Robot Tax

What is this daft discussion about taxing robots as if they are people? Companies are already taxed on the efficiency gains if a robot takes a human’s job.

Company A employs one human to whom they pay $100 to produce one widget that costs $100 and that they sell for $1000. The company earns $800 and pays taxes on it. The human earns $100 and pays taxes on it.

Company B fires its last employee, replacing him with a robot. The robot produces one widget that costs $100 and they sell it for $1000. The company earns $900 and pays taxes on it. Sure, you get to depreciate the robot, but you had to buy it in the first place.

What will rising rates cause?

I get asked almost every week what will happen when rates finally rise.

This is something that most people think they kind of understand, but almost nobody has actually thought through.

The correct answer is that it depends why the rates are going up. Rates, you see, are pretty much always a dependent variable. They do not simply rise randomly and cause chaos in the world. Now, that doesn’t mean they are predictable, since the factors that affect them may not be predictable.

For example, if rates rise because the economy keeps doing wonderfully, unemployment is minuscule, wages are rising, and inflation is at 3%, then I’d guess you’d look at the correlation between rates and the market, and say what a good thing rising rates are, both lines are up and to the right.

However, as we said before, interest rates are essentially a dependent variable. People get confused about this because the Fed can change a couple of rates (either by setting them directly or with open market operations), but working ideally, the Fed isn’t making those decisions in a vacuum.

If we looked at two worlds going forward, one where rates slowly march up as the economy does well and inflation grows, and one where the Fed decides that “just because” we’re going to raise rates by 3%, you can be pretty confident the stock market and economy are going to react relatively poorly to the 3% raise (think taper tantrum), and that the ‘steady as she goes’ timeline is the better one to live in.

Remember, the next time someone asks you what will happen when rates rise, the smart answer is always “that depends on what is causing the rates to rise.”

Confirmation Bias

No, the stock market is not ‘finally taking “X” [insert pet cause] seriously’ when there are back to back down days.

Not very many things move the market, and when they do, they almost always move it fast. If your inclination when seeing the market go down 1% is to shout from the rooftops that at last your worldview is vindicated because the markets agree with you, keep in mind there is a 95% chance the market couldn’t care less about whatever you think the problem of the day is.

The market goes up and down — many times for no discernible reason.

 

Consumption Smoothing

WCI touched on consumption smoothing in a recent post. This is one area where classical economics and real life observation (and behavioral economics) differ greatly.

Consumption smoothing is the act of consuming a more equal amount over your lifetime than just a percent of income or some other measure. The textbook says if you expect your earnings from 40 years old and on to be $1,000,000+ each year, but only $30,000 before that, you should borrow and spend as much as you can get your hands on in your 20s and 30s because you’re probably going to die sleeping on a fat pile of money anyway, so there is no reason to share the kitchen with cockroaches even when you are young and poor.

However, nobody knows the future, and as soon as we start looking even 5 years out, there are so many unknowns that from a stress minimizing perspective, any appreciable attempt to smooth consumption would, at least for me personally, be totally counter productive.

There is also a (puritanical?) values system that suggests living young and lean so that later you can be comfortable and use the optionality you’ve created. This is as opposed to consumption smoothing from the beginning, and getting yourself to a place of negative optionality because you’ve accumulated debt which you have to pay off, limited your future possibilities.

Now, don’t get me wrong, there is certainly some place for consumption smoothing, but as the original link says, moderation is key. When I moved to California after school, I was paying more than 50% of my take-home pay on rent and saving very little at all. This is definitely consumption smoothing in action, as my expenses have increased much more slowly than my (expected and actual) wages since then. However, I’m still early in my career, and classic consumption smoothing models should still have me saving very little, yet that is not my preference.

I’m not sure exactly why not, and haven’t come across (though I expect it exists) a model that describes my utility curve. Something about a very low/negative discount rate on future spending, a desire for optionality early on, and a high aversion to debt.

Consumption vs. Investment (and IPO vs. Secondary Market)

Scott Sumner answers what I imagine is an extremely prevalent question about the difference between consuming and investing.

I have read your site for years, but this is the first time I felt compelled to ask a question: some friends and I were discussing the various benefits to society that would accrue from say, my purchasing a product, vs investing the same amount of money in the stock market. While I know, at a high level, that investment is necessary to grow the economy, I had a more difficult time explaining the specific mechanism by which the action of “I buy 100 bucks of index funds on Vanguard” translates to “investment” in the economy. We were easily able to understand that if I buy a 100 dollar widget from Widget Corp, that benefits that company (and the economy), which now has $100 more to spend on wages or machines, but I am having difficulty coming up with a similar concrete sequence of steps for the 100 dollar stock investment.

On a larger point, I think this reflects part of the skepticism and suspicion that people have towards the stock market, particularly from the crowd that throws around terms like “gambling” and “speculation.”

Scott responds by reframing the question and explaining what ‘saving’ really is.

This is a surprisingly confusing subject. Consider the sentence that begins “We were easily able to understand . . . “. In fact, I don’t think they do understand, as money spent on wages and machines is not a benefit to the economy, it’s a cost. The benefit comes from consuming the widget. In the examples that follow, I’ll assume the $100 widget is a meal at a restaurant for the Moore family.

Before considering Brian’s stock market question, suppose he were trying to decide between spending the $100 on a meal, or spending it on materials for a new front sidewalk. The meal is considered consumption, and the new sidewalk is investment, because it’s durable and yields a flow of services for many years, or even decades. The money spent on the sidewalk is called “saving”. In either case, output gets produced and the effect on GDP is roughly the same, in the short run. In the long run, GDP will be a bit higher with the sidewalk investment, as it will continue to produce a flow of services for many years.

One more thing to address is a distinction that Scott doesn’t touch on in the post. Scott goes on to discuss giving $100 to a company that installs sidewalks, and presumably will install more sidewalks because they have that $100. That is confusing to people in the “thanks for the tip”-zone, because most people think of the secondary market when they are thinking of buying and selling stock. In the secondary market, buying a share of XYZ Corp doesn’t put any money in their pocket to aid the building of sidewalks.

Actually, most people confuse these over and over and don’t have a coherent schema for thinking about how the flow of money in markets actually works — evidenced by many people who don’t want to “give money” to companies whose business practices they don’t like. The better reason not to buy shares of a company is that one wouldn’t want to be an owner of a company they don’t like and can’t change, which is fine, but suboptimal in my opinion. I digress.

The point that I wanted to add to Scott’s is that investments in the secondary market, even though XYZ Corp isn’t actually getting your money to build more sidewalks, also (as Scott says) ‘works on average’, because the cash you use to buy the shares go to somebody else who uses that cash to either consume or invest, which also works on average. Those dollars will eventually go either to someone consuming or investing in ‘sidewalks’ directly until equilibrium is reached.

As a brief example, if Scott owns 1 share worth $100 of NGDP Corp, and I can either spend $100 on lunch or buy $100 of NGDP Corp on the open market. I go to buy the stock and Scott is the lucky fellow with his ask price at $100. Scott was selling his share because he was hungry, so he goes to buy lunch. Nothing changed except the ownership of NGDP Corp, and $100 was still spent on lunch.

 

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Healthcare and Rights vs. Priorities

It’s common to hear that someone in America believes that ‘healthcare should be a right’. This is usually met with a chorus of agreeing and dissenting opinions, but it shouldn’t be, because almost nobody agrees with that statement, per se.

A big part of the problem is that people are throwing around the word ‘right’, when it isn’t what they mean at all. Here is a list of rights. It includes a lot of general things:

  • No one shall be subjected to arbitrary arrest, detention or exile.
  • (1) Everyone has the right to freedom of movement and residence within the borders of each state.
    (2) Everyone has the right to leave any country, including his own, and to return to his country.
  • Everyone has the right to rest and leisure, including reasonable limitation of working hours and periodic holidays with pay.

That list even touches on healthcare, which says:

Article 25.

(1) Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.

Even in this list that should be considered extremely progressive, you’ll notice the generality of the statements — it’s a huge leap from agreeing that basic medical care should be available, perhaps subsidized for the very poorest, to agreeing that ‘Universal Healthcare’ is desirable. It certainly doesn’t specify the extent of the medical care in dollar terms.

Healthcare is extremely expensive, even (especially?) for developed nations. In 2011, France spent about US$4,000 per person on healthcare. If that’s a right, are poorer countries like India or Vietnam, where GDP per capital is about US$4,000 depriving their citizens of their rights by not doing similar? The answer is obviously not. The fact that this argument can be made is prima facie evidence that describing healthcare as a ‘right’ is at best a poor decision and at worst an attempt to manipulate the discussion.

What people actually mean, in my experience, is that they believe healthcare spending should be a priority. This is exactly the same discussion, but once you re-frame it, you have to acknowledge opportunity costs associated with it. When talking about a true “right”, like free speech, it’s self-evident to most that no cost-benefit analysis need be made, because the benefits of free speech are so great.

But, when you’re in an economy and the government has priorities, either imposed via taxes or via mandates to employers, you start to see them affect the economy. This article about the razor thin margins of even the most successful restaurants comes to mind (h/t Josh Brown).

A related discussion about healthcare benefits as part of income is in this great econtalk podcast.

I’ll leave it here for now — an accurate description of the actual debate (priority vs. non-priority instead of right vs. non-right) is vital to productive discussion.

Oil and the United States

Author’s Note: Originally written as a letter on 12/29/2014, somehow still relevant.

The plummeting price of oil has become a major topic of conversation – and with prices that feel more like 2005 than 2015 – no wonder.  How has oil gotten so cheap, and is it too cheap?

Before we get into the why, how, and where next, let’s address a myth: America is not a net oil exporter. There are lots of ways to twist the numbers, but when it comes down to it, we import about 9 million barrels a day and export about 4 million.[i] We are also net importers of natural gas.[ii] Dispelling this myth is key; because while we have been the largest producer of oil this year, we are not totally insulated from the rest of the world.

Back to, “How has oil gotten so cheap?” In his most recent memo, Howard Marks astutely describes how high oil prices tend to lead to lower oil prices and vice-versa.[iii] The cliff notes version is: Supply and demand. The question is then, is the price too low?

While figures for the rest of the world are harder to interpret, less audited, and have the ultimate wildcards – OPEC and Russia – involved, we can look to America’s own figures for a baseline.

Per figures cited by the IMF,[iv] the current breakeven price (i.e., the price below which production is not profitable) for shale drilling in the US is between $40 and $80 per barrel. About half of North American shale production is profitable at a price of $50. The break-even price for shale is important because shale wells represent about 95% of new wells being drilled in the US today.[v]

Asking, “Is $60 the right price for oil?” is the wrong question. The right question is, “Is $60 the wrong price?” Looking into our own back yard, it looks like $60 is not the wrong price; most wells will continue to produce at $60. However, when we look abroad, we see increased levels of economic and geopolitical risk; we also see rapidly industrializing countries with billions of people. These factors, among many others, help explain why $80 or $100 oil isn’t the wrong price either.

While $60 oil seems to be on the low end of sustainable prices, the more people who think that oil is bound to go up, the more likely it is to stay flat. This phenomenon was described best by Yogi Berra, talking about a restaurant he used to frequent in St. Louis, “Nobody goes there anymore, it’s too crowded.”

Nobody has a crystal ball to know where the price of oil is headed, but I do know that following the crowd comes with the danger of being trampled by it.

[i] http://www.eia.gov/dnav/pet/pet_move_wkly_dc_NUS-Z00_mbblpd_w.htm

[ii] http://www.eia.gov/naturalgas/importsexports/annual/#tabs-supply-1

[iii] http://www.oaktreecapital.com/MemoTree/The%20Lessons%20Of%20Oil.pdf

[iv] http://blog-imfdirect.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/

[v] http://energy.gov/sites/prod/files/2013/04/f0/how_is_shale_gas_produced.pdf