The Global Unanimocracy Network

State of Illinois is in hock, productive people on the hook

A.B. Dada — Thu, 11 Mar 2010 17:05:25 +0000

There’s an aphorism that us free marketeers say often: “If you subsidize something, you get more of it.” That’s always the case when government starts a “war” on some impoverished industry or group of people: they subsidize things to make them “affordable” without looking at the losses that are placed on the backs of the productive people in society. Bastiat wrote of it in his parable of the broken window.

The biggest problem with subsidies is that the State can never really pick the industry to subsidize as fast as consumer demand changes to account for what people want and need. Just because some people want more money spent on education doesn’t mean that the State’s education spending will go to the people who want it the most or need it the most. Only with private, competitive businesses do we see the kind of price and service adjustments happen in nearly real time that account for consumer demand for a given product or service. Almost everything the State does is a near monopoly on the provision of a service.

The State of Illinois budget website has 5 items that lead their campaign for “reform,” which generally means more taxes:

Promote JOB GROWTH

The State of Illinois passed a ridiculous law in 2009 called Illinois Jobs Now! The program, which the State estimates to create nearly 500,000 jobs at a cost of $70,000 per worker, is supposed to fund community projects to get things done that the local communities weren’t doing for themselves. This is just a make-work program, one that takes money from productive people and gives it to unproductive people at a salary far above what would likely be spent hiring them in the private market for services people actually want and need. When the State spends $31 billion to create State jobs, it’s no wonder that they’re broke.

That $31 billion is money that could stay in taxpayer’s pockets and be spent on things they want and need. It isn’t the wealthy who are paying it, either: consider all the tax money that even the poor pay to the State through sales tax, cigarette tax, alcohol tax and all the variety of user fees and taxes that are hidden in the cost of production and servicing. The jobs that are created are not needed and are frivolous — if local communities really need to do things, they should focus on finding the funds to do them without stealing from the rest of the State.

Request continued FEDERAL ASSISTANCE through the recession

The State of Illinois has received billions in “bailout” money and then spent it on candy for their voter blocs. This money is running out, so the State of Illinois hopes to steal from other more productive states to buy even more candy for the welfare recipients. Federal money comes from somewhere, and over time the amount you receive will almost always be lost to the amount you pay to other states who will have “needs” for Federal assistance in the future. On top of that, favoritism and cronyism takes its own share of those funds, money that never gets spent properly by consumers on their needs and wants, an activity that tells the market how to adjust what products and services it provides and at what cost.

Worse, this bailout money actually makes it difficult for businesses who are not cronies of State legislators because they have to compete on uneven grounds. Bailout funds likely cause net job LOSSES as the unsubsidized private companies go under, leaving only the subsidized companies who then cry for more money. The old adage stands true: if you give someone something, they will not be a good steward of it.

Continue to CUT SPENDING

This is always humorous, because governments rarely actually cut overall spending, they just make minor adjustments to certain areas and point the finger at their “great” work while patting themselves on the back. Even if some future spending is cut in some areas, past debt and pension agreements will still inflate the budget beyond what can be debated as fundamental spending for a huge government body.

Many areas that the state spends money in make little sense for a large government body to attack. The war on drugs costs Illinois taxpayers billions and has done nothing to halt the use of drugs. Even worse, the long term costs of this war make it detrimental to taxpayers: jailing drug users is expensive, and creates more debt for the overburdened taxpayers.

To truly cut costs, the state has to do it significantly. There are many programs the state can shut down entirely that will be instantly covered by private industry, and at a better cost with more variety of service levels, too. Even though we supposedly had an economic boom for years, the State of Illinois has spent 38% more money per citizen in 2008 than in 1998, adjusted for inflation. Why a state thinks it should need to spend money when people are making more money has never been answered.

The state still spends money putting lights up for little league stadiums, disburses billions to crony businesses through the Department of Commerce and Economic Opportunity, and sends billions in pork barrel projects downstate so the southern legislators look the other way on City of Chicago outlays by the state. The measly few billion the state is underwater could be solved with no “fundamental” services being trimmed, and no income tax increase.

Adopt REVENUE ENHANCEMENTS

Revenue enhancements means tax and fee increases. They’re already talking about raising the income tax 50%, creating new fees for vehicle registration, and adding another $1 tax increase for cigarettes. All of these “enhancements” push the opportunities for business growth into other states with less of a burden on citizens living and working in the state. There’s no doubt that raising taxes and fees would help repair the debt issue, but as we all know, government can’t keep its hands out of the cookie jar. The minute that taxes are raised, spending will move upwards, too, until the new funds are long gone.

To push for more jobs, more growth and a more secure future for Illinois citizens, the State needs to re-read its Constitution and follow it. It has overextended its domain and authority into areas where a large, bureaucratic and parasite-laden organization can not handle efficiently. Cut the state budget significantly, send the money back to taxpayers, and see the economy within Illinois boom as it attracts competitive businesses to fill in the holes temporarily left by government leaving those markets.

That effect would happen almost overnight. The current ideas put forth by the State will just push the punishment for years of overspending and overreaching down the road further, but that bill will be paid in full, on the backs of those of us who aren’t wise enough to jump across the border to a fairer, less intrusive state.

My fears about buying a home

A.B. Dada — Wed, 24 Feb 2010 18:00:10 +0000

Many people in my life have made the jump to home ownership in the past 6 months: one of my best friends and business associate purchased a great home for his wife and himself, a family member upgraded to a larger home as his family grows, a customer of mine downsized their home due to becoming empty nesters as the kids left for college and work. Home prices have tumbled since the Federal Reserve-inspired artificial boom of the early 2000s, but have they tumbled enough?

I’m not married and have no plans to buy a house to raise a family in any time in the near future. I live in a tiny, ancient and practically underground garden apartment that occupies about 400 square feet of space, and I have plenty of room left to add more clutter and junk if I wanted to (I don’t, I actually want to get rid of MORE clutter and junk). If I have an overnight guest, my queen size bed that occupies all of my bedroom is plenty of room for both of us and my cat. My 2 person loveseat is all I need for entertaining company — if I want to invite more friends over, I can rent the large bar down the street for a few hundred bucks a night.

I make a solid 6 figures annually including all my revenue streams, so I could easily afford a great home at 2.5X to 3X my income, but I fear the reality of home prices today: they’re still too high. It has always been my “reality” that home buying requires a few necessary requirements to be fulfilled before taking the plunge:

A 20% down-payment calculated from the actual full purchase price of the home (add in everything including inspection and any moving costs),
A restricted 12% interest rate on a mortgage (I’ll explain that below),
No more than 2.5X income for the actual full purchase price of the home,
A 10-15 year mortgage, maximum, payable in bi-weekly payments (that’s 26 payments a year),
A full understanding of energy costs, insurance costs, property tax costs and any community association dues (which I would never be a member of or pay),
An understanding of loss of time due to extra driving, dealing with road issues (traffic, trains, snow removal, speed limits, etc).

For me to move from my perfectly-located apartment to a home would require a lot of research for a full year: how well does the city or private contractors plow snow in the winter? How often do commuter and commercial trains block off the main streets? How long would it take to get to a major highway and airport at the maximum, average and minimum times? It’s not something I could do just because I love the crown molding and 4 car garage. It’s a lot of work.

But even if I could afford a mortgage (I can), it doesn’t mean I trust home prices at all in the 15 years I would likely occupy such a home. For people who may likely spend the rest of their lives in their homes (like my business associate), buying a home now can make sense — Federal tax credits and desperate sellers are huge incentive, if you don’t plan on selling the home.

The biggest reality to me is that the Federal government is past the point of no return in terms of monetary policy. Greenspan and Bernanke, Federal Reserve chairmen, have destroyed the value of the dollar just like their predecessors did. The dollar will not get stronger, not against anything, because of the burden of current and future Federal debt. The only way to save the dollar will be to raise interest rates significantly, from 0.5% to 12%. This will happen in my lifetime, and it may happen sooner rather than later. I would be surprised if interest rates didn’t hit at least 6% by 2020, just a decade away.

Mortgage rates aren’t completely tied to the Federal Funds Rate or other Federal Reserve inspired interest rates, but they do have correlation. If the Federal Reserve realizes that the dollar is on the brink of collapse, it will have to raise rates to at least 6%, and it would not shock me if it hit even 12% in the next decade based on the frustration of younger voters who no longer want to bail out mom-and-dad for screwing everyone’s future with decades of supporting political candidates who just love pork and spending and war and welfare and power.

A high interest rate would encourage a high savings rate (meaning a savings account at the bank, not an investment account in stocks). When I was a child, regular bank savings accounts paid interest rates of up to 6% — an amazing return on money just sitting in the bank. These deposit accounts used to also finance mortgages, but today’s process of mortgage financing comes more from Federal Reserve inflationary policies that banks can take advantage of, as well as investor-related funds putting up the collateral for 30 year mortgages.

When the interest rates rise, mortgage rates will rise as well. The 5% loans you can easily get today will be 12% or even 15% loans, causing mortgages to be expensive unless home prices fall. When my father bought his first home in the early 70s, his interest rate with great credit was almost 18% and he only had a 20 year mortgage instead of the more common (and psychotic) 30 year term. The home price was 90% cheaper than the identical home today. The difference between a $40,000 home in 1973 and a $400,000 home in 2010 is all the responsibility of the Federal Reserve: over those nearly 40 years, they’ve destroyed the value of the dollar, causing prices to rise. It’s all their fault, and the day will come when the average 20-something realizes this.

Houses that cost $300,000 today at a 5% mortgage interest rate would cost about $1600 a month, not including property taxes and other costs. If the mortgage interest rate was at 12%, the same $1600 a month would get you a home that costs $155,000 — a 48% drop in the maximum purchase price of the home (and much more reasonable at 2.5X income as you’d only need $62,000 a year to buy it). But if the loan terms fell to 20 years (likely if the banks had to finance their own loans rather than sell them to investors who have been burned often in the past 5 years), that same $1600 a month loan would only buy a home worth $145,000 — very reasonable at 2.5X an income of $58,000 per year and a down payment of only $29,000.

If bank savings accounts paid 6% instead of 0.1%, young new workers at 21 could and would easily save that $29,000 in just 5 years, buying their first homes by 26 with 20% down and an easy payment over 15 years instead of 30. It isn’t just likely to happen, it will happen. As interest rates rise, home prices will fall. They’ve already fallen 50% in some community in just 4 years, and I have no doubt that we’ll see another collapse in prices over the next 10-15 years.

For those who truly know they will stay in their recently purchased homes for the rest of their lives (until empty nesting comes around), the difference over 30-40 years is not that consequential. The use of the home for that time frame may cost them an extra $300-$500 a month, which isn’t a big deal. But if you plan on selling in 5 or 10 or 15 years, it’s a huge risk to take. You’re looking at a significant loss ($1000 a month+) when it comes time to sell a home that you still owe 60% of the original purchase price on and current prices are below what you owe. No, thanks.

If you do buy a home, no matter what your interest rate is, you can protect yourself by re-calculating it at 10% or 12%. Take that payment and see if you can afford it. If so, make your usual bi-weekly payment, and take the rest of the “probably mortgage cost” and deposit it into the highest yield savings structure you can (money market, savings, CD, whatever). Don’t touch it, ever, unless you sell. That’s the pain of buying a home at an unrealistically low interest rate. It’s also reasonable as it will protect you when it comes time to sell your anchor and bring a 6-figure check with to the closing.

For me, my tiny apartment makes sense. If I need a bigger space, I’ll happily rent and not worry about the meager mortgage interest deduction on my taxes, maintenance on the house that always falls apart, and risk of being stuck in a 30 year anchor if my business market moves an hour or 10 hours away. For me, the stability of living in a $500 a month apartment is greater than the “amazing feeling” (like using crack cocaine) of owning a home that honestly will fall in value.

Whatever Obama or the next President does, the same jokers who run the Federal Reserve will still be stealing your savings and your future. The time to pay the piper will come, and it will come not just in your lifetime but in the next decade or so. If you don’t think you’re going to stay in your next home for at least 3 decades, buying now is a horrible idea. I’ll take a pass, but maybe I’ll rent that anchor you buy from you at a later date — and at 50% the cost you pay to “own” it.

Amazon versus Macmillan, Hachette, Publishers, Authors, etc.

A.B. Dada — Sun, 07 Feb 2010 17:21:40 +0000

When Amazon decided to try to fight publishers by telling them they were going to sell e-books at a fixed price ($9.99), Apple came in with their iPad and another e-book store to give publishers the option to sell books at a range of prices ($5.99 to $14.99). The publishers balked, and Amazon cut their ability to sell on Amazon, causing some in-fighting until Amazon finally capitulated and gave in to publishers for some sort of variable pricing arrangement.

Lots of industry experts in publishing and tech have chimed in. I think the best article I’ve read, but still far from reality, is author and ex-publisher Paul Carr’s article on TechCrunch “Hey, 1997 – Macmillan called, they want the Net Book Agreement back.” Good job for Mr. Carr to point the fingers at the publishers, but he’s still off track on the reality of online publishing of any material. The only people who are capable of understanding what will happen with the e-book market (and the e-music market, and the e-video market) are those who understand the Austrian School of Economic theory. I don’t know, right now, of any Austrians who are addressing this particular event, but it’s easy to consider what exactly will happen in the future: prices of easily copied content will be forced to zero.

Austrians live and die by supply and demand. Even with government laws and regulations that try to create artificial scarcity (copyright laws, for example), the market of content consumers will too easily be able to get around whatever scarcity the publishers create. Usually that scarcity is circumvented through piracy. As long as there is a near infinite supply of an item, the price will fall to zero for those who are unwilling to go through official methods to get the product.

It doesn’t matter how many steps publishers take to try to hamper the efforts of casual pirates (such as those who grab a movie or MP3 off of a torrent site), increasing fines, increasing threats, changing international laws to try to stifle the flow of information. There is no way to stop this progress now that it has begun.

As any Austrian will tell you, the only way to make money in a market is to offer services or products that people want at prices that are aligned with supply and demand. I didn’t say “at prices that people are willing to pay.” Since the supply of electronic content is near infinite, content creators have to find new ways to generate income.

In terms of music, bands will eventually stop working on selling MP3s and likely just give them away for free. The internet, and torrent sites, is the equivalent of a gigantic radio station. MP3s will be downloadable for free so that musicians can show fans what their music is like. In order to make a profit, musicians will have to charge realistic prices for their live performances, or off value added options to fans that are limited in supply. How about giving away MP3s regularly for free, but offering fans access to a fan club website where they can interact with the band? If they don’t pay for access, they can still appreciate the music they like. If they love the band enough, they’ll gladly pay for fan site access or for tickets to the live shows.

The next step for bands to acquire a realistic income for the live performance work they provide is to get rid of the ticket brokers and move to an eBay-like auction site for concert tickets with proceeds from all sales going directly to the band, rather than the ticket brokers. This will remove the “flat cost” that bands get when they sell tickets at a fixed price, which is a ridiculous idea (akin to Amazon trying to sell infinitely available e-content for a fixed price instead of zero).

But how would an author sell their own time if they just gave away their books? That’s a difficult question. Many authors today, amateurs most of us, are just blogging in hopes of getting pennies a day in advertising on our blogs. It’s not very unique and there is a seemingly endless supply of blogs covering the same topics over and over. If a blogger/author writes well and in a way that readers appreciate, there are numerous ways for these authors and bloggers to generate an income without charging for content. One such way might be to allow readers to read their blogs for free, but interaction with the site comes at a monthly subscription. You can read the blogs freely, but if you want to leave a comment and interact with other readers or the author, you have to pay.

The same case can be said for book authors — the difference between a blog and an e-book is slim, if not none. Authors can release their e-book online for free (in parts, or wholly) and then offer readers the opportunity to pay the author for online interaction with the book (in a private forum or through private comments). Maybe the author’s website could show a limited amount of each comment left, hiding the rest so that readers are enticed into subscribing to read the whole list, and leave their own comments.

It’s crazy that musicians, authors and video directors want to cry about being artists, but then demand payment for something they’ve created. Those who paint oil on canvas usually paint ahead of time with no payment until someone finds a reason to pay them for their limited-supply oil painting. Only then do they get paid, but the oil painting is limited to one unique piece. Supply and demand works. Authors who create online content or content that is easily copied can also do the same thing: maybe offer readers access to limited supply content that is difficult to copy or where time is of the essence in offering value. An author could offer subscribers access to previews of the next book in a series, or insight into the character development stage, things that others could login and copy but might be in such high quantity that it is easier to just pay the $2 or $3 a month for access to the site’s private content.

Regardless of what the end result will be for delivering income to artists for their unique services and products, rather than electronic products that are easily distributable, the reality is that no matter how much the distributors (Amazon, the publishers, even the authors directly on blogs) want to stifle the price falling to zero, it will happen. It’s already happening at a record pace if you look at any torrent search site for current books and music and videos. They can not stop the market, even if the market is considered illegal.

Authors and content creators should be thinking of new ways to offer unique services and products immediately to their readers and fans. There are unlimited options and ideas out there, and the day will come faster than expected when Amazon, iTunes and the publishers are just useless for distributing content that can already be distributed freely by others through legal and illegal means.