Thomas Sowell on the Poor

I hope everyone had a great weekend. I spent some time this weekend reading (actually, it seems all I do these days is read). I have been working my way through Thomas Sowell’s Basic Economics: A Common Sense Guide to the Economy for awhile now. Thomas Sowell is one of my favorite thinkers. As I have been reading through the book, I have been highlighting some of his thoughts. I wanted to share with you a few quotes from Chapter 4, which is an overview of Part 1: Prices and Markets:

The painful fact that poor people end up paying more than affluent people for many goods and services has a very plain—and systemic—explanation. It often costs more to deliver goods and services in low-income neighborhoods. Higher insurance costs and higher costs for various security precautions, due to higher rates of crime and vandalism, are just some of the systemic reasons that get ignored by those seeking an explanation in terms of personal intentions.

I never thought about it like this before but it makes sense.

Lending $100 each to fifty low-income borrowers at pawn shops or local finance companies takes more time and costs more money to process the transactions than lending $5,000 at a bank to one middle-class customer, even though the same total sum of money is involved in both cases.

This is also illustrated in mutual fund loads that charge a lower sales charge percentage for those who invest more money. It costs a mutual fund company more to service one thousand $1,000 accounts that it does to service one $1,000,000 account.

If everything were made affordable by government decree, there would still not be any more to go around than when things were prohibitively expensive. There would simply have to be some alternative rationing method. Whether that method was through ration coupons, political influence, black markets, or just fighting over things when they go on sale, the rationing would still have to be done, since artificially making things affordable does not create any more total output. On the contrary, price “ceilings” tend to cause less output to be produced.

I have often wondered what would happen if the government could somehow capture all assets in the United States and give an equal share to every adult in the nation. How long would it take for things to go back to where there were those who were rich and those who were poor?

I’ll try to share more highlights as I work my way through the rest of the book. For those of you desiring a good introduction to economics, Basic Economics—though long—is an excellent place to start. Although Sowell definitely leans towards the conservative view, he is a libertarian.

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OT Humor: Boudreaux

My mother-in-law sent this to me:

Boudreaux suddenly quit drinking, took a bath, quit chasing women, quit his poker games and started laying around. He started cutting the grass around the church, even painted it and was faithful to be first to attend on Sundays! Father Thibodeaux asked him what about dis wonderful change that had done overtook him. Boudreaux explained, “I heard “Crisis in the Gulf” and if He’s dat close, I wanna to be good to go!

Miguel on Class Warfare

I wanted to take a minute to highlight a piece of a comment that longtime AFM reader, Miguel left on one of my recent posts. For those of you who don’t know Miguel, he used to comment frequently on AFM but had to quit due to work requirements. I have missed his input.

I am one of those Obama rich, high income, doctor/lawyer/small business type folks so deserving of hefty tax increases. Not to highjack the topic, but just want to point out that what the pols are missing is that in this income range, we’re not only looking at Fed tax increases, but every imaginable pol has come out of the woodwork looking to take us to the woodshed. Muni taxes, state taxes, social security, property, etc. you name it—everybody is looking to drink from the same well.

Some pretty smart (and unbiased) folks have come out stating that all these tax increases will likely choke off any GDP growth the U.S. could generate next year. We’re not the billionaires (funny how those guys are all having no problem with the tax increases… because they will not suffer in the least when their accountants are done finding loopholes). It’s the backbone of the upper middle-class that will bear the brunt. You don’t much have to care about us, but care that we are huge drivers of consumption, and employers of service people and contractors, and we are nervous as heck about the tax increases—along with all the other uncertainty over jobs and such that everybody is concerned about—therefore keeping the money in the bank instead of blowing it at the car dealership or whatever. Our whining might be amusing to some for now, but in the end, we’re not the ones who will suffer the worst consequences. IMO, class warfare is a losing end-game for everyone.

In my opinion, all of this would have a totally different meaning if it wasn’t coming from politicians who don’t pay their own taxes. How many politicians have we read about recently that were having tax issues? Six? (I don’t know, I’m guessing.)


Why Are Kindle Books So Expensive?

I bought my wife a Kindle last year. She likes it. I have done some reading on her Kindle and I like it. In fact, I’m thinking about getting one of my own.

That said, one thing that really bugs me about the Kindle is how expensive Kindle books are. It’s crazy. Here are a few examples of what I’m talking about:

The Little Book That Still Beats the Market (Little Books. Big Profits) – Hardcover: $13.99 Kindle: $9.99 (28.59% Discount)

7Twelve: A Diversified Investment Portfolio with a Plan – Hardcover: $26.37 Kindle: $23.73 (10.01% Discount)

Basic Economics 3rd Ed: A Common Sense Guide to the Economy – Hardcover: $26.37 Kindle: $21.10 (19.98% Discount)

Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics – Hardcover: $9.80 Kindle: $9.29 (5.2% Discount)

You get the idea.

Maybe I’m crazy but it bugs me to pay over $20 for a paperless book. I was under the impression that electronic publishing would drive down prices because a large part of the price of publishing books is the paper and production of paper books.

So, if books are cheaper to publish electronically and the bulk of those savings aren’t getting passed on to customers in the form of lower prices, where is the savings going? To the publisher’s bottom line. Maybe I should buy stock in book publishers…

If You’re 22 and You Want to Retire at 65, You Better Start Saving!

You just graduated from college and are setting up your household. Finances are probably going to be pretty tight. You may even want to put off contributing to your 401(k) plan because retirement is over 40 years away. My suggestion to you is: DON’T! Don’t put off planning for retirement. In fact, I think it should be one of your first priorities.


Because you are young and you have one advantage that older people do not have: TIME. Time works for you in that it allows you to save less to meet your goal because you have longer to save and your retirement account has longer to compound. To illustrate the point I’m trying to make, I created the following graphic:

The above graphic assumes a 5.498% annual REAL rate of return. This return figure was derived from my S&P 500 Index data base of returns (reduced for expenses) going back to 1926 and the monthly change in the Consumer Price Index going back to 1947. Inflation has averaged over 3.6% per year going back to 1947.

As you can see, putting off your retirement planning even just a year can really increase the amount you need to save in order to meet the same goal. By waiting just one year, you need to increase your monthly savings by 6.15% in order to meet the same goal at age 65. If you put off saving until you are 30-years old, you’ll have to increase your savings by over 63%! Now, as bad as that seems, there’s a good chance you would have gotten a few raises over those 8 years so the 63% increase may not be as bad as it sounds.

It’s important to note that with all projections like this, we have to use linear appreciation (the account grows at the same rate year after year), which we certainly do not experience in the real world. Some years will be excellent years while others will be bad years. Also, I used the S&P 500 Index as the only investment choice. There are other asset classes that have produce better returns than the S&P 500 Index. I also did not include bonds as I do not have a good source for bond information.

Bottom line: In my opinion, I think you should make retirement planning your main priority as soon as possible rather than buying a shiny new car fresh out of college. And, if you can’t start young, you need to increase your savings rate in order to make up for lost time.

Note to parents: Show this to your kids!

Annuities in a 401(k) – I Can’t Tell You How Much I Hate This Idea

Cruising the ‘net this AM, I came across this article on Yahoo!: Annuities May Be Coming to 401(k)s.

It wasn’t too long ago that I read that most 401(k) plans were too complex and offered too many choices for employees, which made the decision-making process too difficult. So now they want to add annuities to the mix. Folks, you cannot find a more complex and difficult-to-understand product than annuities.

“One of the benefits of offering affordable, easy-to-understand annuities within a retirement plan is that it ensures plan participants receive a constant reminder that they are saving not just to accumulate wealth, but also to help workers approach retirement with peace of mind, knowing they will have income to last a lifetime,” Paul Van Heest, senior vice president, retirement plans of TIAA-CREF, said in his testimony.

What else would we expect to hear from Mr. Van Heest? His company stands to make a bundle if the rules are changed. What’s worse, is that Mr. Van Heest wants to make annuties the DEFAULT CHOICE for employees. I would also like to know Mr. Van Heest’s definitions of “affordable” and “easy-to-understand.” What kinds of annuities are we talking about? Fixed income annuities? Variable annuities?

I’m skeptical of this idea. But, then again, I’m ALWAYS skeptical of any change.

Household Net Worth Dropped in the 2nd Quarter. What About Yours?

Reuters reported recently that household net worth dropped $1.5 trillion in the second quarter:

Household net worth fell to $53.5 trillion, well below the $64.2 trillion it had reached at the end of 2007 when the recession officially began, according to the central bank’s quarterly flow of funds report.

Declines in the value of financial assets — especially in stocks and mutual funds — accounted for much of the decline in second-quarter net worth. Stocks alone were down $1.9 trillion to $14.9 trillion, more than offsetting small gains in other areas like state and local government retirement funds.

We are doing okay. We could be better but we could be a lot worse too. Our home value (the price I think it would sell for) has declined $10,000 to $15,000. Fidelity tells me that the 401(k) has a 5.2% personal rate of return for the year. It’s not good but it could be worse. Those two (the house and the 401(k)) are the biggest determinates of our net worth. So far, things look okay for 2010.

I did find this portion of the article troubling:

The Census Bureau’s annual look at U.S. living standards — once the envy of the world because of the upward mobility Americans could tap into—found the poverty rate at a 15-year high of 14.3 percent in 2009, up from 13.2 percent in 2008.

That’s a significant jump in the poverty rate. I’m sure the umemployment rate is responsible for the increased poverty rate. We need jobs.

What about you? How are you doing? How’s your net worth holding up?