During a meeting with my co-author Carlos Lara yesterday, he raised a point that is obvious but that I had never considered: As the US population ages, this will exert huge selling pressures on the US stock market. Why? Because 401(k)s and other IRS-created retirement vehicles have a built-in exit point. As Nelson Nash explained in his recent LRC piece:
According to all Tax-Qualified Plans, when one turns 70½ you must begin to take income (taxable) from your plan. That means you have to sell your stocks or mutual fund shares. Pray tell, who will you sell them to? Where are the buyers in the next generation?
Everyone see the problem? If the age cohorts were always uniformly distributed, it wouldn’t matter. As one group hit 70, they’d start taking their mandatory withdrawals from their 401(k)s and other holdings. But at the same time, a fresh group of comparable size would enter the workforce, and they would start socking money away into their own (tax-deferred) retirement accounts.
But that’s not going to happen over the next few decades. As we all know in the context of Social Security’s insolvency, the US age distribution is becoming lopsided toward the elderly, as the Baby Boomers move through the age distribution. The first Boomers were born in 1946. Right now they are 63 years old. That means in seven years a wave of stock selling will ensue, due to the arbitrary tax incentives of government-sponsored retirement plans. But of course, smart investors will anticipate this, and start unloading their shares in six years. But the super-smart investors will anticipate this, and start unloading their shares in five years…
A Robert Lucas would tell us not to worry, that the market has already priced all this information in. I doubt it. To see just how significant the demographic shift will be over time, check out this cool link, where the age distribution morphs on your screen (HT2MR).
Here’s another article making the same point I am here.
* A scathing review of Transformers 2. My friend warned me off this (over the phone) when I was standing outside a movie theater during a recent business trip. Judging by the review (which takes the form of a FAQ), I made the right call. (Warning there are some naughty words.)
* I take on Krugman’s critique of high-frequency trading.
* A pretty funny critique of libertarianism (from a libertarian, I think) that involves Monty Python quotes. (HT2 MarginalRevolution) And yes, now that I re-read the sentence I just typed out, I realize why I didn’t date much in college.
This is amazing; a Bloomberg article explains why we don’t need to fear falling prices! (HT2 Jeff Tucker) I almost wonder if the guy read my book the Depression, because here his analysis is very similar to mine:
In reality, anyone with a sense of economic history would have been aware that the whole deflation story was oversold. In the U.K., the House of Commons Library publishes data on prices going back to 1750. From 1814 to 1914, prices rose a bit in some years, and dropped a bit in others, so there was no real change in the price level over the century.
In other words, there were plenty of deflationary years. Yet over that period, the U.K. became the greatest economic power in the world: Its relative decline only started once inflation took hold. Deflation didn’t stop the Industrial Revolution, one of the most sustained times of economic creativity ever seen.
Likewise, a 2004 study by the Federal Reserve Bank of Minneapolis looked at the data on deflation across 17 countries over 100 years. It found that although the Great Depression of the 1930s was linked with falling prices, that wasn’t true of any other historical period. There was, it said, “virtually no evidence” that deflation caused a depression.
Why should it? We are constantly told that deflation is bad because it makes consumers hold off from buying things, thinking they will be cheaper tomorrow. But that is just silly.
Everyone knows that a computer or an iPod will be both better and cheaper in six months. And people really want one right now. Torn between those two impulses, plenty of shoppers go out and buy computers and music players. It is true in the electronics industry, and, once they get used to falling prices, it will be true for other industries as well.
I didn’t realize they were so blatant about it… Anyway the Nevada Development Campaign makes a compelling argument to business owners to relocate out of the Golden State. I’ll be writing an op ed on this in the next few days, which will have the relevant stats (like how many people moved out of California and into neighboring Nevada, and what the difference in after-tax earnings are).
Conservative columnist Bob Novak has died at 78. Below is my favorite Novak clip, where he decided that James Carville wasn’t worth any more of his time.
This doesn’t seem like a good sign:
A Manhattan judge ruled yesterday that a blogger can’t hide behind a web of anonymity while flinging the ugly words “skank” and “ho” at somebody online.
The sternly worded ruling orders Google to give up the identity of an anonymous blogger-assailant who inexplicably devoted an entire blog — titled “Skanks in NYC” — to maligning beautiful blond model Liskula Cohen.
Once she learns her attacker’s name — possibly as early as today — the model can serve the anonymous blogger with a defamation lawsuit.
Obviously the blogger is a jerk, but give me a break. It’s not like he (I’m assuming it’s a man) said, “I have video proof that Ms. Cohen ran over a three-year-old and fled the scene.” His remarks were clearly just generic insults. As far as those insults hurting her career, how many more people have heard them because of her desire to file suit?
But the real danger here is using this pretext to get Google to give up a customer’s name. What happens when Geithner decides that I need to stop spreading vicious rumors about the amero, thereby causing the dollar to lose value?
The feds are breaking down all the remaining obstacles to their power. Swiss bank accounts and anonymous bloggers must go.
In the previous post, I relayed some (good) objections from a reader of my pamphlet [.pdf] describing a stateless society. One of the objections went like this (paraphrasing): “In Murphy’s vision, ‘crimes’ are actually codified contractually, and the punishments are typically monetary. So that means rich people could go on killing sprees, and just pay off the families of the victims.”
Back in 2002, I wrote an essay for the site Strike-the-Root where I took this objection head on. I think many readers will be surprised at the power of free markets to solve such problems. Remember, the good economist doesn’t stop at Step 1; he follows the thought experiment out to its long-run effects.
Without further ado, here is the excerpt from an essay I wrote in 2002:
…This issue has consequences for the stateless society. A typical objection to a private legal system based on restitution rather than retribution, is that rich people could commit crimes with impunity, since they could easily afford the “fines.”
In the first place, this objection overlooks the fact that right now rich people (not to mention politicians) literally get away with murder, through direct bribery or other unsavory mechanisms. At least in market anarchy, the payment would be made in public.
But there is a more sophisticated response to the objection. Let’s take the caricature to the extreme, just to prove a point. Let us suppose that, in a hypothetical anarchist society, the only punishment for murder is a $1,000 fine. What would happen in such a world?
The statist recoils in horror at the thought: Why, Bill Gates could slaughter guests at a cocktail party to reenact his favorite scenes from Clue!
Well, he could, but how many people would go to his next party? Indeed, how many people would deal with him at all after such horrific behavior? People can still condemn the immoral, even in the absence of strict “official” sanctions.
But even these arguments miss the truly intriguing angle. If it’s legal for Bill Gates to kill, then it’s also legal for others to kill Bill Gates. After his homicidal conduct, outraged guests could take up a collection. Once they hit $1,000, they could afford his murder.
Of course, the analysis can’t stop there. Rich people and other public figures would alter their wills to reflect the new circumstances. In the event of their murder, people could establish trust funds to finance revenge upon their killers. Soon enough, people would find that the “official” sanction of $1,000—which is clearly below the level that would be set in an actual private system—would be supplemented with other retaliatory costs. It would be incredibly reckless for anyone, even the rich, to engage in murder sprees.
And what about the pauper, who can’t afford bodyguards or setup trust funds? Well, who wants to kill such a person? Is it really worth $1,000? Keep in mind, we are assuming that every killer is fined, which is different from the present system in which killers serve jail time only in a fraction of the cases. For a simple example, there would be virtually no robbery homicides. It would defeat the purpose to mug someone and shoot him, if the mugger knew he’d be out $1,000 for his crime.
This sort of “economist” talk will surely cause eyes to roll. Skeptics may point out that people commit crimes for all sorts of reasons, and that pecuniary motives do not determine an individual’s conduct. This is true, but in the aggregate, it would certainly make a difference if people knew they’d be fined (however lightly) for every crime. After all, women consider many factors when deciding to have a baby. But surely the welfare state leads to far more births than would otherwise have occurred.
Of course, the commodification of man would do the most good in the arena of politics. If government officials could only be made to feel even a fraction of the human cost of their actions, their worst excesses would be curtailed. Imagine if Harry Truman viewed Japanese civilians, not as his enemy, but as pieces of property. In that case, Hiroshima would never have happened; the residents could have offered a perpetual stream of millions of dollars as ransom on their continued existence.
But no, such a scheme would never have worked. The tender hearted American voters would have vomited at the thought of their fearless leader extorting protection money from helpless women and children. Why, that would be tantamount to slavery! How crass! How inhumane!
So instead Truman nuked them all to smithereens.
Daniel Cotter is debating a minarchist buddy and told him to read my pamphlet, Chaos Theory [.pdf]. Below is a list of questions that the minarchist had. These are great questions, but unfortunately I am too swamped with “real work” to answer them anytime soon. So I hope some of you can help Daniel in his proselyti–educational efforts.
Let me remind everyone that two important sequels to my thoughts in Chaos Theory are these Mises Daily articles: “But Wouldn’t Warlords Take Over?” and “The Possibility of Private Law.” In retrospect, I think the last essay comes logically before the beginning of Chaos Theory. –RPM
I meant to glance at Chaos Theory but I ended up reading the whole thing. All in all I found it very interesting but I wrote a list of issues that I have with Murphy’s analysis:
-The system of apprehension of criminals requires the criminal to approve their own detention by accepting the terms of a contract to enter a premises (in his example a movie theater). This seems to imply that if a criminal did not leave his own property, he could not be apprehended.
-If criminals can only be jailed voluntarily in order to keep down the costs of their insurance, then they would probably prefer to live under house arrest. That way they wouldn’t need to enter into contracts with others and wouldn’t need insurance.
-Murphy points out that the costs of combat are high so conflict between security providers is unlikely, but I believe that using force against the competition is still profitable if you can eventually establish a monopoly. I suppose that is a matter of conjecture, but he didn’t address it.
-In the footnotes he mentioned that it would be unlikely for parents to collude in mistreating their own child, but it certainly has happened. He does not account for children born out of wedlock or for children that have only one parent present for whatever reason. His assessment of markets in which children are traded neglects the fact that when children are abused for gratification, especially sexual gratification, or forced to perform other work they are economically valuable outside of their value as a loving child. Such a market would also probably lead to various derivatives like future trading in children.
-I found the comments on abortion to be quite strange. Ultimately, I suppose, this system would make abortion a matter of choice. That being said, those that don’t approve, would probably not be satisfied with simply locking themselves into a gated community and pretending that abortion doesn’t happen. There is no prohibition on pro-lifers forming exclusive gated communities now, but I’m yet to come across one. They tend to get out and about and make their disapproval known.
-With various companies providing their own title registries, there would be a myriad of different lists that you’d have to check before buying property. The whole idea sounds unworkable. I think that it would lead to a monopoly or at best a small oligopoly since people would not want so many registries complicating every major purchase.
-The fact that very wealthy individuals could afford massive insurance premiums means that they could, if they so desired, kill people and just pay out the victim or pay the higher premium. Putting a price on the value that is to be paid out is in itself problematic in that in some circumstances it may be profitable to kill someone. Basically, this insurance based system doesn’t prohibit the use of force. It just associates a cost with the use of force.
-Insurance companies that are meant to defend an anarchist society would likely collude with an invading army since the aggressive state could nullify their contractual obligations. So the company could just collect insurance premiums from it’s customers until a state invades and then surrender and collaborate with the new state so it doesn’t need to pay its customers out. The company would loose its income stream, but there would still be opportunities to trade with the formerly anarchist market under the new regime. And the state could even legislate it a monopoly.
-Murphy also asserted that if a defense firm initiated aggression against a neighboring state, that the insurance company which covers the defense firm would need to make payouts to the victims. This seems unlikely. The insurance companies are only used so that other actors in the anarchist economy will trust and therefore trade with the defense company. People residing outside of the anarchist economy would not be covered by the insurance contract. Why would the defense company pay higher premiums to cover deaths in the neighboring state with whom it doesn’t trade. Even if it did trade with them, it could set up a subsidiary to attack the neighbor. As long as it honors contracts with those who reside within the anarchist economy, it would not have any problems.