NFL Denies Referee Conspiracy

There is growing evidence that NFL referees have been instructed to make calls – particularly pass interference calls and false start calls – to control the outcomes of NFL games.  The NFL vehemently denies these accusations, but the data are very clear.  The NFL knows the outcomes that will maximize television revenues as well as ticket and clothing sales, and they are determined to make sure these outcomes happen.

Our operatives have managed to make contact with people at Black Rock Big Data Analytics who provide services to the NFL.  None of these people would speak on the record, but they provided various insights.  A key manager said, “Keep in mind that this is all about entertainment, not athletics.  We are focused on earnings per share, not Hall of Fame inductions.  Our goal is to sell beer, pickup trucks, and game shirts.”

We asked, “What does this mean operationally?”  She responded, “The Patriots and Panthers were undefeated until recently.  We maximized the sales of game shirts, and then we needed these teams to lose because there were no more shirts to sell.”  She continued, “We instructed the referees to make sure these teams lost.”  They delivered, sales improved, and the referees got their bonuses.

“Doesn’t this conflict with the whole spirit of the game?” we asked.  The response was simply, “College and pro sports are the essence of corruption, exploiting talented athletes for maximal corporate earnings.”  So, we asked, “Does it not matter that millions of people are totally focused on their teams and their success?”  The response was simple, “Of course this matters.  Our goal is to maximize the percent of their income that ends up in the NFL coffers.”

Finally, our contacts added, “You realize that the whole athletics enterprise is focused on exploiting talented athletes, university presidents, and the general public to fill corporate coffers at the expense of the health and well-being of athletics and academia.  The idea of a student athlete is a farce.  All that matters is earnings per share.”

So, we asked, how far might you take this idea?  “Well, if we look at ultimate fighting, the extreme is death of the competitors.  This could generate enormous amounts of revenue.”  We could not help but ask, “Is this ethical?”  The answer was simple, “All that matters is earnings per share.  Dead athletes are just an insurance premium payment.”

The New Reality

Our operatives have uncovered the motivation and reasoning behind various presidential candidates now emphasizing what many of them are calling the “new realty.”  This reality relates to their personal histories, climate change, economic prospects, and so on.  All of the candidates have “repositioned” their personal stories to gain voter support.

One candidate, born to immense family wealth, tells his story of hardscrabble poverty and Horatio Alger like immersion from this poverty.  The media, their fact checking having discredited this story, finds itself dismissed by the candidate.  They have to ask questions and report answers in the context of this seemingly ridiculous reality.

Other candidates advocate policies, e.g., nuclear attacks on adversaries, which make no sense in terms of costs or consequences but are great pitches for support and votes.  Let’s build a wall between Mexico and the US, or between Canada and the US.  Great idea for construction companies that build walls!

There are lots of ideas about taxes.  The majority of Americans pay no taxes beyond Social Security assessments.  Thus, income tax revenues must come from everybody else.  How can we best redistribute income from earners with high incomes to everyone else?

Our tax policies shield many high-income people by designating their earnings as capital gains.  Thus, they pay 20% rather than 40% of their income in taxes.  The real victims are people whose incomes are designated salaries.  Between federal, state, and local income taxes, as well as property and sales taxes, these people can pay as much as 60% of their income in taxes.

The candidates have long argued for lower taxes, but it has all been just rhetoric.  The country cannot function without many high earners paying 60% in taxes while the majority of people pay 0% in taxes.  This is not going to change.  The minority of people with above average incomes is going to pay dearly to support everyone else.  Otherwise, the stability of the overall social system is at risk.

The candidates, from either political party, cannot embrace this reality.  The idea that we have to redistribute income to avoid social unrest is not acceptable, except for the fact that this is exactly what we do.   The reality is that a minority of people is positioned to benefit enormously from various technology and market opportunities; everybody else will find such changes challenging.  The political system needs to spread the benefits around.

Nevertheless, several candidates are advocating zero income taxes across the board, as well as zero corporate taxes.  They would create a national Value Added Tax.  They suggest 2% but replacing the lost revenue from income and corporate taxes would require a VAT of 15-20%.  Adding this VAT to state and city sales taxes could yield an overall tax of 30% on all consumption.  Commentators have pointed this out but candidates respond with putdowns like, “You need to take a math class.”

The rhetoric really soars when addressing defense spending.  Several candidates have advocated doubling the defense budget immediately.  They argue that this will pump money into the economy.  It has been pointed out to them that the absence of income and corporate taxes will mean that such pump priming will yield little revenue to the government.  They typically respond, “Good.  Less tax revenue the better.”

Candidates’ poll standings reflect the general public’s enthusiasm for the new reality.  The simple fact that the math does not work – the deficits would be immense – is of no interest to the public.  They are apparently believing and very much liking the rhetoric.

We decided it was time to explore the genesis of these audacious positions and promises.  Our operatives posed as representatives of potential European donors to the candidates’ campaigns.  It turns out that a potential donation of $10 million is the price for getting serious attention.  $100 million gets you a meeting with the candidate, but we did not need that.

We ended up meeting with three campaign managers.  We asked about the reality of their candidate’s positions and promises.  All three managers responded similarly, “We are trying to win the nomination and then the presidency.  Period.  We will take whatever position is needed to win convention delegates and electoral votes.”

But, we asked, “What if you win?  How will you deliver on your promises?”  They responded, “Promises?  If we win the presidency, the slate is clean. Whatever we said during the primaries and the election is irrelevant.  Once we are in control, we will do whatever we want.  At that point, the public’s preferences do not matter.”

So, we commented, “You are assuming a one term presidency?”  Their retort was, “Not at all.  Any shortfalls in delivering on promises can easily be attributed to the opposition.  We want to do the right things, but we cannot because the other party stymies our every move.”  We asked, “How do you know that will happen?”  Their response was, “It doesn’t matter.  We weren’t going to do those things anyways.”

This readily begged the question, “Why do you want the presidency if there is nothing that you plan to achieve?”  With a knowing smile, they each responded, “The key objective is to keep anybody else from accomplishing anything.  We want to keep government perpetually dysfunctional.”  We asked, “What’s the purpose of that?”  With a knowing look, they replied, “While the turmoil plays out, our donors and supporters will be making loads of money, which can help fuel the next round of this charade.”

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NFL Rules

Confidential sources have indicated that the NFL is considering some sweeping rule changes, all with a goal of increasing the entertainment value of the former sport.  Unnamed executives indicated that, “Our goal is for fans to have fun, to go home with memories of exciting games when their team miraculously won despite the odds against such outcomes.”

One conclusion was that home field advantage has to mean something more.  Consequently, the NFL is considering giving the home team five downs per possession, while the visiting team will still have only four downs per possession.  Purists have protested, but the NFL has reminded them that the focus is on the fans.  “Our sponsors want to sell beer and pickup trucks.  The home team winning is good for viewer retention.  If the home team is losing, fans tend to change the channel.  That does not sell anything.”

Another proposal receiving serious consideration is requiring both teams to wear identical uniforms without numbers or names on the jerseys.  This idea would so totally confuse players that miscues and mistakes would be rampant.  The idea emerged from some enthusiasts of America’s Funniest Home Videos.  The players union is adamant in their opposition to this idea.  One spokesperson said, “This is the most ridiculous idea since Bill Veeck tried midget players.”

Yet another extreme proposal is limiting each player, except the quarterback or kicker, from touching the ball more than once per game.  Each player gets one carry or one catch per game.  Enthusiasts have pointed out that this would give many other players chances to display their skills.  Naysayers respond that this would decimate the record books.  Almost no one could excel with one possession per game.

The Consolidated NFL Hall of Fame is studying this proposal.  Since the Consolidated Corporation acquired the HOF, they have changed many policies and procedures.  HOF members no longer vote on potential inductees to the Hall.  Election is now based on sales of apparel and accessories.  Not surprisingly, the result has been that players are elected in their first year of eligibility or not at all.  Once no one remembers them and their game shirts are not selling, players simply disappear from the collective consciousness.

The most controversial proposal by far would eliminate any play calling by coaches.  Head coaches, offensive coordinators, and defensive coordinators would be prohibited from directing plays.  The quarterback would be solely responsible for choosing and executing plays.  Any evidence that the coaching staff was trying to intervene in the calls would result in forfeiture of downs.  Two assessments would result in forfeiture of the game.

The backdrop for all these deliberations is the desire to increase fan enjoyment and commitment.  Everyone wants their team to make the playoffs.  Another proposal being considered is that every team makes the playoffs.  Further, each round of the playoffs would be the best two of three games rather than a single game.  The three games would be played in a one-week period.  This would push the Super Bowl into April or May.  This would yield a windfall of revenue from advertising and ticket sales.

Finally, initial ideas are emerging for decreasing the current 12 minutes that the ball is in play during a typical three hour telecast.  Another 2-3 minutes of advertising time would be highly valuable.  The most popular suggestion was to eliminate stopping the clock during a series of downs and then adding an additional minute of advertising between each of the four quarters.  Enthusiasts argue that the faster-paced game would be more exciting.

Overall responses of fans to these suggestions have been quite negative.  One fan said, “If you make the real game so short and I only get to see my favorite player once, how am I going to be able to justify three hours of drinking beer and scarfing junk food?  I already have a new pickup truck.”  Another fan remarked, “Well, at least these changes will reduce injuries.  Football is just an excuse to hang out with my friends anyways.”

Disruptive Service Innovations in Healthcare

A recent issue of The Economist provided an in-depth review of how high technology financial startups are poaching high-margin financial services from large banks.  The large banks are not standing still; they are often acquiring these startups once they prove viable.  This may keep them in the game, but high margins are being substantially eroded for services that were once cash cows.

There have been many related discussions in the vehicle industry.  Many vehicle manufacturers are trying to position their vehicles as service platforms.  OnStar by GM is a classic example.  As more high-tech vehicle services emerge, it may be that Apple and Google, for example, will be the innovators rather traditional automobile companies.  They won’t produce the cars, but they will make the profits.

Both of these examples involve industries with business models, especially cost structures, which overprice technological innovations, yielding profit margins that can compensate for enormous inefficiencies elsewhere throughout their enterprises.  In general, disruptive technology-based innovations can obsolete business models and displace mainstream providers who are deluded by the incumbency of their traditional approaches to their markets.

There is a significant opportunity to disrupt the business models of consulting service companies that provide business process improvement services to healthcare providers.  The disruption will completely undermine the construct of the “billable hour” for these services.  Consider these observations:

  • Healthcare providers are notoriously inefficient users of capacities, in part because they get paid for everything they do regardless of relevance or efficiency.  Any reasonably competent process engineer can see countless low hanging fruit in terms of process improvements.
  • All major healthcare providers are delivering the same services, i.e., caring for the same maladies of humans ranging from hypertension, diabetes, and heart disease to automobile accidents and gunshot wounds.  There is no inherent reason that they could not all provide these services in the same ways.
  • Such standardization has led to major efficiencies and increased effectiveness for sales force automation, logistics, supply chain, and inventory management, and numerous other industrial processes.  Healthcare delivery is ripe for such process innovations.

It is important to differentiate process innovations that involve direct adoption of, for example, logistics, supply chain, and inventory management, from those innovations that address healthcare delivery specifically.  The latter must draw upon evidence-based medicine to devise, evaluate, and generalize care processes for hypertension, diabetes, heart disease, etc.  Standardizing such services requires deep knowledge of diseases and procedures for screening patients, diagnosing disease states, and treating diseases.

One approach to standardizing care delivery processes has been to map the processes of each provider, leading to one-off solutions for each enterprise.  These process maps are used to identify process inefficiencies, redesign processes to eliminate inefficiencies, deploy new processes, and then evaluate both efficiency and effectiveness.  This usually requires an enormous number of consulting person-hours and, hence, is very expensive.

This approach is based on the idea that every provider is unique and, of course, every patient is unique, and only the knowledge and skills of their individual primary care physicians and specialists are adequate to know how best to treat an individual patient.  Such reasoning is deeply flawed.

The Institute of Medicine has found the following — from the time that a new best practice is proven until the majority of physicians have adopted the practice averages 17 years.  Other studies have shown that physicians’ approaches to care are much more affected by where they graduated from medical school than by research findings since they graduated.  Thus, most patients are not getting the best care.

To be fair, various thought leaders have shown that it is absolutely impossible for clinicians to keep up with the developments in their specialty.  They could spend all their time reading and still not be able to keep up.  The individual clinician, despite high motivation and commitment, simply cannot keep up with the generation of medical knowledge and delivery skills.

It might be argued that the medical literature provides all the knowledge needed to specify best practices.  However, the literature focuses on scientifically defensible knowledge rather than how to deploy this knowledge in the care delivery system.  The need to translate increasing knowledge to constantly improving best care practices presents an enormous business opportunity.

This opportunity is premised on the strong belief that there are definable best practices that every provider should follow.  These best practices can be identified and constantly updated.  Knowledge of these best practices can be deployed in terms of web-based interactive visualizations enabled by computational models that embody these practices.  Clinicians can interact with these visualizations, perform any desired “What if?” experiments, and assess the impact of updated best practices on health outcomes and financial consequences.

Once decision makers are convinced of the merits of the best care practices portrayed in the web-based interactive visualizations, it is inevitable that many will ask about how these practices can be customized to the demographics of their patient populations.  Much of this type of customization can be enabled online. Other types of customization, e.g., to their physical infrastructures, may be difficult to fully automate, at least initially.

The fully customized version of a provider’s processes and practices can be created and maintained online for their use in strategic and operational management.  Parameters within these processes and practices can be updated monthly.  Performance outcomes can be compared to predicted outcomes.  Deviations can be used to track down performance problems, for example, unusually long delays for out-patient diabetics.

The vision is to provide to medical practice what SAP provides to logistics, supply chain, and inventory management and Salesforce.com provides for sales force automation.  This will require a combination of compelling online capabilities with deep knowledge of medical practice, as well as an efficient and fine-tuned mechanism for constantly updating knowledge of the state of the art in medical practice.  In the process, the 17 years it takes to for the majority of clinicians to adopt best practices should be reduced to perhaps six months.  This will be a major contribution.

Leading a University Research Center

University research centers are delicate organizational systems.  They bring together faculty, research staff, and graduate students for several reasons.   Centers are often formed as a result of a large NIH or NSF grant or because of a large gift or grant from industry or wealthy alumni.  So, there is money on the table and researchers are naturally attracted to funding.

Researchers can also be attracted to the research agenda of the center.  They like the center’s portfolio and other researchers involved and want to affiliate with the endeavor.   This is also true for graduate students, who are often attracted to the research portfolio but also looking for graduate assistantships.  Prudence is needed to identify students who have the potential to make real contributions.

I have found that any university will embrace a research center that is totally externally funded and places no demands on the university.    Such centers provide resources, at least in terms of overhead, to pay for use of the brand on letterhead and brochures.  If all goes well, they hit a homerun; otherwise they quietly fold after the external resources are expended.

Universities tend to have two strategies.  For things that they view as mission critical, e.g., nanoscience and genomics, they will invest far beyond any possible returns – except bragging rights.  Other things have to earn their way onto the agenda, typically by paying returns far in excess of required investments.  This excess is used to further fund mission critical areas.

If your assignment is to run a university research center, here is some advice.  First, determine whether or not you are mission critical.  If you are receiving resources in excess of what you generate, chances are you are mission critical.  If you are, in effect, paying taxes on the resources you generate, you are a cash cow, at least as long as the cash lasts.

If you are mission critical, your success is assured – the university needs you to succeed and needs to trumpet your success.  If you are a cash cow, consider alternative futures.  A commercial spinoff might make sense.  Another possibility is to move the whole center to another university.   This might seem like being disloyal, but keep in mind that you have enjoyed little loyalty thus far.

While you are still a cash cow at your university of origin – where the center was founded – there are several tactics worth considering.  First, do your best to avoid taxes.  A primary mechanism to achieve this is to secure funds that allow no overhead charges.  Since you are not getting a share of overhead, why contribute to the pool?

Why would universities accept such stipulations?  Quite simply, they cannot walk away from money on the table.  Money received in this way makes you less of a cash cow.  However, you are not getting a share of the milk – or meat! – so why should your research center contribute?  If you are really good at this, you will find the university administration wanting to talk about how they can better support you.

When I was 12 or so, I came home from Charlie Boyd’s farm with a pigeon under my arm.  I proclaimed to my mother, “Charlie Boyd gave me a pigeon!”   My mother responded, “He didn’t give you a pigeon, he got rid of a pigeon.”  If you are directing a research center, especially one newly founded, you need to learn how to identify and avoid pigeons.

Pigeons, in the context of university research centers, are faculty members who are difficult to work with and/or consistently underperform.  Deans and department chairs often tend to recommend pigeons to research center leaders.  If you manage to transform their attitudes and performance, you have solved a problem for the dean or department head.  If not, it is now your problem.

One of the primary objectives of the leader of a research center is brand development.  You want the broad community to see your center as a prime time player in the areas of its research and teaching.  My experience is that the university will not help you with this.  Their marketing and communications staff members are oriented to serving the needs of the president, provost, et al.

Thus, you need to identify the constituencies with whom you want to communicate, develop the messages and associated packaging to communicate with these constituencies, and create the capabilities and opportunities to communicate. You will, of course, be the primary one to deliver these messages.  However, getting other faculty members involved with this messaging can contribute enormously to fostering a shared mental model of the center’s vision.

As soon as possible, you want to get to the point that you are not writing all proposals and leading all projects.  Mentoring faculty members, particularly junior faculty members, is the way to grow these competencies.  An important aspect of this is providing them opportunities to present their research to senior audiences from industry and government, not just academia.  Speaking skills, as well as writing skills, benefit from frequent opportunities to use them.

Finally, as the leader of a research center you should invest little time enhancing your resume and much time doing things that improve others’ resumes.  Your center needs to be vehicle for personal growth of faculty, staff, and students.  The outcomes from your center may include many articles, books, patents, etc., but the primary product of a university research center is the people who employ their knowledge and skills to address the needs of society, typically from a long-term perspective, but nonetheless as contributions to the common good.

Thoughts on Location

Does location matter?  It depends on what you are seeking.  If economic opportunity is your yardstick, here are some interesting statistics.

Greater New York City generated $1.5 trillion in GDP for 2014.  Greater Los Angeles provided $0.8 trillion; greater Chicago $0.6 trillion; greater Houston and greater Washington, DC $0.5 trillion each; and greater Dallas, San Francisco, Philadelphia, and Boston $0.4 trillion each.  The total US GDP for 2014 was $17 trillion.  New York City generated roughly 10% of this, and these nine metro areas generated over one third of the country’s GDP.

Most of the government research-funding agencies are in Washington, DC, as are many foundations.  A large percentage of research-funding foundations and potential Fortune 500 sponsors are in New York City. The top five homes of Fortune 500 companies include California (54), Texas (52), New York (47), Illinois (33), and New Jersey (28), accounting for almost half of the Fortune 500.  New York and New Jersey account for 16% of the Fortune 500.

High tech cities, ranked by numbers of jobs, are San Jose (Silicon Valley), Seattle, Boston, Washington, Los Angeles, Dallas, San Diego, Orange County, New York, and San Francisco.  Silicon Valley once dominated in IT related jobs but has been losing jobs as companies migrate.  The majority of aerospace and defense companies are on the West Coast – Arizona, California and Washington — although their headquarters have migrated to the east, mainly to Washington, DC, but also Chicago.

In the Sun Belt, Atlanta companies include AT&T Mobility, Coca-Cola, Delta Airlines, Home Depot, NCR, Newell-Rubbermaid, Southern Company, Turner, and UPS.  These companies are focused on transportation, supply chain and operations issues.  Dallas companies include Advance PCS, Dean Foods, ExxonMobil, Kimberly-Clark, Neiman Marcus, Southwest Airlines, and Texas Instruments, a quite diverse mix.  Houston companies include Phillips 66, Conoco Phillips, Sysco, Halliburton, Baker Hughes, and Marathon Oil, obviously reflecting a strong energy sector.  Charlotte is the second largest banking center after New York City.

Multiple healthcare providers are in all major cities. The top ten cities for healthcare employment, in rank order, are Houston, Philadelphia, Baltimore, Boston, Milwaukee, Denver, Fargo (ND), New York, Cleveland, and Norfolk.  Healthcare is the largest employer in Pittsburgh.  Seven of the 25 largest employers in New York City are healthcare providers.

The essential tradeoff is economic opportunity versus cost of living.  The Cost of Living Indices for each region’s major cities are shown below.  The average index nationally is set to 100.  A major contributor to high or low values is the cost of housing.

  • Northeast: New, York (Manhattan, 217; Brooklyn, 182; Queens, 159), Hoboken (183), Washington (140), Boston (133), and Philadelphia (127)
  • West Coast: San Francisco (164), San Jose (156), Orange, County (146), Los Angeles (136), San Diego (132), and Seattle (121)
  • Midwest: Chicago (117), Minneapolis (110), Denver (103), Salt Lake City (101), Kansas City (98), Cincinnati (94), Pittsburgh (92), and St. Louis (90)
  • Sun Belt: Miami (106), Phoenix (101), Raleigh (98), Atlanta (96), Charlotte (93), Houston (92), and Dallas (92).

Clearly, the large Sun Belt cities offer jobs and low costs of living, with a major contributor being significantly lower costs of housing.  The Northeast and West Coast have lots of job opportunities but are very expensive places to live.  The Midwest is closer to the Sun Belt in costs, but not in terms of job opportunities.

Pundits’ Performance

There is a wealth of self-proclaimed pundits providing pronouncements on sports, politics, the economy, and so on.  There seem to be unlimited numbers of Democrat and Republican strategists.  Some are wizened pros that have been through many campaigns, some successful and some less so.  Many are quite young.  Despite having seemingly no credentials, they are happy to make sweeping pronouncements about global warming, same-sex marriage, and tea party turmoil.

Editorial writers for major newspapers seem to be better informed and balanced, and are usually quite transparent about their liberal or conservative leanings.  They are usually clear about their opinions versus observations based on data.  My experience has been that print journalists are much more thought provoking that television or radio journalists.  Writing takes much more discipline than speaking.  Of course, reading also takes more discipline than listening.  Sound bites are much more likely to be misleading.

Sports pundits are rather different.  Many are former professional athletes or coaches.  So, they have reasonable credentials.  Their prognostications are readily evaluated by the outcomes of the sport they follow.  The successes of their predictions are tabulated and reported.  They tend to do a bit better than just flipping coins, but are seldom highly successful.  Nevertheless, fans seem to enjoy their banter and tune in regularly.

How are pundits judged?  Expecting their predictions to be correct is a tough yardstick.  We can assess whether or not sports pundits’ predictions are accurate.  However, it is difficult to evaluate the statement by the 28-year-old Republican strategist that global warming is a hoax and same-sex marriage will lead to the end of civilization.  It is equally difficult to judge the equally young Democratic strategist pronouncement that income inequality will likely lead to a revolt of the downtrodden.

It may be that people like pundits whose pronouncements agree with their positions and whose choices of positions and articulations are entertaining.  People are not looking for enlightenment.  They want to feel comfortable in their preconceived opinions and entertained in the process.  It is not about fact-finding journalism.  It is about intellectual comfort food with a few laughs thrown in for entertainment.

The Economics of Retirement

My last post addressed my frustration with a 60% taxation rate that left me wondering if my role was mainly to provide resources to be redistributed to other, undoubtedly needy, people who do not pay taxes.  The 40% that I get to spend barely covers my financial commitments.  So, how do I ever get ahead of the game and retire when I am 75 or 80 years old?

Many people are asking this question.  The number of highly educated older seniors delaying retirement has soared, resulting in an income tax windfall for the government that has helped fund the early retirement of less educated people caught by the Great Recession and unable to find employment.  Despite the recent recovery, such seniors continue to delay retirement.  What choices do they have?

One scenario is to simply die with their boots on, provide various life insurance proceeds, and accept the tax folks scarfing up their portion of the proceeds.  Another scenario is to make sure they end up poor.  Give away everything.  Leave themselves wards of the state.  Do their best to assure the state pays for hip, knee, kidney, and heart transplants.  Could be pretty expensive.

I can imagine this becoming a sport for baby boomers.  How much can you cost the system?  What percent of lifetime taxes paid can you recoup via medical expenses paid?  If you can exceed 100%, you get a free heart transplant or an evening with an aging Hollywood star.  If you identify a mechanism that others can use, you get an additional double hip replacement and an annual evening with aging Hollywood stars.

Of course, all of these whimsical ideas are avoiding the central issue.  We need the capable folks to provide the resources for the 50%+ of people who cannot be net contributors.   There is obviously a point at which the capable people will balk.  However, such people have demonstrated abilities to game the system in ways that minimize the number of capable earners who walk away from continued earning.  They find loopholes, which once closed, lead them to find new loopholes.

Underlying this dilemma are three compensating phenomena – people who are really capable, motivated to work very hard, and sufficiently insightful to identify opportunities for innovation – see Malcolm Gladwell’s Outliers.  These types of people change the world. Everyone else, in effect, lives off the consequences of these phenomena.

Well, it is not at all that simple.  If the masses of workers do not have the income needed to consume, markets will not have the scale to enable cars, airplanes, and smart phones.  Henry Ford identified this need a century ago when he doubled wages to $5 per day, although his primary motivation was to reduce the substantial employee turnover he was experiencing.

We need masses of people who are willing and able to consume.  Carnegie, Ford, Morgan, Rockefeller, and Vanderbilt depended on this.  Bezos, Brin, Gates, Jobs, Page, and Zuckerberg more recently have depended on people to consume.  Thus, income redistribution via taxes is essential to the economic growth of the country.  Our consumption-driven economy totally depends on people consuming – buying more and more stuff.  This, in turn, depends on people having incomes sufficient to enable the needed consumption.

What does this mean for the economics of retirement?  The success of my attempt to recoup my retirement investments lost to the real estate bubble has been diminished by the unexpected heavy taxation on my “homestretch” income.  In fact, I have to use retirement assets to pay the increased taxes, so the nest egg is decreasing rather than increasing.

In other countries, there is a substantial value added tax on consumption that provides a large percentage of the government’s income.  This tax on consumption is often called regressive, as it is indifferent to the income of the consumer.  The benefit to someone close to retirement is that you can choose to not consume, e.g., not buy a new car or engage in expensive travel.

Yet, this does not address the dilemma.  Income redistribution is essential to a civil society. Without redistribution, the impoverished inevitably revolt at the ballot box or in the streets. However, there is another solution — full employment and well-paying jobs. This may sound utopian, but it is not. See my earlier post “Five Million Jobs.”

Income Taxes

Over the past three years, my tax rate has increased to over 60% of my income.  This includes Federal and State Income Taxes, Social Security Taxes, Workmen’s Compensation, Medicare Tax, Sales Tax, and Property Taxes.  This tax rate, combined with the costs of living in an area where I earn a high enough income to pay over 60% taxes, has given me some pause.  The amount remaining after taxes, and high rents, provides for Ramen noodles and an occasional beer.

This post reviews various “theories” of taxation, starting in the late 19th century.  All of these theories recognize the difficulty of high rates of taxation decreasing the motivation of high earners to continue earning.  For example, at a 100% tax rate, the government could redistribute all income to meet its obligations.  In fact, incomes would no longer be individual citizens’ incomes; it all would be the government’s income.

Government could then provide citizens their daily Ramen allocation – probably no beer though.  People would work their 10-12 hour days, eagerly looking forward to their Ramen, and a bit of rest before the next day.  People could even work seven days per week.  Why not?  Such a scheme would provide the resources needed to redistribute income to the 50%+ low-income Americans who pay no income taxes.

I could see many of the “powers at be” being quite excited about this model.  The most capable people would be indentured to support the least capable.  This is not a new idea.  Many people have thought about this possibility over the past 100+ years.

Edgeworth (1897) discusses what he terms the pure theory of taxation. Written before the 1913 establishment of U.S. federal income tax, he focuses on taxes on the consumption of goods and commodities.  Invoking the principle of equal sacrifice, he assesses impacts of taxes on each stakeholder.  Equal sacrifice is defined as each taxpayer losing the same utility to the tax collector – in other words, the goal is equality of perceived pain for each taxpayer.

Ramsey (1927) continues this line of reasoning.  He is concerned with the following:  Given a bundle of goods and commodities, how to design the differing tax rates on each type of item to minimize loss of utility of those taxed.   He mathematically shows that “the taxes should be such as to diminish the production of all commodities in the proportion” (p. 54).  The key point here is that taxes on goods and commodities will diminish consumption of them.

Mirrlees (1971) explores the theory of optimal income taxation.  He presents a mathematically rigorous approach to determining optimal progressive income taxes such that taxes impose equal utility losses on everyone.  Individuals have a utility function for consumption (x) and time worked (y). An individual of ability n is paid ny for his or her work.  The government imposes an income tax percentage of c(ny) on this income.  The overall result is that a c(ny) function that is linear in rate progression is near optimal, unless “the supply of highly skilled labor is inelastic.”

Mirrlees suggests, however, that greater equality could be achieved by taxing people by ability to earn income, perhaps proportional to IQ, rather than actual income.  He argues that this would be “an effective method for offsetting the unmerited favors that some of us receive from our genes and family advantages.”  The difficulty that Mirrlees is trying to overcome with this idea is that high tax rates are likely to discourage high ability people from maximizing their earnings, thereby undercutting the tax revenues that were expected from them.  Taxing by IQ, in theory at least, implies that people would have to pay taxes on what they could earn even if they chose not to earn these amounts.  It is, of course, very difficult to imagine this ever being implemented – but is it?

More recently, Feldstein (1982) and Summers (1981) address the impacts of tax rates and inflation on investments. Feldstein argues that, “Inflation creates fictitious income for the government to tax” (p. 154).  Taxes are paid on inflated returns while investors only gain real returns.  In this way, a positive real return can become a net loss once taxes are deducted.

Summers (1981) discusses trends in business investments versus those made to satisfy regulations, e.g., pollution control.  The investment rate in the 1975-1979 period was 3%, the lowest in three decades.   Total taxes (on corporate profits, dividends, and capital returns) declined from 71.5% in 1953 to 52.7% in 1979. Inflation soared, “In a tax-less world, firms invest as long as each dollar spent purchasing capital raises the market value of the firm by more than one dollar” (p. 77).  However, as Feldstein notes, high inflation rates undermine this possibility.

Much more recently, Mankiw, Weinzierl, and Yagan (2009) discuss optimal taxation in theory and practice. They argue that, “The social planner has to make sure the tax system provides sufficient incentive for high-ability taxpayers to keep producing at the high levels that correspond to their ability, even though the social planner would like to target this group with higher taxes.”  They report a range of lessons from their review: 1) optimal marginal tax rate schedules depend on the distribution of ability, 2) the optimal extent of redistribution rises with wage inequality and 3) optimal taxes should depend on personal characteristics as well as income.

Thomas Piketty has focused on income inequality and capital taxation (Piketty & Saez, 2012; Piketty, 2014), with his 2014 book receiving an enormous amount of attention.  They focus on “socially-optimal capital taxation,” on both savings and bequests, to deal with the problem of a “large concentration of inherited capital ownership.”  They assert that, “Inequality permanently arises from two dimensions: differences in labor income due to differences in ability, and differences in inheritance due to differences in parental tastes for bequests and parental resources.”

They show that the “socially optimal” tax rate on inheritances, TB, can range from 40-60% to 70-80% when bequests are highly likely.  Increasing TB allows decreasing the tax rate for labor, TL.  For a 20% bequest probability, TB = 73% and TL = 22%.  Their model also includes a tax rate for capital gains, TK.  They consider how people shift income from monies subject to TL versus TK.  They find that the optimal TK increases with uncertainty about future returns due to TB.  They also consider a consumption tax, TC.  This tax can enable TL < 0, which implies a labor subsidy for low-income people.

Of course, whatever schemes are proposed for TB, TL, TK and TC, high ability people will figure out how to take advantage of these schemes, effectively thwarting income redistribution.  People with high incomes and/or wealth, will have the resources to hire high ability people to figure this out for them.  Thus, any scheme is subject to “gaming” and adaptation will inevitably be necessary.

So, is my frustration with my 60% tax rate justified?  I clearly am doing my part to help with income inequality.  Further, I am still working; so the tax rate has not reached the extent to which I have given up trying.  Of course, I am keenly aware of my financial commitments.  The 40% that I still get to spend covers many things.  There is a point, however, where living in a high cost of living area to earn a highly taxed income is no longer worth it.

I have a vague sense that the taxation system understands this, if only implicitly.  The intention is to squeeze as much revenue as possible from highly capable earners to just before they are no longer willing or capable.   Upon retirement, the taxation system will drain taxable resources from former earners via one mechanism or another, e.g., required Medicare charges linked to income.  It almost seems that the system will, if possible, create penniless citizens just as they draw their last breadths in nursing homes, having no assets and supported by Medicaid.

There are various mechanisms to fend off this future.  Trusts can be formed and foundations can play a role.  However, perhaps with the exceptions of the super rich, the system is designed to suck resources from capable people who earned them and redistribute these resources to people who need them.  Interestingly, this redistribution leads to a subset of these under-resourced people becoming enormously successful and then being subject to the same dynamic.

The redistribution of resources keeps society from rebelling.  High ability folks – creative and crafty – understand how to prosper.  The social and political system knows how to balance idea generation, venture formation and allocation of resources, while also redistributing income to support those who, for one reason or another, cannot compete.  Those losing income, like me, gripe and complain but, as the long history discussed above illustrates, redistribution is a necessity of modern society.  The mechanisms and magnitudes are debatable, but the phenomenon is not.

References

Edgeworth, F.Y. (1897). The pure theory of taxation. The Economic Journal, 7 (25), 46-70.

Feldstein, M. (1982). Inflation, capital taxation and monetary policy. In R.E. Hall, Ed., Inflation: Causes and Effects (pp. 153-168). Chicago: University of Chicago Press.

Mankiw, N. G., Weinzierl, M., & Yagan, D. (2009). Optimal taxation in theory and practice. Journal of Economic Perspectives, 23 (4), 147-74.

Mirrlees, J.A. (1971). An exploration of the theory of optimal income taxation. The Review of Economic Studies, 38 (2), 175-208.

Piketty, T. (2014). Capital in the Twenty-First Century. Cambridge, MA: Belknap Press.

Piketty, T., & Saez, E. (2012). A Theory of Optimal Capital Taxation. Cambridge, MA: National Bureau of Economic Research, Working Paper 17989.

Ramsey, F.P. (1927). A contribution to the theory of taxation. The Economic Journal, 37 (145), 47-61.

Summers, L.H. (1981). Taxation and corporate investment: A q-theory approach. Brookings Papers on Economic Activity, 1, 67-140.