Trickle Down Mythology

Here comes the rain again
Raining in my head like a tragedy
Tearing me apart like a new emotion
--Eurythmics

Thomas Sowell challenges the political fabrication of 'trickle down economics.' Barack Obama, for example, has claimed that trickle down economics is a philosophy which "says we should give [emphasis mine] more and more to those with the most and hope that prosperity trickles down to everyone else."

These types of statements are lies because no formal theory of trickle down economics exists. It has never been developed. A mind grounded in economic reason would not propose such a theory. Not even in the most voluminous treatises on economics can trickle down theory be found.

The reason is that the idea is absurd. Why would anyone give something to A in hopes that it would trickle down to B? Any reasonable person would give directly to B and cut out the middleman.

'Give' was italicized above because the left likes to propose that some group, namely the rich, is granted some sort of special privilege (e.g., a tax 'break') via the trickle down idea. Sowell suggests that leftists are particularly prone to trot out trickle down myths when suggestions are made that taxes should be limited.

But lowering a person's taxes does not 'give' that person anything. A tax cut amounts to a person keeping property the he/she rightfully owns--property that others want to take by force through the strong arm of government.

The trickle down myth is another product of the socialist mind. Government is the gatekeeper of privilege. It must dole out this privilege smartly.

Such is the flawed thinking of the central planner.

General welfare improves not through grant of special privilege by government, but through production and trade by individuals. Social cooperation rather than state force. As productivity improves via saving, investment, and entrepreneurship, scarcity is reduced.

This is the law of capital and markets. It is not the trickle down mythology of socialists.

Capped Bust Half Dollar, 1807-1839

In a big country, dreams stay alive
Like a lover's voice fires the mountainside
Stay alive
--Big Country

President Thomas Jefferson had recommended Thomas Reich as assistant Mint engraver in 1801. But chief engraver Robert Scot, who had designed most early US coins including the Flowing Hair and Draped Bust halves, did not want an assistant. Within a few years, however, Scot's health began to deteriorate and a new mint director, Robert Patterson, was named in 1806. Patterson wanted to overhaul the designs of circulating US coinage and hired Reich to head the effort.

Reich's efforts included the Capped Bust half dollar, first struck in 1807. Like its predecessor, the obverse features a bust of Ms Liberty, but this time she faces left. Ms Liberty wears a Phrygian or 'freedom' cap--a symbol of the American Revolution. The headband carries a LIBERTY inscription. Her low neckline retains a draped gown, but it is now secured by a brooch at the shoulder. The obverse retains the 7 + 6 = 13 stars representing the original states. The date is below.

1830 Capped Bust Half Dollar PCGS AU55 Large 0 CAC

The reverse design features an American Bald Eagle facing left with wings spread. The eagle clutches a bundle of arrows and an olive branch in its claws. A shield is superimposed on the eagle's breast. A scroll above the eagle is inscribed with the motto E PLURIBUS UNUM, and UNITED STATE OF AMERICA circles the rim from about 8 o'clock to 4 o'clock. The denomination appears at the bottom of the reverse as 50 C. The basic design of this reverse would become a fixture on half dollars for much of the 19th century.

The design also featured a lettered edge which read FIFTY CENTS OR HALF A DOLLAR. The 89 silver/11 copper alloy mix was similar to the previous denomination, as were other specs:

Diameter: 32.5 mm
Weight: 13.48 g
Composition: .8924 silver; .1076 copper
Edge: Lettered
Net precious metal weight: .38676 oz silver

Lettered edge Capped Bust halves were issued every year for 30 years except for 1816 when a fire destroyed the Mint's rolling mills and suspended all silver coin production. Annual mintages routinely exceeded 1 million pieces, and peaked at more than 6.5 million in 1836.

Because Capped Bust coinage during this period was produced on screw presses and each production die was individually made with lettering, date, and stars punched by hand, this series produced a huge number of varieties that have challenged collectors for generations. Overton's work remains the seminal catalogue of the myriad varieties.

In 1836 steam powered presses were introduced at the Philadelphia Mint. Steam power enabled the Mint to produce coins more efficiently and with greater uniformity. However, the technical advancements came with some aesthetic cost, including severe limitations on edge ornamentation. Engraver Christian Gobrecht was charged with modifying Reich's design to align with the new production capabilities.

1837 Capped Bust Half Dollar PCGS AU58 Reeded Edge

Gobrecht's modifications featured a coin with a smaller diameter and a reeded edge. Although the portraits of Ms Liberty on the obverse and the eagle on the reverse appeared the same, there were some subtle revisions. On the obverse, the stars were smaller and Ms Liberty was slenderized. On the reverse, the scroll with E PLURIBUS UNUM was removed, and the denomination at the bottom read 50 CENTS.

Fraction of silver in the reeded edge Capped Bust half bust was increased slightly to 90%, but the smaller diametered coin resulted in a net weight of silver slightly smaller than the previous design:

Diameter: 30.0 mm
Weight: 13.36 g
Composition: .90 silver; .10 copper
Edge: Reeded
Net precious metal weight: .38658 oz silver

Only about 1,200 reeded edge halves were struck in 1836. Strictly speaking, the 1836 coins were patterns (i.e., non-production trial coins) as the legislation authorizing the design was not passed until January, 1837. About 3.7 million coins were struck in 1837.

In 1838, Gobrecht tinkered with the design again. He used slightly heavier lettering and tweaked details in the eagle's feathers and talons. The most noticeable change is that the denomination at the bottom of the reverse was altered to HALF DOL.

1838 Capped Bust Half Dollar PCGS AU50 Reeded Edge

The reeded edge "Half Dol." Capped Bust variety was struck in 2+ million quantities in both 1838 and 1839. In 1839, the New Orleans Mint also struck some pieces, making it the first branch mint to produce half dollars.

Because no silver dollar coinage was produced during the 1807-1839 run of the series, the Capped Bust half dollar was the highest denomination coin in circulation during the period. It was the 'workhorse' coin for commerce during the early 1800s. Many pieces were held and traded by banks, so many coins were preserved with light wear. Carrying a Capped Bust Half in one's pocket during this period probably engendered a pretty good feeling as it constituted about a half day's pay for the average working American at the time.

IP and Big Business

"You're not in the oil business. You're in the oil shortage business."
--Barney Caine (The Formula)

This snippet from a new book proposing negative effects of intellectual property laws includes arguments made often on these pages.

Intellectual property laws are unjust because they grant monopoly privileges to people who develop ideas from on the backs of peoples' ideas and then claim the sole possession of the intangible and abundant result. This result cannot be justly be considered property because clean title cannot be proven.

Moreover, intellectual property laws are unlikely to facilitate more production and competition. In fact, they are likely to do the opposite. IP laws add barriers to entry. Larger firms can absorb these costs better than small firms. Entrepreneurs that might enter an industry see those costs and are discouraged.

The beneficiaries are the large firms. Industries get more concentrated and complacent. Innovation goes down...as does efficiency.

As such, general standard of living does not benefit from IP laws. The beneficiaries are those who receive IP privilege and then are protected by the strong arm of the State.

More often than not, this means big business.

New Year's Asset Allocation

Under a blood red sky
A crowd has gathered in black and white
--U2

Entering 2014, my asset allocation among securitized (i.e., paper) assets is as follows:

57% cash
36% alternative assets
4% equities
2% fixed income
1% international

Alternative assets are split between commodity (primarily precious metal) ETFs (21%) and short equity ETFs (16%)

Sole equity position is Pan American Silver (PAAS). International is an emerging markets mutual fund, DFA Emerging Markets Portfolio (DFEMX).

As my view currently stands, will be looking to add to precious metals, short, and international position should the right opportunities arise.

State of War

The war machine springs to life
Opens up one eager eye
Focusing it on the sky
Ninety-nine red balloons go by
--Nena

Jacob Hornberger discusses the collosal failure of three favorite state 'wars': the war on terror, the war on poverty, and the war on drugs.

More than 10 years after the war in Iraq, things are no better there and perhaps worse than before. Afghanistan...same situation. The greater the uninvited US presence in a foreign land, the greater the animosity (and pushback) of that locale toward America. Why should we expect otherwise? How would Americans react to forced presence of Chinese or Russians on US soil?

When measured on a timeline, however, the war on terror is still in its nascency compared to the war on poverty, which celebrates its 50th anniversary this year. After a half century of waging this campaign, grand proof of its failure are statist claims that poverty remains a huge problem and that governments must continue battling it.

Again, why should we expect anything other than failure? As JH observes, the mechanism of the war on poverty creates its own cause. The process of confiscating wealth to fund poverty programs destroys the foundation for building wealth and prosperity in society. That foundation is production.

The war on drugs has been another colossal failure. The purported goal, a drug-free society, is nowhere within reach. Meanwhile, the war on drugs has spawned gang violence, corruption, robberies, murders, and overcrowded prisons. JH argues that the drug war failure is the one area where it seems Americans are waking up to the folly of statism.

Warfare and welfare statists list a bevy of excuses:

"The right people just haven't been in charge. Get our people in there and the war will be won."
"Outside factors beyond our control have postponed victory."
"Judge our programs by their good intentions rather than by their results."
"Just give us more time and we'll win the war."

The correct solution is to stop the wars. Prohibit government from waging them.

This would bring into existence economic enterprise, savings, and productive capital that alleviates scarcity. Free and voluntary trade raise general standard of living.

As statist wars decline, peace and prosperity advance.

Democracy and Divisiveness

I'll move myself and my family aside
If we happen to be left half alive
I'll get all my papers and smile at the sky
For I know that the hypnotized never lie
--The Who

After voting on a decision where the majority vote is deemed the ruling one, you will often hear variations of the following: "Whatever differences people may have had in the past are now behind us. It is time now for the community to come together."

Of course, it is usually members of the dominant coalition that utter such proclamations.

Issues that are settled by democratic (majority) rule are naturally devisive. They encourage factions and deal making among special interests to collect a majority vote. The will of the majority is forced on the dissenting minority.

Expecting an increase in community cohesion following democratic vote is either naive or intellectually dishonest.

Property Rights and Non-Aggression

Just like one and one don't make two
One and one make one
--The Who

It has been said that the libertarian perspective is grounded in two primary principles: property rights and non-aggression. But aren't these two principles really one in the same?

Property rights endow all individuals with inalienable authority to dispose of their property (broadly construed) as they see fit--as long as they do not invade the pursuits of other individuals. Invasion of someone else's pursuits constitutes aggression. Thus, property rights cannot exist without non-aggression.

The non-aggression principle states that aggressive, or offensive, force is unjust because it interferes with the pursuits of others--i.e., it limits the liberty of others to dispose of their property as they see fit. The only just use of force is for purposes of self-defense--i.e., force used to fend off against aggression by others. Thus, the non-aggression principle makes little sense without the notion of property rights.

Property rights and non-aggression go hand-in-hand.

How Wealth is Created

Feed the babies who don't have enough to eat
Shoe the children with no shoes on their feet
House the people living in the streets
Oh, oh, there's a solution
--Steve Miller Band

In economic terms, wealth measures the value of economic resources that is owned or controlled.

While it can be transferred in many different ways, economic wealth can only be created one way: production. Production combines labor with other scarce factors (materials, land, energy, etc) to generate output that enables people to live and prosper.

When it generates output that people desire, production alleviates axiomatic scarcity that constrains standard of living.

Policies that limit such production limit the creation of wealth.

Lesson of Leverage

Time respects no person
And what you lift up must fall
They're waiting outside
To claim my crumblin' walls
--John Cougar Mellencamp

In the economic context, leverage is borrowing resources to live larger in the present than one otherwise could. Anyone carrying debt is leveraged to some degree.

Borrowed resources are employed now with the promise to pay them back later--usually with interest. Leverage thus entails risk--there is a chance that resources borrowed today cannot be paid back tomorrow. That risk may be borne by the borrower, the creditor, some combination of the two, or, as was made clear during the recent credit crisis, the public at large.

During the recent credit debacle we learned that the risk associated with leverage can be quite latent. Leverage was building in the system for years as credit was made easier. Government, organizations, individuals all levered up.

Early on, things seemed fine. In fact, higher near-term standards of living facilitated by leverage created the illusion of prosperity. "New era" claims abounded. "Housing prices can only go up..." "Policymakers have our backs..." Collective optimism increased which drove leverage to greater heights.

As we now know, there was no new era. The prosperity was a mirage--a state of borrowing from the future to fund higher living in the present.

At some point the mirage disappeared. Collective risk appetite declined. Incomes did not permit repayment of debt. Credit spigots closed. A downward spiral insued as the potential for loss associated with leverage became actual loss.

Did we learn the lesson of leverage? Not hardly. Today's systemic leverage is much higher than prior to the credit collapse. The Federal Reserve's balance sheet, for example, currently shows assets of about $4 trillion against capital of about $55 billion. That's leverage of 73:1--far higher than Fannie Mae's at the height of the real estate bubble.

Government and corporate borrowing are once again at epic levels.

Will 2014 be the year where we are presented with another opportunity to learn the lesson of leverage?

New Year's Shoe for Obamacare

Well, you can knock me down
Step on my face
Slander my name all over the place
Do anything that you want to do
But uh uh honey, lay off my shoes
--Elvis Presley

Obamacare, in terms of the legal mandate to be enrolled in federally compliant health insurance plans, officially went live at midnight. Zerohedge suggests that the new year sets the stage for another problem.

The federal government reports that 2+ million have signed up for Obamacare. However, signing up does not equate to being covered by insurance. A plan is not activated until the first premium is paid.

A significant fraction of Obamacare enrollees have yet to make their first premium payment. Moreover, the program's myriad technical glitches and extended enrollment deadlines make it difficult for providers to verify coverage.

This means that some people seeking to consume healthcare goods and services in the first few weeks of the year may be unable to do so because they have not yet paid for coverage. Others may get turned away because providers cannot verify their coverage. Some providers may take on risk by providing goods and services to people whose coverage cannot be verified.

Furthermore, once they receive their first premium bills or co-pay invoices, some enrollees may realize that they committed to plans that they could not afford. Zerohedge suggests that it is likely that many of those who have had the time to muddle through the glitch-prone enrollment process are people who are lacking in disposable income--and thus more prone to experience sticker shock when they get their first bills.

The first few weeks of the year will reveal whether this shoe falls on the program.