Americans Living Relatively Beyond their Financial Means: A True Falsehood

Badmouthing the typical U.S. consumer has been a practice widely employed by journalists time and time again. Indeed, it is true that the U.S. has tallied up the highest external debt of any nation in the G20 – currently hovering at an estimated $12.25 trillion as of December 2008, according to the CIA World Factbook. However, looking at this figure alone may create a distorted illusion far from the truth.
As a basic tenet, it is the case that the bigger a business, the bigger its running costs. Analogously, it would not be surprising to note that the U.S. does indeed run up the highest annual GDP of all nations in the G20 – of all nations in the world as a matter of fact (currently at an annual $13.5 billion as of 2008). However, this simple and obvious fact is not what I initially planned on boring you, my reader, with.
By simply subtracting a nation's external debt from its GDP, we can derive a value also known as 'Effective Net Worth.' What this excruciatingly simple figure tells us is (as one could imagine) an individual's, firm's, or nation's total assets minus total external liabilities. And compiling information from the CIA World Factbook leaves us with the following information:



As shown above, the U.S. is far from being the most over-consumptive nation. Clearly, the U.K. leads the way for over-consumption with an external debt 5X the amount of their annual earnings. Our right-most column displays net worth per capita (the amount each citizen in the nation in question is worth). As can be seen, Australia, France, Germany, the U.K., and the European Union each consume more than they earn. On a brighter note, the U.S. is in the positive with an average individual worth just over $6K every year.
For the most part, nations with negative net worth per capita can be accused of trying to obtain (with money they don't currently own) social welfare of some sort. In each of these cases, either productivity on the average level is too low, social program costs are too high, or both.
However, a socialist may be relieved to find Canada's net worth per capita soaring in 3rd place (right under South Korea and Japan). Therefore socialism, it appears, may be conceivable while simultaneously retaining one's financial dignity – this is at least what has been suggested by our figures above.

An Enquiry Concerning the Nature of Generalities

This article will slightly digress from my usual topics... Nevertheless it's something I must share with the world.

The other night, in casually conversing with my roommate, I uttered a proposition which received its usual objection. I will frame the conversation, along with its objection and my counter-objection.

Me: I wonder why it is the case that a good number of our ethnic group's females are so culturally conservative.
Roommate: Isn't that too much of a generalization?

Now here is what I want to address to as many people as possible. A generalization is NOT an argumentative fallacy. As a matter of fact, if a generalization were an epistemic illegality, then all of knowledge as we know it would not exist. I will go so far as to say that all knowledge IS a generality. When testing any argument for validity, or set of premises for consistency, a logician will annotate each premise using generalities in propositional calculus, quantificational logic, or any other first-order languages of logic. In this article, I will limit the scope of demonstrating that any proposition of both propositional calculus and quantificational logic are indeed generalizations. Why only these two first-order systems? Simply put, virtually all other systems of logic reduce to either propositional or quantificational logic. Therefore, what is true of these two systems is true of all systems that entail them.

We start with prop calc...
A law or a theorem, be it a law or theorem of physics, mathematics, or anthropology, is a proposition of the nature 'All A's are followed by B's.' We can also regard such a proposition as 'A implies B,' or 'A entails B.' All books have pages. All humans are mortals. All matter is non-destroyable. We know some of these propositions (the first two) to be true by definition alone, as a book entails some number of pages and all humans indeed have a finite lifespan, and the latter to be true given empirical evidence (Law of Conservation of Matter). (Immanuel Kant was the first to make this distinction between analytic and synthetic truths, but that is outside the scope of our argument.)

The types of propositions mentioned above (laws) can be validly regarded as 100% generalizations. This is simply the nature of propositional calculus. 'If A, then B' is a simpler way of asserting all A's must be followed by B's, or that all A's are indeed also B's. If this conditional is true, translated to its most abstract form, we can think of it as 'any object that is ascribed the property of A must be ascribed the property of B.' This utterance is a generality in its purest form. But let us complicate the matter a bit further. Let us suppose we have run into an urn full of 10 marbles – consisting of 5 red marbles and 5 blue marbles.

Quantificational Logic
Now things have gotten slightly trickier. We have as our domain, let us call ∆, 10 objects – 5 of which have been ascribed the color property of redness, and 5 of which have been ascribed the color blue. Using the formal language of quantificational logic, we can summate this situation as follows:
Suppose...
R = red
B = blue
M = marble, which we will designate as an operator
∃x∃y [M(∆) → (Rx v By)]
Admittedly, the formalized notation above is not required for our analytic purposes. It will suffice to know that the logical proposition above can be translated as 'given some values of x and some values of y, for any marble (object) in set ∆, it is either the case that the color property of red or blue is ascribed. Simply put, we can truthfully say some objects in ∆ are red, and some objects in ∆ are blue. And this IS indeed a true proposition, given our setup. Nevertheless, this is a generality.



We can add a further complication that our fellow sociologists and political scientists will utilize. Given our urn, a more specific proposition may be given as follows:
∃x∃y [0.5(M(∆) → Rx) & 0.5(M(∆) → By)]
This proposition above says almost the same as the previous, but a bit more. Simply put, it ultimately translates to '50% of the marbles in set ∆ are red, and 50% of the marbles in set ∆ are blue.' This type of utterance is not as clear-cut as our previous examples of 'All A's are followed by B's,' where 100% of A's are B's. Nevertheless, it asserts something quite similar in nature: 50% of M's in ∆ are R's, and 50% of M's in ∆ are B's. Once again, we have ourselves a truthful generalization.

So much are generalities essential to the existence and continued perpetuation of knowledge, that logicians have gone so far as to build two quantifiers one of which we have already used (also known in the philosophical community as the generality quantifiers). These are are the existential quantifier (for some objects in a given domain, it is the case that) and the universal quantifier (for all objects in a given domain, it is the case that). Saying that no objects in our urn are green would simply be asserting a universal generalization with a negation of the property greenness, or 'all objects in ∆ are not green.' Nevertheless, this is itself a generality of similar nature.

A case my roommate may have legitimately been able to make is one of the following: I disagree, I believe none of our ethnic group's females are conservative, or I believe all of our ethnic group's females are conservative – either one of which would have been inconsistent with my assertion that 'there exists some females in such and such domain that are conservative.' Given that I did not make an utterance of a specific probabilistic nature, and given that neither one of us had a formal survey to cite, neither one of us were in an epistemic position to disagree on an exact numerical value of conservative females in our domain (or ethnic group). Therefore, my utterance was less exact – of the form 'There exists some females in this specific domain that carry the property of conservative-ness.' And any philosopher of language will agree that some, by definition, constitutes 1+ (one or more) objects of a domain. Therefore, so long as there exists at least one conservative female in the ethnic group in question, my proposition was indeed valid.

Possible Philosophical Counterobjection: An Appeal to Modality
One who is well-read in the philosophical arts may find a possible counter-objection which may initially seem as though it bears some truth. One may make an appeal to necessary truths, those whose denial will necessarily result in a logical self-contradiction. But for one, it must be realized that the existence of such necessary truths in nature (independent of our definitions) is arguable even in the philosophical community. Nevertheless, even if opponents of necessary truths were wrong in every possible way, and such modalities do exist, it can be argued that any necessary truth must follow from a tautological disjunct: Av~A (A or not A) either of which must be the case. Therefore, we can have Av~A implies the 'existence of God' or 'a naval sea battle's occurring at noon tomorrow' or any other proposition which an individual may deem as a necessary truth. This conditional can itself be deemed a generality.

Any other possible counter-objections
I invite any reader to hand me a proposition (a semantically and syntactically valid statement) which I will readily be able to show is a generality.

In conclusion, a specific generality in itself may be deemed true or false. However, a generality does not in itself constitute an argumentative fallacy.

Health Addressed... or ignored

Recently, while glancing through news headlines in attempts to educate myself of current world affairs, I stumbled on a news article which caught my interest:

http://news.yahoo.com/s/ap/20090412/ap_on_he_me/uninsured;_ylt=AvQwGRA3ii14by270b35bAes0NUE;_ylu=X3oDMTJicWs5cjJmBGFzc2V0A2FwLzIwMDkwNDEyL3VuaW5zdXJlZARjcG9zAzgEcG9zAzE0BHNlYwN5bl90b3Bfc3RvcnkEc2xrA2FtZXJpY2FzdW5pbg--

In a nutshell, the article raised an interesting fact: uninsured Americans comprise one of the largest (if not the largest known) demographic group in the US. An approximated 50 million Americans do not have health coverage.

Clearly, with political support of 50 million+, much can be done in addressing concerns of the group. However, as most know by now, the issue has not picked up momentum. And the reason was clear: the constituency is politically apathetic.

One may further question why this is the case. Why do uninsured Americans not vote, at least with respect to their issue? Among some reasons given were the following:

1)Lack of time. Many uninsured Americans comprise of demographics that simply try to “make ends meet”
2)Continual recycling. The average uninsured American remains uninsured for 4 months. Therefore, commitment to the concerns of the demographic group may not develop in time for many uninsured individuals in the length of time which the average member is uninsured.

What follows from a weak to non-existent political constituency is a lack of legislative support. Surely, if a legislator will not gain any political patronage, recognition, or reward for trying to help a group, then why would he or she even try to support that group at all? One answer: because it's the morally correct thing to do. However, reality has it that any elected political position is subject to Darwinian laws. Any elected official would simply be frustrating his or her ends and means by supporting something which will not necessarily help his or her candidacy.

Let us now try and analyze these facts at our disposal. Consider uninsured Americans an entity to itself, call them UA. Most or all ethicists will agree that any entity is responsible for its own actions, whether or not they commit themselves to acting a certain way. I would be the one held responsible for choosing whether to study for an exam I have next week, just as I would be held responsible for choosing not to prepare. An account of moral responsibility stretches beyond individual people. An organization would be held responsible for throwing an event, or not throwing the same event.

Similarly, UA would be held morally responsible (given that they have the choice offered by the kind courtesy of our democratic system) as to whether or not to vote to support a healthcare bill. Evidence has it that they choose not to. Therefore, we can validly conclude that, for one reason or another, UA finds it more beneficial to not support a healthcare bill than to support one – in accordance with rationality.

Now here is my postulate (which I'm sure will naturally spark some controversy): does this not suggest that our current private healthcare system suffices to the needs of the public?

Why the world's oil supply will NEVER run out...

Thought this was always a fun topic for those unexposed. In actuality, however, it's true. The world's oil supply will never run out. By never, I don't mean 'not soon.' I mean a much stronger sense of the word – much like for as long as the solar system exists and the Earth is around, oil will be physically present.

This of course runs counter to environmentalist propaganda and intuitions. Time and time again, mathematicians have predicted that the Earth will run out of oil in an x number of years; x being a very small and finite number, such as 20, or 50. Many years have come and gone, and all that these mathematicians have realized is that in order to preserve their predictive credibility, they should make predictions that outlive their existence. Current oil supply predictions typically range anywhere from 30-60 years, depending on which environmental NFP one consults.

However, it is obvious this pessimistic prediction will never come to fruition. Additionally, it doesn't take a genius to figure out why. Anyone with an economic intuition has a right to roll their eyes at the redundancy of this passage – but for those who don't yet know, you soon will.

Simply put, the fallacy to having the world oil supply run out is attributed to the fixation of the rate at which oil is consumed. Mathematicians believe they can predict the rate at which oil will be used. Simply put, as the finite world oil supply lessens, supply will (by definition) decrease. As supply decreases price will increase as quantity supplied will be reduced. This trend will continue until it no longer becomes a viable option to use oil or natural gas as energy sources. As relatively expensive as hybrid or electric cars may be, a sufficient hike in gas prices will eventually deem even electric cars (with current market prices) relatively inexpensive. Once this relatively small amount of oil is left on the planet, using oil will simply be too expensive of an option as any energy source.

Therefore, despite the environmental damage continued usage of oil and natural gas can cause, rest assured that the Earth will never run out of oil.

Cries Against a Misconstrued Current

It may seem as though President Obama’s removal of Rick Wagoner, chairman and CEO of General Motors, is the fuse that will ignite America’s path to socialism.
Additionally it may be apparent that upon further reflection, an argumentative commitment to the preceding proposition is ultimately a commitment to idiocracy. And why, you may ask, is this the case?
Let us first get our facts straight. Wagoner was unable to reduce costs to a level that would make GM competitive. Nor did the executive promote the production of vehicles that would attract market shares. However, these shortcomings are not sufficient to attract government involvement by any means. But here comes the curveball.
It is commonly accepted today that Wagoner was “asked to step down” from his position as chairman and CEO. Let us give this articulation of our opponents the benefit of the doubt in assuming that a political request of the sort is the equivalent of force. What most do not realize is that saying Wagoner was “asked to step down” does not in fact capture the entirety of what really happened. In actuality, Wagoner was asked to step down as a pre-condition of federal help – meaning if he did not step down, GM would not receive federal bailout aid.
How is this any different than what we had earlier? By simply mentioning that Wagoner was asked to step down, one is strongly suggesting that the government laid it down as an imperative for the chief executive to resign. However, by attaching this simple word “precondition,” things change drastically as we now have a conditional – namely GM's receiving further federal aid implies Wagoner's having resigned. And indeed, Obama did make his request as a pre-condition.
What follows is that, at least in principle, Wagoner still had a choice to make his departure. If I were to ask my parents for a month's rent (given that I was unemployed and broke – a case of desperacy akin to GM's situation), and my parents agreed to offer me the rent on the condition that they could come by to my apartment anytime and move furniture around (much like the governmental restructuring of GM which might be underway), then it would still be left up to my own discretion to choose whether or not I would take them up on the offer. Analogously, Wagoner still ultimately had a choice, independent of any outcome.
President Obama did not simply approach a CEO at random, such as say Robert Iger of Disney or Sam DiPiazza of Pricewaterhouse, and request their resignation or nationalize their company. We would have reason to worry about a possible trend towards socialism only if such an instance were the case.
It is common for some to blow the impact of current events out of proportion, by say calling Obama's recent proposal is a step towards socialism. One may wish to uphold the ideal of a free-market with free trade, insofar as the underlying intention is to promote personal wealth, in addition to personal freedoms, and fall into no self-contradiction by claiming what President Obama did was right. We already went over personal freedom and proved that no such violation was made on that end. Any violation of personal freedom from the part of the government would require an imperative, or unconditional demand, on the government's end. However, no such imperative was given.
Likewise, free market principles have not been violated. Violation of free market principles would entail a barrier of free trade of some sort. However, no such barrier set on the part of the government exists.
We can safely conclude that any cries for a supposed loss of a free market are cries not worth bailing out.

AIG - What should have been done...

The facts and figures are all but familiar to those who haven't been living under a rock: $165 million paid to an estimated 400 AIG executives, HR1586 passing with flying colors (328-93) with the promise to return 90% of all post-January 2009 retention payments to the tax base, and an outraged public. Sure enough, it doesn't require a Harvard mathematician to figure out that the average bonus handed out per executive was $165million/400 = $412,500 – an amount more than what 90% of American households make in a given year. Some reporters of the Associated Press have even reported what they think is a more accurate figure of the amount handed: $218 million.
Regardless of what the real amount was, for the purposes of my mini-analysis, it will suffice to say that this recent action (both on the part of those handing out the bonuses and those accepting them) was unwarranted. By unwarranted we mean unethical, or simply put as violating an implicit social contract meant to enhance the aggregate benefit to society. We need not get into a meta-ethical debate as to the exact definitions of ethics and actions which qualify as ethical or unethical. Most, if not all, would agree that distribution and acceptance of $165million retention payments given in the current temporal context was unethical.
We move on to the essence of the analysis. My thesis: HR1586 will be almost completely ineffective in eradicating prospective corrupt usage of American tax dollars by bailed-out corporations. It might effectively collect 90% of the $165million handed out to AIG executives. However, it still keeps open possible instances of future scandals of the sort. Why? Suppose you are an executive in a non-AIG firm receiving bailouts with overwhelming influence on the preparation and distribution of bonus payments. Your line of reasoning – given that you capably carry sound judgment – will go as follows:

AIG execs got away with 10% of their distributed bonuses; therefore even in a worst case where 90% of my bonuses were taxed, I can still creep away with 10% of the money which was not even mine to begin with. Not bad, I think giving this a shot can help me more than it can hurt me. And even if some Draconian move on Congress's part took away 100% of my bonuses, my firm will in essence have lost only a fraction of the bailout originally received, which will hardly make a dent in my firm's current operations and cash flows. Therefore, I have myself a win-break even situation; where I win in a best case, and break even in a worst (and even unprecedented) case.

Simply put, the lack of punitive action on the part of both the House and Senate will not necessarily avoid (and even possibly give leeway to) similar instances of corruption and greed in the future. Then what solution, if any, do I have to offer? Abstractly speaking, an ideal solution will be one that perpetuates AIG's business transactions (as the company is indeed “too big to fail”) while having the scandal-inducing executives and decision-makers serve both punitive and compensatory sentences. By this I do not mean jail-time, as putting managers behind bars is inconsistent with a firm's operational perpetuation. The compensatory sentence is simple, a 100% tax on the bonuses will suffice. The punitive sentence will undoubtedly become the heat of more controversy: income and asset redistribution of up to 50% of all executives willing to receive American tax dollars in the form of retention payments. A loss of 50% of a given year's annual income and all personal assets will still keep executives' continued work in the firm as personally more beneficial than quitting altogether. This is only a ballpark estimation of the sort of punitive action that must be carried out to effectively eradicate the problem from its root. The redistribution may be slightly higher or lower than 50%, however it must be substantial to remain effective. And that is ultimately what we need – namely continued operations of these firms with gargantuan disincentives of future scandals of the sort.

Yielding our Consumptive Zen

“Any whiffs of growth this year are likely to herald a false dawn.”

A simpler articulation of this proposition will render: “the economy will most likely not grow for the remainder of the year.”

Simplified even further, we're left with “we're screwed.” Or at least that's what Stephen Roach, CEO of Morgan Stanley Asia, and Niall Ferguson, a financial historian at Harvard University, think. And sure enough, it seems that any whiffs heralding any more falsehood would bound us to never see light again. Hearing about a 6.2% annual contraction rate, AIG's $30 Billion additional bailout fund, a loss of 650,000 jobs in a month's time, and the Dow's 1997-level pricing doesn't lend argumentative credence to the hopeful side. Many, myself inclusive, may find a tonal conflict with President Obama's somewhat optimistic address to Congress couple weeks back. Truthfully, though – mood aside – no such conflicts exist. Both support a strong likelihood of economic deterioration on every level (falling housing values, employment, real income) for a sustained period lasting up to three years.

But there is actually a sign of hope.

If we all took a moment to dim the lights, take a toadstool position, quiet our minds, light our incense, and find our true inner nerdy economist, the answer may indeed “dawn.” The sign of hope which may reveal itself is one currently narrowly discussed in prevailing economic literature: the yield curve. Any 'Investment for Dummies' books will reveal that the yield curve is the spread between interest rates on the 10-year Treasury note and the 3-month Treasury bill. People such as myself wonder why one of the most powerful indicators (if not, the most useful leading indicator) has gone almost completely unreported. It raises the question of whether or not most forecasting reporters fails to live up to the intellectual standards of a dummy. And what relevance does this value have to any hope?

Putting questions of integrity aside, let us shortly get back to our mini-tutorial. Simply put, the yield spread is a leading indicator highly correlated with upcoming recessions. Its predictive power can range anywhere from 2-6 quarters. Historical trends indicate that a little over six out of seven recessions have been preceded by a negative yield spread. Since the yield curve can be represented mathematically as the 10-year note minus the 3-month note, this would mean that about six of seven recessions have been preceded by (within 2-6 quarters) a higher 3-month note value relative to the 10-month note value.

But we haven't yet answered our own question: how does this tie in to our current situation? A current look at yield spread data released daily by the U.S. Treasury department will show hopeful results: an average yield spread of 2.68% over the past week.

By taking this average value and finding its corresponding probabilistic assessment of upcoming recessions, we feel some relief as we see a 6/7 (85.7%) probability for recessionary recovery four quarters from the present.

That's almost a 90% chance of good news, you fools!

Nevertheless, one may make the argument that our indicators grossly mislead, or that an unexpected or unforeseen factor determines an entirely different outcome than the one indicated above. However, in the face of the current mishap, we can know definitively that the trends above force us to conclude at least one of three things: either our luck has it that our happy indicator does not exhibit its causal efficacy in this case (unlikely), the macro-psyche is undergoing a breakdown at an amplified rate with respect to actual real-world occurrences (meaning consumer confidence is unnecessarily low), or consumer confidence properly corresponds adequately to the severity of the current mishap, yet the rate of recovery is fast enough to avoid a recession extending beyond four more quarters.

What consumers need to do is exactly what I indicated earlier: go home, dim the lights, light a candle, and quiet the mind. Although I will not go into details here, it can easily be argued that a great deal of underpricing today is attributable to low consumer confidence, and not particularly to any non-psyche related business shenanigans.

Path to Socialism

I’m not a journalist, therefore I feel compelled to give my own input on this matter. But as a human being who feels compelled to give each argument a fair evaluation regardless of possible personal affiliations that may fall into contradiction, I will first mention exactly what happened.

Recently, Hugo Chavez, the newly reelected Venezuelan president called for a socialist revolution in the United States. A reporting on this incident can be found here:
http://www.bloomberg.com/apps/news?pid=20601086&sid=aB6yw1ihGZ2k&refer=latin_america
This post is simple in nature. I will offer an argument (in the purest philosophically-styled format) against the practicality of socialism. What exactly do I mean by practicality? I will define an economic transaction as practical if and only if it achieves a statistically significant level of efficiency.

Argument Against the Practicality of Socialism
Premise 1: An industry is efficient only if it entails a profit motive.
Premise 2: Any socialized industry will necessarily eliminate any profit motive.
Conclusion: Therefore, any socialized industry will not be performing efficiently.

The argument above is transitively valid. It consists of the form:
A --> B
C --> ~B
Therefore, C --> ~A. by Law of Contraposition we know this inference to be truth-preserving.
If one wants to refute the argument above, they will have to attack either Premise 1 or Premise 2. Any economist will affirm the truth of the first premise. The second premise may be most commonly inspected on grounds of suspicion. Therefore, let me make its argument. Socialism, by definition, is the theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, and labor in the community as a whole. However, each community member is, by human nature, concerned with his or her own best interest and not with the community's at large. Therefore, each individual will work to maximize his or her own benefit at the expense of the aggregate. What you are left with is a loss of profit incentive and consequent systematic disorder and chaos. If one wants to contest this further, I would strongly suggest one first read an economic-philosophical paradox which is said to have instantiated capitalism into existence: The Tragedy of the Commons.
What Friedman suggested at one point with respect to socialism, is where anyone will find the angels willing to work without any profit incentive. Sure enough, on paper the theory works well. In practice, however, failure or extreme inefficiencies will result. And if the inefficiencies do not show up immediately in the industry per se, they will necessarily surface in the aggregate economy in one form or another through the payment of unnecessarily high taxes and resulting deadweight loss – such as chronic high unemployment, high inflation, wage rigidity, and many other negative features attributed to socialist endorsing nation-states. We can see such instances in countries such as France and Germany whose natural level of unemployment gravitates at around 8-12%.

Sorry Hugo, but socialism just doesn’t work in the non-imaginative world, beyond its oversimplifying theoretical limitations.

Rent Tax - A Conceivability or a Fantasy

In reading on various tax systems and their effects (including our current Federal/state/income/consumption tax system which Jimmy Carter himself called a humiliation to mankind), I stumbled on a set of literature which any individual with an interest in macroeconomic policy would find interesting:
http://www.wealthandwant.com/themes/Deadweight_Loss.html
To give one a sense of the matter without requiring a thorough read, the literature above suggests ideas parallel to the following:
“The use of rent for public revenues therefore has no excess burden, no burden on society or the economy. Taxes on income, goods, and transactions do have an excess burden, since by raising the price and reducing the quantity of goods, resources do not get allocated to where the people most want them. Taxes on labor and goods raise prices, while rent-based payments do not affect the rent, and they lower the price of land rather than raise it.
Rent is therefore the ideal source of general public and community revenue. Tax reform should therefore shift to rent as the primary source of general funds. Pollution charges can supplement the rent, and indeed can be considered a rental charge for using and abusing the atmosphere, land, soil, and other forms of land. There could also be user fees for services specific to users, fines for violating traffic rules, and profits from enterprises.”
My particular interest regarding the matter at hand is economic efficiency. In hearing on any tax plan or modifications of existing tax plans, one necessarily encounters two key implications: incentives and deadweight loss. My interest today is the latter.
For anyone unfamiliar with the term, deadweight loss may adequately be defined as the costs to society created by an inefficiency in the market. Empirical research has proven that a tax on any goods or services with an elastic market supply curve (regardless of the degree of elasticity) necessarily incurs some deadweight loss. This is obviously a bad thing for society. A tax system that collects revenues while incurring 0 additional cost to society resulting from any disincentives is indeed conceivable as the literature indexed above may suggest. However, a necessary condition of this possibility is that the good or service produced have a perfectly inelastic supply curve (meaning the supply for the good or service is fixed). And where in the market can we find such an instance? That's right, you thought of it and your landlord may fight it routinely in city-planning hearings: housing.
It appears that a tax on rent creates 0 dead weight loss. A causal reason given in support of this observational finding is that landlords do not earn the money they collect. It is hard to argue even for the conceivability of the preceding idea as the truth, as landlords must tend to maintenance issues and initially accumulate enough capital to purchase the units which they later offer for rent. All of this, of course, would qualify as some sort of work. Nevertheless, even if it were somehow argued that landlords really do not work, it is hard if not impossible to find a consequent 0DWL to society from tax on rent solely because of landlords' not earning their income. Simply put, the antecedent mentioned above does nothing to resolve the paradox.
A better reason given in support of the finding concerns the nature of the good's (housing's) supply. Simply put, since housing is fixed, any amount of taxation that still gives room for total revenues to exceed total costs will have landlords producing (or renting out) the same number of units.

For those unfamiliar and still feeling alienated with the concepts discussed above, the diagrams above help depict the concepts more clearly. The diagram above depicts the supply and demand relationship of a typical good with an elastic supply curve. The tax drives down the demand as indicated and creates a DWL indicated by the orange shaded geometric region. The diagram below depicts a market with a fixed supply such as housing. As can be illustrated in the diagram, no DWL results from a tax.

An Anti-Normative Approach to Economics

The ultimate goal of all positive sciences is correct prediction concerning phenomena not yet observed.

-Milton Friedman

Purpose

The subject of this analysis regards the theoretical progress of a discipline which has grabbed my attention for some time now: economics. What I will attempt to do is set forth a number of arguments and considerations for and against an exclusively positivist approach to the development of theoretical economics.

The Dichotomy

In order to gain maximal insight into a positivist approach to economics, one must first understand the positive-normative dichotomy. This separation hardly remains exclusive to economics – but rather branches through ethics, epistemology, and permeates several other social science and humanities disciplines. However, for the purposes of our analysis, we will limit its scope to economics.

But what exactly does each position advocate? Simply put, a normative approach considers what 'ought to be,' whereas a positive approach simply describes 'what is the case.' (Martin & McIntyre, 1994) Consequently, each serves its own purpose. As one can imagine, a purely normative approach may entail presuppositions which may or may not be true of the society to which the set of propositions are prescribed. On the other hand, a purely positive approach will supply facts with inexact direction. One can think of a positive approach, in itself, as a strong servant but a weak master.

And why on God's green Earth would we care about all this? Acceptance of what I will go on for the next few pages advocating would help account for current underlying inexactitudes in economic theory while giving predictive powers that merit the discipline credibility. Before setting out to complete this arduous task, let us clear some ground on which we may build the foundations of our argument.

The Relationship

The first issue we must address, which is a big one indeed, concerns the possible coexistence of normativity and positivity with respect to economics. Many would agree that a normative and a positive approach are conceivable as mutually exclusive elements. However, a number of arguments have been set forth to disprove this possibility. Let us visit and evaluate each of these considerations in light of our intended purpose.

Inconceivable Coexistence Argument 1

Many economists must cater to the needs of policy-makers and offer goal recommendations. Therefore, whether these economists like it or not, they must conform to conventions of normativity. (Machlup, 1969)

The suppressed premise in this argument is the link between offering goal recommendations and giving normative prescriptions which is indeed a connection we can make intuitively without much trouble. However, our concern in particular is not ridding the entirety of economics of possible prescription, but rather ridding theoretical economics of such actions. In other words, applied economics can make use of a value based prescriptive system as need be. Our concern, however, is directed towards theoretical economics, whose rate of development will be optimized (for reasons discussed shortly) by normative abstinence.

Inconceivable Coexistence Argument 2

Economic “science” is a human activity, and like all human activities it is governed by values. (Mongin, 2006)

What this argument entails, insofar as it tries to demerit the possibility of coexistence, is a clear instance of equivocation. Facts of values do not constitute as a prescriptive set of propositions based on values. I can truthfully claim 'My roommate loves eating chocolate' which makes a factual assertion of a person's value. However, saying 'My roommate loves eating chocolate' is in no way logically equivalent to saying 'My roommate should or should not eat chocolate.'

Inconceivable Coexistence Argument 3

People's views of what is right and wrong are, as a matter of fact, at least in part based on their beliefs of others' behaviors. (Marwell & Ames ,1981)

This probably is true of a great number of theories postulated at one point or another. However, it can hardly be said that this is true of most or all economic theories. Going through each potentially problematic axiom of economics would be too arduous of a task. However, let it be known that any value based economic theory (which will necessarily not hold as absolutely true) may easily be corrected in light of disconfirming observational data.

Examples

Up until now, we've been speaking in abstractions. But what problems particularly merit the defense that a purely positive approach can offer? A great deal indeed. For the purposes of our analysis, however, we will lay out two of the most fundamental tenets found at the heart of mainstream economic theory, which are attacked time and time again for their oversimplifications and impossible or improbable idealizations. The theories in question are rationality and utilitarian theory.

Indeed such theories have been demerited by critics for their gross oversimplifications. Rationality holds the position that all individuals in any given market seek to maximize their own best interest and will choose consumption bundles accordingly. What follows (at least in economists' models) is a trade-off pattern that assumes a consistent set of values for each and every consumer – adjusted for identical incomes. However, we know that in the real world this is not the case. Each individual may relate (and often does) a different set of values to the same set of goods, which will essentially factor in on their choice of the quantity of that given purchase. Therefore, notions of rationality may be based on a set of values making them inconsistent from one individual to the next.

The same case is made with utilitarian theory, as relevant to economics. Utility refers to the capacity of a commodity to satisfy some human need. Conceptually, most would agree that utilitarian theory makes good sense. However, the theory has little to offer beyond this conceptualization. Economists speak of utility in arbitrary quantified units for purposes of their analysis. The fact remains that there is no reliable indicator of utility; in other words, utility cannot be quantified. This renders the theory as limited, since most explanations of utility attempt to suggest a comparative bundle as numerically greater. In the real world, however, no such comparisons can be made.

Logical Form

But what have we really said up until now? Rest assured, the point is to be made soon. We've identified two questionable and fundamental assumptions of mainstream economic theories. Using this analysis, we will come to show that denial of these assumptions will not necessarily lead one to conclude the denial of the conclusion. A key assumption, by definition is an unstated premise that is intended to link any premise disparate terms or ideas to disparate terms or ideas in the conclusion. For instance, we have the argument

All men are mortal.

Therefore, Socrates is mortal.

The key assumption in the simple argument above is that Socrates is a man.

Denying that Socrates is a man will not lead us to validly conclude that he is not a mortal. He can be an alien which by definition would also constitute as a mortal, insofar as mortal is defined as any being subject to death. However, one would necessarily commit themselves to a logical fallacy if he or she believed that the denial of what is sufficient to bring about an effect would result in the denial of the effect itself. Formally, this argumentative fallacy is called 'False Denial of the Antecedent.'

Let us suppose now, that instead of our Socrates-Mortal argument, we had an Economic Argument that encapsulated everything mainstream economics has to offer today. This would indeed be a gross oversimplification. Additionally, if it were possible to sum up all mainstream economic theories in one stand-alone argument, books beyond books would be needed for thorough articulation. For our purposes, however, let us suppose we can see this argument in the form of two premises and a conclusion. Imagine further that the premises would act as the collection of axioms up until the present, whereas the conclusion would be a prediction of what future economic trends will result based on the presupposed theorems and the current state. In such a case, what we would have is an argument similar to the following form:

Axioms (Laws & Theorems): If A then B.

Current state: A.

Conclusion (Prediction): Therefore, B.

Now this is where our positive approach can potentially work wonders. Economics by nature is not empirical much like most of the natural sciences, but is rather observational much like astronomy. Data is collected and interpreted, only to be reinterpreted in light of new evidence until a fully functional theoretical framework, which can account for all collected data, is reached. Critics of oversimplifying theorems, such as our two mentioned conjectures above, often make a good point. And let us assume that considerations set forth against Rational Theory or Utilitarianism, like those mentioned above, were completely true and the two theories were fully discredited. In such a case, our Economic Argument above would take a negation of the first Axiom Premise. So instead of 'If A then B,' we would have something more like 'If A then not necessarily B,' which is logically equivalent to 'Some A are followed by not B's.'

Indeed this does weaken the argument as a whole. And if economics were a purely rational study, much like philosophy, we would not be able to know definitively whether or not the conclusion still holds. However, we can still know if our conclusion still holds by merely presenting facts which either contradict or confirm the prediction (our conclusion). Doing so would, of course, require a positive approach.

What if the critics are wrong and we had simply been deceived by an extremely appealing argument and were falsely lead to believe that our perfectly sound argument was in fact false? Furthermore, suppose the conclusion of an argument posited by a critic is false. A positive approach would still help with any such possible instance. We can be certain that a premise or axiom of economics is proficient in its explanatory powers only if it makes consistently accurate predictions. In other words, if an economic tenet does not make accurate predictions, then we can deem it critically problematic for our theoretical purposes. Given this criteria, a basic economic tenet (such as Utilitarianism or Rationalism) need not be consistent with all facets of worldly truths as relevant to their domain. As long as they serve their theoretical role of offering correct predictions, we can make good use of them and ignore any objections offered by critics in applications. Nevertheless, confirmation of predictive ability heavily utilizes, and even requires, a positive approach.

Income Differential Paradox (I really do think about these things in my spared time)

I'd like to discuss, and possibly stimulate concern for, an economic paradox which has grabbed my attention for some time now. In talking to an elder just recently, I was reminded of the heightening trend in household income differentials. Through casual conversation, one may already be aware of an increasing variance in household income. However, in pursuit of intellectual curiousity, one may wonder what exactly those figures have been overtime. The chart on the right will shed some light on that.
To be honest, it doesn't appear quite as disturbing as most political scientists or historians make out. However, there does seem to be a trend nevertheless – most obviated by the 10th and 20th percentiles' constancy over the last 40 year period and the 95th percentiles' near 160% increase. However, this is not the crux of what I wanted to talk about today.
What I wanted to talk about concerns a resolution to this matter. What should be done? This question assumes, of course, that widening income disparities are malicious to society in some way. Indeed countries with wider gaps in income are those highly correlated with high crime, inflation, often guerilla warfare, governmental corruption or disorder on some levels, and many more civil disfunctions of the sort. The relationship between the two remains unresolved – meaning is it the higher income disparity that causes social disorder, social disorder that causes high income disparity, or are both an effect of a third unaccounted factor? Some have tried finding good in the recent financial mess, claiming that a recession of the sort is needed to re-synthesize different socioeconomic classes, much like the Great Depression of the 1930s did. Economists such as Armine Yalnizyan have disagreed with such a notion claiming that “Income polarization always gets worse during recessions.” Nevertheless, for the purposes and scope of our argument, we will rid ourselves of the responsibility of answering these often difficult and irresolute questions and assume (crossing our fingers justifiably so) that most social scientists are right in claiming that widening trends in household income is indeed disturbing.
So once again, to reiterate our concern: what must be done to reverse the growing and seemingly irreversible trend in household income differentials? Most economists agree that redistribution initiated by some form of government intervention is necessary. However, any society that values civil liberties will necessarily avoid any form of forceful government intervention. Ayn Rand once held, for instance, that a government can be the most dangerous threat to man's rights: it holds a legal monopoly on the use of physical force against legally disarmed victims. And indeed she had a point. People who hold the position of these economists – namely those who favor forceful redistribution – must commit to a position that violates libertarian principles entailed by Western political philosophies. Additionally, such redistribution can eliminate incentives for economic productivity.
We arrive at a second possible resolution: differential tax rates varying with respective socioeconomic positions. Such resolutions may or may not work. Legislators may want to avoid what mathematicians would call piecewise functions. If for instance, tax rates were a function of income (say increasing as income increased, or decreasing as income decreased), then any corner solutions may once again encounter the same problem as the previous: elimination of economic productivity. What exactly does this mean? For instance, suppose a doctor and lawyer couple collectively make $260,000 annually in household income. Now suppose tax law has it such that those households making over $250,000 will pay 50% income tax annually (meaning $130,000 for our doctor-lawyer couple) and those below $250,000 will pay less than or equal to 25% of their income. Suppose now the lawyer makes $80,000 annually – meaning if she were not to work, the couple would earn $180,000 annually and qualify for the under $250,000 income bracket. It follows that the lawyer's quitting becomes economically profitable for the household by $5,000; since tax on $260,000 would be $130,000 and tax on $180,000 would be $135,000. An economy will clearly be disadvantaged by the lawyer's quitting his or her job. Nevertheless, the lawyer can kick up his feet everyday, not work, and expect his or her house to rack in an additional $5,000 annually. Such economic paradoxes implied by certain tax schemes exist, and indeed hold potential to create what economists would call dead weight loss, or unfulfilled economic potential. Nevertheless, such tax schemes are far from perfect in exclusively resolving our problem at hand: increasing income differentials.
This is where I personally return to the drawing board. What can be done to exclusively remedy this trend without causing unintended havoc? To this day, no one (to the best of my knowledge) has succeeded in answering this preceding question.

To Laff or Not to Laff

An individual whose work I'd like to direct attention to help kick-start what I hope will be a forum of intellectual exchange is that of Arthur Laffer's. Indeed, over the decades Laffer has built himself solid credentials with well-articulated and highly useful macroeconomic theories underlying presidential platforms. On the other hand, one can just as easily make a case against Laffer's credibility with his 2006 appearance on Kudlow & Co and his losing of a 1 cent bet with Peter Schiff concerning a possible upcoming market recession. Laffer then (2006) denied such a possibility and agreed to place his credibilty on the line. And sure enough, Laffer lost.

In attempts to investigate further on this issue with minimal bias, let us rid ourselves of any possible attacks on credibility. Laffer may, in this instance, have failed to account for a variable or two. However, we know the man is no idiot. Similarly we have no reason to believe that current economic theories entail predictive perfection. Rest assured, to the contrary of what many believe, public intellectuals such as Laffer and Lavorgna (whom we'll be discussing in a moment) are indeed fulfilling their contributions to society as intellectuals. By maintaining opposing sides of a debate concerning the American public's well-being, both successfully bring to the table considerations which either side may or may not have taken into full account. By doing exactly this, intellectuals such as Laffer engage in what Stephen Mack would call "keeping the pot boiling."

What I'd like to draw attention to in particular, is Laffer's reappearance on Kudlow & Co. In an October 2008 reappearance, in answering one of Kudlow's questions, Laffer raised a critical point in a correspondence with Joseph Lavorgna, Managing Director and Chief US Economist for Deutsche Bank, Inc. In attempts to avoid any possible errors which may result from paraphrasing, let us frame their respective dialogue:

Host: Banks are worried about leverage ratios. If the government gives banks money at 5% and they have debt at 7-10%, won't they use the cheat money to retire their expensive debt and wouldn't that be prudent for shareholders?

Laffer: Sure it would, one of the problems was they didn't have enough capital per unit liability. And one of their problems is to build reserves to and part of it to build business. The real problem is government involvement in the banks.

Lavorgna: I fundamentally disagree with that. You wanted Freddie and Fannie to go under, and we would've been in Armageddon.

Laffer: When you bail someone out like Freddie or Fannie, you put someone else in trouble. [You would then] have to take from somewhere else. We're going to have to live with the taxes that this operation has done. The result from this is worst than anything Nixon did.

Taking a common sensical approach to this paradox, let us assume that the best decision is the one which will cause the least havoc to the least number of people. Therefore, decision X is better than Y if and only if X causes less financial distress to less people than Y. And indeed, the decision as illustrated in Lavorgna's and Laffer's dialogue is two-fold: Congress can either do absolutely nothing concerning the failure of certain banks, or Congress can authorize (as has been done) the Treasury to go through with liquid injections with the hope that assets can be recovered in the face of (every-body-crossing-their-fingers) strengthening consumer optimism.

The first option sounds easy in principle: the government does nothing and the free market tends to itself. Things can indeed work out that way. And hopefully, I'll find employment in less than 10 years. However, in avoiding Hoover's mistake, or at least trying to find more practical means to more efficiently remedy the situation, we try to further complicate the matter. Perhaps some sort of government interference (although Adam Smith or Milton Friedman may deem unnecessary) would indeed speed up the recovery process. Let us take this crazy notion, and turn it on all sides to see whether or not we can derive benefits which outweigh consequent costs.

A hypothetical plan would consist of 2 main courses of action: purchasing of distressed assets by the Federal Government, and the Treasury's injection of an upward of $700 billion liquidity into effected banks. An infinitude of possibilities may arise as a result of such a plan ranging from a best case to a worst case. At best, we can expect a minimal amount of purchases of bad assets (say 0) and a liquid transfer of any amount which would ultimately stir enough consumer confidence and optimism to restore pre-2008 housing values – which will essentially give support to the artificially inseminated $700 billion+ dollars. In this fantasy world, we can imagine that inflation will be minimal (as reclaimed assets will support the new capital) and the markets will resume with original pace, or somewhere near that. Hopefully, new legal restrictions will also be set in place to avoid encountering the same problem again.

We then try to come back to grips with the real world and the most probable outcome. Let us first visit a worst case, before mentioning all the in-betweens. If all goes bad, a 90%+ accumulated depreciation of all government-purchased assets (funded by citizen tax-dollars) will run up a tab that will have Americans paying socialist tax-rates for years to come. Alongside such a disaster, the capital injection can render itself wholly unbacked which most definitely would result in loss of purchasing power (exactly by the amount transferred to banks), which would further result in hyperinflation. Minimized disposable income and acute loss of purchasing power are two factors not embedded in a healthy economy. We can, in such a case, expect extreme economic hardship – possibly even worst than not having ever done anything at all.

The most likely scenario lies somewhere in between these two exaggerated possibilities. We now ask ourselves: all this being said, was Laffer right? The answer to this question is simple. Given our current predisposition and factual knowledge, we cannot yet know definitively. Some possibilities may arise which would ultimately deem Laffer correct in believing minimal government involvement with banks would be in the economy's best interest. This proposition is true in possible instances of hyperinflation and marginalized disposable income. However, if indeed consumer confidence can somehow be restored and some depreciation recovered, we can expect government involvement to cause a more favorable outcome. In either case, government interference entails risk with an outcome that can be actualized either way.