Big Government

ZIRP Embodied

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ZIRP or “Zero Interest Rate Policy” has been in effect in the USA since late 2008. From that point forward, the effective interest received on money from CD’s, banks, and non-risk bearing debt is very low, especially when taxation is taken into consideration.

Recently I was standing at an ATM when I saw this receipt casually left on the ground. It showed over $300,000 left in a low or non interest bearing account. To me, this embodies how ZIRP has turned the world on its head.

When I was growing up, inflation was high and interest rates were high, too. I distinctly remember my grandfather having an argument with someone else when he said that interest rates would never go below 10% again (they were nearly 20% at the time). If you had any money, you had to put it to work to get the benefit of “compounding interest” which is basically interest earned on interest, which would make your assets grow quickly. In parallel, of course, inflation was making everything cost more, so you were probably treading water, but that is a different issue entirely.

In the age of ZIRP, there is no point instructing anyone about the advantages of compounding interest, because the effects are too small to be believed. In the portfolios I run for my nieces and nephews, they receive ZERO CENTS most months on the cash held in their account, and the cumulative year end totals are too small to receive an interest 1099 from the IRS. The SEC fee, which amounts to a few pennies per trade, actually is a larger cost, so I am just likely to ignore both elements.

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Obamacare, the Scrooging

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People signing up for Obamacare are being robbed by the government. This time it’s not metaphorically, like when your perfectly satisfactory insurance plan is made illegal and all the compliant plans are more expensive and have worse terms but literally. People are having their accounts debited improperly during the Christmas season. And because it is being done by the government, there is little recourse to sue due to sovereign immunity and, of course, those most injured haven’t the money to hire representation anyway. I think Pope Francis calls it ‘despoliation of the poor’.

Double debits, wrong day debits, wrong amount debits, these are all standard hazards with any sort of Electronic Funds Transfer (ETF) system. There’s nothing particularly new about these issues. It’s all part of the back end errors that those dastardly Republicans have been hyperventilating about and Democrats have been pooh poohing for weeks now.

You never know when Tuttle will turn into Buttle in one of these systems. But what’s in a name?

Merry Christmas

Cross posted: Flit-TM

“Occupy Pennsylvania Avenue”

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New from Kevin Villani: Occupy Pennsylvania Avenue: How Politicians Caused the Financial Crisis and Why their Reforms Failed, and the Kindle version: Occupy Pennsylvania Avenue

(Kevin has shared on this blog a couple of prior works on the same subject. You can find those essays, and reader comments in response, here.)

The Minimum Wage Debate and Tax Incentives

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Originally when I started over at Chicago Boyz I used to write regularly about tax policy. I haven’t written as much lately on that topic because the news has been completely dispiriting… at every turn it seems that the Federal, State and Local governments have taken positions to make the system more complex, confusing, and dysfunctional.

The goal of a tax policy should be to:
1. Achieve the revenue goals that they set out to meet
2. Do so in a way that has causes the least amount of distortions to the economy

Recently the idea of “fixing” our tax policies and incentives, for me at least, is aligned with recent discussions on the idea of raising the minimum wage. The minimum wage is $7.25 / hour, although this varies with state and local laws as summarized here. A suburb in Seattle, near the Seattle-Tacoma airport (Sea-Tac), recently passed an ordinance to raise the minimum wage to $15 / hour. This ordinance is a bit more clever than most, since the airport is unlikely to close or take significant actions due to the immense capital costs and constraints associated with doing so, and has a strong public element (politicians can just try to pass the costs on to air travelers).

These same discussions come up in Chicago, as fast food workers also have had some (small) demonstrations to try to raise the minimum wage to $15 / hour. While their campaign has sputtered out, it will likely re-surface and be championed by our governor.

The obvious difficulty with raising the minimum wage is that employers are not sitting ducks. There are many low wage workers in River North, for instance, working in bars, restaurants, cleaning services, and in various security related occupations (virtually every building has a set of doormen). If you doubled the minimum wage, for instance, all of these businesses and institutions would immediately embark on a host of labor saving initiatives and automation efforts. I am not an expert in these sorts of automation experts but can imagine people being replaced by computers, call centers handling service, and moving to self-service for customers in other instances. It is highly unlikely that they would just attempt to pass on the price increases and keep the same level of staffing; that would be economic suicide, especially with their competitors scrambling to reduce their labor expenses. Efforts that could not be automated would rise in price, which would likewise discourage consumption, until an equilibrium was reached.

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How A Simple Train System Lays Bare Our Impending Decline

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Recently I was riding on the Metra, the commuter rail system that connects the suburbs to downtown Chicago.  I picked up “On the Bi-Level”, the flyer that Metra management makes available to riders and was browsing through it when I came upon this innocuous sounding statement:

I certainly will not argue that Metra is without challenges.  Perhaps the biggest challenge, and one that will impact many of our plans, is our needs for more capital money to invest in our system.  We estimate Metra will need about $9.7 billion over the next decade to achieve a state of good repair on the system, and we expect to receive about a fourth of that amount from traditional federal and state sources.  Riders need to understand that fares help us cover our operating costs but have never been a significant source for capital expenses – we must rely on Washington and Springfield for that funding.

Within the utility community there is a concept called “generation equity”.  This implies that you need to spread the burden of replacement and renovation across the life cycle of users, rather than hitting them all on the first riders, such as in the case of a train line.  On the other hand, you cannot just ignore ongoing capital costs and let the system run into ruin by paying the minimal upkeep costs every year.


In this article, Metra lays bare the facts that:

  • Fare costs (riders) only “help” them cover their operating costs
  • Funding from other sources (and debt) helps them cover the rest of their operating costs
  • Then they rely on largess from the state or Federal governments for about a fourth of their capital costs
  • And who knows where they are going to get the rest of the funds for capital replacement


In fact, it would be impossible for Metra to re-build the train lines that they have today in the current regulatory and legal environment.  Permits, lawyers, litigation, politically favored contractors, and a welter of archaic tools and practices would make the costs impossibly high and the deadlines incredibly long.  By “capital” costs, they are generally talking about replacing bridges, stations and sections of existing track rather than “true” expansion, although they do occasionally add some incremental lines or stations.


It is important to understand that things have gotten more EXPENSIVE but they haven’t gotten BETTER.  The infrastructure that we take for granted might as well have been built by the ancient Egyptians given how herculean the task would be to replace them.  Americans will never see another major dam built in the USA and likely few to no additional incremental nuclear or coal plants in the next 25 years.  Even major transmission lines are going to be few and far between, which will only be built because it is absolutely necessary to get electricity to new population centers.  This is all due to the layers of process and regulations and lawyers that we have overlaid atop the simplest tasks, and you can see the contrast when you go to China and see cities being built overnight. 


At some point we are either going to need to radically re-structure how we build and pay for things or go to a completely private system where you pay for what you receive in terms of capacity, reliability and performance.  States and cities that make it impossibly expensive to build and expand will inevitably suffer relative to other locations that are freer in terms of rules and regulations, unless (as is likely) the entire US is burdened with Federal regulations that make it impossible to escape this yoke.


Cross posted at LITGM