Month: May 2014

Reality Shows, Market Forces, and Tolerance

by Alex Merced

I am admittedly of pretentious cultural tastes enjoying television shows with complex thought provoking writing and production values and enjoying complex and unique musical genres. Although, while my personal aesthetic often finds me raising my nose at mainstream popular culture, there is beauty in its role in the evolution of societies values and its interplay with the laws of economic forces. In particular I’m referring to my belief that the growing proliferation of reality shows has had a role to play in what seems a rapidly increasing proliferation of tolerance of groups and individuals of all types.

The Economics

First of all, the growth in reality tv is a story of economics and scarcity. While the profit margins of television shrank as more alternatives for entertainment came to existence also diluting the supply of prime advertising space driving the cost of ad space down, there was demand to create low cost programming to increase the profit margin on shrinking ad revenue. With the success of shows like The Real World, Survivor, and Big Brother it became clear reality television would fill this gap.

The Tolerance

This easy and cheap to produce culture created a rush of finding subjects that would capture the audience in this genre saturated with programming. The result is that may channels sought to display groups and individuals that many would have a  curiosity about such as polygamist, gypsies, drag queens, and more. So while these shows sensationalize and sometimes can be seen as “exploiting” (how I so dislike that word) these groups and individuals for profit, the end result often shows the humanity in these diverse groups of people which in my opinion led sometimes initial curiosity of the audience to turn into empathy and tolerance as they interact with the diverse world around them.

In short, growing scarcity led to decisions for ones own benefit that in my opinion had great social externalities. Yes, the market works, and it works well.

Why Taxing Wealth is a bad idea?

by Alex Merced

In his new book, “Capital in the 21st Century“, Piketty advocates for a global tax on wealth as a way to curb growing income inequality. Of course, as a libertarian you can probably guess I think this is a bad idea but for good reason. I have discussed income inequality in previous articles I’ve written, and disagree with Piketty that the correlation between the return on capital and income inequality means the capital growth is cause of the inequality (thus taxing it the cure). Instead, I believe my other article on how monetary policy and inflation increase income inequality not only explains the correlation (inflation increases returns to capital and decreases return on wages) but also just makes more sense in explaining the trends discussed by Piketty.

Although in this article I’m less concerned with what is the true cause and cure for income inequality, but with how bad a solution a global tax on wealth would be. Taxing wealth would not only have the effect of reducing and confiscating wealth which of course is abhorrent from a libertarian perspective, but it will also make capital gravitate to more risky investments than they otherwise would, destabilizing the capital structure of the economy.

So why would higher taxes mean riskier investments?

From an investors point of view, you are generally not just looking for a high % return but generally a return after you adjust for inflation and taxes. The higher the taxes and the higher the rate of inflation the higher return needed to survive both.

For example:

Let’s say you have a 10% (which is pretty good) with a tax rate of 35% and inflation rate of 3%

After taxes you will have a 7.5% return (10 – 35%)

Adjust that for 3% inflation (7.5 – 3)

your at a 4.5% return (and this ignores state and other taxes, also ignoring any issues in measuring inflation)

The point being is that as the hazards of inflation and taxes build up, one must seek more return and the name of the game is “more risk, more reward” meaning that higher returns will be found in increasingly risky investments.

Why do riskier investments return more?

Imagine a world where investments of all levels of risk gave you a 10% return, which one would you choose to put your money in?

If you answered the safest, that would be quite rational and would be what many others would do as well. The result is, that everyone wanting the safest investment will bid up the price which in turn reduces the return on investment (your giving up more for the same thing) and the return will continue to go down until the return goes so low it’s not worth it to investors to bid it any higher.

These investors would then do the same with the next safest investment, etc. By the time you start getting to the riskier investments there will be less potential buyers so they won’t be bid as high, and when you get the riskiest of investments they may be bid down (because maybe 10% return is not worth the risk) so a lower price would give you a higher return (giving up less for the same thing).

Bottom line, investments are generally priced heavily based on risk and reward. So more taxes and inflation will just lead to an increased demand for risk, which at some point will create a scenario that bad investments may outweigh good investments and growth turn into a slump.