I love it when people point out the blindlingly obvious

While I’m no fan of immigration restrictions, Charles Krauthammer asked a good question of those who don’t believe fences work:

If fences don’t work, why is there one around the White House?

If tax cuts are spending, shouldn’t liberals want more tax cuts?

According to her comments, Nancy Pelosi considers tax cuts to be spending.

If Pelosi really believed this, shouldn’t she be as supportive of tax cuts as she is of real spending increases?

What’s the difference? Does she think tax cuts are irresponsible spending? If so, are there any other types of government spending she considers irresponsible?

My guess, the only stuff she finds irresponsible are changes that put more in the hands of citizens and less in the hands of government.


Westward Implosion

Here’s a couple links on the subject.

Joel Kotkin: The Great California Exodus in the Wall Street Journal

And for a true measure…U-Haul Rates Confirm the Great California Exodus from Mark Perry at Carpe Diem

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.

The Performance Appraisal Myth

Each year, HR departments do their duty and administer the performance appraisal process.  Most folks seem to detest it.

There are good reasons for that.

If you work for company that does not do a good job of training and developing its people*, the performance appraisal process functions about as effectively as a New Years resolution treadmill.  It doesn’t.  It collects dust for a year, then there’s a flurry of activity for a short period and it’s forgotten again for another year.

If you work for a company or boss that does a good job of training and developing  people**, then the performance appraisal process is superfluous.  Good performance feedback occurs regularly.  These are like the fitness people who don’t need a New Years resolution to encourage them to stay in shape.  They have established the behavior and priority to exercise and these companies maintain the the behavior and priority for associate development. So, performance appraisal process becomes one of housekeeping and documentation.

Here’s how to tell which type of company you work for:

*In good economies, other companies tend not to recruit heavily from these companies and the folks who do leave, usually do so out of frustration.

**In good times, other companies actively recruit from your workforce and there’s usually a good number of people who leave through these opportunities, which opens doors for others to advance and replace them.

So, make a point in your next interview to ask your potential new boss whether the company’s talent is recruited away or if they leave on their own accord.  That can tell you a lot about what you may be getting into.

Bad comparison

This article reports that airline add-on fees have doubled in three years.

Airline management: “It’s an important part of our revenue.”

Customers: “We get nickel-and-dimed everywhere” and “It’s horrible!”

This article provides a good example of bad analysis.  Saying that add-on fee revenues have tripled says nothing.

Have fees added to revenue or do they just lower ticket prices and move some revenue over to the baggage fee line item?  Do they help attract and retain clients?  Do the fees cause a more economical use of cargo space?  Are there a lot of bagless travelers out there that are glad that airlines unbundled the baggage fee for them?  Have the fees caused people to choose other options like Megabus, Southwest, driving or not traveling at all?

Granted, it’s not always easy to answer these questions with a high level of certainty. There are usually too many factors to consider.  But I think attempting to do get a reasonable answer is better than just saying that fees have doubled over three years.

For me, one important true measure is what happened to total revenue in comparison to a reasonable control during the last three years to try to filter out some of the noise from from other factors.

For example, from 2007 through 2010, United Continental, the top add-on fee airline according to the article,  reported a 15% increase in total revenue.  Not bad, but not helpful unless you compare that increase to an airline that did not charge add-ons.  Southwest provides a good control comparison.  They are well known for not charging annoying add-on fees.  Southwest reported a 22% increase in revenue over the same period.

Based on these results, I’d say it’s not clear whether add-on fees have helped revenue and they may have held back United Continental’s revenue given that Southwest grew at a higher rate.

There still could be other factors that caused the disparity in revenue growth rates.  For me, the number one factor for the airline I choose tends to be the flight times.  Price is a close second, but only because most airlines are in the same ballpark on price.

But, given the statement that add-on fees have doubled, I might have expected to see a bigger disparity between United Continental’s and Southwest’s revenue growth rates.  Southwest’s results certainly proves that you don’t need baggage fees to grow.

As a customer who has flown Southwest and add-on fee airlines over the past several years, I can attest that the add-on fees have made the process more complicated.  I can also imagine that it has made the client systems for complicated for those companies.

I’ve also noticed that parking at the Southwest terminal of my local airport is usually filled, but I never have trouble finding parking at the terminals of other airlines.

Based on the revenue results and my own observations as a customer, I’d conclude that the add-on fees are likely a nuisance and, at best, they are are a lot motion that produce no real benefit.  Many large companies get stuck in this trap.  They do things to do things because they have no better ideas.

I remember reading long ago that an auto exec said that once a feature on an automobile becomes desired by about 70% customers, its time to make it standard and include it in base price, otherwise a competitor will and you will alienate your customers by keeping it as an option.

Hotel rooms come with a bed, shower, toilet, sink and TV included in the fee.  Hotels charge extra if you want to upgrade to a room with better amenities.

Car prices include a set of wheels and tires.  You can upgrade the set of wheels and tires for an extra fee.

It’s difficult for people to envision an airline ticket without checked baggage.  I would expect on most routes that 70% of people do check a bag.

Like hotels and auto sellers, Southwest has figured out ways tack on some fees without alienating everyone. They do so by charging extra for things that fewer than 70% of the customers expect and for things that have a clear value delineation for customers.

Want a guaranteed “A” boarding pass? It’s yours’ for a fee.

While that may produce a minor annoyance to folks who aren’t willing to pay, most folks understand that there are only 30 “A” passes.  I’m guessing that fewer than 70% (the auto exec’s rule-of-thumb) actually expect an “A” boarding pass.  They’ll take it if they can get it, but they’re not willing to spend money on it and they don’t expect it to be included in the ticket price.

And, getting on the plane first has a clear value delineation.  Some folks place a premium on maximum seat choice.  Maybe they want to ensure an aisle seat, or a seat near the front so they can get off the plane quickly to make a connection.  Or maybe they don’t want to hassle with finding space for their carry-on in the overhead bin.

The add-on fee airlines could learn something from Southwest and auto sellers.  Unbundling the basic package doesn’t do much except annoy folks and make it more complicated.  Save the add-on fees for those extra value drivers.

True Measures: Female Pay

On the Dennis Miller Radio Show (podcast available for 4/8/2011), Thomas Sowell debunked the notion of a gender pay gap caused by systematic pay discrimination.

If you don’t accept the statistical argument — that when you normalize for pertinent factors like years of experience, hours worked, type of job and so forth then the gap isn’t really there — then try Sowell’s next argument.

At about 5:29 into the podcast, Sowell offers the following challenge to the gender pay gap.

If it really was true that a man and a woman of the same productivity, working the same job, that a woman is only paid three quarters of what a man is paid, the obvious inference is that another employer can hire four women for what this guy is paying for three men and he would have a tremendous competitive advantage that would probably drive [this guy] out of business.

Nice point.   That would give the other employer 33% more productivity for the same price.  In the business world, differences in productivity of 2 – 3% over time can separate  winners and losers and open and close doors.

A 33% productivity advantage would result in enough dominance to overcome discrimination barriers for many business leaders.

Comparing gross numbers like wages can be like comparing apples and oranges.  Sowell’s argument suggest that if a true pay gap exists, it isn’t due to gender discrimination.

Progressive tax rates II

I appreciate the comments to my previous post.  They all provide good reasons why progressive tax rates may not be as fair of a way to tax as it first appears.

As dave points out, it’s inefficient to pay for a mediator to administer the system because the mediator takes his cut too.  That could be the economic rent that gets wasted in setting the rates, the cost of running the IRS and all the expense taxpayers and businesses go through to file tax returns.

W.E. Heasley suggests asking why they desire a more level income distribution?  Actual results of such schemes do not have a good track record.

thebigdog suggests considering that progressive tax rates shrinks the pie for everyone, which could hurt the very people with lower income that progressive tax rate supporters are trying to help.

With further correspondence with commenter, DG Lesvic on Cafe Hayek, he pointed me to this good passage on his website EconTrashTalk.org (from a section titled The Forbidden Theory of Redistribution):

At the line between rich and poor, but one penny of income separates them.  So, when it is taken from the rich and given to the poor, their stations are reversed.  The rich become poor and the poor rich, which attracts manpower from the occupations of the one to those of the other.  To restore the manpower allocations it preferred, the market must bid the net wages of the formerly higher paid occupations back up and of the formerly lower paid back down.  But, anticipating increasing rates of redistribution, and compensating not just for the current but for the greater anticipated rates, the market must bid the net wages of the formerly higher paid to even higher levels and of the formerly lower paid to even lower levels than before, for differentials even greater than before.

Let’s remember the original two sentences supporting a progressive tax rate:

Someone who makes $10,000, pays 10% to the government only has $9,000 left.  Someone who makes $1 million pays 50% still has $500 thousand left — a lot more even though they pay a higher rate.

Here’s my feeble attempt at a response.

You assume that wage rates do not change with tax rates.  What if someone who makes $10,000 earns less because the market accounts for their lower tax rate while someone who makes $1 million earns more to compensate for their higher tax rate?

You don’t think that’s possible?

All else equal, would you prefer a job that pays $50,000 and a 20% tax rate ($40,000 after tax) or one that pays $60,000 with a 40% tax rate ($36,000 after-tax)?  My guess is that you would take the lower paying job with the lower tax rate because the after-tax income is greater.

And when you think of it, why would wages be different than any other good or service?  You may spend more on a car if you did not have to pay sales tax.  Tax rates matter.

While progressive tax rates appear to be a fair way to tax, please consider that may only be an illusion.

If it were an illusion, would you still favor a progressive tax rate?

Effective Visual

On the Dennis Miller Show, columnist Jeff Jacoby provides a good illustration of what it means to him when he heard President Obama say he wants to freeze government spending for the next five years.

I was envisioning a guy going to the doctor.  The doctor says, Tim, you’ve been overeating, ridiculously. You are grossly obese. You weigh 300 pounds more than you ought to.  So we’re going to freeze your diet and weight at the point it is now.  You’re not going to gain any more weight.

That guy is still going to die of a heart attack in the next three years.

The podcast of the interview is available on iTunes.  It was released on January 26.  This part of the conversation is about 8 minutes in.

Jacoby exposes one of those sleight-of-hand tricks that politicians use to make unreasonable things sound reasonable.   Saying that you are going to freeze spending, sounds really good to folks who don’t pay too close attention.  It sounds responsible, almost austere.  We’re making adult decisions here.

But, it’s not that remarkable at all when you consider that government spending today is 67% higher than it was when W ran for re-election.