VT or VTI for Stock Allocation?

[AdamA]

I am skeptical of a vastly diminished government for that reason.  I find that too many resources going to support the few is in-and-of itself a misallocation of resources.

I agree, Moda.  To me, this is the paradox of this Libertarianesque thinking that is becoming more and more popular these days. 

It's easy to take for granted how much protection our government gives us.  If it were to "diminish" (at least in certain ways) I'm not sure that it would be the utopia here that some think.

This is not to say that our government hasn't perhaps gotten excessively large, just that it's kind of an imperfect balancing act.

[moda0306]

Yeah Adam... Government can misallocate resources probably more easily than any other entity hands down, so naturally this happens all over the place.  I see this as a flaw of an apathetic and/or uneducated public... which will lead to just as many poor private-sector decisions.  I may not trust the future of SS and medicare, but I also don't trust:

- 90% of car salesmen
- 90% of financial advisors
- 90% of insurance salesman
- 90% of realtors
- 70% of auto repair shops
- 80% of airlines
- 50% of doctors

Yes, an educated consumer should dive in and weed out the bs in these industries, but the fact is people don't because they aren't educated, don't have the time, or it's just simply too difficult.  I can honestly say I would NOT be able to properly weed through and educatedly bargain a health insurance arrangement.  Without safety nets most people would still fall victim to all the market noise out there.  The PP reinforces this to some degree.  I think most of the private sector is trying to sell you snake oil you don't need, and many would agree, but then they act like any form of social insurance or minimum need transfer of wealth is absolute blasphemy (ok, getting a little straw-man going here).

[MediumTex]

I like the idea of state and local governments shouldering a lot more public functions, just as the Constitution prescribed.

[moda0306]

MT,

I too like that idea... I wonder how this would function in the real world, though.  Would all the people with enough wealth & market influence just move into Plutoville where there's no social insurance of any kind?  It's a little easier to vote with your feet now than in 1776... not saying that it's a bad thing or putting the idea down... but as always I like to think through the logical conclusion of certain ideas.

[MediumTex]

MT,

I too like that idea... I wonder how this would function in the real world, though.  Would all the people with enough wealth & market influence just move into Plutoville where there's no social insurance of any kind?  It's a little easier to vote with your feet now than in 1776... not saying that it's a bad thing or putting the idea down... but as always I like to think through the logical conclusion of certain ideas.

This has actually been happening for years in Texas.

Look at all the companies that have moved their headquarters to Texas.

Low taxes, low cost of living and nice weather are powerful draws.

[moda0306]

One additional thing... I tend to take the "misallocation of resources" argument to what most people would argue are proper government functions.  Pretend for a second that our military actually practiced DEFENSE and not occupation... even then, having an active police force and military is redistributing from those that are properly equipped to defend themselves to those that aren't, and thereby creating a "moral crisis" of "I won't own a gun and take proper precautions."

I'd rather have police and a military, own 1 gun, and call my bets hedged at that point.

Another item, roads.  The government's slicing and dicing of communities into convenient organisms for transportation may be seen by some to be a trampling of their rights and a completely arbitrary organization of private property that is a misallocation of concrete, land, etc.  No market discipline was used in deciding when roads are fixed or how they're organized, only "arbitrary central planning."  But I'd argue that after looking at some of the creative efforts to create more efficient intersections (roundabouts) and freeway interchanges (there's a massive new one that's supposed to decrease congestion but looks like a maze and probably involves a learning curve) that it's worth the cost of a government monopoly in roads and the misallocations of resources that may occur to have a standard transportation system not subject to different tolls, widths, weight tolerances, and awkward transitions (not to mention market manipulation) that would accompany a privately run road system.

I'm not trying to patronize you guys or anything and say that military = social engineering.  Just that it may help to try to look at things from outside the prism that government MUST be somehow effing up the allocation of resources and more importantly that a privately run system would lead to a better result.

[Lone Wolf]

I like the idea of state and local governments shouldering a lot more public functions, just as the Constitution prescribed.

Precisely right.  In response to the question of how small government should get, Harry Browne answered, "I want a government small enough to fit inside the Constitution."

The most successful systems are robust and flexible.  We have only one federal government.  If we want maximum flexibility, this component of our government should be as small as possible.  The more "features" that are glommed on to it trying to meet every need of every person in a vast nation, the more complex it gets and the harder it becomes to predict the side effects of such interactions.  In the software development world, this anti-pattern is so common that it has a name: the Big Ball of Mud.

One day you wake up with a system that is so complex that even though you know it is filled with waste and garbage, you're too afraid to change it because you don't know what will happen.

The Framers foresaw this problem, specifically enumerating a very limited set of governmental functions.  The 10th Amendment specifically insists that everything else was reserved to the states or to the people.  Interestingly, when Madison proposed it, many thought that it was so obvious that it ought to be unnecessary.  (They hadn't considered how inconvenient politicians in the 20th century would find this design feature of the Constitution.)

It's fascinating to read these arguments being played out in the Federalist Papers.  These men really knew how to design a system of government.  We as a country completely lucked out in the "Founding Fathers" lottery.

I see this as a flaw of an apathetic and/or uneducated public... which will lead to just as many poor private-sector decisions.  I may not trust the future of SS and medicare, but I also don't trust:

- 90% of car salesmen

You don't need to fear the used car salesman.  He can't use force on you or confiscate your wealth.  Just walk away from him.  The government exists to protect you from force and fraud.  The rest is down to who you choose to associate with.

[moda0306]

MT,

I see that.  I wonder if you eliminate SS, Medicare, and welfare and hand it 100% to states & cities how much more instantaneous the effect would be.  Do you really think Texas or their best suburbs would take on social insurance of that degree?

I think our country would dissolve into some very nice, wonderful free-market communities that the poor can't afford to live in with great private schools and everyone saving for retirement properly, and in contrast absolute cesspools (think Detroit x10) where the free-market is having the opposite effect, and the desperation that was supposed to get people to make themselves better people is actually making them shallower, weaker, and greedier.  

[moda0306]

LW,

My point about the marketeers is that people NEED certain products from our society, and when desperation and poor regulation grips business and individuals the fine print and half-truths come out in spades, and consumers are left with the choice of either not participating in the market (kind of difficult in many of the areas mentioned) or trying to determine the best businesses in the market and properly weigh their options.  The fact is, if I want to be able to get anywhere efficiently, I DO have to trust some salesman at some point, whether an individual or car-lot.  I may be protected by fraud, but am I protected from omission?  More importantly, it's not so much a call to individual regulation of those markets as a sign that the private sector is SO full of lies, half-truths, fine print, legalese, and sales-pitches that it could hardly be argued that a system largely based on transactions within that market is going to be a "proper allocation of resources."

[murphy_p_t]

I am skeptical of a vastly diminished government for that reason.  I find that too many resources going to support the few is in-and-of itself a misallocation of resources.

I agree, Moda.  To me, this is the paradox of this Libertarianesque thinking that is becoming more and more popular these days. 

It's easy to take for granted how much protection our government gives us.  If it were to "diminish" (at least in certain ways) I'm not sure that it would be the utopia here that some think.

Adam,

I'm curious...what gov't protection are you grateful for?

Ironically, It seems to me that the examples I cited above largely benefit the plutocrats aka too-big-to-fails. For example, attempting to prop up the housing market helps builders, bankers, real estate agents to the detriment of renters who would like to buy a house @ a reasonable price. The orig manipulation is also to be condemned, which led to the bubble in the first place (Greenspan keeping rates so low, etc)

Another example is Obamacare...designed to greatly increase the market size available to the insurance companies thru gov't mandate.

[moda0306]

Murphy,

Eventually a benefit paid to someone (even direct poor-person-welfare (as opposed to corporate)) is going to end up in the hands of a corporation.  That doesn't mean that every government dollar spent on welfare is in effect a distribution of wealth from the middle-class to the Plutocrats.

While certain government policies definitely help the Plutocracy, I don't believe that the market is self-balancing in that the removal of things like medicare, medicaid, welfare, SS, universal education, antitrust laws and Obamacare is going to result in a flatter distribution of wealth and income.  I think the effect would be very much in the opposite direction, despite any flaws in the individual programs mentioned.

[Lone Wolf]

Yes, an educated consumer should dive in and weed out the bs in these industries, but the fact is people don't because they aren't educated, don't have the time, or it's just simply too difficult.  I can honestly say I would NOT be able to properly weed through and educatedly bargain a health insurance arrangement.

Don't think too much about what it takes to make a "perfect" decision.  It won't happen and can't happen in a fluid world.

For example, I know jack about cars.  Yet still, somehow even an ignoramus like me can find a good deal on a car with just a little research.

The pricing system holds incredible power to perform much of this work for you.  No central planner will understand the effect that a surplus of leather in one part of the world has on the price of chaps in my corner boutique, yet the pricing system fluidly and reliably transmits this tiny nugget of information around the entire planet.  If you've never read I, Pencil, it's a great illustration of how prices collate information in ways that planners never could.  It's an incredible thing.

military is redistributing from those that are properly equipped to defend themselves to those that aren't

The military is very much a proper function of government, prescribed in the Constitution.  It's a completely legitimate and completely necessary extension of our natural right of self-defense.

Police, on the other hand, are a function of local government.  I recommend living in an area with the level of police protection that you approve of.  I also recommend having a backup plan in case they are unable to protect you.

[moda0306]

A car is one thing, but insurance & investing ones wealth is another, is it not?    Further, if we privatize our schools as well, what's the mechanism for maintaining proper consumer skepticism in transactions when the very entities educating our children are products of a private sector that they are to be effective judges of.

I have a feeling that our public-sector schools do a better job of instilling us with some skepticism of government than a private-based system would be of instilling us with the proper consumer/contract skills necessary to navigate as young adults.

I guess I simply don't see these market forces working the way you think they will.

One last thing, as much respect as I have for the founders (this isn't simply lip service... I have am dumbfounded by their wisdom, courage and selflessness) I wonder if the size and scope of government would have looked a bit different if non-white, non-male, non-landowners had more political say during that time.  I mean we almost literally allowed the Plutocracy plus some mid-income individuals have the initial say in what our government should do... Maybe there would have been an 11th amendment for a system of social insurance guaranteed to every individual in the country.

[dualstow]

My wife is Chinese and would cringe at this discussion.  :D It's interesting for me to hear her perspective, especially since I lived with a Taiwanese woman for 13 years beforehand. I've lived in Taiwan and been to the mainland.
I have no idea where China's economy is going, but I am quite comfortable with having almost all of my pp stock allocation in VTI. (I've got a small piece of Vanguard's international stock index).

[moda0306]

Why would she cringe at the discussion?

I wasn't suggesting a full-blown communist managed economy is ideal, and not even that the government's reach is currently appropriate... simply that there are questions to ask regarding social insurance and how unfettered markets may or may not work for a sustained middle class.

[Lone Wolf]

I have a feeling that our public-sector schools do a better job of instilling us with some skepticism of government than a private-based system would be of instilling us with the proper consumer/contract skills necessary to navigate as young adults.

I don't follow this line of reasoning.  Private schools (and home schoolers) already exist, so there's no need to speculate.  I don't see any evidence that these institutions are churning out vacant-eyed consumer-bots.  Anyhow, these are functions that can be performed by some government.  But what's the value in placing any of it under the umbrella of the one-size-fits-all federal government?

Remember that at the beginning of the 20th century, federal\state\local taxation combined took less than 10% of our income.  (Now it's more like 50%.)  If you're predicting dystopia, why did it fail to take shape before?  Why did the United States enjoy such a long period of prosperity (with deflation all the way, I might add!)  Are we fundamentally different creatures now than we were then?  Perhaps... but if so, in what way?

My wife is Chinese and would cringe at this discussion.  It's interesting for me to hear her perspective, especially since I lived with a Taiwanese woman for 13 years beforehand. I've lived in Taiwan and been to the mainland.

That's interesting.  Are there any facets of her perspective on China that you'd be willing to share?

[dualstow]

Why would she cringe at the discussion?

Not to put words in her mouth, but I think page one would be something akin to seeing America judged mainly by a combination the Kardashian sisters and the average standard of living in the Appalachians. Needless to say, though, that we are both extremely critical of the CCP, and she is well aware of the many scandals and problems, from Tibet to the dam at Three Gorges to tainted pet food and toothpaste.

My wife is Chinese and would cringe at this discussion.  :D It's interesting for me to hear her perspective, especially since I lived with a Taiwanese woman for 13 years beforehand. I've lived in Taiwan and been to the mainland.

That's interesting.  Are there any facets of her perspective on China that you'd be willing to share?

There's not much I could repeat from her side that would help anyone make investing decisions. However, we have had conversations about how people have always said, "Look at the U.S. It's a rich country but there is such a huge discrepancy in wealth (among the classes)." And, I think that China is going through a lot of the ugly and awkward stages that developed countries have gone through. Nouveau riche, environmental catastrophes in the wake of industrialization, etc. City dwellers look down on those in the countryside instead of thinking about how to improve their situation. Of course it's also very different from the West because of the government and the massive population. Clearly, it could get worse before it gets better.
It's also strange how long the "communist" regime has been able to hold on to power.

EDIT: saw moda's post late. I put in a response at the top.
(also edited "three gorgeous" -- can't believe I typed that -- to Three Gorges ( ?? )

But again, I have no idea where China's economy is going and I would trust what I read here with more confidence than any estimations my wife could make.

[dualstow]

I have read in the Economist recently a number articles talking about the growing influence of China's population as consumers rather than mere manufacturers and exporters. The two that I can remember off the top of my head were about Canadian timber -- Canadians now shrug at American pressure because they can sell to China now, and American pecans -- prices are going up and American nut shellers are having trouble for getting their hands on these nuts (forgive the awkward phrasing) before the Chinese snatch them up. I will edit in the links in a minute.

I think a larger part of the population is living better than we think. But yeah, there is still widespread poverty and I saw it firsthand when I was there. Not pretty.

[AdamA]

Adam,

I'm curious...what gov't protection are you grateful for?

Police
Military
Interstate Highway system
FDA
FAA
Railroads
National Parks
Property Law

Ironically, It seems to me that the examples I cited above largely benefit the plutocrats aka too-big-to-fails. For example, attempting to prop up the housing market helps builders, bankers, real estate agents to the detriment of renters who would like to buy a house @ a reasonable price. The orig manipulation is also to be condemned, which led to the bubble in the first place (Greenspan keeping rates so low, etc)

Another example is Obamacare...designed to greatly increase the market size available to the insurance companies thru gov't mandate.

I know, and I can't argue with that.  I just think it's not as simple as going from one extreme to another. You have to balance the good with the bad either way.

[dualstow]

I will edit in the links in a minute.

Took me forever to find the pecan article, because it was at WSJ, not the Economist.
And, the Canadian timber piece. Granted, pecans are more obviously bought by individuals while timber buying could just be a sign of booming businesses. But if business is booming...

[KevinW]

...it's worth the cost of a government monopoly in roads and the misallocations of resources that may occur to have a standard transportation system not subject to different tolls, widths, weight tolerances, and awkward transitions (not to mention market manipulation) that would accompany a privately run road system.

Well --- the internet has no government-mandated standards, and yet it works pretty smoothly.  People who build systems for the internet create their own standards through the RFC process ( http://en.wikipedia.org/wiki/Request_for_Comments ) or other private standards-writing organizations.  Anyone is free to follow or not follow those standards, so the good ones (e.g. HTTP) attain a critical mass and outdated ones (e.g. gopher) die off.

It's not a perfect analogy to the road network, but I think it illustrates that a lack of regulations doesn't necessarily lead to a big ball of mud.

[Lone Wolf]

lone wolf i love the "big ball of mud" definition! i had to copy it to use myself in the future....thanks...

the primary problem with social programs may not be so much their size, this much vs that much being the "right" size,  but their unending and irresistible ability to grow  (the effect of men voting for their own benefit to be taken from others) i wonder if there is any government system of socialism that won't eventually grow into a big ball of mud as an inherent part of its nature, and if expending the effort needed to successfully resist its growth is even possible, or a reasonable exchange for whatever benefits the government programs provide..

Glad you enjoyed the analogy.  And you raise a good point.  I can't think of much more that the Founders could have done to try to prevent what has happened.  Their safeguards worked well for a very long time.  One source of trouble is these safeguards against out of control government tend to be loosened during wartime or economic shock.  Once government has acquired these new powers (and the increase governmental girth that accompanies them), it's reluctant to let them go.

People on the whole like the idea of getting things from the government, whether they be simple checks or other goods.  What they miss is that these goodies come with a very high price and that there's not always "somebody else" footing the bill.  On a related note this interesting Gallup poll found that while 67% of those making $250k or more think that their taxes are too high, only 38% of these same people think that "upper income" individuals pay too much in taxes.  (A household income of $250k easily puts you in the top 5%, but this clearly shows that these people do not feel "rich".)

This same effect also causes the middle class to underestimate its own size and overestimate the number and earning power of the upper income group.  To raise a lot more tax revenue, you must tax the middle class.  Due to the inefficiency of government vs. the market, this is why there's a hard limit on how much you can subsidize the middle class before you punish them much more than you help them.  This is why one of the best things you can do for the middle class is reduce the overall tax burden and overall size of government.

[KevinW]

I can't think of much more that the Founders could have done to try to prevent what has happened.

They did an amazing job, yes.  One thing that they could've done better, though, would've been to pin down what exactly they intended the commerce clause to mean.  Much of the ball of mud is authorized by a modern interpretation of the commerce clause which I think is very different from what the framers had in mind.

[Lone Wolf]

They did an amazing job, yes.  One thing that they could've done better, though, would've been to pin down what exactly they intended the commerce clause to mean.  Much of the ball of mud is authorized by a modern interpretation of the commerce clause which I think is very different from what the framers had in mind.

Very good point.  I don't think that I could have asked anybody to try to predict a court decision as insane and arbitrary as Wickard v. Filburn (aka "the one that says wheat you grow and eat yourself is 'interstate commerce'").  But you are absolutely right.

[moda0306]

"General Welfare" as well is probably carried well beyond what they had intended.

LW,

I disagree with your assertion that the middle class would have to be heavily taxed.  Right now, the wealthy are paying 15% on their capital gains & dividends with no FICA or Medicare contributions necessary on those amounts, while the middle-class are paying 15-28% federal PLUS 7.65% FICA/Medicare on their wages.  Wealth appreciation also does not show up in "AGI" and therefore doesn't end up as a denominator in the "tax rate" equation. 

I believe I read something recently saying that the wealthiest ??% of Americans are paying about 16% average tax rate to the federal government.  I am not arguing the morals of "soaking the rich" so much as I think that the idea that we've stumbled into the unfavorable realm of the Laffer Curve is a myth.  We had exhorbitant rates on the top during some of the most prosperous years for our middle class, that gave little preference to income from return on capital.