Communism

I just saw Michael Moore on CNBC where they talked about his new Film "Capitalism: A Love Story." He answered some question by saying: "Capitalism is a system that guarantees--and these are the statistics--that the top 1% of the population have more wealth than the bottom 95% combined." I think that was verbatim. The CNBC talking heads came back at him with these kinds of questions: "So are you saying that there should be no losers?" And in particular they started asking about the system of capitalism theoretically. And then they argued about the theory of capitalism. And it makes me think that in general it seems to me--and this might be false--that we, as a society, are pretty willing to discuss capitalism as a theory and how theoretically it's the superior system, how, sure, market forces might need taming or direction but that in general "the invisible hand" allocates resources efficiently. This is a theorietical construct. There is, as we all know, no invisible hand. It's just a metaphore Adam Smith came up with.

So why??? are we perfectly willing to discuss and defend capitalism on a theoretical level while ignoring the outcomes or, if not ignoring, viewing them as deviations from the norm, noise, dirt that muddles the theory a little but in general the theory holds... why are we willing to do that when any time someone would want to seriously discuss socialism or communism the next sentence spoken is: "Communism is a great theory but it doesn't work in practice." Sure, the failure of communist experiments have been huge but the failures of capitalism like e.g. the past crisis (or the fact that wealth is so unevenly distributed around the world or even around this country and that millions die of hunger and disease, every year) have been nothing to sneeze at either.

Notice that I am not advocating communism or socialism (although I am hazy on what exactly socialism is--I am in favor of a socially conscious and responsible capitalist approach.) I am merely wondering why, as a society, we are fine arguing on the basis of theory, ignoring the unfavorable outcomes in capitalism's case but are not willing to do so when talking about communism.

Soda Tax

Congress (or someone, I dunno) is considering taxing soda in order to fund health care reform. The amount that I have heard tossed around on Bloomberg TV is one cent per ounce, which would constitute a "15%, 20% hike in tax" (Bloomberg). According to the New England Journal of Medicine this could raise "$150 billion over the next decade" (also Bloomberg). And soda is 10% of people's daily calorie intake. Here are some questions I had:

I wonder what the elasticity of soda demand is. (Note to non-economists: elasticity is the responsiveness in your demand for a good when the price changes. I.e. if price of soda goes up by 1% how much will the quantity demanded of soda fall in percent?) If you want to maximize revenue on some tax you typically want to tax something with particularly inelastic demand. If the quantity demanded before the tax was 50 units and after a 1% tax it's 40 then obviously the government makes less money than if after the tax it's 48. That's partly why addictive things like ciggies are so nice to tax. So if soda demand is pretty elastic, meaning it responds a lot to price changes, the government won't make a lot of money on the tax. On the other hand, if soda demand is really inelastic, meaning that it doesn't respond very much to price changes, then one of the nice byproducts of the soda tax, namely that it's supposed to reduce calorie intake and therefore dampen obesity rates doesn't really happen. Trade-offs, trade-offs....

What strata of society drink most soda? Is it possible that we would end up taxing poor people more than rich people? Not that poor people couldn't use an incentive to drink less soda (if that is in fact the socio-economic stratum we are talking about.)

What about diet soda? Would that be taxed too?

Why soda? Why not chocolate or other fatty things? Maybe a compelling reason exists to tax soda. Maybe it's sugar that we want to tax, not any old calorie-delivery mechanism. But if sugar, why not cookies? Is it b/c people don't eat as many cookies as they drink soda? Is it possible that we are arbitrarily disadvantaging one industry (awwwwwww, poor Coca Cola, my heart goes out to you!) for the benefit of another?

What about substitutions? So people buy less soda and maybe substitute into similarly sugary fruit juices? It seems that it's not easy to tell that that would be any healthier.

Law of Unintended Consequences: What are some of the unintended consequences? Is this enough for e.g. Coke and Pepsi's profit margins to get squeezed to the point where they have to lay people off? What else could happen as an unintended consequence?

How do you even define soda? I mean, if you just list the current sodas, any soda company can just come up with a new one. Maybe New Coke would be back, haha. If you say, anything with so-and-so much sugar, it would include fruit juices. What about iced tea then. What about any tea with sugar. Are they going to start charging me at Little Veselka in the morning when I get my iced coffee as soon as I put sugar in it?

Finally, Isn't the healthcare number thrown around somewhere around 1 trillion? I mean, 150 billion is nothing to laugh at but it's just, you know, 15%. It's not like we'd actually fund this baby with the tax.

All in all I'm probably in favor of this. People don't really need to drink this much soda and soda is so dirt cheap, it's not going to send anyone to the poor house. I do wonder how effective you could make this and what some of the possible unintended consequences would be.

Mortgage Crisis Redux

Okay, I don't understand a lot but here's how I see this whole financial crisis unfolded:

1.) Over the past few years one of the great financial innovations created was Mortgage Backed Securities (MBS.) What you do is the following:

A small bank or someone gives someone a mortgage. They lend them money for a house and then they get periodic payments to pay back the principal (i.e. the original money lent) plus interest. So for the next e.g. 30 years the bank gets $1,500 or whatever every month.

What big banks did was buy these mortgages from smaller banks. You buy them at a certain price and now you get the monthly payments. You do it with a ton so you have a continuous stream of payments. Every day money comes in (b/c obviously some people pay on the first of the months, some on the third, some on the 15th, &c.)

The the big bank takes, let's say, 1,000 of these mortgages and "bundles" them together. What does that mean? It just means that those are "thrown into one big pot." The money that comes in every day from those 1,000 mortgages is all thrown into one big pot.

The big bank paid a certain amount for those 1,000 mortgages. So obviously they could just resell those 1,000 mortgages to someone else. But, unless you're rich, you don't have enough money to buy 1,000 mortgages.

So what the big bank does is it just splits this one big pot of money with a stream of money coming in all the time into e.g. 100 million little pieces. Each one of these pieces is now easily available for $100 (or around there.) And then they go ahead and sell that to anyone who wants one of those little pots. And let's also say that they just keep the money that comes in a safe for a little bit and pay you every month or every six months. That's what a Mortgage Backed Security is.

Of course some people are going to default on their mortgages but that's not that big of a deal b/c a) it's just a handful of those underlying 1,000 mortgages and b) if someone defaults you still get a part of the house that they put up as collateral. And of course it's much better for me as an individual to own one of those little pots of money instead of one mortgage where, if the homebuyer defaults, I'm screwed. AND I get maybe a 5% return whereas on some Treasury bond I get close to nothing. And the rating agencies have said these things are secure so I'm kinda thinking they are.

2.) Of course, back when, all these people with no income and no assets got a mortgage. Makes sense if I'm the small bank. I do the mortgage, sell it to the big bank. If they are too dumb to buy it, not my problem. The big banks... well, they just bundle it all together, slice it up, hope all goes well and sell it to someone else. Not their problem anymore.

3.) Now all those NINA (no income, no assets) people start to default on their mortgages. Surprise!!! The big bank gets the house and tries to sell it. But people are defaulting on mortgages left and right. Everyone who wanted a house got a house and everyone who can't pay for it is defaulting. No one wants to take the house off the big bank's hands.

4.) Of course for the owner of the small pots of money that sucks. More people than I thought are defaulting on the mortgages (so I don't get as much money every month) and the collateral they leave behind is worthless, too.

5.) Okay fine, Ima try to sell my MBSs. But EVERYONE owns these securities. They become worth ever less.

6.) If you're a big bank that owns a ton of these MBSs the value of all your asset drops. But the government requires you to have a certain amount of assets in the basement just in case someone comes and wants to withdraw all their money. But now you don't have that anymore. So either you have to sell off business units or... or who knows.

7.) Except for no one wants to buy your stuff now b/c everyone else owns the mortgage backed securities and is strapped for cash.

8.) Okay, so the first thing I, a big bank, stop doing is lending out money to businesses. I have no idea who else owns how much of this stuff and isn't going to pay me back.

9.) And that's what Ben Bernanke means when he says that the arteries of the economy are frozen.

So fast-forward to a year later. We're possibly slowly recovering. Everyone has been slapped on the fingers, and a lot of big banks are still hurting (not to mention the rest of the us.) How do I, as a big bank, make up for all the losses, all the jobs lost, all the bonuses forgone? Oh, easy!

The NYT reports:Wall Street Pursues Profit in Bundles of Life Insurance

Ummmm.... seems like a great idea? You bundle all these payments, slice them up, sell them to a ton of peop.... errrrr....

Update: The verdict is still out

It looks a little rosier but who really knows.