The school officials I saw, especially the head of the campus psychological services, seemed to me endearing losers. But endearing is too strong. I mean "not obviously and vividly offensive." The school officials who gave all the highly competent, almost smooth and practiced news conferences seemed to me like white, bearded people who were educated in softness. Cho was "troubled"; he clearly had "issues"; it would have been good if someone had "reached out"; it's too bad America doesn't have better "support services." They don't use direct, clear words, because if they're blunt, they're implicated.

The literally white-bearded academic who was head of the campus counseling center was on Paula Zahn Wednesday night suggesting the utter incompetence of officials to stop a man who had stalked two women, set a fire in his room, written morbid and violent plays and poems, been expelled from one class, and been declared by a judge to be "mentally ill" was due to the lack of a government "safety net." In a news conference, he decried inadequate "funding for mental health services in the United States." Way to take responsibility. Way to show the kids how to dodge.

From the movie review “Casualties of China’s Transformed Economy” by Jeannette Catsoulis, in today’s Times:

Bracketed by stunning long shots taken from the front of a moving freight train, Wang Bing’s epic, three-part documentary, “Tie Xi Qu: West of Tracks,” is an astonishingly intimate record of China’s painful transition from state-run industry to a free market. Filming between 1999 and 2001, Mr. Wang and his sound engineer, Lin Xudong, painstakingly document the death throes of the Tie Xi industrial district in the city of Shenyang, in northeast China, a once-vibrant symbol of a thriving socialist economy.

How foolish of China to abandon its “thriving socialist economy” of perpetual mass starvation for a rapidly progressing market economy of soaring skyscrapers and rising living standards for hundreds of millions.

Update... Friend David Duval adds,

Digging deeper into the movie review that George Reisman so aptly tears apart, "astonishing" fails to capture the oxymoronic nature of what Jeannette Catsoulis wrote quite clearly in her review of "Tie Xi Qu: West Of Tracks."

She writes, "...this profoundly empathetic and humanist work bears witness to a vanished way of life and the real cost of progress" right after these descriptions of the "thriving socialist economy":

* "...we enter the decaying, state-owned factories where the few remaining workers toil in an inferno of smelting furnaces and particulate matter so dense they can barely see."

* "...catching the smoke from their cigarettes as it mingles with furnace gases and countless unidentifiable emissions."

* "Filled with obsolete equipment and stagnating pools of toxic waste, these hazardous spaces of the factory floor project a forlorn beauty as poignant as the lives they shelter."

Forlorn beauty??? That reveals more about the beholder than she and her fellow NY Times writers might wish us ever to know.

One more observation: Isn't Reisman's summary simply delicious?? "Such is the intellectual and moral state of The New York Times, a veritable cesspool of wrong and vicious ideas serving day in and day out to poison the minds of its readers against the capitalist economic system and economic freedom." That deserves being committed to memory.

If you take a look at Barry Ritholtz's site, you will find that he has listed a number of his "Favorite Posts" on the righthand side.

One interesting one that caught my eye was "Market Flashes Caution" from January 22, 2004.

Barry was cautioning everyone of a coming bear market, suggesting the market was probably at it's top, and suggests to readers to "let your shorts ride."

I just did a back-of-the-envelope calculation, and found that a super-simple S&P 500 index portfolio would have returned something like 36% since this "Best of Bear-y" post. And I'm not even counting against him the massive losses one would have sustained the last three years by letting those shorts ride. And this is one of his FAVORITE POSTS, by his own description.

I have respect for people who approach the markets with clear eyes and who conclude not only that markets can go up, but they can also go down. But in Ritholtz's case, the man is clearly a Johnny-one-note, fixated on Gloom-and-Doom for Gloom-and-Doom's sake.

As you can now see, "Dow 6800 by December 2006" was not his only stupid call.

Ralph Gomory...is a gentle-spoken technologist, trained as a mathematician and largely apolitical. He does not set out to overthrow the establishment but to correct its deeper fallacies... Now president of the Alfred P. Sloan Foundation, he knew something was missing in the "pure trade theory" taught by economists. If free trade is a win-win proposition, Gomory asked himself, then why did America keep losing?

Update... Reader Andrew Terhune notes,

And you don't even get into his coercive prescriptions. Trade would be balanced by fiat - nothing comes in unless something goes out. To say nothing about the infringement of our liberties, specifically the liberty to spend our money as we choose regardless of the origin of the product of service.

In any case, Gomory is fighting the last war. With more and more of the economy based on services and with the internet making it easier and easier to off shore those services, any trade wall he tries to erect will leak like a sieve.

William Greider begins his article "The Establishment Rethinks Globalization" with mention of a certain new "revised understanding" of global trade that promises to do to economics what Luther did to the Roman Catholic Church. Naturally, I was intrigued, and I read on with great anticipation. Below I present the crux of Greider's description of this (ahem) newly discovered problem with unrestricted global trade:

"The persistent offshoring of domestic production is leading to a perverse consequence: The United States finds itself paying more for imports. The production that originally moved offshore to get low-wage labor and cheaper goods is now claiming a larger and larger share of national income, as the growing trade deficits literally subtract from US domestic growth. "

As I read this, the anticipation gripping my soul eased. This was the great new finding that would revolutionize economics?? Stuff and nonsense! This was nothing but mercantilist doctrine translated from old English to new. My mind immediately went to a passage from another author who was likewise opposed to trade freedom. Richard Cantillon, a mercantilist, published the following in 1730:

"The Manufactures of the Indies […] are at a very low price in England, which would pay for them with the thirtieth part of her articles and manufactures if the Indians would buy them. But they are not so foolish as to pay extravagant prices for our work while work is done better and infinitely cheaper in their own country. So they sell us their Manufactures only for ready cash, which we carry to them annually to increase their wealth and diminish our own. The Indian manufactures consumed in Europe only diminish our money and the work of our own Manufactures."

As you can see from the above quote, Cantillon in 1730 brought up the exact same alleged "problems" that Greider brings up today. The substance of the argument has not changed at all. The only change is that certain terms have been modernized. First, what Cantillon described in the first two of his sentences above, Greider instead simply calls "offshoring". Second, whereas Cantillon bemoaned the "dimish[ing] of our money", Greider bewails "a larger and larger share of national income" going to foreigners. Finally, what Cantillon called the "diminish[ing]…of our own Manufactures", Greider calls subtraction from our domestic growth. (In addition, Cantillon and Greider both complain about the same country: India)

A Paul Johnson quote comes to mind: "The study of history is a powerful antidote to contemporary arrogance. It is humbling to discover how many of our glib assumptions, which seem to us novel and plausible, have been tested before, not once but many times and in innumerable guises; and discovered to be, at great human cost, wholly false."

This alleged "revised understanding" of global trade is nothing more than a regurgitation of ancient Mercantilist fallacies. Who's surprised?

"The move from Dow 8800 to 6800 won't be a rational, calmly contemplated affair. No one will be quietly wondering about option-expensing or multiple compression. Instead, it will be a severe overreaction to some external event."

...like the election of a president who has Barry Ritholtz as an economic advisor.

Suppose one guy makes nothing in his first year because he is building a business and then the hard work pays off and in year 2 he makes $200,000. The second guy isn't much of a risk taker and he makes $100,000 both years. The entrepreneur will have his 200K taxed at a higher rate. Talk about unfair!

Guy A, the entrepreneur, only pays more in taxes if Guy B is not self-employed, and even then there is a "but".

Guy A makes $200K in his second year. He is self-employed. Unless he cleverly uses Sub S rules, and using $200K as taxable income(and 2006 tax rates), he will owe 52591.50 in federal taxes, 5800 in medicare, and 11780 in social security(using 95K income cap), for a total of $70,171.50.

Guy B, also self-employed but risk-averse, makes 100k two years running. Using 2006 rates for convenience, his yearly totals are 22331.5, 2900, and 11780. Double those for the two years, and the total is $74,022.

If Guy B is not self-employed, hence "not taking a risk", his total is reduced by $14,680 by the fiction that the cost goes to his employer not him. In that case, Guy A pays about 10K more than B, obout 17%.

This was a quick stab, so I am likely wrong somewhere.

Nonetheless, this does not really diminish the fact that Guy A's risk is not amply rewarded. And, it points out the pernicious effect of the base 15.3% tax rate on the self-employed.

I think the part that Mr. Madren ignores is that Guy A has paid those taxes in ONE YEAR, while Guy B pays over TWO YEARS.

More to the point, in year Three, if we can assume the same $200,000 for Guy A and $100,000 for Guy B, Guy A is again charged almost twice as much by the Feds as Guy B.

Important distinction, I think, especially when you take into account that small business owners could use more cash in their pockets to keep investing in their businesses.

Graffiti filled walls within a hundred yards of the seat of the country’s Congress. The city’s public parks, presented as an attraction to tourists, were overgrown with weeds; the wrought-iron fences they contained were in a state of collapse. Building after building, in neighborhood after neighborhood, was in a state disrepair. Often, only a burnt-out concrete shell was left. Hardly anything, anywhere, looked new. Much of the city was reminiscent of the South Bronx, an area devastated by more than two generations of rent controls. Only one, small area of the city, near the River Plate, appeared to be at all prosperous.

Uruguay no longer has trains. “They don’t work anymore,” our tour-guide announced. “Uruguay has been resting for the last 50 years and has made no progress in that time,” she said. The population of Montevideo and of the country as a whole are both declining. A large proportion of university graduates in particular leave, in search of better opportunities elsewhere.

From what I saw, if there are another 50 years of such “rest,” there may be nothing much left of Montevideo beyond an impoverished village.

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.

The fifth would pay $1.

The sixth would pay $3.

The seventh would pay $7.

The eighth would pay $12.

The ninth would pay $18.

The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men --- the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer.So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:

The fifth man, like the first four, now paid nothing (100% savings).

The sixth now paid $2 instead of $3 (33%savings).

The seventh now pay $5 instead of $7 (28%savings).

The eighth now paid $9 instead of $12 (25% savings).

The ninth now paid $14 instead of $18 (22% savings).

The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too.

It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.

From CNBC's "Kudlow & Company" last night, a transcript courtesy of Larry's excellent blog. But I like this picture better.

KUDLOW: All right. Don Luskin, let me go to you. I'm looking at some of the distributional aspects of our current tax code. The top 1 percent now pays 37 percent of income taxes. Back in 1980, they only paid 19 percent. The top 5 percent pays 57 percent. That's up from--that's up from 37 percent back in 1980. And if you make over a million bucks, 181,000 people, they pay 19 percent of the income tax. Your thoughts, Don Luskin.

Mr. LUSKIN (Trend Macro Chief Investment Officer): Well, I'd like to borrow a word from Jared Bernstein, unfair. I'd like to know what's fair about getting one class of people to pay all the bills for another class of people, be they rich or poor. I'm sick and tired of hearing the word fairness used in this discriminatory way. It's a one-way use of a word, where it's fair if the rich pay more and it's unfair if the poor pay their fair share.

Mr. BERNSTEIN (Economic Policy Institute Senior Economist): You're breaking my heart here. For the rich...

Mr. LUSKIN: And I'm tired of it.

Mr. BERNSTEIN: ...you're breaking my heart here, Don. I mean, corporate profits are at 56-year high. Who here feels sorry for rich people?

KUDLOW: Don?

Mr. LUSKIN: No one is feeling sorry for anybody, Jared. I'm talking about fairness. I'm talking about equality. I'm talking about egalitarianism...

Mr. BERNSTEIN: So you want--so you want everybody to pay...

Mr. LUSKIN: ...the kind of thing that people like you spend your whole careers raving about. All I know is that it doesn't make any sense for a taxi driver who is willing to work two shifts to pay a higher tax rate than a lazy taxi driver who only works one shift. Now, you explain to me what is fair about a tax code that punishes enterprise.

Mr. BERNSTEIN: Well, you want to talk about fairness, let's talk about the Bush tax cuts. The reduction in tax liability...

Mr. LUSKIN: Well, why don't you answer my question first before we talk about the Bush tax cuts?

Mr. BERNSTEIN: The reduction--I think I am answering your question.

Mr. LUSKIN: What about those taxi drivers?

Mr. BERNSTEIN: I am answering your question. The reduction...

Mr. LUSKIN: Why is it fair for a hard-working taxi driving to pay a higher tax rate than a lazy taxi driver?

Mr. BERNSTEIN: Well...

Mr. LUSKIN: Answer that question.

Mr. BERNSTEIN: Certainly that's not fair. The...

Mr. LUSKIN: Thank you.

You know what's really unfair about the mindless fairness debate? Nobody ever defines the term "fair."

I would like the people constantly prattling about the "unfair" income distribution to provide a definition of fairness. Next time you share the stage with Bernstein, try to get him to give a *precise* and explicit definition of fairness that society can use as the basis for making policy. These people want policies that take money away from one group and give it to another group. When is doing that fair, and when is it unfair? Let's hear the criteria, not just a bunch of emotional mush or, as is usually the case, no justification at all. We need a definition so we can judge what is fair and what isn't. So far, I have seen no such definition. I suspect I'll never see one because I think "fairness" as used by these people is simply unbridled communism, in which anybody who does anything more than average is robbed to pay those who do less than average. "From each according to his ability, to each according to his needs," you know. If I am mistaken in my view of what the liberals mean by fairness, let them give me a proper definition.

Oh, but I forgot. This is all beside the point. We should be talking about the Bush tax cuts! You want a definition of unfair? The Bush tax cuts are it! Yadda, yadda, evade the issue, yadda, yadda.

As the USA Today article pointed out, small business is the unseen engine that drives America's economy ahead of the world. As CFO of a small contracting S corp. here in San Diego CA, (and an avid fan of your blog, Ayn Rand, Miton Friedman and Ronald Reagan), I can relate to the frustrations that you and many of your readers have about the propaganda, mistruths, and outright lies that are told on a daily basis about this economy. Since 2003 I have increased our revenues for our small family-owned business from roughly $300,000 to a forecasted gross in 2007 of $600,000. I have done this, from real estate boom to the now much-touted bust by switching from residential type contracts to more upper-end residential and commercial contracts. If I had taken the initiative of the Barry Ritholtz's of the world, I would have tucked my tail between my legs in late 2005 when it seemed that residential construction was peaking, and then given up and clamoured for a Democratic candidate to make it all right. Keep up the Lord's Work on the blog and your media presence.

In response, Barry makes a classic mistake -- he really should go back to media training 101. Instead of just manfully saying, "Yeah, I was really wrong about that one," he tries to weave a preposterous story about how he really said the market would go higher. He did indeed say the market would go higher during the early part of 2006, but that doesn't change the fact that Dow 6800 was his ultimate target for 2006. He explicitly wrote about it in TheStreet.com, and he supplied that forecast to BusinessWeek as part of its survey of economists. From the TSC article:

I'll detail how to get to my 2006 target of Dow 6800 -- the lowest (by far) in the Business Week survey -- and lay out a scenario for how the S&P 500 could take a 30% haircut this year.

...I also forecast Dow 11,800 by mid-year...Why the bull call before the fall? Because that's how market tops get made...

...All it will take will be a modest earnings slowdown, and the Dow slips below 10,000. That happens, and apprehension levels rise in earnest. Dip-buyers who bought stocks 1,000 points higher are upside-down.

...If breaking 10,000 will make traders nervous, below 9000 the fear levels will be palpable. At that point, any one of our laundry list of negative catalysts might come into play. In my war-gamed scenarios, the dollar doesn't have to go into crisis, and the avian pandemic need not kill millions; instead, the investing public need only become alarmed that something nasty might occur to take fear levels up toward panic.

The move from Dow 8800 to 6800 won't be a rational, calmly contemplated affair. No one will be quietly wondering about option-expensing or multiple compression. Instead, it will be a severe overreaction to some external event.

Posted by Donald L. Luskin at 7:33 AM | link