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Philip Mause
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My name is Phil Mause. I am a Senior Advisor with the Pacific Economics Group, focusing on energy, regulatory and valuation issues. I retired from 40 years of law practice earlier this year. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds,... More
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  • Some Musings On Income Distribution - Part 2

    6. Small Families, Inheritance Tax, and Prenups - I think that a variety of factors that are often ignored may have increased the concentration of wealth. If one very wealthy person has 5 children and leaves his wealth in equal shares to the five, it will create five individuals each of which has somewhat less than one fifth the wealth of the person leaving the money. On the other hand, if he has an only child the wealth is concentrated in one person. This becomes a much bigger issue when we think of "extended families" in which one "rich uncle" can benefit numerous nephews and nieces by providing them money for college or to start businesses. After a generation or two of multiple only child families rather than five child families, extended families are much, much smaller. There definitely has been a trend toward smaller families; I am not sure how pronounced it has been among the affluent. I also get the sense that the inheritance tax has been weakened and that avoidance is easier and more widespread than it used to be; this obviously concentrates wealth. Wealthy individuals who marry multiple times and have to divide assets each time wind up creating multiple affluent households. Prenups allow the wealthy to avoid this problem and again probably concentrate wealth. Whether any or all of these factors are significant is hard to tell and statistical analysis of the issue would probably be a daunting task but they each tend to push things in one direction.

    7. Government Regulation - I suspect that various forms of government regulation (and policy) tend to concentrate wealth. Certainly, the policy that primary and secondary schools are funded primarily by local property taxes allows wealthy jurisdictions to have better schools at lower levels of tax effort. The concentration of the wealthy in certain areas is probably assisted by zoning laws and regulations which can effectively exclude low and middle income housing. While many think of government regulation as harming business, the truth is that a great mass of government regulation is aimed at (rightly or wrongly) erecting barriers to the entry of new competitors into professions, occupations, businesses and other enterprises designed to generate wealth. The medical profession is most notorious in this regard. We have a "nursing shortage" and import nurses from all over the world but Americans find it next to impossible to get into nursing schools. Why not import nursing school teachers rather than nurses so that we could educate Americans to become nurses? I am convinced that much of the work done by doctors and nurses could be done by individuals with much less training at much lower cost and it would create lots of nice middle income jobs but professional licensing is the barrier. Finally, all sorts of government largesse is parceled out on a superficially egalitarian basis but in fact only the wealthy can devote the resources to bid on oil leases, participate in FCC spectrum giveaways, apply for various complex grants, etc.

    8. The Problem of the Safety Net - The government has toyed with the idea of a negative income tax or other single shot subsidy designed to alleviate poverty. What we have instead is a confusing complex of programs including Medicaid, Food Stamps, housing assistance, etc. Putting aside the difficulty of navigating one's eligibility for these programs, it is also true that they may tend to create a web from which it is difficult to extricate oneself. Even with a simple negative income tax of say $20,000 a year, there is the problem of perverse incentives. What do you do with the applicant who earns $15,000 a year? If you simply give him $5,000, you destroy all incentive to enter the job market - you have effectively imposed a 100% tax on his first $20,000 of income. If you let him keep, say, 60% of his earnings (and impose the equivalent of a 40% marginal tax on him), then you will wind up sending checks to people earning all the way up to $50,000 (at a $40,000 income, you would still pay out $4000). Of course, at that level, he may start paying actual taxes as well and further incentive problems would occur. These issues become incredibly complex with our intricate programmatic approach as, for example, some people learn that they are not longer eligible for Medicaid once they get a decent job. Does all of this have the effect of "trapping" people in poverty? I am not sure, but it certainly reduces the incentive to move up a notch.

    9. Inflation - Although inflation is decried as penalizing those on fixed incomes, it may, in fact, help the middle class. Inflation tends to undermine the value of paper assets (stocks and bonds) and increase the value of real estate. In the United States, the middle class has a huge percentage of its gross wealth tied up in homes which tend to appreciate in value robustly during a period of inflation like the 1970's. I am not saying that inflation is good or that the Fed should not strive for price stability but it may well be that one of the unintended consequences of very low inflation is a greater concentration of wealth as paper assets increase in value faster than homes. Starting in the early 1980's, we conquered inflation and have had a long term trend of lower and lower interest rates. Perhaps, it should not be that big a surprise that this period to time has also seen increased concentrations of wealth.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 21 1:44 AM | Link | Comment!
  • Some Musings On Income Distribution - Part 1

    There has been a continuous concern (which I believe is legitimate) about the regressive changes in US income distribution. Many believe that this trend portends political instability and many also that underlying moral concerns require efforts at redistribution or at least at abating the trend in the wrong direction. I have not thought this through as well as I might but I have had several insights which may or may not interest readers. My greatest concern is that the "path upward" traveled by my immigrant ancestors may be narrowing and that we have to take steps to widen it.

    1. Women in the Work Force - Because income is generally measured on a household basis, the increased presence of women in the work force (as compared with 60 years ago) may have created statistical distortions which suggest a more regressive distribution of income. As compared with the 1950's, there are certainly more "two high income" households than in the past. Thus, two high paying jobs which supported two households in the 1950's now support only one. This is exacerbated by a likely tendency of graduates of elite schools to marry one another rather than choose a spouse from the pool of low income earners. I am not saying that this is a bad trend or is anyone's fault but I think that it may have to be taken into consideration in assessing the household income statistics.

    2. Information Technology - When I started working in a law firm, we had one secretary per lawyer, an army of messengers, proofreaders, and a steno pool. Most of that is gone now and what we have instead is lawyers making quite a bit more money and fewer solid middle income support jobs. I suspect that this has played out throughout the economy. There is no real "solution" and it definitely suggests that those entering the work force should think long and hard about career choice. But I think it explains at least some of the change.

    3. De-Unionization - The reduced number of union workers in the private sector has likely changed some nice middle income jobs into lower paying jobs or no jobs at all. Union agreements often preserved jobs and prevented employers from replacing workers with technology or with more efficient deployment of the work force. In addition, we know that quite a few jobs went overseas. It is also the case that salaries probably declined as certain companies became non-union.

    4. Regional Distortion - I suspect that the differential between living costs in various regions of the country may have increased over time. This is purely impressionistic but, if true, it would suggest why the market itself might produce a concentration of high incomes in high living cost regions and it may suggest that the problem is not as severe as national statistics would indicate.

    5. Political Implications and the Strange Case of the Lottery - Ever since Mitt Romney's "47%" statement, there is concern that an ever growing number of low income or no income voters may elect governments dedicated to redistribution. In this regard, let us reflect on the popularity of the lottery. I have often said that gambling in general and the lottery specifically is a tax on people who neglected their grade school arithmetic homework. However, there is another possible explanation. People may really be willing to sacrifice a disproportionate amount of their income in order to obtain a small probability of becoming very rich. That is exactly the trade off that is made when someone pays $2 for a lottery ticket that offers a one in a million chance of getting $1 million. And, frankly, it is likely what motivated a lot of people to move to this country. I recall a good friend of mine telling the story of his father who lived in a very modest immigrant community and became a Republican. His neighbor asked him "Jake - why are you a Republican? That's the rich people's party." His answer revealed a great deal - "I didn't move to this country to be poor!!" The Republicans really have to sell themselves as the "rags to riches" party that will preserve the God-given right of every American to "make it big." In that regard, they should look for candidates who arose from modest means - like Eisenhower, Nixon and Reagan - and avoid patricians like Romney and the Bushes.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Dec 12 3:58 PM | Link | 2 Comments
  • A Pro-Business Platform For Either Party

    As a Reagan Democrat, I find myself torn between the two political parties - often disappointed at some of the policies my fellow Democrats advocate but even more disturbed by some of the recent antics of the Republicans. I really think that it is not enough to express disgust at the current system; voters should try to communicate what policies they would like to see and try to move the system in the right direction.

    My basic premise is that with sufficient economic growth many of our problems can be resolved but that, without economic growth, most of them will inevitably get much worse. The priority must, therefore, be the adoption of policies that will get the economy out of the ditch and return us to a healthy growth rate and full employment.

    1. Tax Cuts and Simplification - We should reduce the top tax rate to 30% (it was 28% under Reagan, but there was also a 33% rate right below the top) and simplify taxes. The alternate minimum tax should be abolished so that taxpayers can more readily calculate their taxes and determine which deductions will actually apply to them without requiring the use of a Cray computer. Corporate tax rates should be reduced to no higher than 25%. Some deductions and credits will have to be eliminated but I would not make "revenue neutrality" on a static basis a fetish. Cutting and simplifying taxes will unleash economic growth and will more than pay for itself in a short time.

    2. Infrastructure - We have woefully inadequate harbors, airports, highways, and bridges. I am constantly met by foreign visitors at airports who tell horror stories about the time it takes to clear passport control. I recently took two trips in which it was easier for me to enter foreign countries than to clear passport control and customs coming back to the United States. Tourists trying to come to the United States to spend money and create jobs in our economy are subject to ridiculous delays and are likely persuaded to never try it again. Many of our airports are virtually antiques and the danger of bridge collapses has been well documented. Given the underutilization of labor and capital in our economy, this is a perfect time for a massive infrastructure program. We want to have something to show for the deficit spending we will have to undertake to restart the economy. Where the private sector is interested in undertaking the construction of infrastructure, it should be encouraged rather than stymied by government policy. Keystone should be approved; critics have underestimated the environmental harm that can be created by shipping the oil by rail or truck.

    3. Immigration - Our immigration policy should be primarily designed to benefit people already here. Rules should be adopted allowing people with certain skill sets virtually automatic entry and a path to citizenship. In the short run, the presence of a number of illegal immigrants requires a practical solution. We are not the kind of people who will enact laws which require millions of these people to be put into boxcars and dumped at the border. Therefore, we should enact clear and understandable rules which give these people a feasible and attractive path to United States citizenship. We should do everything we can to encourage people to travel on this path rather than continue to have a large population of people living on the edge of our legal system. We should continue to offer asylum to those being persecuted. We should consider offering a select number of immigration slots to those willing to pay to the government or to commit to invest a large amount of money. This is not "selling citizenship"; it is compensating the rest of us for creating a society which seems to attract people from all over the world and adopting policies which will help grow the economy.

    4. Privatization - We should privatize government operations which can be more efficiently managed by the private sector. In this regard, the Post Office and various federal power agencies come to mind. In addition, valuable federal land should be sold to the private sector in areas of the country where the highest and best use is no longer the use that the government is undertaking. The extremely valuable California Coast provides some striking opportunities here. Of course, sale should be conditioned upon environmental protection and all National Parks and wilderness areas should be off limits. That leaves, however, enormous land holdings that could be opened up for optimal development.

    5. Fiscal Issues - A new President who adopts and a Congress which enacts these policies will run into complex fiscal issues. If these policies were adopted in the first year of a Presidential term, by the third or fourth year, the resulting economic growth would produce higher tax receipts and lower demand for transfer payments, and policymakers would have to tackle the complex issues presented by a large federal surplus. I would tend to advocate further tax cuts but the creation of a large education trust fund in order to transition our schools to a 12 month schedule and to enhance adult education should also be considered.

    Most of all, the country needs optimistic leadership. President Obama is clearly capable of providing this - he should consider a weekend spent listening the speeches of JFK, Reagan, Teddy Roosevelt and FDR. Our best years are clearly in front of us. All we have to do is to seize the opportunities which are so clearly before us.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Nov 07 5:30 PM | Link | Comment!
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