My red herring of the week

Sitting around the dinner table, talking about the Secret Service exploits in Colombia, I said:

Those Secret Service agents are so dumb. You never dispute a bill with a whore. That will cost you dearly.

Others at the table started to agree and then caught themselves, “…wait…they shouldn’t have done all that stuff to begin with.”

I was pleased the others were able to spot my red herring so quickly. We had a good laugh.

Bottom-up experimentation

The nice thing about having 50 states is that we get to experiment with policies and see what works and what doesn’t.

As individuals, it’s nice to have choices, too. If you’re not happy with your state, rather than struggle to convince more people to vote with you, you can just choose to move to another state that has more attractive policies.

In the Wall Street Journal today, Arthur Laffer and Stephen Moore take advantage of the information we have from the 50 experiments on tax policies to build a persuasive case that lower taxes is good for everyone. I recommend reading, A 50-State Tax Lesson for the President.  Here’s a good snippet:

Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes. In 1980, for example, there were 10 zero-income-tax states. Over the decade leading up to 1980, those states grew 32.3 percentage points faster than the 10 states with the highest tax rates. Job growth was also much higher in the zero-tax states. The states with the nine highest income tax rates had no net job growth at all, and seven of those nine managed to lose jobs.

Then there’s the question of in-migration from state to state—or how people vote with their feet. As common sense would dictate, people try to move from anti-growth states and cities to more welcoming climates. There are relevant factors other than tax policy, of course (as in North Dakota today, where the oil boom has brought about the lowest unemployment rate in the nation), but in general the most popular destination states don’t have income taxes. That’s as true recently as it was 40 years ago.

Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates. Such interstate migration left Texas with four new congressional seats this year and spanked New York and Ohio with a loss of two seats each.

“I’m not your best friend, I’m your only friend”

Mitt Romney should adapt this speech from Larry the Liquidator, from the movie Other Peoples Money, for his campaign.

I especially like Larry’s 10-year analysis. Here’s Larry’s version (to shareholders):

For the last ten years, this company has bled your money. Did this community ever say, ‘we know times are tough, we’ll lower taxes, reduce water & sewer.’ Check it out. You’re paying twice what you did 10 years ago.

And our devoted employees, who have taken no increases for the past 3 years, are still making twice what they made 10 years ago.

And our stock? 1/6th what is was 10 years ago.

Here’s a version for Romney:

For the last 10 years, our government has bled our money. Did they ever come to you and say, ‘we know times are tough, we’ll share your pain, we’ll lower government spending so you can invest more and grow the economy, that way we’ll all do better?”

No. They increased spending in the good times and increased it more in the bad. They don’t care about you. They care about growing their power and telling you its for your own good.

Check it out. They’re spending twice as much as ten years ago.

Our debt? It’s tripled in the last 10 years. It was about $16 thousand for every man, woman and child back then. That was plenty. Did you just have a baby? Congratulations! She was born owing $50 thousand.

Other parts of Larry’s speech that I really liked:

  • It doesn’t pay to grow market share in shrinking market. The last buggy whip maker was probably the best, but you wouldn’t have invested in it.
  • Take the buyout, then go invest your money in growing businesses. You’ll help the economy, you’ll create jobs and “God forbid, you’ll make a couple bucks!”

That last one is another good one for Romney.  “God forbid that I pursued the American dream and SUCCEEDED. You can too!”

Spoiler alert: Other Peoples Money had a happy ending. Larry the Liquidator gained control of the company off the strength of his speech (hint, hint Romney), but discovered that the company could produce something useful.  I believe it was kevlar or gore-tex fabric, or something like that. So everyone got to keep their jobs and the company became a success again, without being liquidated.

Hypothesis testing

The New York Times has written a follow-up to a piece I wrote in 2010 on Michelle Obama’s food desert hypothesis.

From the article:

It has become an article of faith among some policy makers and advocates, including Michelle Obama, that poor urban neighborhoods are food deserts, bereft of fresh fruits and vegetables.

But two new studies have found something unexpected. Such neighborhoods not only have more fast food restaurants and convenience stores than more affluent ones, but more grocery stores, supermarkets and full-service restaurants, too. And there is no relationship between the type of food being sold in a neighborhood and obesity among its children and adolescents.

Too bad the article didn’t mention that our government passed a $4.5 billion bill based on this incorrect hypothesis. That’s money we won’t get back. It also created a bureaucracy that will not go away — no matter how ineffective it is.  Who cares if it works?  It’s for the kids, right?

This is a good example of the ineffective feedback loops on government programs and why we should be resistant to create new government programs.

Had Michelle Obama started a private charity to address her hypothesis, people could give what they want. When the information came out that that hypothesis may not be accurate and the charity doesn’t actually solve the problem, people would give less and the charity would disappear. That’s a good feedback loop. When something doesn’t work, it goes away.

Put the program in government and it won’t disappear whether it works or not.

Happy Tax Day

A family member recently complained about the high cost to have her taxes prepared.

I said:

Well, taxes are complicated. If you want simpler taxes and a lower cost to prepare your tax return, vote for different people. Congress designs the tax code.

It was a rare occasion where this person didn’t have a comeback and, judging by the look on her face, hadn’t considered that connection before.

That reminds me of something else I read in the last couple days, but can’t remember where: We should move election day closer to tax filing day. We might see different results.

Thomas Sowell’s Random Thoughts

They are usually a treat. Here are some of my favorites from his last batch:

How long do politicians have to keep on promising heaven and delivering hell before people catch on, and stop getting swept away by rhetoric?

With all the talk about people paying their “fair share” of income taxes, why do nearly half the people in this country pay no income taxes at all? Is that their “fair share”? Or is creating more recipients of government handouts, at no cost to themselves, simply a strategy to gain more votes?

In politics, few talents are as richly rewarded as the ability to convince parasites that they are victims. Welfare states on both sides of the Atlantic have discovered that largesse to losers does not reduce their hostility to society, but only increases it. Far from producing gratitude, generosity is seen as an admission of guilt, and the reparations as inadequate compensations for injustices — leading to worsening behavior by the recipients.

Some people say that taxes are the price we pay for civilization. But the runaway taxes of our time are the price we pay for being gullible.

Bureaucrats v Innovators

Here’s a nice piece from the Wall Street Journal about bottoms-up and top-down recovery efforts in two tornado stricken towns, Tuscaloosa Alabama and Joplin Missouri. Apparently, Tuscaloosa is taking the top-down approach, while Joplin is more bottoms-up.

That means that in Tuscaloosa, city officials see themselves as the center of the redevelopment efforts. They want to redesign and rebuild the city to their liking. They want to be the heroes.

In Joplin, the approach is much more practicable. The city officials are doing their job — issuing permits and such — and then getting out of the way to let private citizens do their job.

Instead of encouraging businesses to rebuild as quickly as possible, Tuscaloosa enforced restrictive zoning rules and building codes that raised costs—prohibitively, in some cases. John Carney, owner of Express Oil Change, which was annihilated by the storm, estimates that the city’s delays and regulation will cost him nearly $100,000. And trying to follow the rules often yielded mountains of red tape, as the city rejected businesses’ proposals one after another.

“It’s just been a hodgepodge,” says Mr. Carney. “We’ve gotten so many mixed signals from the get go. The plans have been ever-changing.” Boulevard Salon owner Tommy Metrock, one of the few business owners to rebuild on Tuscaloosa’s main thoroughfare, McFarland Boulevard, says the restrictions created “chaos” as people put their livelihoods on hold while the city planned.

Joplin took a dramatically different approach. According to interviews with local business owners, right after disaster struck the city council formally and informally rolled back existing regulations, liberally waving licensing and zoning mandates. It even resisted the temptation to make “safe rooms” a condition of rebuilding.

Short lesson in value proposition

I find that many folks don’t quite understand what I mean when I talk about value proposition. Value proposition is the complex web of reasons that you may choose one product over another or may not choose any product at all.

I don’t care for potato chips. I would eat no more potato chips if potato chip companies gave them to me for free. For me potato chips have no value proposition.

I thought of another example to illustrate value proposition with something I use often: iPod/iPhone ear buds. I have three sets.

The first set came with the iPhone. They sound nice and I use them when I listen to podcasts while working around the house where there isn’t a lot of background noise.

The second set I bought because I quickly discovered that the standard ear buds fall out of my ears when I exercise. This set has hooks that go over my ears to hold the ear buds in place.

The third set I bought because I quickly discovered that my other two sets were not good for situations with lots of background noise, like flying in an airplane or mowing the lawn. This set insulates the background noise with cushy buds that I stuff into my ears.

All do well for their specific niche, but not so well for other niches. I purchased two additional sets of ear buds. The makers of the exercise ear buds could not have persuaded me to buy my third set from them if all they did was lower the price of their exercise ear buds.  I already have a set of exercise ear buds, I don’t need another.

The best way for that manufacturer to persuade me to buy their brand is to make what I want for my third set — a set of noise insulating ear buds.

A penny for your…vote?

Most people would be incensed if they found out that their city councilman or school board member voted in their political capacity to award a contract to a business in which they had a direct financial interest.

For example, if a school board member voted to award a cleaning contract to a cleaning business he owns, most people would instantly recognize this as a conflict of interest and cry foul. In his role as school board member, we expect him to act in the best interest of the school district patrons, not in his own best interest.

I find it equally outrageous that folks who receive direct money from government programs get to vote for political candidates. Why isn’t that considered a potential conflict of interest?

It seems very likely to me that instead of voting for the candidates best fit to carry out the duties and serve their roles they swear an oath to uphold, voters who receive government support may be inclined to vote for the candidates who promise to continue doling out goodies.

Don’t think so? Pay closer attention to campaigns and see how politicians tell voters they will continue to expand certain programs if elected. Why would they make such promises if it doesn’t get them votes.

I propose giving folks a simple choice. If you choose to receive direct government benefits, then you forego your vote.

Some will say that we should not be able to remove someone’s right to vote, but under this proposal “we” would not remove anybody’s right to vote.

It would be their choice. And it would resolve potential conflicts of interest that contribute to ever-expanding government spending.

Headlines that make you go, hmmm….

#1: A local NBC affiliate reports: Zuckerberg Joins Buffett, Asks for Higher Taxes

#2: Forbes magazine reports: How Facebook Billionaires Dodge Mega-Millions In Taxes

From the Forbes article:

Facebook billionaire cofounders Mark Zuckerberg and Dustin Moskovitz are both 27, unmarried and have no children we know of. Yet back in 2008 they both set up grantor retained annuity trusts (GRATs) that we estimate will allow them to transfer a total of at least $185 million of wealth to future offspring or others, gift tax free. That compares to a supposed gift-tax exemption of just $1 million in 2008 and $5.12 million today.

Granted, Zuckerberg may not have had his tax epiphany yet in 2008. I’m assuming he’s moving swiftly now to dissolve this tax dodge trust.

#3: Buffett writes: Stop Coddling the Super Rich in the New York Times about how the super wealthy should pay more in taxes, inspiring Obama’s Buffett rule proposal.

#4: Reuters reports: Government sues Buffett’s NetJets Unit for Unpaid Taxes

I have no problem with folks legally minimizing their tax bill.

I do have a problem when these same folks get the positive glow from voicing their opinion that their tax bill should be higher, without putting their money where their mouths are.

Of course, what really annoys me about this thread is that the whole thing is a giant red herring that misses the key issue: government spending.

Let’s say we do raise taxes on the super rich or that Buffett and Zuckerberg stop talking out of both sides of their mouths and decide to voluntarily pay more in taxes. Let’s go even further and assume that either of these efforts actually increase government revenue.

Which result do you think is likely?

A. Government maintains spending, so the extra revenue reduces the deficit.

B. Government increases spending, so the extra revenue leads to more government spending and does not reduce the deficit.

I would appreciate anyone who believes (A) is likely to provide evidence. Do we have any experience where higher government revenues were not accompanied by higher spending over a 2 – 5 year period?

I’d like to know which Buffett and Zuckerberg thinks is likely or if they’ve even given it much thought. If not, then they could do all us all a favor by 1) thinking about it and 2) using their voices to shine light on the real issue: government spending.