Thursday, September 22, 2011

Who Pays More...?

Who pays more in federal income tax, your grandma the plumber/teacher of the disabled and infirm, or Warren Buffett?  Take a look at this link (from Greg Mankiw's Blog) to the Effective Federal Tax Rates based on income.

The lesson: The wealthiest pay 30.4 of their income to their government.  The middle income distribution pays 14.1.  So...billionaires already pay more than secretaries.

Saturday, September 17, 2011

Learning By Doing

Learning by Doing could refer to a particular class of models in the Macro literature, or it could just describe what humans do when they do stuff....  The last few days I've been preoccupied with the importance of, for lack of a better word, starting. 

Think of the time value of money and compounding interest.  It's important to start a retirement account as early as possible so that you can earn compounding interest over that time.  But money is not the only thing that behaves like this.  I generally expect things to be easy.  That is, because I find something conceptually easy, I often expect the details to be similarly easy; a silly assumption.  Example: planning a budget.  Seems easy, right?  It is, conceptually, but there are quite a few assumptions you have to make.  Do you count income earned in August, but paid in September as September or August income.  Not that this is too difficult, but you have to decide or things get confusing.  Also, when you project your financial positions 1, 3, or 5 years into the future, there is a bit of error.  You have to go back and plug in actual values in place of your estimations, and you have to recognize that this is what you are doing.  Again, not a complicated task, but it can make your spreadsheets look messy. 

My point is this: you may not know the optimal way to build your spreadsheet on day one, because you don't anticipate all the information you will need at future dates.  Building the optimal spreadsheet for your needs takes practice, time, and repetition.  If I had started budgeting on my 18th birthday, I would have a pretty solid understanding of how to build my optimal spreadsheet by now.

What other activities fall under this category?  Well....just about every activity a human undertakes, right?  The more complex the task, the greater the importance of starting early.  This train of thought led me to ask questions regarding where one chooses to live and economic growth.

I'm sure more rigorous thinking would lead me to abandon this line of thought, but let's entertain it.  The best way to develop expertise is to practice a specific task or occupation over and over.  The variety of tasks available for individuals to choose from is greater in urban areas than in rural.  Society's resources are optimized when every person specializes in something they have the lowest opportunity cost in pursuing (i.e., do the most valuable thing you are good at).  Growing up in a rural area limits the exposure one has to various occupations.  Consequently, one may not find that task that they have the lowest opportunity cost in doing, and thus society's resources may be allocated less than optimally.  But, does this mean we should encourage relocation to urban areas?  Does this happen naturally (small towns decline as economic opportunities decline)?  I'll leave the discussion for now, there is certainly much more to say and consider.  Readers' thoughts are encouraged.

Saturday, September 10, 2011

Social Security Fun

Here, Tabarrok outlines a couple of views on Social Security.

Person 1: Anyone who thinks SS is a Ponzi scheme is nuts.
Person 2: SS is a Ponzi scheme that WORKS!  A growing nation is the greatest Ponzi scheme ever contrived.
Person 3: SS is a Ponzi scheme...may or may not work. Tabarrok doesn't specify this person's view.
Person 4: SS is a Ponzi scheme that used to work great, now it has just gone flat and may even pay you less than you put in.

Persons 2, 3, and 4 are all Nobel Prize winners.

Oh, a Ponzi scheme is an investment scheme where people who invest initially are paid returns from money invested by other people (or their own money) not from any returns actually made through investing (think Bernie Madoff or Tom Petters (this guy dated my cousin!!)

So, is SS a Ponzi scheme?  For more info, read the links!