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When subtraction equals addition – human behavior matters to economics

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Human behavior often ignored in economic theory

One of my favorite quotes ever was from a citizen of the old Soviet Union. He observed that under Collectivism, “We pretend to work, and they pretend to pay us.”

Darn us humans. We tend to go on learning curves, don’t we? Put a three year old in a corner of the room, a ‘timeout’ if you will, for behavior you wish to discourage, and they learn not to repeat it over time. We tend to go towards pleasure and away from pain. Who knew? Apparently many countries, or at least some of their leaders over the last couple centuries.

Human behavior is the one factor so many economic theories must ignore, even quash. Collectivism and its many variations is, and has been the prime example. Tell folks they’ll get a roof over their heads, and food in their bellies regardless of how much they add to the economy and watch what happens. Production falls and slacking becomes a national sport. Don’t wanna go out on a limb, but maybe that’s the reason Cubans courageously risk life and limb to get to Florida, and not the other way around.

On the other hand, honor increasing production with ever increasing rewards, and suddenly you’re experiencing surpluses out the ying yang. Seems when hard, effective work is rewarded in direct proportion to the quality/quantity of results, behavior is magically modified. What’s even more impressive is that the behavioral change was born of free will. Motivation that originates from within is powerful, and positively so.

Let’s use real estate agents as an example

Unlike most folks, agents don’t have the security born of a weekly paycheck. As we all know, most paychecks received are based on performances that vary from week to week, sometimes wildly.

Though in the end employers will fire an employee consistently failing to produce at least the minimum standard for results, paychecks get cashed till that day of reckoning comes. Not so in real estate.

Produce empirical results or perish.

Pretending to work will get them the same pay as the Soviet citizen quoted above. There’s no middle ground, no place to hide a pathetic work ethic. Work hard but still no results? No paycheck. Agent behavior producing closed transactions for their clients produces commensurate paychecks. Go figure — paying only for successful results tends to modify agent behavior.

IRS impacting behavior? JFK’s take

Does the Internal Revenue Code impact Americans’ behavior — even the economy’s performance?

John Kennedy apparently thought so, and on both counts.

  1. “Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased – not a reduced – flow of revenues to the federal government.” – John F. Kennedy, Jan. 17, 1963, annual budget message to the Congress, fiscal year 1964
  2. “In today’s economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarges the federal deficit – why reducing taxes is the best way open to us to increase revenues.” – John F. Kennedy, Jan. 21, 1963, annual message to the Congress: “The Economic Report Of The President”
  3. “Our tax system still siphons out of the private economy too large a share of personal and business purchasing power and reduces the incentive for risk, investment and effort – thereby aborting our recoveries and stifling our national growth rate.” – John F. Kennedy, Jan. 24, 1963, message to Congress on tax reduction and reform, House Doc. 43, 88th Congress, 1st Session. (NOTE: Emphasis mine, as it denotes intended behavior modification)
  4. “A tax cut means higher family income and higher business profits and a balanced federal budget. Every taxpayer and his family will have more money left over after taxes for a new car, a new home, new conveniences, education andinvestment. Every businessman can keep a higher percentage of his profits in his cash register or put it to work expanding or improving his business, and as the national income grows, the federal government will ultimately end up with more revenues.” – John F. Kennedy, Sept. 18, 1963, radio and television address to the nation on tax-reduction bill. (NOTE: Again, emphasis mine. JFK believed lower taxes would ultimately produce higher revenues to the Treasury, which indeed happened)

Ronald Reagan’s view

Ronald Reagan believed Kennedy had this right, as he did the same thing in spades, much more aggressively, about 20 years later. He cut the top rate for personal income taxes from 70% to about 28%. The economy exploded. The tax revenues from personal income taxes and business income taxes (also cut) increased by massively from the day Reagan took office till the day he left office.

A bit of astounding trivia: JFK reduced the top rate to 70%. How many of you knew it had been approximately 90.5%! Geez, makes me wanna go out ‘n make another $100,000 for the privilege of keeping a whole $9,500 – BEFORE state taxes.

What about Americans’ behavior in today’s economy?

Both businesses and households are voting with their feet. How so? They’re moving from states they perceive to be tax happy, and prone to bleeding business in general, (Hey California!) to states that tax less and openly welcome business and business expansion/growth.

In other words, they’re changing their behavior. Check the states losing businesses and population. If you live in California and make roughly $150,000, your state income tax bill alone will likely exceed $9-10,000! Add fed taxes and you can see why many Golden Staters are now in Idaho, Texas, Florida, and the like. Even more important, former California employers and now just that — former.

They voted with their feet too. How else do ya think we got saddled with the Governator? His predecessor was far worse. That’s why he was hounded from office. Even those who insist on bleeding the golden goose of business realize they can’t bleed him dry.

Does anyone honest believe the tax code doesn’t influence business and individual behavior? Some think there’s now evidence of at least one such person.

Jeff Brown specializes in real estate investment for retirement, has practiced real estate for over 40 years and is a veteran of over 200 tax deferred exchanges, many multi-state. Brown is a second generation broker and works daily with the third generation. With CCIM training and decades of hands on experience, Brown's expertise is highly sought after, some of which he shares on his real estate investing blog.

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22 Comments

22 Comments

  1. Lani Rosales

    April 13, 2011 at 2:10 pm

    Jeff, this is a really great commentary on how we've gotten to where we are. We cover economics from a real estate perspective every day here but rarely get to take into account the weight of the bigger picture from a historical perspective.

    I love how you've juxtaposed Kennedy and Reagan, I can't wait to see what others think…

  2. Joe Loomer

    April 13, 2011 at 3:12 pm

    Great post Jeff, love your stuff.

    Navy Chief, Navy Pride

  3. Jeff Brown

    April 13, 2011 at 3:14 pm

    Thanks Chief.

  4. Kim Hannemann

    April 13, 2011 at 3:51 pm

    You might want to check your facts.

    "Ronald Reagan . . . cut the top rate for personal income taxes from 70% to about 28%. The economy exploded. The tax revenues from personal income taxes and business income taxes (also cut) increased by massively from the day Reagan took office till the day he left office."

    Not so. See krugman.blogs.nytimes.com/2008/01/17/reagan-and-revenue/. This myth about an explosion of tax revenue following the Reagan cuts is thoroughly discredited.

  5. ken brand

    April 13, 2011 at 4:28 pm

    Well said. Who can argue?

  6. Jeff Brown

    April 13, 2011 at 4:31 pm

    There are many who'll still argue, even though it's akin to pleading the case for the dryness of water. The Office of Management and Budget has all the numbers. Facts are facts.

  7. Al Lorenz

    April 13, 2011 at 6:58 pm

    I should have noticed the author in the beginning! Great stuff Jeff.

  8. Jeff Brown

    April 13, 2011 at 7:23 pm

    Much appreciated, Al.

  9. Missy Caulk

    April 14, 2011 at 6:36 am

    So glad you posted this, I am reading Reagan An American Life right now. I have underlined so many passages. It is amazing how many things happening today were happening back when he ran, was elected and got the economy stimulated again. I feel I am ready history, the only difference is the interest rates were high then and low now.

    He sent to Congress a bill, calling for a 30% ACROSS THE BOARD tax cut for 30 years.Seems fair to me instead of all the bickering over cutting this, not cutting that going on now.

    Bottom line when you give up a large % of your income in taxes, incentive to work goes down.

  10. Jeff Brown

    April 14, 2011 at 10:32 am

    Hey Missy — "He sent to Congress a bill, calling for a 30% ACROSS THE BOARD tax cut for 30 years."

    And the majority leaders of the House/Senate sent it back in a hearse with a joke wreath that said D.O.A. 🙂

  11. Missy Caulk

    April 14, 2011 at 12:51 pm

    But, he took it first to the American People something he was known for and they loved it. He did go on to cut needless programs out of a 80 Billion dollar budget deficit that year.
    It took time, like it will with where we are now. But, the spending must end.

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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…

#CarsonHUD

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Economic News

Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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Economic News

Gas prices are down, so are gas taxes about to go up?

Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.

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Gas taxes and your bottom line

Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.

Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.

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Supporters and opponents are polar opposites

Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.

Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.

While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.

The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.

Is a gas tax politically plausible?

Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”

Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”

Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.

Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.

“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”

Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.

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