Tax cut for the multimillionaire will be a stimulus to China

Even Peter Orszag is advocating extending Bush tax cuts for two years:
http://www.nytimes.com/2010/09/07/opinion/07orszag.html?_r=1&scp=2&sq=peter%20orszag&st=Search

The reason is that the economy needs stimulus, and only the tax cut extention will receive bi-partisan support.

The economy is producing only 93.5% of its capacity according to WSJ. But 20% of the tax cuts go to people making more than a million - about 300,000 individuals. They are unlikely to consume more. And with idle capacity abundant they aren't likely to invest in the U.S. , either. I think they are most likely to invest their tax savings in China, where labor is cheap and capital return is more certain.

So in a globalized world a U.S. tax cuts will stimulate Chinese economy.

A stagnate future for the US economy

http://www.calculatedriskblog.com/2010/09/house-prices-and-stress-tests.html

This is the source of Japanese style stagnation. US Economic growth is likely to remain low perhaps less than 2% a year over a decade. Unemployment will stay high for the forseeable future. People will gradually adjust to the new reality.

If housing price can not adjust downward, the only way to full employment is to raise the price of other goods and service - inflation. Holding down the mortgage rate alone will take a very long time to clear the market.

This is a political struggle between homeowners and bond holders.

What is conservative American thinking?

To me conservative American thinking is saying "I don't want a dime of the money I earned to be taxed to support the poor and needy. If they are sick, injured, or stuggling with inherited disease, it's their problem, not mine."

My value has always been that people who are fortunately endowed with health, intelligence, good family upbringing, and good luck in business dealing should help out the unfortunate and deprived. It's a fact that there are people born poor and sick. Human society should lend a hand to where God has failed.

Compare to Scandinavia countries America is too big to form a sense of society. Immigration, ever changing technology, and traditional individualism all contributed to what America is today. "If I help others, will they help me when I need it?" "The weak need to be culled from the herd" These are all commonly seen on internet posts. Social fabric does not exist. It's every man for himself.

Work Against Yourself

The market is a big propaganda and marketing machine. When you fell good and want to deploy your cash it's the most dangerous time. Sell immediately! On the other hand, when market depress you and you don't want to hear or read anything about market it is time to buy. This is why investment is hard. You need to work against yourself.

Know yourself: your analytical brain can be easily overcome by your emotional brain.

Tools

May 1 - Crab grass is shooting up in our vegie garden. Saturday monging I went out to pull the weeds by hand but they are too many. I went back to our deck to get the spade and I started to kill the weed by the 10s.

Since stone age human discover that, with the right tools, you can be so much more effective and productive.

Economic progress relies on better tools. If we continue to build better tools we will continue to improve our productivity, which is essential to standard of living.

Since humanity acquired tools we are not afraid of lions, tigers, and even the great white sharks. In fact with the right tools we are the predators to these once alpha animals. I feel so fortunate that I live in an era full of tools to address all types of problems.

On Tax

Saw a post here: http://www.wisebread.com/bar-stool-economics-0

The complaint is about that over half of the population pays no income tax. Ten percent of the population pay 70% of all income tax.

For those who complained about "unfair share" of tax on the rich, let me also provide this statistics from government study of wealth distribution:
- top 1% of the poupulation owns 34% of total assets in this nation
- top 20% of the poupulation owns 85% of total assets
- the bottom 80% claims only 15% of the assets

As you know assets generate capital gain, interest, and rent. These income are almost effortless. (say compare to coal miners.) Those who wrote articles like in the above link never cite these statistics side by side with tax burden. I think we need to consider the whole picture. Tax is an unpleasant fact of life. But US tax burden on the rich is less than most, if not all, OECD countries. It is a necessary evil. And I think the rich should be a bit more compassionate toward society.

A recent report from WSJ: Wall Street Banks are lobbying against centralized clearing house for derivatives trading because $20 billion of revenue is at risk.

But without centralized clearing house, it means future government bailout is inevitable because society can not afford the melt down of the entire financial system.

From this example you can see anyone's wealth has to do with how the law is written. That centralized wealth I quoted above has a lot to do with US law and lobbying.

I think when considering tax policy we need to factor in these facts. The bottom 80% who owns only 15% of all assets obviously don't have the resources to do much lobbying.

Can you really measure and model risk?

I am not saying statistical inference is useless. As I said in my first post, for life insurance and the risk of a claim due to death is predictable. In fact if you have a large enough risk pool, the projection can be accurate to an impressive degree. On the other hand, the risk of mortgage default is a very different animal. With the benefit of hindsight I understand today that it has to do with trillions of easy credit flowing into this country, with China and Japan together lending us more than 1.6 trillion. The potent power of low interest rate created the asset bubble and the bust that follows. As you can see this is an external variable that keeps accumulating (by just look at the trade deficit). But AIG keeps selling Credit Default Swap (CDS) as if it is a life insurance to insure mortgage default, to the degree that without 80 billion of government bailout, it means chain bankruptcy of financial institutions all over the world and the Great Depression 2.0. I don't want to elaborate on the relationship between Great Depression 1.0 and World War 2 as I am not an expert, but you understand the scare. So let me conclude by answering to the question "Can you really measure and model risk?". My thought is that it depends on what kind of risk you are talking about. You need to use a common sense judgement before you apply the state-of-the-art software. And you need to have a sufficient understanding of the boom and bust nature of economic history. And when someone pretend to be able to model things that can't be on a sound scientific footing, you should be able to call their bluff and air your skepticism. It is healthy for quants to air their skepticism. You are helping the society by demystifying the quants.

Quantitative Modeling

Wrong forecast gives a false sense of security. You can safely argue that none of the Lehman, AIG, and Bear Stern modelers forecasted the coming tsunami in 2007. Not even the Fed foresees the damage a nationally depreciating housing price can do to the world economy. The fact that world governments resort to fire fighting by printing money - 1.4 trillion in the US alone - speaks volumes to the failure of forecasting. That is why Mr King is advocating improving robustness of the infrastructure, and funding the fire fighting capacity. The true lesson from this financial crisis is that financial modelers are very ignorant about economic history, and determined to stay that way, while layman put too much trust in these "quants". Don't be fooled by people claiming to have an equation that can forecast a society's behavior. Issac Newton said he can not, and so you should be skeptical. Your skepticism will make the financial market healthier - you become part of the robust system.

Can risk be modeled?

If you are talking about Life Insurance and the risk of death, more than one hundred years of experience has proven that, short of a war or pandemic, mortality is predictable. Law of large number will reduce the variability and you can model to a degree of confidence. If you are talking about probability of default on debt, then you are talking about modeling people's behavior that will be driven by incentives and the performance of the entire economy, which as many under currents. Everyone probably still have the credit crisis and financial panic of 2008 in mind. One of the source of the panic is that financial engineers assume mortgage default rate will behave about the same as the past 10 years, and priced the CDO/ CDS accordingly. When law of large number does not stabilize the default rate and it becomes clear that trillions of derivative assets are priced on wrong assumptions, the run starts. The disaster was a magnificent view. You put your trust on the model you don't fully understand at your own peril. And some short sellers are wise enough to profit handsomely on it. The lesson I learned is that I should examine the assumptions modelers use carefully, before embracing "financial weapon of mass destruction" (Buffett) as a panacea to reduce funding cost.

The religious right and the small government don't come together

I come to the US at the age of 27 and have worked and lived here for 15 years. I still found the US a country hard to understand. The conservatives want three things: small government, strong defense, and Christian value. But I consider these goals are mutually exclusive of each other. A small government and strong defense mean very little social support. Health Care debate in America is the best example for little social support. The bottom 15% of the US citizen don't have health insurance. This is the highest in all of the OECD countries. These same people also have a 31% unemployment, compare with a 3% unemployment for people on the top 10% of income scale over the years. The US has the highest infant mortality rate among OECD countries. At a rate of 0.006 it is double that rate of Italy at 0.003. But if you look at GDP per capita alone, US is 50% higher than Italy, at more than $46,000 versus Italy's about $30,000. All these economic indicators point to a policy of social Darwinism, in the sense that freedom is valued above equality, and under free competition the weak and the poor is often on their own, struggling to survive. This is understandable to me since America is proud of its capitalist traditions. What is hard to understand for me is that this same group of people who advocate small government and personal liberty and free market capitalism also call themselves Christian and hold religion dear to their heart. A good example is when Sarah Palin hailed her supporters for holding on to their gun and religion, and the crowd cheered. To me this is puzzling - is Christianity somehow consistent with Darwinism? What is the content of this religious right? A moral value that believe in free competition and winner take all? To me edging out the poor and the weak has nothing to do with Christianity, which it is about compassion and love. So why would these people call themselves religious? And religious on what kind of faith? A mysterious, interventionist God? A God that punishes the evil and has no compassion toward the weak and poor? A religion that serves the ideological ground to use gun to fend off anything they don't like? It puzzles me.

I am still seeking to understand, but I wonder if I ever will.