Category: Economics

Teach financial skills.

Would you choose moral preening over substantive solutions? If so, here’s your example for today, courtesy of Michelle Singletary’s column in the Washington Post:

When you’re living on the edge financially, you cannot afford convenience fees that go along with instant money. That’s why I dislike Refund Anticipation Loans, or RALs.

A RAL is a short-term loan backed by a person’s tax refund. Tax-preparation companies count on desperate people trying to get their refund as quickly as they can. But there’s a price for that speed.

What galls me is that there’s little, if any, risk to the lender — yet the loans often carry high fees. The Consumer Federation of America and the National Consumer Law Center have found that RALs cost from about $30 to more than $125 in loan fees. Some tax preparers also charge a separate application or document preparation fee of about $40. The consumer groups say the effective annual interest rate for a RAL can range from about 40 percent to more than 500 percent.

This type of loan takes advantage of the very people — cash-strapped taxpayers (sic) — who can ill afford the costs.

And so on. Of course, it’s also possible to say that this type of loan offers an advantage to cash-strapped taxpayers, and getting a benefit generally requires a cost. We may deem the terms unfavorably lop-sided compared to what we would agree, but that does not mean they are “unfair”. As long as both parties involved agree that the terms are acceptable enough to enter the contractual agreement, they are acceptable.

That almost gets lost in the buildup to the key argument.

Although the appeal is that you get your money fast, you in fact marginally speed up the delivery of your refund cash. The turnaround on the loans can be a day or two. However, taxpayers who file returns electronically and opt for direct deposit can receive refunds in 10 days or less.

Logic is a powerful tool. I’m glad it’s finally unleashed here. But it’s strange that the article isn’t a plea targeted to the millions of Americans who receive a tax-refund, the potential customers for this service. Instead, a proposal:

I would like to see a ban on these loans. …

Of course. And concluding the essay with a rumination on the IRS proposal to regulate such loans:

The longer they take to restrict the marketing of this useless product, the more it costs the poor.

We have Ms. Singletary’s subjective assessment that these loans are “useless”. Her judgment is a better stand-in than the person who takes the loan. Thus always with central planners.

This is not to argue that I like these loans. I don’t. Nor am I arguing that I think poor Americans will make good choices when the terms of the loan are terrible. Income is not an indicator of intelligence, and circumstance can force decisions that involve choosing the lesser of two evils. But I believe that people who take these loans are taking them for a reason. I do not pretend to know what that reason might be, nor will I speculate or pass judgment. Still, it’s logical to accept that quick access to most of the money they’re owed is better than no quick access to any of the money they’re owed.

I will make a suggestion for an objectively better topic than calling for a ban on financial transactions between consenting adults. Tell poor Americans to stop being interest-free lenders to the United States government and start being taxpayers who pay only the taxes they owe.

If poor Americans do not pay the government money they do not owe throughout the year, they will have more money throughout the year to pay for whatever inevitably builds from a lack of those dollars. They are much less likely to need a solution such as a refund anticipation loan. Or they can save they money in an account that pays interest, spending it at tax-time if they must have the irrelevant visceral feel of a large lump sum amount. That’s stupid, of course, if there are creditors at the door who will charge interest and fees for debts not payed, but it’s smarter than lending that same money to the federal government without interest while those creditors are calling. And the money has the benefit of being available immediately, beating even the two days of the RAL.

Interest-free loans masquerading as tax refunds are the problem, not an imagined capitalist conspiracy to screw the desperate poor.

More tax refund thoughts here, here, here, and here.

Hooray for Capitalism

Whenever someone starts selling the line of bull that big bad corporations are out only to screw you the customer, remember this:

The HD DVD camp suffered a serious blow on Jan. 4, when Warner Bros. Entertainment said it would stop publishing movies on HD DVD in May, to focus on Blu-ray and regular DVD.

That leaves only two major studios, Paramount and Universal, still supporting HD DVD, while five support Blu-ray.

Toshiba on Monday slashed the suggested retail price of its cheapest player, the HD-A3, from $299.99 to $149.99. The price for the HD-A30 was also halved, from $399.99 to $199.99, while the price on the high-end HD-A35 went from $499.99 to $299.99.

Explain to me how the customer loses there. Nothing has changed since yesterday on the technological front. But the possibility has probably increased that customers will choose a Blu-ray device rather an HD DVD device. Toshiba now offers a better incentive. Yesterday, a customer could buy a player. Today, she can buy a player and five or more movies. Or she can buy two players for two rooms. Or she can get the features of the HD-A35 instead of the HD-A3. Competition is grand.

Also, most customers who purchased those Toshiba HD DVD players in the last thirty days or so are probably eligible to receive a partial refund from the store from which they bought the device, given that most major retailers have price match guarantees in place. Again, just another case of The Man&#153 not looking for ways to screw customers.

Markets in Everything: Reproductive Edition

Guaranteeing that children are cared for is legitimate, but contracts matter.

The Pennsylvania Supreme Court ruled that a woman who promised a sperm donor he would not have to pay child support cannot renege on the deal.
…

“Where a would-be donor cannot trust that he is safe from a future support action, he will be considerably less likely to provide his sperm to a friend or acquaintance who asks, significantly limiting a would-be mother’s reproductive prerogatives,” Justice Max Baer wrote in the majority opinion issued last week.

Like so many things, the ability to enter into a contract does not necessarily include the ability to competently enter into a contract. That does not mean the competent party must be held retroactively responsible for the poor decision by the incompetent party. Courts should not provide an “oops” clause not found in the original contract.

Also from the article:

A county judge said it was in the twins’ best interests that McKiernan be required to support them. In addition to monthly payments, McKiernan also was ordered to come up with $66,000 in back support. The appeal reverses that order.

If the law can ignore a valid contract, why not rule that it’s in the twins’ best interest that Brad Pitt be required to support them? I’m sure he has more money, and I bet the twins might enjoy hobnobbing with Hollywood celebrities. That would be no less based in fact than the county judge’s actual order.

Justice J. Michael Eakin, in a dissent, said a parent cannot bargain away a child’s right to support. “The children point and say, ‘That is our father. He should support us,'” Eakin wrote. “What are we to reply? ‘No! He made a contract to conceive you through a clinic, so your father need not support you.’ I find this unreasonable at best.”

Children have a right to support from parties obliged to support them. In this case, that’s the mother. So, yes, we are to reply “No! He made a contract to conceive you through a clinic, so your father need not support you.” I find this reasonable. The facts are what they are.

There is no shame in “for the money”.

There’s apparently some controversy and he said/he said confusion surrounding David Cross’ appearance in Alvin and the Chipmunks. I googled through a bit of it to understand the background. It bored me quickly. I’m not interested in what’s hip or what side I’m supposed to be on. Do what makes you happy, for whatever reason(s) it makes you happy.

Still, David Cross’ explanation for why he took the role is awesome. The entire essay is worth reading, but this part made me happy. He’s describing the cottage in Upstate new York he wanted to buy:

MITIGATING FACTOR #4a
… It was a little more than I had budgeted for but it was definitely worth it. I asked the owner if he’d take some of my credibility as payment. He looked at me as if I was an alien with A.I.D.S. speaking some intergalactic gobbledy-goo. I had to patiently explain to this country bumpkin about my indie hipster cred, and I would now like to cash it in. This rural rube was so backwards and ignorant that he couldn’t even conceive of how financial markets work and simple free market capitalism. I tried again to explain the concept of the value of “credibility” and “artistic integrity” but he refused to take it in exchange for the house. This guy was a fucking idiot! But what could I do? He wouldn’t take no for an answer. If I wanted that cottage I would have to pay him money. Sigh. So I used my “Alvin and the Chipmunks” money to pay for the down payment. Seriously, I totally did.

Say what you will about art and how credible or trashy it can be. There is no honor in poverty¹ for the sake of the good opinion of others. Of course buying a second home can’t be considered poverty. Consider poverty here to be a simple substitute for larger concepts, among them sacrifice and/or self-denial. Refraining from buying something you want solely to avoid keeping up with the Joneses is as ridiculous as buying something you don’t want to keep up with them. That holds whether it involves upgrading from your old 5-Series BMW to a new 7-Series or passing on Alvin and the Chipmunks to appear in indie film people will pretend to like because it’s indecipherable and/or coma-inducing.

Link via Pop Candy.

Wii have a disagreement, but only one side is correct.

In this Boing Boing story on successful efforts to hack the Nintendo Wii – allowing independent, non-sanctioned games to work on the Wii – Cory Doctorow writes:

Incredible as it may seem, there are still companies that think that they should have the right to tell you what you can and can’t do with your hardware after you pay for it.

They have such a right. It’s called a contract. The customer agrees to it, admittedly without negotiation, when he buys the hardware.

I agree that companies who insist on this are stupid. I wouldn’t run the business that way. But Nintendo’s executives run the company, not outsiders seeking to impose a different set of decisions. If the consumer doesn’t like the terms attached to the hardware, he should refrain from buying the product until the terms change. Anything else is insolent whining.

The FairTax is a bad idea.

Remaining from a September debate, I owe regular commenter Scott my analysis and opinion of a national sales tax. To be upfront, I began my search against the idea. Not because I wanted to hate it, although I do hate it. Yet, as I’ve thought about my 15-year support for a flat tax plan – and I acknowledge that it has its problems – I’ve considered some of the basics of a national sales/consumption tax. The economics and politics of a national sales tax fail miserably.

From Americans for Fair Taxation, I roamed through some of the finer points of what is now under consideration. I used this recent editorial to focus mostly on the ideas. For example:

What emerged from this research is that a national retail sales tax is a preferred method of taxation among most Americans surveyed.

A majority of Americans supported slavery at our nation’s beginning. Segregation was hunky-dory for most well into the 20th century. Even today, a majority of Americans believe that surgically altering the healthy genitals of their male children is reasonable. Of course income versus sales tax is not comparable to those sorts of oppression, but forgive me if I fail to be swayed by such arguments in favor of any position. Mob desire is irrelevant because good intentions do not guarantee good outcomes. The details matter.

Research on the price of consumer goods reveals that up to 20% of all prices today represent hidden income taxes and payroll taxes. Once these taxes are repealed and replaced with the FairTax, it is likely that market pressure would force retail prices to fall.

This is either ignorant or dishonest. The FairTax will not eliminate embedded taxes; it will merely change the source of which businesses collect taxes from individuals. Even something as simple as an apple will have embedded taxes.

The apple will require a seed to create an apple tree. That seed will have a sales tax. The tree will require fertilizer to make grow. That fertilizer will face a sales tax. The fertilizer will need to be transported from producer to apple grower. That fuel will face a sales tax. The distributor needs a truck to haul the fertilizer. That truck will face a sales tax. The truck will require gas to operate from A to B. That fuel will face a sales tax. And so on, all the way to my cupboard.

Now, imagine something more complicated, with multiple ingredient raw materials. Think that iPod that Americans love doesn’t consist of parts purchased from vendors with an “s” for plural who all require inputs to make their products? The disappearance of embedded taxes is a myth, unless we assume that someone who currently fails to absorb hidden costs will suddenly absorb non-hidden costs. I will not assume something quite that silly.

Which leads to this, perhaps the boldest claim:

The FairTax would collect revenue from the underground economy.

How, exactly, when basic logic suggests the FairTax would push more of the U.S. economy underground, not less? There would be evasion everywhere. Need to get your hair cut? Here’s $20 cash. Need your lawn mowed? Here’s $40 cash. Never doubt the human capacity to subvert rules. Simplicity is important, but reducing the burden of complying is much more effective. Absent that, reducing the ability to bypass the system is important. I don’t have to believe that taxes are good to push the idea that collecting as close to the assumed amount is wise. Otherwise, reality will be destroyed by the theoretical estimate and actual receipts. The rate would increase more the greater those two figures differ.

As the FairTax advocates own figures indicate, the sales tax is not 23 percent. That’s only the tax-inclusive rate offered because it looks better² than the tax-exclusive – the common metric – rate of 30%. Dividing 30¢ sales tax by the final price of $1 and 30¢ gives a 23% tax-inclusive rate. But in Virginia, if I go into the store and buy a bottle of water, I see the price of the water as 99¢ and the final price as $1.01 after the 2% sales tax is added. No one pretends that the rate is 1.98%.

In the end of the editorial, this:

Significantly, the FairTax eliminates all loopholes, gimmicks, exemptions and deductions from the federal tax system.

The “prebate” is certainly an exemption, and given the details, I’d call it a gimmick. The details:

Another benefit of the FairTax is that, unlike other sales taxes, it would not hit the poorest Americans the hardest. The FairTax proposal calls for sending every American a “prebate” check to offset the cost of the national sales taxes paid by those living in poverty. This feature would effectively exempt those living below the poverty line from paying taxes to the federal government, and provide all taxpayers with a reimbursement of a portion of taxes paid.

Who’s administering this “prebate”? How are differences in regional cost of living factored into the “prebate”? Are the differences factored in? According to the following document, “The Prebate Explained” (pdf):

Poverty level spending represents what it costs families of varying household size and composition to buy their necessities.

All consumers are alike. Every central planner believes that and the “prebate” requires the adoption of central planning. You need four chickens, two gallons of milk, one dozen eggs, and eight ounces of cheese. That’s normal. Except it’s not, because the government can’t know everyone. It can only assume and expect you to fit that mold. Some people will receive a larger “prebate” than they should and some will not receive enough. It’s inevitable.

And what about those people who spend their “prebate” on lottery tickets, for example? I’m not offering that as an expectation of what “the poor” will spend their “prebate” on or as a judgment on lottery tickets. I think people should be able to spend their money on whatever they want. But this plan specifically relies on government-managed handouts, in advance and tied to no actual spending, to make the plan plausible and not regressive. How do we prevent such wastefulness among citizens when it leads to further reliance on the government to pay for necessities? There will be people who waste their “prebate”, just as there are now millions of Americans who believe that their tax refund is found money rather than an interest-free repayment of excess taxes paid as many as 16 months prior. There will be a call to further assist these people through government resources. The loopholes, gimmicks, exemptions, and deductions aren’t going anywhere.

Neither is the intrusion of government into each person’s privacy. To get the “prebate”, Americans must do the following (according to the pdf above):

The registration form requires only the following information:

  1. The name of each family member who shares the residence;
  2. the Social Security number of each family member;
  3. the family member to whom the monthly prebate check should be paid;
  4. a sworn statement that all listed family members are lawful residents, that all family members sharing the common residence are listed, and that no listed family members are incarcerated;
  5. the address of the shared residence; and
  6. the signature of all family members 21 years of age and older.

Failure (unwillingness) to adhere to those instructions results in no “prebate”. And again, who will be managing this information and
distributing monthly checks to millions of households? Maybe the IRS goes away, but why should I believe its replacement will be any better? (Who validates that my claim of 6 children is correct? Fraud and waste, anyone?)

The effect of eliminating regressive payroll taxes is commonly overlooked when analyzing the FairTax, but it would have a very significant impact, as these taxes represent the single largest tax burden on these income earners.

I agree with fixing the burden of payroll taxes. It is inherently regressive. Making it “fair” would be a huge tax increase on higher earners, but it wouldn’t help our economy. So what to do?

Eliminating the tax is a great idea, but the FairTax only seeks to fund the underlying flawed entitlement through a sales tax without addressing the fundamental flaw in seeking to be revenue neutral to maintain ineffective programs. And since when has Congress been expenditure-neutral? Why should I believe it will suddenly find fiscal responsibility? Taxes are bad¹ and should be lowered as much and as soon as possible, but we need to cut expenditures first. Without that measure, we’re engaging in diversionary games³.

Finally, and most damning from a practical path, how do we transition from an income tax to a sales tax? The Y2K nonsense was overblown. Flipping the switch from Income Tax on December 31, 20xx to Sales Tax on January 1, 20xx would be a realized nightmare, but I’ve seen nothing other than that simplistic transition implied. That’s foolish.

I also used this chain of entries from Kip at A Stitch in Haste as research.

¹ We have a $9,124,016,501,555.91 national debt, as of today. That has to be repaid.

² For another example of this sleight-of-hand marketing, read this.

³ There is one final caveat looming large. We’d have to repeal the 16th Amendment.

The ability to vote does not qualify the voter as an entrepreneur.

Consider this another reason I neither live in the District of Columbia nor have my business registered there.

The District could become the second U.S. city to require employers to provide paid sick leave to all workers, a move advocates say could protect employees from having to choose between keeping themselves healthy and keeping their job. Opponents say such a law could prompt businesses to reduce benefits and lay off workers.

The D.C. Council is scheduled to vote on the measure Jan. 8 after several months of negotiations.

Under the bill, large businesses, defined as having 51 employees or more, would have to provide up to seven days of paid leave. Small businesses — those with 10 or fewer workers — would have to offer up to three days. Two other categories of employers would fall in between, and part-time workers would get half the number of days.

What makes the D.C. city council so confident that it knows better how to run the businesses in its borders than the owners of those businesses? More importantly, what makes it believe that it has the right to dictate its opinions on proper compensation packages?

Employers would pay an average of $10.35 more a week per employee to be in compliance, said Ed Lazere, executive director of the D.C. Fiscal Policy Institute, which studies the District’s finances. “It’s not nothing, but it’s not huge,” he said. “It’s not as big and scary as they think.”

Does the business owner think $10.35 more per week per employee, with no increase in productivity or revenue, is not huge? She bears the cost. Her opinion should matter exclusively, in anticipation and response to what her employees demand.

To put this in perspective, we must consider what that $10.35 means in practice, not in subjectively judged theory. Assume the minimum business required for full compliance, 51 employees. The cost is expressed as $10.35 because it appears insignificant. But the first thing the business owner will do is multiply $10.35 times 51 employees times 52 weeks. The result is a $27,448.20 increase in expenses for the employer. What could $27,448.20 buy instead? I’ll guess employee number 51 in my scenario, although the logic holds whether we’re talking about employee number 51 or employee number 63.

The first city to engage in this:

The D.C. measure falls short of a law on sick leave in San Francisco, which became a pioneer when 61 percent of voters approved a 2006 ballot initiative to require that employers of 10 or fewer workers provide five days of paid leave and that larger employers give nine days. The law went into effect in February.

How many of those 61 percent of voters malcontents run a business? Mob rule (allegedly) seeks to raise everyone up to a higher standard, but serves little purpose other than to bring everyone down to a base level. Aside from its illegitimacy, it is cruel. I doubt seriously that the employee who might’ve earned $27,448.20, or the customers who will now be asked to pay the expense, would prefer the sympathy over the money.

What’s good for us is not good for them.

So many nuggets in this story.

The federal budget deficit would have been 69 percent higher than the $162.8 billion reported two months ago if the government had used the same accounting methods as private companies, the Bush administration reported Monday.
…

The report was released by the Treasury Department and the president’s Office of Management and Budget. Under the accrual method of accounting, expenses are recorded when they are incurred rather than when they are paid. That raises the costs for liabilities such as pensions and health insurance.

Imagine that. Look at the picture as a whole and it looks worse. Now, why would Congress reject such accuracy?

The new report indicates that funding for Social Security and Medicare will come up $45 trillion short in the next 75 years in paying for projected benefits over that time frame.

Oh, right. But what’s a mere $45,000,000,000,000 in the grand scope of caring about people through government?

As it has for every report, the Government Accountability Office, Congress’ auditing arm, said it could not sign off on the books because of problems at various agencies, most notably the Defense Department.

In a letter, GAO Comptroller General David M. Walker did note that his agency was able to sign off on the financial statement for the Social Security and Medicare programs.

“The federal government did not maintain effective internal control over financial reporting, including safeguarding assets, and compliance with significant laws and regulations,” Walker said in his letter.

If you or I did that in our record-keeping, the government would assume our guilt, take everything we own and throw us in jail.

**********
Then there’s this:

“The 2.6 trillion in record-breaking revenues that flowed into the Treasury this year reflect a healthy economy,” Treasury Secretary Henry Paulson said in a statement accompanying the new report.

It could just as easily reflect that Congress is taxing the American people heavily. Granted, I’d go along the lines of arguing that the $275,500,000,000 deficit reflects that the Congress and President are willing to spend beyond all rational bounds of fiscal responsibility. But that wouldn’t make anyone look favorable, so it must not be true. Right?

Oops. Do over?

I like Megan McArdle’s analysis of the sub-prime bailout:

On a moral level, I’m with the latter group: people who qualify for the bailout are mostly people who really should have known better; they will now be bailed out mostly by people who did know better.

On a macroeconomic level, placing blame is somewhat counterproductive. Those who have sensible, fixed mortgages will not really be made happier if the credit crunch turns into a liquidity crisis, the economy plunges into a deep recession, and they lose their jobs, forcing them to default on their sensible, fixed mortgages.

I largely agree with this, and I say that as someone who has a fixed-rate mortgage taken out during the period included in the plan. Unfortunately, too much rests on the if in that last sentence. I don’t think this deal prevents the negatives as much as it delays them. And I worry about how much worse parts of the impending problem will be because we pretended as though we could make them go away by wishing hard enough.

In my opinion, a willingness to tolerate high levels of moral hazard–to give people second, and third, and eighth chances without inquiring too closely about how they got into so much trouble–is one of the great strengths of the American system. It makes us happier as people, and it lets our society make use of human capital that is too often left moldering in (metaphorical) debtor’s prison under the more punitive and moralistic regimes that prevail in the rest of the world.

Again, I agree with the larger view, as it pertains to our wisdom in permitting failure. It creates a dynamic ability to rebound. But rewarding the failed without demanding the necessary consequences of the failure only encourages the first, second, and seventh failures in the next foreseeable disaster.

Markets in Everything

The background:

A melee at a Kmart store in Wauwatosa Saturday morning was started by a computer glitch.

The store was running a promotion in which it would give away $10 to anyone applying for its credit card, but the computer glitch led to everyone’s application being granted — bestowing up to $4,000 in instant credit to anyone who applied even if they shouldn’t have qualified.

Generally the lesson should be that businesses should take better care to test their software before unleashing it into use. In software development, test, test, and when you’re done with that, test some more. Oh, and then test again.

But what’s interesting is how quickly the entrepreneurial spirit kicks in:

Two employees confirmed for police that anyone who applied was being given instant credit — from $850 up to $4,000. They also told police that people started calling other people to the store for so-called free money. The store ran out of credit applications.

One witness told police someone went to another Kmart, got some applications there and was selling them in the Wauwatosa Kmart parking lot for $20 apiece.

I should wave a finger and tsk, tsk this. There’s a missing level of fairness and decency here, knowing that the advertised benefit is a mistake and the people who are clamoring presumably wouldn’t qualify without a software glitch. (Sounds eerily familiar to the current subprime “scandal”…)

I won’t tsk, tsk, though. The applicants are adults. If they get themselves into debt from “free money”, I have no problem with the economic damage they’ll cause themselves when Kmart comes collecting. A software glitch does not include the right to engage in a fraudulent agreement to borrow without intending to repay. And Kmart is large enough for its management to know that it needs to test its software. It will now deal with the fallout, although it has a legitimate claim on every debt incurred by its customers.

More importantly, the individuals selling the applications are the only people who demonstrated any intelligence here. Sketchy morals, perhaps, but an acute sense of the immediate market. That counts for something.