Congress and The Internet Sales Tax: Whatever Happened to Marketplace Fairness?

A couple of days ago, the Senate passed the Marketplace Fairness Act (S. 743), which essentially allows for local and state entities to collect sales taxes on the Internet. Whether the Republican-dominated House will pass the bill is another story entirely. In any case, the idea behind the bill is to close the Internet as a tax loophole and provide a tax revenue of an estimated $23.3B per annum (although that number might be as low as $4B) to help compensate for budgetary shortfalls, which would explain the 69-27 bipartisan vote. Although I am all for minimizing tax exemptions and simplifying the tax code, I have to wonder whether enacting an Internet sales tax in its current legislative form is as sound of an idea as it seems, especially when done in the name of fairness or the government attempting to "level the playing field."

Under existing tax law, the buyer is the one who owes the sales tax. However, due to a Supreme Court ruling (Quill Corp v. Heitkamp [1992]), an individual state cannot compel the collection of taxes of citizens of other states unless the retailer need to have a physical presence in the customer's state. This ruling applies both to traditional retailers and online retailers. Instead, the customer is supposed to submit the sales tax directly to the government (How many people even knew that this was required under law?). It makes sense that state laws should only apply to things that take place within that state. Why force a business to pay a tax to a government in which they have no political voice or representation?

What the Marketplace Fairness Act would do is require online and other remote sellers with annual sales over $1M (so much for factoring in profit margins) to collect the sales tax and send it to the appropriate tax jurisdiction. What this means is that the seller would have to ascertain the purchaser's location, find the appropriate tax rules and regulations for that location's given tax jurisdiction, collect the tax, and submit it to that distant authority.  

Under the Marketplace Fairness Act, this level of compliance would only apply to online and remote sellers. No brick-and-mortar establishment would be required to process all of this for its in-store sales, yet online retailers would have to do so for its remote sales? Where is the fairness in that? This will only discourage online retail. Also, given that there are 9,600 sales tax jurisdictions in the United States, can you imagine the compliance costs, as well as the bureaucracy, red tape, and tax audits (Section 2 of the Act) a small or medium-sized business would have to endure? How will driving up the cost of doing business help economic growth? It's not as simple as "simplifying sales tax laws" or using a "streamlined" computer program. Categorizing goods and services across multiple tax codes is anything but simple: just take a look at this example here.  

A few other miscellaneous points to consider:

• If this about "protecting small business," why is it that Amazon and Wal-Mart are the most ardent supporters? There is a reason for this: they can handle the burden, whereas the extra burden on their smaller competitors would either cause them to adversely restructure the way they do business or even lay off employees. 
• Since the bill provides more opportunities for private information being lost, I am worried that the passage of this bill can cause an erosion of privacy. Is anyone worried that the government would be privy to an unprecedented amount of consumer data?
• From a customer's standpoint, isn't it possible that shipping costs can offset a sales tax? Shippers have to pay fuel and transportation taxes because of shipping. Also, people don't buy goods online to avoid sales tax. They do so because of price and availability. Many goods online are cheaper, even before sales tax.
• Mom-and-Pop stores are not at a disadvantage because of online commerce. If anything, more brick-and-mortar stores have an online presence due to better inventory management and simplification of ordering necessary outputs for final goods.
• Rather than strictly focus on revenues, shouldn't states be focused on general budget reduction?
• This bill is about forcing out-of-state merchants to act as deputy tax collectors. If a state with high taxes (e.g., California) can collect a sales tax from a state without a sales tax (e.g., Montana), this distorts incentives created by taxation. If a high-tax state refuses to adjust its tax policies, a business or individual can move to another state. However, with this bill, it would give high-tax states the right to impose their bad tax policies extraterritorially. Another way of putting it: instead of competing to lower taxes and attract businesses, states will be competing to to see who can impose the highest level of taxation on citizens in other states.     

While there should be tax reform to simplify the collection of sales tax, as well as making sure that Internet transactions have the applications of sales tax as brick-and-mortar businesses by implementing an origin-based sourcing rule, let's not delude ourselves in thinking that the Marketplace Fairness Act is actually about fairness; it's about imposing undue burdens and regulations on small and medium-sized businesses while enlarging government power.

Why "Free Trade Agreement" Is a Misnomer: Some Thoughts on Trade Liberalization

I am someone who believes that words have value and meaning, and we should therefore use them with care. This would explain why I get annoyed when people inaccurately apply words and labels to ideas and concepts, and also why I enjoying the idea of calling a spade a spade. In the spirit of "calling it like it is," I can't help but direct that sentiment to the notion of a free trade agreement (FTA). But how can someone such as myself, being libertarian and capitalist, question the notion of an FTA? Isn't free trade a good thing? Of course it is! The more liberalized trade is, the greater the economic wellbeing. What I question is whether FTAs actually engender adequate free trade.

So what are FTAs? Free trade agreements are deals between two or more countries in which they agree  to eliminate trade barriers on most, if not all, goods amongst themselves. So where is the issue? More countries are removing trade barriers. This should be a good thing. Without getting into related topics such as the sweatshops in Mexico [also known as maquiladoras] or outsourcing, I still have to wonder where exactly in these FTAs free trade exists.

Free trade does not require a treaty because all a government has to do is voluntarily remove the trade barriers. At best, free trade should require a memorandum of understanding (MOU) or a free trade organization like the World Trade Organization (WTO) to confirm a commitment to free trade. In terms of procedure, the process is simple.....at least in theory.

If free trade is a simple process, then why are there so many stipulations and exemptions in FTAs? Take a look at the North American Free Trade Agreement (NAFTA): the sheer amount of exceptions and clarifications illustrates that free trade agreements are nothing more than a form of protectionism under the guise of free trade.

If we want to give these trade agreements a more accurate label, we would call them preferential trade agreements (PTAs), instead of free trade agreements. Those nations within the trade bloc remove the trade barriers amongst themselves, but the tariffs and other trade barriers on countries not in the trade bloc still exist.

This is not to say that PTAs are without benefit. More trade creation exists prior to the creation of the PTA, but there is also more trade diversion. What takes place in trade diversion is that the composition of trade changes: production from low-cost nations who are not part of the agreement gets diverted to nations with higher production costs (e.g., NAFTA shifted some production from China to Mexico). The net effect of economic wellbeing is the gains from trade creation minus the losses from trade diversion. Typically, the trade creation exceeds the trade diversion, as can been seen with Mercosur or with agriculture under NAFTA. However, this net positive welfare takes place relative to a previous situation with even higher levels of trade barriers. Advocating for PTAs with this comparison presents a false dilemma that neglects a third option: multilateral free trade. Removing all trade barriers with all countries is better than using PTAs because trade liberalization means greater economic freedom, which improves overall wellbeing. The idea that free trade creates a net positive welfare and improves overall wellbeing is one of general consensus amongst economists.

Does this mean that I think we should remove all PTAs? Not necessarily. If it is between autarky (i.e., no free trade) and using preferential trade agreements, I opt for the latter. Nevertheless, the discrimination induced by PTAs is not optimal. Using PTAs diverts goods and services from being produced and allocated in the most efficient way possible. Even though I believe the best option is a multilateral agreement in which trade barriers are [next to] non-existent, there is a political reality with which I have to contend: preferential trade agreements are here to stay. The implementation of PTAs has increased substantially over the past twenty years. It also makes for good politics. Certain interest groups, such as labor or environmental groups or even domestic producers (e.g., sugar tariffs), further complicate the process. All of this complication creates the spaghetti bowl effect, in which the complex, intertwined network of PTAs creates paradoxes and inefficiencies. PTAs might pull developing countries from economic stagnation in the short run, but in the long run, it diverts from the ultimate goal of economic liberalization. The only good free trade agreement is one that promotes actual free trade.

Making a Case for Legalizing a Market in Human Organ Sales

I can hear the arguments against creating a market for selling human organs. "It turns humans into commodities. You'll most likely exploit the poor for their organs. Simply despicable! How dare you put a price on something like human organs?" This is yet another instance in which people feel like their personal beliefs should dictate public policy. Rather than give into something like a repulsion towards an individual selling one of their organs, we should take a look at whether providing a legalized market for selling organs is the preferable policy option to the status quo of banning the sale of one's organs.     

Basic economics can predict what happens in this scenario. Although current law allows you to donate an organ without financial compensation, by banning the legal and voluntary sales of human organs, what the government does in this instance is create a de facto price ceiling of $0. What happens when you put a price ceiling on a good? Much like with anti-price gouging laws, when prices are artificially depressed, there is a shortage of a good (e.g., transplantable organs). We can see theory lines up with practice because there is a shortage in the organ market. As of today, there are 117,959 patients in the United States on the waiting list for organ donations (U.S. Department of Health and Services). In 2011, there were under 18,000 transplants performed, which is well below the number required to fulfill all transplant needs.

We don't live in a world with an unlimited supply of organs. Although one would be more likely to donate a kidney to a close friend or family member, we also don't live in a world where the vast majority of people are altruistic to the point where they would donate an organ to a complete stranger. Since most are not incentivized by altruism, using the price mechanism in a liberalized organ market would incentivize more people to donate than what is currently being donated. Increasing the supply of kidneys [or any other organ that could be donated] would mean more transplants, which would mean fewer people dying while waiting for a kidney, not to mention that less people have to pay for palliative care (e..g, a very expensive dialysis treatment).

What about taking into consideration those who donate? Poor people will be more likely to donate their organs than rich people because of financial strain. Wouldn't this be an exploitative practice? Well, no. Even if there are certain financial pressures or incentives for poor people to donate, there is still a reasonable trade-off between donating an organ and creating an opportunity for improving one's financial stability. Life is full of instances in which we have to make trade-offs, even when they are dangerous ones (e.g., fighting in the military, working in a coal mine or at an oil rig). Life is also replete of examples in which we commoditize valuable things. We can treat art or music as "priceless," but we have nevertheless markets in which paintings and concert tickets have prices.

We shouldn't treat adults like children. Selling one's organs should be treated like any other health care decision in which one is informed before going ahead with a certain procedure or treatment. If the money accrued from donating one's organ helps improve the economic welfare of an individual without harming others, who are we to say otherwise? If the idea of "my body, my choice" were to mean anything, wouldn't this be a good example of illustrating the importance of personal choice? Furthermore, does it make sense to pay the nurse and the doctor for service provided, but not to compensate the donor, who undoubtedly plays a vital role in a lifesaving procedure such as a transplant? We pay teachers who provide our children with education and firefighters who save children from burning buildings. We don't question the purity of the motive with the teacher or the firefighter when their service is complemented with financial compensation, so why should we view the organ donor any differently?

If you're still worried about the wellbeing of the individual, keep in mind that one is not going to trade an organ if it means certain death. As of date, 80% of those on organ transplant waiting lists are waiting for a kidney. Although it's preferable to have two kidneys, only one is necessary. Another 12.86% are waiting for liver transplants, and a partial liver transplant (i.e., a removal of a lobe of a liver) can heal some of those in need of a liver transplant. As for the other organs that cannot be traded while alive, a futures market in organs could be created.      

What happens when cases of fraud occur, like those of Levy Rosenbaum? First, fraud is fraud. Those who defraud should be prosecuted like any other criminal. Second, and more to the point, scenarios like this occur when there is a black market. When demand is so high for a good and that good is not provided in licit/legal markets, where do people go? To the black market. There are many unintended consequences when you drive goods to the underground market. One of those consequences is that suppliers charge exorbitantly high prices. It is so much easier to exploit people in need [of an organ] when the exchange takes place in the black market.

People also like to bring up the possibility of organ thefts or people being murdered for organs, for which my response is two-fold. One is that legalizing organ sales would address the shortage, thereby lessening or even eliminating the need for said theft or murder. Two is that the transplant would be unsuccessful not only because finding a match between donor and recipient in a random theft or murder is next to nil, but because getting a qualified surgeon and adequate facilities is also arduous. Bringing organ sales out of the black market would be the best way to assure that people are not intimidated or defrauded because market forces and social pressures would kick in. By bringing organ sales to a legal market, prices would plummet in comparison to what the going rate is for an organ in the black market, which would make a kidney more affordable.

Some people have an issue with permitting a legal organ market because it's repulsive. To harken back to Thomas Jefferson, "if it doesn't pick my pocket or break my leg," what do I care what another individual does with their life? If you don't like marijuana, don't smoke it. If you don't like same-sex marriage, don't marry someone of the same sex. If you don't like the idea of selling your kidney for profit, then don't do it. If anything should be morally repulsive in this case, it should be that 6,500 people die every year because repulsiveness towards selling organs is a driving force that prevents people from getting transplants they need.

[Another thing that is intriguing is that out of all the countries in the world, the one that legalizes organ sales is Iran, and to add further intrigue, it worked well enough where the Cato Institute wrote a policy analysis on the Iranian organ market.]

Postscript: Wisdom of repugnance, also known as the "yuck factor," plays a huge role for many in terms of how they feel about certain practices, whether it is organ sales or even something like sweatshops. It becomes difficult to look a policy more objectively when the yuck factor is in play. Regardless, transcending sentiments such as the yuck factor is what makes for good policy analysis. An organ sale is a voluntary transaction in which a consenting donor is compensated for providing a patient with a lifesaving transplant. Both parties benefit from the procedure. When comparing a liberalized organ market to the alternative of a government-induced organ shortage, it's no contest as to which one I would select.

Are Women Really Paid Less Than Men?: Demystifying the Gender Wage Gap

Lies, damned lies, and statistics. What a great Mark Twain phrase. I love how he points out how trying to impress people with numbers, especially those yanked from their context, can give a false sense of reality. That certainly comes into play today, which happens to be Equal Pay Day. The premise behind Equal Pay Day is to close the wage gap in which "women make 77¢ for every dollar a man makes" (Census, p. 5). Being libertarian, I believe in the equal treatment of individuals under the law, regardless of gender. Shouldn't I be outraged that women are being subjected to this labor market discrimination?

I'm not disputing the 77¢ statistic itself. What I am disputing is distortion behind the statistic, mainly done via an omitted variable bias. What the statistic does is the following: First, it aggregates the salaries of all women and divides it by the number of women in the labor market. Second, the salaries of all the men are then aggregated and divided by the number of men in the labor force. The numbers are then expressed in the ratio of 77:100, and voilà, "women make 77¢ for every dollar a man makes." The issue is that the statistic is an apples-to-oranges comparison. Why? It assumes that women invest and utilize their human capital in the exact same way that men do. To make the findings more accurate, one would need to compare two similarly-situated co-workers of different sexes with the same skill set and background who are working in the same industry and doing the same work for the same amount of hours.

Before I outline my argument, I would like to postulate how I find the argument to be intuitively problematic. The rhetoric I hear often on the Left is that businesses are greedy, which would mean that ultimately, an employer cares about the bottom line. Let's also assume that male chauvinism is the primary, or even the sole, factor in the depression of female wages. If I were an employer in this scenario, would I pay a man to do a certain job, or would I pay a female a fraction of the cost to do the same exact job? If I ultimately cared about profit maximization, you better believe that I would enjoy a huge advantage over my competitors by replacing as many of my male employees with female ones so I could increase my profit margins.

Now let's lay out some reasons as to what makes the raw wage gap so different from the actual wage gap:

Educational attainment and occupational choice: Although more women are acquiring college degrees than men, women still select career fields that pay less (e.g., nursing, education, clerical work) than men do (e.g., sciences, business, law). Women have a better sense of work-life balance, which is why they tend to choose jobs that have more regular hours and have more comfortable conditions, whereas men gravitate towards jobs that have more erratic work hours an involve more risk or specialization, which result in better pay. The Federal Reserve Bank of St. Louis postulates that this selection of career fields is the primary factor behind the wage gap.

Labor force attachment: According to the Bureau of Labor Statistics, men have a higher participation rate in the labor market than women. Furthermore, men are more likely to work full-time, whereas a larger proportion of women work part-time. Even assuming that wages are equal, the gap in weekly earning is going to be sizable since women work less hours (American Time Use Survey, BLS, Table 1). What is biggest factor in this wage-hour gap? Motherhood. It might be 2013, but women are still predominantly responsible for raising children. Since childrearing engenders a weaker attachment to the labor force, women are employed in jobs that require less capital and on-the-job training.  

Postscript: This is not to say that sexism does not exist or it doesn't play a role in the gap. It does, but it plays a relatively small role in explaining the raw wage gap. Much of the gap can be explained by such factors as occupation selection, experience and length in the workplace, as well as hours worked, as is confirmed by a study (p. 2) recently published by the feminist group American Association of University Women (AAUW). This study shows when these factors are taken into account, the wage gap closes to about 94¢ for every dollar a man makes. A study commissioned by the U.S. Department of Labor comes to a similar conclusion.

Some would like the government to intervene in closing the reminder of the wage gap. Government's good intentions in this case would lead to more regulations, red tape, and frivolous lawsuits. There are ways that these issues can be solved in the free market. If pay is that much of an objection, females can be encouraged to pursue careers in business or the STEM (science, technology, engineering, and mathematics) field to counter the cultural stereotypes (Blau and Kahn, 2000). Fathers can take further responsibility for child-rearing, or alternatively, employers can provide better family-leave and child-care policies. We should empower women to make whatever lifestyle or career choices they like, but let's not pass faulty legislation such as the Paycheck Fairness Act in hopes that the government can attempt to fix a problem that by and large does not exist.

How Will the Supreme Court Rule on Same-Sex Marriage?

This week is the week that the United States Supreme Court (SCOTUS) tackles the issue of same-sex marriage. The fight for legalizing same-sex marriage has been gaining traction in this country, and given the demographics of the support (e.g., a lot of it is based on age, as well as if you personally know someone who is gay), it should only be a matter before time that same-sex marriage is legal in all fifty states. I would prefer that the government stay out of people's marriages and stop defining what is an acceptable contract for consenting adults. The only time the government should intervene in a contract signed by consenting adults is if there are contract enforcement issues. Alas, we don't live with that libertarian ideal; we live in a world where the government is involved in defining marriage. Based on the two cases before the Supreme Court, there could very well be a shift in the definition of marriage...and it wouldn't be the first time there was a societal change in the definition of marriage.

As for how this will play out, I need to emphasize that I don't have a crystal ball or clairvoyance. These proceedings have a way of taking unexpected turns. For instance, no one expected that Justice Roberts was going to vote in favor of Obamacare. I am going to assume that these two cases won't be thrown out due to technicalities (in this case, the technicality being Article 3, §2 of the Constitution). I will also try to make educated guesses based on the actors involved. With that in mind, how will this all materialize?

The first case is Hollingsworth v. Perry, which is the case questioning whether Prop 8, a 2008 California state law that defines marriage between a man and a woman, is a violation of the Constitution's Equal Protection Clause under the 14th Amendment. Under Article 3 §2 of the Constitution, Hollingsworth might not even have legal standing for SCOTUS to hear the case. I am doubtful of a dismissal of the case on procedural grounds because this is such a hot-button issue where I am sure that SCOTUS wants to weigh in.

Assuming that the case is not thrown out, there are a few possible rulings. One is that SCOTUS upholds the current definition of marriage [between a man and a woman]. Another is that SCOTUS rules in favor of Perry, but limits the ruling in favor of same-sex marriages to the state of California. This ruling would make sense because Californians were previously afforded rights, but said rights were revoked. The third option is the "eight state" ruling. I found this option to be legally creative (read: deft). This ruling would affect the eight states that allow for civil unions, but prohibit gay marriage (i.e., California, Delaware, Hawaii, Illinois, Nevada, New Jersey, Oregon, and Rhode Island). In these eight states, they treat same-sex marriage couples in all ways but one, i.e., the "separate but equal" bit. This ruling would make it so that civil unions were no longer legally viable because they violate the Fourteenth Amendment. Finally, there is the possibility of the "fifty state" holding, which would allow for same-sex marriage to be legal in all fifty states. There could be the argument that under Romero v. Evans, the discrimination against gay people cannot even satisfy rational basis review. There can even be the argument under Loving v. Virginia that the Due Process Clause allows for one to marry the partner of their choice.

The second case is that of United States v. Windsor. This case will primarily question whether Section III of the Defense of Marriage Act (DOMA) violates the Fifth Amendment in terms of equal protection of same-sex couples whose marriages are already rendered legal on the state level, a.k.a., does a federal definition of marriage defile the notion of federalism? The standing question in this case is a bit more convoluted because the question is whether the House of Representatives has standing to defend DOMA in court. If SCOTUS rules that they don't, SCOTUS can either choose not to hear the case or choose that Windsor still has legal standing, which means the case would proceed. If the House does have standing, SCOTUS proceeds. Assuming the case proceeds, SCOTUS will have to decide whether Section 3 of DOMA violates the notion of equal protection. If it does not, the status quo stays intact, thereby making it more difficult to legally question the definition of marriage in the future. If DOMA is unconstitutional, that means one has to defer to the state's definition of who is married, which would mean at least for those same-sex couples living in states where same-sex marriage is legal, it would mean same-sex couples are granted 1,138 rights, benefits, and provisions previously unavailable to same-sex couples.

It would be wonderful if same-sex marriage were legal in all fifty states because it would certainly be a step in the right direction when it came to due process and contract rights. However, what I would like to happen is not the same thing as what I think will happen. When it comes to civil rights issues, SCOTUS historically likes to be ahead of the curve, but not too far ahead of the curve, which is why I think that same-sex marriage throughout the country is unlikely to happen with these court rulings. It is difficult to guess how all the justices will vote. I assume that Scalia, Thomas, and Alito will vote to uphold DOMA and Prop 8, whereas Sotomayor, Ginsburg, Kagan, and Breyer will vote to repeal DOMA and Prop 8. I figure those justices will vote based on ideological lines, as they typically do. The two justices where I am unsure are Kennedy and Roberts. As we saw in the Obamacare case, Roberts sided with Obamacare in a 5-4 ruling in a failed attempt to limit the government's power. Justice Roberts can very well vote against DOMA and/or Prop 8, but do so in a very limiting manner. Looking at Roberts' voting record, though, one sees that he is one to affirm federal power, which he might do with Congress and DOMA. Kennedy might have made a limited ruling in Romero v. Evans, but based on his ruling in Lawrence v. Texas, I am going to guess that Kennedy wants to be on the right side of history and vote down Prop 8 and DOMA. Justice Kennedy is a proponent of gay rights, but given that Justice Kennedy has a comparable affinity towards states' rights, which is why the Prop 8 case is going to be more complex for Kennedy than the DOMA case. I would guess that there will be 5-4 rulings, but the Court could very well rule 6-3 in favor of civil rights, but again, time will tell.

I would posit that DOMA is repealed, not only because lower courts have already ruled it unconstitutional, but one of the judges who ruled it unconstitutional was Justice Dennis Jacobs, who is a very conservative judge well-known in the world of the Federalist Society. DOMA is an overreach of Congress' enumerated powers, and is thus unconstitutional based on federalist grounds. Even if DOMA is repealed, that would not mean same-sex marriage for all fifty states. What would happen is that there would no longer be a  federal definition of marriage, which means that defining marriage would be relegated to the states. As previously mentioned, the plus for progress for gay rights is that the states that have legalized same-sex marriage would provide the same benefits to same-sex couples that are already provided to other couples.

The Prop 8 case is more interesting just because there are more options that SCOTUS can consider. Cultural shifts lead to legal shifts; that is the way the history of civil rights has operated. Momentum for gay rights has certainly picked in the past few years, and changes previously thought unimaginable (e.g., passing same-sex marriage at the ballot box) have been actualized. If the federalist/"leave it to the states" argument is what brings the more conservative members of the Court, such as Justice Thomas, on board, then I would postulate that the ruling will be limited in nature. Since the lower courts (i.e., the 9th Court of Appeals, federal appellate court) limited their rulings to the state of California, I would guess that SCOTUS will also follow suit on that precedent set. Plus, a more moderate and gradual change will make the issue less divisive over time.

In summation, my concise prediction of what is most likely to occur is the following: repeal of DOMA and repeal of Prop 8 in which the scope of the ruling will be limited to the state of California.

Wealth Inequality in America Is Nowhere Near As Problematic As It Seems

Wealth inequality: another example of a politically charged phrase. The disparity between the poor and the rich is hardly a new source of contention. It's that economic hard times make the gap between the rich and the poor more pronounced and more noticeable. It is understandable to sympathize with the poor person who is scraping by just to make ends meet while showing disdain for the CEO who "makes bank." A YouTube video (see below), entitled "Wealth Inequality in America," has gone viral, and is one of the latest examples of invoking the previously mentioned sentiment. This video outlines how the actual wealth distribution is so different from what we perceive to be or what we would ideally want it to be. Is it fair that the 1% has so much money while the average American works so hard to sustain a living? Is wealth inequality as terrifying as portrayed in this YouTube video, or is it merely the perceptions created by the wealth inequality? Is there something we should do to make the wealth distribution more equitable, and if so, what should that something be?  

In the past, I have discussed the merits of the income inequality argument and how it is not as big of a deal as people were purporting. Wealth inequality is just a variant of the same discussion and same points. Nevertheless, I do want to go over points that the video makes and see what holds up and what does not.

First, the framing of the issue as "wealth inequality" is problematic. People being wealthy isn't the issue; poverty and social dysfunction are the issues here. Wealth is not just a sign that rich people are doing well. Since we don't live in a zero-sum world, everyone derives benefit from the success of wealthy people. Yes, Bill Gates is rich, but that is because he made such strides in the computer industry, and in the process, many individuals have computers. There are numerous examples of this phenomenon, but it's safe to say that the wealthy are not getting wealthy because they're exploiting the "working class"; it's because they create a product that consumers desire. Also, let's consider that the wealthy did not get wealthy at the expense of the poor, which can be observed by the fact that income in real terms has increased since 1979.

Second, this video is a static snapshot measuring people in economic quintiles, not as individuals. Mark Perry makes a good point here: "Sports statistics are kept in a much more rational way than statistics about political issues. Have you ever seen statistics on what percentage of the home runs over the years have been hit by batters hitting in the .320s versus batters hitting in the .280s or the .340s? Not very likely. Such statistics would make no sense because different batters are in these brackets from one year to the next. You wouldn't be comparing people, you would be comparing abstractions and mistaking those abstractions for people." This point cannot be stressed enough because the creator of the YouTube video implies that zero income mobility exists, which is patently false (see video below). Fortunately, much of this inequality is attributable to long-term demographic factors, such as marital status, age, and level of education.

The YouTube video "Wealth Inequality in America" presents the country's wealth in terms of proportions. Not only does this video not state the average wealth [or income] by quintile, but the video does not even bother to bring up the point of the quality of consumption. In pre-capitalist times, abject poverty was an inevitability for "the 99%." The ability of the everyday person to have access to an unprecedented, absolute standard of living that exceeds that of what people like Queen Elizabeth I or Andrew Carnegie had. Although we might take things like the microwave, dishwasher, television, computer, or cell phone for granted, these conveniences make our lives much more luxurious and comfortable than we realize.

Watching the YouTube video "Wealth Inequality in America" might invoke you to want to have a more redistributive wealth system. But how about we go after the collusion between Big Government and Big Business that provide the rich with the exemptions that exacerbate the wealth inequality? How about going after "zero-sum" policies like minimum wage, unemployment benefits, or Social Security that make it more difficult for the poor to escape the poverty trap? Instead of demonizing wealth, how about we ask ourselves what can be done to help the poor without sticking it to the rich?

Sequestration: The Hype That Shouldn't Be

Last December, the world was supposed to end because the Mayan calendar predicted the apocalypse. Looking at political commentary, I'm expecting a similar breakdown of society due to the sequestration "cuts" that are planned to take into effect on March 1, 2013. The sequestration consists of $1.2T of spending "cuts" over the next ten years. $88B of which are supposed to take place this year, and that doesn't consider the fact that the government will do away with $44B of those "cuts" (CBO, p. 11). The Pentagon is threatening hiring freezes and furloughs, particularly since about half of sequestration "cuts" affect the military. Heritage Foundation is complaining about how the sequestration will undermine national security. The White House and the Democrats cannot help but scare the American people. Liberals complain because Meals on Wheels will be put on hold, quality of education will worsen, and sequestration will increase the likelihood of health risks. Sequestration is something that makes both sides of the aisle nervous. What comes to my mind is the following: are we going to experience societal dysfunction if sequestration goes through or is this an example of Big Government incapable of taking a small dosage of the medicine it needs? Unsurprisingly, my answer is "the latter." Rather than give into emotionalism, I think it's prudent to put the spending "cuts" into perspective:

Government spending is not decreasing. You might be wondering why I have been putting the word "cuts" in quotation marks. That is because when we look at the big picture, these aren't actual cuts. If the government were to experience actual cuts, there would be a net decrease in government spending from the previous year. What is going to take place is decreases in initial projected baseline increases, not spending cuts. The Congressional Budget Office (CBO) shows that our federal budget will nearly be $3.6T (Table 1-1) this year, which translates into about spending cuts about 1%. Looking at Summary Table 1 of the CBO report, net government expenditures [in real dollars] still increase.  

Defense spending can take a "hit." Defense spending is 4.7% of the overall GDP and about 18% of the federal budget. The United States has more military spending than all the other major militaries combined. If the full sequester goes into effect, the defense budget will drop 31% from the 2010 peak to the 2017 trough. We've already pulled out of Iraq and we're looking to pull out of the pointless war in Afghanistan by 2014. Since both of those military expeditions will be eliminated shortly, there is no need to increase spending. Let's also consider that in the next ten years, the federal government is planning on spending over $7T [in nominal dollars] (See Table S-4) on defense spending and defense spending actually increases over time (ibid). With the sequestration, the CBO still calculates that the defense budget will still be over $6.4T [in real dollars] (See Table 1-5), not to mention that the Pentagon will still have about $500B per annum and overall military spending in real dollars will exceed current levels by the year 2019 (ibid).  In the grand scheme of things, cutting $500B from $7T is not a huge cut.

Bottom Line: Hysteria like this frustrates me. Anything that resembles a "cut" is, in aggregate terms, negligible to the fact that the government is still increasing its overall spending. Much like with the case in Britain, the "anti-austerity" crowd wants to bemoan the implementation of faux spending cuts and how spending cuts don't work, even when these "cuts" are only 0.03% of our GDP. This sort of scare tactic is used by those who think that we can spend our way out of an economic crisis and that we should perpetuate the "tax and spend" mentality because of the misconceived notion that government creates economic growth.

Even the perceived threat of spending cuts gets people all riled up. Considering that the net debt-to-GDP ratio is about 87% right now and projected to rise, I'd be worried since it affects our country's credit risk, which affects our economy's overall well-being. I would have preferred that the sequestration targeted Social Security and other forms of entitlement spending in addition to defense spending. I wish that we had real spending cuts that would help with deficit reduction and get our fiscal house back in order. Even if the sequestration "cuts" only modestly cut back initial baseline increases in spending, at least it's a modest beginning in the right direction that might even get the government thinking about how it spends its money.