proclaiming, 'A Great crash is coming, and I don't want my name in any way connected with it.' The calendar had said it was mid 1929.

Stimubucks, Share Economy, targetted spending

Germany promoted a share the work scheme where they gave subsidies to firms who did not lay off workers but rather reduced their hours. Germany had little increase in unemployment. (But he did not add that all Europe has had high unemployment in general.) He also argued in favor of a Works Progress Administration Krugman has made clear that he prefers a conventional stimulus. I have argued that a target fiscal stimulus, targeted by sortition juries, should be aimed specifically at reducing unemployment.

Nassim Nicholas Taleb, Black Swan, On Debt

My alma mater, Polytechnic Institute, now Polytechnic Instiute of New York University, hired Nassim Nicholas Taleb, of Black Swan fame. He said, "a complex financial system cannot tolerate debt" because debt "doesn't allow someone to make mistakes."

Of course, here I advocated the share economy, an economy without debt, and without nonlinearity as everything is a percentage of everything else.

Source, Polytechnic Cable, Spring 2009, page 7 to 8, Volume 36 No Two.

No Layoff Share-economy companies

I wrote about the share economy, where companies share their revenue with their employees. During recessions, their employees make less; but there are no layoffs.

NPR had a section today about manufacturers who produce high-tech goods and have highly skilled and trained work force, do not want to lose their loyal employees. Frank Koller wrote a book, Spark about no-layoff companies. Of course there are reasons that companies are reluctant to cut wages rather than lay people. Truman bowley discussed this many years ago in Why Wages don't fall during a Recession They are reason more than the inertia of organizing a busines s differently, or management taking on a different set of headaches, or even labor unions, as mentioned in the story.