Friday thoughts

Democracy

In a democracy, we put political power into the hands of some and try to limit the damage they will do as much as we can by putting all the obstacles we can think of in their way while giving them the authority to do what needs to be done. (from here) 

Warren Buffet says tax me more. 

OUR leaders have asked for “shared sacrifice.” But when they did the asking, they spared me. I checked with my mega-rich friends to learn what pain they were expecting. They, too, were left untouched. 

While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks. 

...Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.

...Back in the 1980s and 1990s, tax rates for the rich were far higher, and my percentage rate was in the middle of the pack. According to a theory I sometimes hear, I should have thrown a fit and refused to invest because of the elevated tax rates on capital gains and dividends.

I didn’t refuse, nor did others. I have worked with investors for 60 years and I have yet to see anyone — not even when capital gains rates were 39.9 percent in 1976-77 — shy away from a sensible investment because of the tax rate on the potential gain. People invest to make money, and potential taxes have never scared them off.

...I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them. Many have joined the Giving Pledge, promising to give most of their wealth to philanthropy. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.

...I would leave rates for 99.7 percent of taxpayers unchanged and continue the current 2-percentage-point reduction in the employee contribution to the payroll tax. This cut helps the poor and the middle class, who need every break they can get.

But for those making more than $1 million — there were 236,883 such households in 2009 — I would raise rates immediately on taxable income in excess of $1 million, including, of course, dividends and capital gains. And for those who make $10 million or more — there were 8,274 in 2009 — I would suggest an additional increase in rate.

But he can make a voluntary contribution of taxes the US government at any time. So why doesn’t he?  As a friend recently suggested, he is trying to leverage his good will by forcing others to come for the ride.  But he also states that his fellow mega-rich friends are "very decent people" and "give most of their wealth to philanthropy" and "wouldn't mind being told to pay more in taxes".  My questions are

Why isn't a greater tax contribution part of their philanthropy? 

What is stopping them? 

Do they feel that giving privately to charity offers more social gains on a per dollar basis? 

If they were taxed more, would they give less to these charities?

'Going green'

This came by email from an unknown original source, but is appearing all over the internet now. Please keep in mind my previous comments about how we increase demand for resources when we learn to use them more efficiently – we expand our use electricity, fuel and another resources in ways we never dreamed would happen.  Also, here is some background reading on the ineffectiveness of 'green' shopping bags.

In the line at the store, the cashier told an older woman that she should bring her own grocery bags because plastic bags weren't good for the environment.

The woman apologized to him and explained, "We didn't have the green thing back in my day."

The clerk responded, "That's our problem today. Your generation did not care enough to save our environment."

He was right -- our generation didn't have the green thing in its day.

Back then, we returned milk bottles, soda bottles and beer bottles to the store. The store sent them back to the plant to be washed and sterilized and refilled, so it could use the same bottles over and over. So they really were recycled.

But we didn't have the green thing back in our day.

We walked up stairs, because we didn't have an escalator in every store and office building. We walked to the grocery store and didn't climb into a 300-horsepower machine every time we had to go two blocks.

But she was right. We didn't have the green thing in our day.

Back then, we washed the baby's diapers because we didn't have the throw-away kind. We dried clothes on a line, not in an energy gobbling machine burning up 220 volts -- wind and solar power really did dry the clothes. Kids got hand-me-down clothes from their brothers or sisters, not always brand-new clothing. But that old lady is right; we didn't have the green thing back in our day.

Back then, we had one TV, or radio, in the house -- not a TV in every room. And the TV had a small screen the size of a handkerchief (remember them?), not a screen the size of the state of Montana.

In the kitchen, we blended and stirred by hand because we didn't have electric machines to do everything for us.

When we packaged a fragile item to send in the mail, we used a wadded up old newspaper to cushion it, not Styrofoam or plastic bubble wrap.

Back then, we didn't fire up an engine and burn gasoline just to cut the lawn. We used a push mower that ran on human power. We exercised by working so we didn't need to go to a health club to run on treadmills that operate on electricity.

But she's right; we didn't have the green thing back then.

We drank from a fountain when we were thirsty instead of using a cup or a plastic bottle every time we had a drink of water.

We refilled writing pens with ink instead of buying a new pen, and we replaced the razor blades in a razor instead of throwing away the whole razor just because the blade got dull.

But we didn't have the green thing back then.

Back then, people took the streetcar or a bus and kids rode their bikes to school or walked instead of turning their moms into a 24-hour taxi service.

We had one electrical outlet in a room, not an entire bank of sockets to power a dozen appliances. And we didn't need a computerized gadget to receive a signal beamed from satellites 2,000 miles out in space in order to find the nearest pizza joint.

But isn't it sad the current generation laments how wasteful we old folks were just because we didn't have the green thing back then?

Households better of than 1994... just

Housing market data provider Chris Joye has written a great deal of analysis on Australian housing recently. However his latest graph (above), showing households have more money left over after buying the average home today than any time since 1994, is very confusing.

He explains the data and method as follows.

We decided to simply look at the "average household"--calculated by dividing the ABS's quarterly disposable national income estimate by the number of households each quarter--buying the "average dwelling" in Australia, which is defined as the average sales price in a quarter.

And he explains the findings

Like the RBA, we find that--contrary to popular myth--today's households actually have more disposable income than at any other point since we began our analysis in 1993.

One would hope that with 28 years of economic growth in the mean time household would have FAR MORE disposable income today (after housing costs). What is surprising is how little disposable income has grown because of increased housing costs.

Even Joye’s own graph shows that home buying households were worse off between 2000 and 2009, because any income growth was more than offset by the cost of homes. It also shows that home buying households in 2004 were no better off than in 1994. In fact, if this analysis was undertaken any time prior to 2009 the popular myth would be shown to be true.

I also have some other concerns:

1. The income measure in the national accounts is 57% higher than measured by the survey of Survey of Income and Housing Costs (SIHC) and does not reflect actual household income (see here)

2. The outcome does not pass the common sense test. $43,000 of disposable income left over after mortgage payments, in 1993 dollars, is actually $73,350 in 2011 dollars. This seems like a lot of disposable income for the average household to have left over considering the national median dwelling at $418,000 dollars and the associated mortgage cost of $35,000 per annum. These figures therefore assume that $113,000 after tax is the average household income. This makes no sense to me. You need to have one income of approx $170,000 or two incomes of around $75,000 to meet this income level – that is FAR above average.

3. The outcome appears inconsistent with previous data. For example, mortgage rates in 1998/99 were a little over 6% (compared with a little over 7% today), and prices were about 60% lower than today, according to Joye’s own recent published graphs.

4. The graph shows that mortgage repayments have gone from 25% to 32% of the average household income over the period (which is consistent with Steve Keen’s observations – second graph). To get back to 25% of average income, prices need to fall 20%, or mortgage interest rates drop below 5%.

5. The graph, probably unintentionally, shows that incomes grew 40% in real terms over the period, but after housing costs, they only grew 26% (with most of that growth the past 4 years).

6. Indeed, the 2008 and 2011 blips show that when prices fall home buying households are BETTER OFF. The same applies to interest rates.

I sincerely hope this type of analysis is not interpreted as a reason for house prices to rise and I hope nobody leverages into the housing market because of it without properly understanding the risk they are taking.

Recycling Jevons Paradox

I have previously argued (here, here and here) that cost effective recycling actually leads to an increase in the demand for the resource being recycled. This is the opposite of what most environmentalists, and even most economists, believe.

What I probably didn't explain is that not only can recycling increase the demand for the resource being recycled, but it can also increase demand for all other natural resources used in the economy. Yes, a new technology that makes recycling car tyres cheaper than manufacturing new car tyres would increase our demand for tyres (because they are cheaper) and for other resources, like oil. The reason is simple. Automotive transport just became slightly cheaper due to the recycling technology, and the response to this price reduction, however slight, is to increase the demand for automotive transport and all the other resources required to provide it.

This result usually seems counter intuitive at first. But we all accept that improving labour productivity does not decrease the demand for labour. And we all accept that improving agricultural productivity leads to an increase in land under cultivation, due to marginal lands becoming economically viable. So why not recycling? After all, if recycling is cost effective, isn't it also an example of improving the productivity of the material?

At the risk of being painfully repetitive (this is my fourth post on the matter), I will use the 'recycling of labour' as an example.

Suppose there is a task that takes two labourers a month to complete. Given the nature of the task, suitable labour can be found at $1000 per month per man. Now, a new technology allows us to 'recycle' the first mans labour at a cost of $500 per month. Given this is half the cost of employing a second man, recycling is an obvious profitable choice to get the work of two men achieved in a month with only one man. This new technology might comprise new equipment (power tools etc.), or simply the investment in teaching the man new skills.

In any case, one man is achieving two men’s' work for less cost. If I changed the terms a little it is clear how this is actually an example of 'labour recycling'. "Two bottles of cola can be provided with one bottle for less cost" would be a simple summary of the net effect of plastic bottle recycling.

But we know from centuries of experience that recycling labour increases demand for it. And we know that it leads to productivity gains elsewhere in the economy, since you can't improve economic productivity in isolation of the rest of the economy. As Len Brookes once elegantly noted, the 'principle of the indivisibility of economic productivity' means that any technology that improves the productivity (aka efficiency) of one resource, improves the productivity of ALL resources in the economy.

This post was partly inspired by one of Don Boudreaux's blog posts (originally published here). In it he describes recycling more broadly -

After I awaken, I shower and dry myself with a towel that I’ve had for a few years. I don’t discard it after one use. When it gets dirty, I rejuvenate it by processing it through recycling machines that my wife and I own: a washing machine and clothes dryer.
Then I brew coffee and fix breakfast. Each day, I use the same coffee maker that I used the day before. I clean it after each use, recycling it for the next brew. My wife and I drink the coffee from mugs that have been used many times in the past. (One set of our coffee mugs was handed down to us after my wife’s parents used them for several years.)
We also eat our breakfasts using dishes and utensils that are recycled from countless past uses. After breakfast, we recycle our mugs, dishes, and utensils with the help of another recycling machine: an automatic dishwasher.
After breakfast, I dress in clothes that I’ve worn before and that I will wear again. My underwear, my pants, my shirt, my necktie, my belt, my coat, my shoes – all are recycled from previous uses. Indeed, I take my suits and coats to a store specializing in recycling such garments: my local dry-cleaner.

And from a later post -

When materials are worth recycling, markets for their reuse naturally arise. For materials with no natural markets for their reuse, the benefits of recycling are less than its costs – and, therefore, government efforts to promote such recycling waste resources

His use of the term waste in the final sentence is misleading. He means that no consumers will gain from government efforts to promote costly recycling, therefore the resources utilised in recycling are wasted, as they could have been employed elsewhere to better satisfy consumers. However, from a macro viewpoint, it is this very cost-ineffective recycling that reduces economy wide productivity (aka efficiency) and resource demand.

That is the key lesson here. If an activity in uneconomic, it decreases our total level of economic activity and our total demand for resources. If it is economically justifiable, it increases our demand for natural resources. Indeed, if we are concerned about the externalities associated with using our natural resources we need to restrict the supply of these resources at the source - restrict sand mining locations, reduce allowable mining rights to coal etc. Trying to achieve these environmental outcomes by the most indirect route possible, through the consumer and far upstream production processes, is completely misguided.

Chart of the day: Shares v houses in the US

A fellow blogger has pointed out a comparable chart to yesterday's share price v house price chart for Australia since 2003 from the Federal Reserve Bank of St Louis.

Just because housing investors (in some Australian cities) have made relatively good returns over the past four years, that shouldn't be interpreted as an indication of future outcomes.  There are precedents for large sustained falls in home values which will be extremely financially painful for the leveraged investor.

Comments on the London riots

I have a mind that continually seeks answers, and have therefore had an interesting time looking for answers to the London riots. The question is - why are people rioting?

Clearly there was a legitimate protest last week about police violence and the shooting of a man. But why would that lead to people completely unrelated to the event participating in social media facilitated rioting and looting?

Last night’s 7.30 report had a good interview with a former UK police advisor who pinpointed a growing pool of disengaged citizens, perhaps from families with generational unemployment and council housing – a pool of people with nothing to lose who are attracted to the excitement of the riots and the opportunity to be part of something, since they have never themselves felt like part of society.  This seems a reasonable explanation to me, but doesn't really help explain what type of actions government might want to take in the future to help avoid the situation.

Tyler Cowen links to some academic studies on the economics of riots, noting the importance of opportunity cost, chance of punishment, ethnic and cultural diversity, but not of poverty.

Here are some reader comments from Bristol West’s Liberal Democrat MP Stephen Williams’ blog that I found had some interesting angles. (ht:Chris M)

• The main thing to come out of this for me is how out of touch with today’s youth, and particularly the ‘lost’ youth, the government is. It’s not only the greed that caused this. It has as much to do with fun. These people were visibly enjoying themselves, it’s like heaven for them. Violence, hate and destruction are an intrinsic part of their lives. They love it, and the inability of anyone in power to understand why is why the problem will never go away.
  
• It’s the way this round of civil unrest has a weird consumerist spirit that seems genuinely unusual. Reports of looters standing around deciding what shops to kick in based on what stuff they want; of kids trying on different pairs of trainers in a kicked-in JD Sports before picking which ones to take. Even while burning buildings, smashing cars and attacking police, the looters retain a well-disciplined sense of their need to make ‘wise’ consumer decisions, and remain obedient to market-based desires.
  
• As usual an MP with no regard for considering who might be at the root of this unrest ie the bankers, politicians and big businesses who dont pay their taxes and make us all look like fools while they live in their Surrey mansions. How about, just for once, coming up with some policies that help people to make a contribution to their comminities instead of slashing jobs and services to pay for the failing of the banks. These people are angry,frustrated and have had enough of being told what to do by people whose only interest is serving themselves.
  
• They are only out clashing with police and looting shops because they have nothing else to do, and nowhere else to go. The riots are caused by ruthless austerity measures that mean their voices are drowned out. It is hypocritical for you to blame them for starting these riots when it was really your coalition government. You say we “need to have a good hard look at the direction in which our society is heading.” Damn right we do. The way your government is going, this cry for help from the deprived may become a lot more common.
  
• “A riot is the language of the unheard.” —Martin Luther King, Jr.
  
• so 30 years of boardroom pay rises of 60-80% per annum, funded by “efficiency savings” i.e. sacking much of the work force, along with no wage rises for those at the bottom of the corporate structure “lucky” enough to still have their jobs – would have absolutely nothing to do with all this at all? i guess the sight of wealthy bankers ruining the economy and causing people to lose their jobs and homes being repossessed while they retire at 50 (sir fred goodwin) with £1million+ per year pensions is setting the right example? if the system is seen to be corrupt, greedy & there is no hope even given to those at the bottom, while they are constantly taunted by glamorous billboards advertising the latest “must haves” in a consumerist society, things they can never afford, who can be surprised when the first opportunity is taken, and any excuse will do, to just say sod it, and take what you can. god helps those who help themselves – just ask any burglar. and burglars are pretty much what the boardroom giants and bankers are. does sir philip green and other wealthy people even pay tax? i think not.

Chart of the day: Shares v houses

I have noted before at this blog that comparing share prices and house prices is a terrible way to examine the real differences in returns in these two markets. My key arguments are:

1. The share market is and equity market, and to compare like with like you would need to subtract the debt against housing to compare the volatility of equity.

2. The negatively geared investor usually sets the market price (they are the marginal buyer). That means they are losing money each year on the house, so a certain degree of price growth is necessary to break even.

3. The cost of home ownership is high, as are the transaction costs. In one trade of a home you would need to make an additional 10% return compared to a share trade.

So today I note again that an incomplete comparison has been undertaken by a prominent property analyst. The general finding is clear.  There is no doubt that property (in Sydney and Melbourne at least) has outperformed the share market over the past four years. But I thought is wise to add some modifications to compare like with like.

The original graph is below.

Again, the problem is that this graph fails to consider returns, and in particular, comparing the position of a negatively geared property investor. So I made my own comparison of the house price and ASX200, along with my own housing equity accumulation index taking into consideration the negative returns (and tax breaks at the highest marginal rate), compared to the ASX accumulation index. I also added the returns to cash at 5.5% average over the period (a bit of a guess at the average term deposit rate), and an accumulation index for residential property bought with cash (click for larger image).

As you can see, when you consider the higher annual positive returns on shares, the losses are not a severe as the price index would make out. For housing bought with cash, the accumulation index shows the same effect of increasing returns, but to a lesser degree due to the lower net rent compared with dividends in the ASX200.

What stands out is the tremendously better position the leveraged housing investor is in if they bought a home in 2007 with a 20% deposit (and capital growth similar to the index – this is not the case in Brisbane and Perth). This investor would have made over 80% on their equity in 4 years due to capital growth alone. This is especially impressive since the annual cost of ownership is 9% of their equity. (As a side note, the high transaction costs in property mean that to convert that return to cash will cost in the order of 3.5% on the purchase price, and 3% of the sale price, or 36% of the original equity, giving a 'sold up' return of 46% return on equity of over the period- still VERY impressive.)

However, there are important things to note. First, leveraging works both ways. The leveraged accumulation index fell for 3 months longer in 2008, and for a house price drop of just 4.9%, the index fell by 27.5%. Also, at the April 2009 trough, although the house price was still 4.1% higher than when they bought in June 2007, their equity was only 3.7% higher.

This is particularly important to note during the current falling trend in house prices, which has so far amounted to just 2%. The leveraged investor has already lost 9.6%, and every extra percent decline leads to a 5% decline in this index (and more still for a similarly leveraged investor who bought during 2010 or 2011).

Given these leverage considerations, the question of whether housing investment is a way to soften the downside from your investment portfolio is not so clear cut. For someone with plenty of cash looking for a home, perhaps a cash purchase of a well located home with potential to add value is an option. Of course, you need to expect some early losses in value, and low returns, but when the alternatives are looking quite bleak, there might be no harm. I would be waiting a couple of years to buy in Sydney and Melbourne, but perhaps sooner in Brisbane and Perth where prices have already fallen substantially.

Of course, in the mean time, anything could happen. Please don't take this as investment advice.

One final question for readers. If Australia is headed the way of the US, with negative real returns to bank deposits, and housing market that will seemingly not find a bottom, will we see a surge in the share market simply due to lack of other options to invest locally? Perhaps the bottom of the share market will be in later this year and some good value can be found.

*note to readers, the CBA cut its fixed rate mortgage rate this morning. Next interest move is down.

Peak life expectancy

Life expectancy has peaked in some US States according to recent research. This follows research published in 2005 that suggests current living children may not outlive their parents, and that peak life expectancy in the US may be reached between 2030 and 2040. Mostly, this is attributed to the massive spike in childhood obesity which typically results in lifelong obesity and associated health problems.

In coming decades, as obese children carry their elevated risks of death and disease into older age, average life spans could fall by two to five years.

The map below shows areas of the US where life expectancy fell between 1987 and 2007 (in red). At first glance it seems that rural areas are overrepresented in falling life expectancy. There is usually is typically a strong inverse correlation between obesity and income, which would appear consistent, but also one could guess that more automation of rural jobs, and greater propensity of sedentary recreation activities (the internet etc), may be a contributing factor.

Since then more evidence of decreasing life expectancy is dripping into the debate, especially in the US. One recent study suggests that based on data from 2008, the latest available, life expectancy in the U.S. fell 36.5 days from 2007 to 77.8 years.

But the overall picture still looks very good. The below graph compares the growth in life expectancy in a selection of countries.

In Australia, life expectancy continues to grow, but there appears to be no similar geographical disaggregation studies showing the divergence between urban and rural life expectancy. The data below shows that men have gained 3.1 year of life expectancy at birth in the past decade, while women have gained 2.1 years

For me, the surprising thing in these data tables is that our life expectancy at birth is rising mostly due to the prevention death earlier in life, not the extension of life after 85. If you make it that far, you have only gained six months of extra life expectancy over the decade – around a quarter of what you gained at birth (one fifth for men).

The other trend of note is that men are catching up to women in the life expectancy at birth. Again, this concurs with the observation that early preventable deaths are being reduced, as risk taking behaviour is disproportionally male.

A couple of questions spring to mind. First, will the rising trend in life expectance continue in the rest of the world? And second, the big question is whether there is a biological limit to life expectancy that developed countries are trending towards, to whether peoples lifestyles are compensating for improved medical care by being less vigilant about their health or taking more health risks?

When I watch extreme sports I often think that it could be a sign that we as a society have made life so risk free that people need to compensate by taking on risky activities. I would classify this type of risk as low probability but high impact, and it is the type of risk we seem to regulate tightly, with seatbelts, helmets, fire alarms and other safety precautions.

My interpretation is that as a society we have removed many high impact low probability risks, but compensated them to a small degree. This compensation must be small, as the data show that the prevention of death early in life the key reason for increased life expectancy at birth.

The other type of risk, high probability but low, or distant, impact is what we usually don’t address well. Smoking laws in Australia are probably the stand out success in this area. But when we do address them, they are the easiest risks to substitute for others. For example, a former smoker might find that chomping down a bit of chocolate is a good substitute for their addictive habit.

Further, we might be avoiding high impact risks by substituting for low impact risks. Parents need to be especially aware of this. For example, cycling appears to be dangerous because of the need to wear helmets, so parent might be less inclined to encourage cycling. The same goes with sports where there is a perception of high risk, such as rugby or Aussie rules football. Even the most basic of actions such as walking to school is often seen through the high risk lens (due to the low probability of abduction) and a generation used to being dropped at the gate may be less likely to walk later in life.

I have no definitive answer to either question. My gut feeling is that medical breakthroughs will stay one step ahead of any compensatory behaviour, and that life expectancy will creep up ever so slowly. I also feel that life expectancies between countries will continue to converge. But I will be on the lookout for more evidence of a peak in life expectancy elsewhere, and should we see this case arising more frequently, I believe that the theory of compensatory behaviour will need serious investigation.

Quick links and curious thoughts

Housing bubble – my favourite quote ““No one can produce an explanation as to how fundamental factors can lead to a run-up in home sale prices, but not rents” (originally from here)

ACCC says milk war is actually what competition is all about

Dumbed down debate -  
In 1860, in New York Abraham Lincoln began his campaign for the presidency with a very complex speech about slavery at the Cooper Union, 7500 words long, complex and nuanced. All four New York newspapers published the full text, which was sent by telegraph across the nation, widely read and discussed. In 1860 the technology was primitive but the ideas were profound and sophisticated. In 2011 technology is sophisticated but the ideas uttered by presidential aspirants are embarrassing in their banality, ignorance and naivety.

Dog whistle politics -   
JASON REIFLER: Well we're certainly susceptible to misinformation in that once we believe something that is wrong then it's really difficult to correct people.

ELEANOR HALL: So we know that our ignorance about certain issues makes it easy for us to be misled but your research shows that we don't necessarily change our minds even when we have the facts. 

I wonder about the geographical boundaries used for the capital city price indices. For example, the Brisbane City Council area would not include many homes that are in ‘greater Brisbane’, but not in the local government area. These areas include Moreton Bay Regional Council, Redlands and Ipswich (where a large portion of the new housing supply is located).  Different data providers using different areas would explain some of the inconsistencies in price movements detected. I would happy to hear some detail about this from the data providers.

(ht: okakesan)

An explanation of equality concerns about progressive tax systems (ht: Chris Boulis)
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100...
If they paid their bill the way we pay our taxes, it would go something like this...

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7..
The eighth would pay $12..
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve ball. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20". Drinks for the ten men would now cost just $80.

The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.

So, the bar owner suggested that it would be fair to reduce each man's bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

And so the fifth man, like the first four, now paid nothing (100% saving).
The sixth now paid $2 instead of $3 (33% saving).
The seventh now paid $5 instead of $7 (28% saving).
The eighth now paid $9 instead of $12 (25% saving).
The ninth now paid $14 instead of $18 (22% saving).
The tenth now paid $49 instead of $59 (16% saving).

Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

"I only got a dollar out of the $20 saving," declared the sixth man. He pointed to the tenth man,"but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar too. It's unfair that he got ten times more benefit than me!"

"That's true!" shouted the seventh man. "Why should he get $10 back, when I got only $2? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison, "we didn't get anything at all. This new tax system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

David R. Kamerschen, Ph.D.
Professor of Economics.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible.

Chart of the day - long run house price comparison

Many thanks to Chris Joye for putting in the leg work to produce the below graph and associated analysis.  I recommend reading Joye's analysis before drawing any conclusions.