Coyote Blog

Hit and Run, trying to make a different point, quoted this statement from Harold Meyerson (my emphasis added):

But the new growth of selective libertarianism in the Democratic ranks
is hardly going to be the main source of controversy in coming party
debates. More likely, that debate will pit those who think retraining
is the answer to our more layoff-prone society (that's the Bob Rubin
solution) against those who think that retraining needs to be
supplemented by, for instance, publicly funded alternative energy
programs that would generate millions of jobs (that's the solution of a
number of union leaders, and one that I favor as well). The latter
position is clearly more in the New Deal liberal mode, but Rubin's is
hardly libertarian.

Do serious people actually favor publicly funded alternative energy programs of the scale that would employ millions of people?  Note that since the total civilian labor force is approximately 150 million people, he is talking about a program encompassing several percent of the US workforce.  I am supposed to be on vacation this week, but here are a couple of random thoughts:

• A huge government make-work program seems to be an odd response to an increase in employment volatility, which is how the problem is framed, even by Meyerson.  He calls it our "layoff-prone society."  I don't accept that this is necessarily a bad thing, but even if it is, a jobs program does not solve it.  Our unemployment today is at a low level (less than 5%) so that the problem, if it exists at all, has to be volatility, not the absolute size of employment.  So a jobs program helps, how?
• I will confess a big government-funded jobs program would reduce employment risk in one way:  once someone is hired by the government, whether it be a teacher or bureaucrat,  it is impossible short of a felony conviction to fire them, no matter how horribly destructively incompetent they are.  So anyone hired by this new job program would have a job for life, I guess, though at an enormous dead-weight-loss of the overall economy.
• The current economy hovers near full employment.  That means that millions of people sucked by the government into an alternative energy program would be pulled out of areas the market currently says is the most productive place for them.  Unless the government has identified a massive market inefficiency, such a program will net reduce the productivity and output of the economy.  Remember -- these millions of people are likely employed somewhere else today, so those places they are employed either have to scale back or pay more for labor.
• Does anyone really think the government is going to make the right technology and investment choices in such a program?  It will take about 47 seconds before the investment process is politicized and spending is handed out as pork to valued supporters in key Congressional districts. (just look at ethanol and the Midwest Archer Daniels Midland lobby). Remember, the government has been pouring all its investment and subsidies and regulations (e.g. zero emissions requirements) into plug-in electric cars, which still are not there technologically.  In the mean time, the market has latched onto hybrids, a technology actually opposed at first by government energy czars in places like California (because they were not zero emissions).  Hybrids have done more to reduce automotive fuel consumption than any of the technologies, from plug-ins to fuel cells, that the US government has supported in any big way.

Postscript:  Yes, I know plug-in hybrids may be here soon, but batteries are apparently still not where they should be.  I would love to have a plug-in hybrid.  Note, of course, a plug-in hybrid is very very different from a straight electric car, which was the choice of the bureaucrats.  Also, I know that some areas have started to subsidize hybrids, for example by allowing their use by one passenger in the car-pool lane.  These are late-to-the-party efforts to claim some government credit for a private market trend already in progress.

Update:  In fact, today's SJ($) brings us a relevent example:

[Former Airbus CEO] Mr. Streiff talked of moving production jobs between
partner countries, running Airbus like a business. For the first time,
there was talk of apportioning work on the basis of competitiveness,
not national entitlement. There were hints that Airbus should emulate
Boeing with major risk-sharing partnerships, looking beyond Europe for
new product development resources and production sites. He even
committed the ultimate sin"”publicly admitting that Airbus had fallen
over a decade behind Boeing in new product development.

In his exit statement, Mr. Streiff said, "I
progressively came to the conviction that the mode of corporate
governance at Airbus didn't allow for the success of my plan." In other
words, the now former CEO implies, he was blocked by people who like
the status quo. So who would be happy with the status quo when the
situation is degenerating with each day? Well, any government official
who wants governments to stay in charge of the economy. The last thing
they want to see is private sector cash reinventing the fruit of their
state-directed industrial policy.

For the best clue to this dysfunction, consider
France's finance minister, Thierry Breton. He recently told reporters
that Airbus is a "European success," but vowed to "defend this model."
Now why would a model need defending if it were successful?

Airbus was created when European governments
orchestrated their economies, creating new national and continental
champions according to politicians' whims. As far as industrial policy
goes, Airbus was a no-brainer: The jetliner industry offers guaranteed
growth rates and extremely high barriers to entry. Take some legacy
industrial assets, insert government cash, find some talented sales
people, and watch it go. Every other European industrial
scheme"”shipbuilding, cars, Concorde"”obliterated value. Airbus was the
only state-supported success. Unfortunately, Europe's politicians
forgot a crucial fact: Airbus succeeded despite government industrial
policy, not because of it. In fact, this government interference has
created some serious trouble.

Look at the Airbus record: a series of moderate
successes (A300/310, 330), one huge home run (A319/320/321), and some
lamentable but forgivable near misses (A340, A340-500/600). But with
the full support and connivance of parent governments, they launched a
spine-breaking disaster, the superjumbo. Without the A380, Airbus would
still be a tremendous success. Instead, they've got a serious
industrial crisis, right in the middle of the best jetliner market in
years. Mr. Breton's "model" of state-guided industries is alchemy in
reverse: spinning gold into straw.

I'm not really into the culture, so prevalent here in Scottsdale, of purchasing expensive cars and boats for use as ego-prosthetics (I drive a Volvo, for god sakes, a chick-anti-magnet if there ever was one).  But I have to admit this is cool, a new supersonic business jet.  The real breakthrough seems to be their ability to substantially reduce the sonic boom, which got the Concorde banned from over-land flights, to a legal and manageable level.  They claim sound levels 99% lower than the Concorde at ground level, though this is theoretical and has not been tested.

They don't mention fuel economy -- the Concorde drank fuel. 

Oh, and the price - expected to be $80 million for a twelve seat aircraft.  For those of you who don't routinely shop for private aircraft, this price is steep even in that rarefied market.  You can get a Boeing 737 outfitted very nicely as a private plane for half that.  But this new plane will get you to your house in Gstaad twice as fast.

Yes, for those who are counting, this is something like post number 157 on the mismatch between anti-trust myth and reality.  The myth is that it is about protecting the consumer.  The reality is that anti-trust is an opportunity for companies to get the government to sit on their competitors:

In their new version of Windows dubbed "Vista," Microsoft has included a number of useful features that has several companies rattling the anti-trust sabers once again.

For instance, Adobe Inc., creators of the widely used PDF
document standard, object to Microsoft's built-in functionality that
gives users the ability to create PDF files without having to use
Adobe's own software.

Real Networks, per usual, is protesting that Microsoft is integrating media playback capabilities in the form of Windows Media Player 11, which competes directly with Real Player.

And now Symantec, developers of anti-virus software, is complaining that Microsoft will include their own firewall, which could lower sales of Symantec's own solutions.

And as mentioned above, all three of these firms are appealing to regulators to "solve" what they see as anti-competitive business practices to prevent their sales from eroding.

Surely then, it is only a matter of time before software firms that
make calculators or solitaire protest the inclusion of such services
into Windows. Is not the native support of the English language (and
dozens of others) a clear and present danger to third-parties eeking
out a living?

Soon thereafter, perhaps boutique's specializing in steering-wheels
and headlights may begin to sue automobile companies for integrating a
steering-wheel and headlights into cars. And no one should forget about
those built-in cassette and CD players.

It's hard to see how consumers are hurt by getting more free functionality in their operating system.  Of course, the companies above will work very hard to get the government to require that you pay extra for these components. 

A frequent topic of this blog is to point out situations where technocrats translate their distrust for individual decision-making into the justification for government control. 

Kevin Drum provides me with one of the best examples I have seen of late of this phenomena of using distrust of individual decision-making to justify government intervention, in part because he is so honest and up-front about it.  I usually try not to quote another blogger's posts in total, because I want to give folks an incentive to go visit the site, but in this case I need to show the whole thing (the extensive comments are still worth a visit):

If we treat healthcare like any other market, allowing consumers
free rein to purchase the services they like best, will it produce high
quality results? A recent study suggests not:

Researchers
from the Rand Corp. think tank, the University of California at Los
Angeles and the federal Department of Veterans Affairs asked 236
elderly patients at two big managed-care plans, one in the Southwest
and the other in the Northeast, to rate the medical care they were
getting. The average score was high "” about 8.9 on a scale from zero to
10.

....In the second part of their study, the medical researchers
systematically examined 13 months of medical records to gauge the
quality of care the same elderly patients had received....The average
score wasn't as impressive as those in the patient-satisfaction
surveys: 5.5 on a 10-point scale. But here's the interesting part:
Those patients who graded the quality of their care as 10 weren't any
more likely to be getting high-quality care than those who gave it a
grade of 5. The most-satisfied patients didn't get better medical care
than the least-satisfied.

Surprise! Patients are
poor judges of whether they're getting good care. And if consumer
preferences don't map to high quality care, then a free market in
healthcare won't necessarily produce better results or higher
efficiency, as it does in most markets.

Back to the drawing board. Perhaps a national healthcare system
would be a better bet to reduce costs, cover more people, provide
patients with more flexibility, and produce superior outcomes. After
all, why are we satisfied with allowing the French to have a better
healthcare system than ours even though we're half again richer than
them?

There is it, in black and white:  Most of you individual slobs out there cannot be trusted to make good health care decisions for yourselves, so the government should do it for you.  (And by the way, who the hell thinks the French have a better health care system, but that's off-topic for today).

Here is the false premise:  If the intellectuals who ran the study judged that the individuals involved were getting poor care when the individuals themselves thought is was good care, this does not necessarily mean the individuals being studied were wrong.  It may very well mean they have different criteria for judging health care quality and value.  In fact, what goes unquestioned here, and I guess the reader is supposed to swallow, is that there is some sort of Platonic ideal of "high-quality care" that the people who run this study have access to.

But this is ridiculous.   Does high-quality mean fast?  painless?  private?  successful?  pleasant? convenient?  I, for example, have all the patience of an 8-year-old who just ate three pieces of birthday cake washed down by two Cokes.  I need stuff now, now, now.  I hate gourmet restaurants where meals take 3 hours.  Many gourmands, on the other hand, would probably shoot themselves before eating some of the food I eat.  We have different standards.

Let's take an example from another industry:  Cars.  Every year, the "experts" at Consumer Reports and Car and Driver try out all the new cars and publish the two or three they think are the best.  So, does this mean that everyone who does not buy one of these cars selected by the experts as the best are making a bad decision?  Does this fact tell us the government should step in and buy their cars for them because they can't be trusted to make the right evaluations?   NO!  Of course not.  It means that the people who buy other types of cars have different criteria and priorities in judging what a "high-quality" car is.  Some want high gas mileage.  Some want a tight interior with leather.  Some want a big honkin' engine.  Some want a truck jacked way up in the air.  Some want room to carry five kids.   You get the idea.

There are at least two better explanations for the study results.  Let's first be clear what the study results were:  The study found that the patients studied graded health care differently than did the people who ran the study.  That's all it found.  This could mean that the intellectuals who ran the study and the individuals studied judged care on different dimensions and with different priorities.  Or it could mean that the individuals studied had incomplete information about their care and their choices.  Neither justifies a government takeover of the industry.  (In fact, to the latter point about information, markets that are truly allowed by the government to be free, which health care has not, often develop information sources for consumers, like the car magazines mentioned above.)

The thinking in Drum's post betrays the elitist-technocratic impulses behind a lot of the world's bad government.  Look at "progressive" causes around the world, and you will see a unifying theme of individual decisions that are not trusted, whether its a poor Chinese farmer who can't be trusted to choose the right factory work or an American worker who can't be trusted to make her own investment decisions for retirement.

Postscript:  In some past era, I might have called this one of the worst excuses for fascism I had ever heard.  Unfortunately, Brad DeLong recently took that title with his post that the government needs to take even more money from the rich because the rich are ostentatious and that hurts other people's feelings.  No really, I don't exaggerate, he said exactly that.  If somehow you have missed this one, look here.

For most city dwellers, the temperature increase in the summer time from the urban heat island effect (UHIE) dwarfs any temperature increase from global warming.  UHIE is the result of high population density, with lots of cars and equipment that generate heat and buildings and roads that seem to hold it in.  Many cities are several degrees warmer than the surrounding countryside.  The effect is so dramatic that correcting for this effect is a big part of the uncertainty in answering seemingly simple questions like "how much has the earth warmed in the last 100 years?"

Apparently, UHIE is a big problem in one of the world's densest cities, Tokyo.

The gleaming high rise buildings that crowd the
cityscape may symbolize Japan's economic recovery but they have also
converted this priciest of human habitats into vast heat-trapping
canyons in what is known as the urban heat island (UHI) effect.

Heat churned out by air-conditioners, automobiles and human activity
finds no escape, causing ambient temperatures, especially in the summer
months, to rise by several degrees and forcing authorities to
constantly look for newer ways to cool down a city on the boil....

A report released by the Tokyo Metropolitan government this
year shows that average temperature rise in the capital over the course
of the 20th century has been 3 degrees C....

Yamaguchi also told IPS that the number of days recording temperatures
of over 35 degrees C has gone up to more than 35 days a year,
concentrated around the three summer months between July and September.
That contrasts with the 14 days recorded in 1975....

Tellingly, most of the deaths from the European heat wave several years
ago where in cities, which tells me that UHIE had a contributing role
more than global warming.  This is actually something we argue about
from time to time in Phoenix.  Ocasionally the city considers
steps to lower our albedo, such as requiring white (rather than black)
roofs and looking at alternatives to dark asphalt for roads.

This has never been a big environmentalist issue.  My guess is that
this is because environmentalists, at least in the US, have adopted a
goal of increasing urban concentration and population densities.  I
suppose it might be embarassing for them to admit the warming they are
trying to get city dwellers to blame on CO2 may in fact be largely due
to the environmentalists own urban planning approaches.

Michael O'Hare and Matt Yglesias (via Megan McArdle subbing at Instapundit) makes this very good point about carbon taxes:

Tragically, if you tell people you're going to tax their ft ossile
fuels, they freak out and your political career dies a swift and
merciless death. But if you tell people you're going to subsidize alternative energy sources
the people will like that. Functionally, however, these are basically
the same thing, except for the fact that the tax method works much,
much better.

This is unfortunately true.  As I have posted a number of times, I am skeptical that man-made global warming and the net of the problems (and opportunities) it brings will be bad enough to justify the economic cost of slowing or reversing CO2 emissions.  However, I can imagine being convinced that efforts to limit CO2 emissions are necessary.

Regulations on emissions, whether to the air or into shared waterways, is one of the few areas of government action that actually facilitate the smooth operation of strong property rights.  As I explained before, one could easily imagine a world of strong property rights bogged down in constant suits and counter-suits, as any property owner could rightfully sue over molecules of emissions that crossed their property line from another.  Certainly I can imagine private solutions and agreements that could have developed in the absence of government to sort this out, but government emissions restrictions, when done well, are not an unreasonable approach.

Of course, there are a lot of bad ways to manage emissions, and the government has tried about all of them.  New source controls, which are still debated and, incredibly, supported, represent all the worst of government hubris in trying to micro-manage solutions and technologies rather than just defining the desired outcome.  If anything, new technology subsidies (think ethanol) have been even worse, acting more like political pork and rent-seeking than intelligent pollution policy.

However, the government, especially the environmental lobby which tends to be full of technocrats and statists, greatly prefer the government micromanagement approach.  The impossibility of the task should be clear.  Take CO2 reduction -- to micromanage the reduction, the government would have to sort through every source of CO2, every available technology, and come up with a prioritized plan for investment to get the most reduction for the least $.  And even if the tried, they would be wrong, because this is a problem with a billion variables.  And even if they happen to get it right, they would not implement it, changing their plans the minute the Archer Daniels Midland lobbyist walked in the door. 

To understand the complexity, take one example: electric cars.  Hey, everyone loves the idea of electric cars -- they are zero emissions, right?  Well, sort of.  Actually they are emissions outsourcing devices, shifting emissions from the individual car's tailpipe to the power plant where the electrical charge is coming from.  Now, that power plant is a lot more efficient at burning fossil fuels, so often the net is better, but what if the marginal electricity production is coming from coal?  Does that net reduce CO2?  And, if electric cars reduce carbon emissions, does $10,000 investing in electric cars reduce more or less carbon emissions than $10,000 in solar?

These decisions are impossible to make, but we don't have to.  Every day, markets and price signals help individuals make such tradeoffs rationally.   That's why a carbon tax, that raises the price of CO2 emissions fairly directly, would be a much more efficient approach to managing emissions.

Update: People have asked about emissions trading.  Emissions trading schemes are OK, in that they help push emissions reductions towards the people who can do it most efficiently.  What I don't like about them is they are a government form of incumbent subsidy - basically industry incumbents get a tradeable asset of value, while new and future entrants do not.

Frequent readers of this blog will know that this quote from Milton Friedman on licensing is one of my favorites:

The justification offered is always the same: to protect the consumer. However, the reason
is demonstrated by observing who lobbies at the state legislature for
the imposition or strengthening of licensure. The lobbyists are
invariably representatives of the occupation in question rather than of
the customers. True enough, plumbers presumably know better than anyone
else what their customers need to be protected against. However, it is
hard to regard altruistic concern for their customers as the primary
motive behind their determined efforts to get legal power to decide who
may be a plumber.

Ilya Somin at Volokh has an interesting post (though right this moment their site seems to be down) about the American Bar Associations (ABA) role in accrediting colleges.

To my mind, the problem goes beyond the shortcomings of specific ABA standards.
The real mistake is allowing an organization with a blatant conflict of interest
to take over the accreditation role in the first place. As an interest group
representing lawyers, the ABA has an obvious stake in limiting entry into the
profession so as to decrease the competition faced by its members. One way of
doing so is by restricting the number of accredited law schools, at least in the
vast majority of states that require all or most aspiring lawyers to attend an
ABA-accredited school in order to take the bar exam.  We would not allow an
organization run by Chrysler, GM, and Ford to set regulatory standards
determining who has the right to sell cars in the United States. Requiring ABA
accreditation for law schools is the exact equivalent in our industry....

To be completely clear, I am NOT arguing that the ABA should be prevented from
certifying schools as meeting what it considers to be appropriate standards. I
am merely suggesting that ABA accreditation should not be required by law as a
prerequisite for allowing a school's graduates to take the bar. If ABA
accreditation really is a sign of school quality, then applicants can take that
into account in making their decisions on what school to attend, just as they
currently consider US News rankings and other data. If some form of legally
mandated accreditation is needed (and I highly doubt that it is), the system
should be run by an independent agency insulated as much as possible from
control by the ABA and other interest groups representing practicing lawyers.
There should be similar insulation, by the way, from influence by established
law schools, since we too have an obvious self-interest in limiting competition
by preventing new entry into the legal education market.

Insurance legislation passed in Massachusetts:

The bill requires that, as of July 1, 2007, all residents of the Commonwealth must obtain flood insurance coverage, even if they don't live in a flood plain.... The purpose of this "Individual Mandate" is to strengthen and stabilize the functioning of flood insurance risk pools by making sure they include people outside of flood plains with no flood risk as well as people who know they live in a flood plain.

What?  We have to get insurance, even if we think there is no risk and the insurance is just wasted money?  Yes indeed, that is correct.  Well, almost correct.  I changed a few words.  The actual wording of the bill, sent to me by reader L Cole, mandates unwanted health insurance rather than unwanted flood insurance:

The bill requires that, as of July 1, 2007, all residents of the
Commonwealth must obtain health insurance coverage.... The purpose of
this "Individual Mandate" is to strengthen and stabilize the
functioning of health insurance risk pools by making sure they include
healthy people (who, if not offered employer-sponsored and -paid
insurance, are more likely to take the risk of not having insurance) as
well as people who know they need regular health care services.

More from Bloomberg.

For years I have criticized the argument which says that the problem with the health care system is that there are too many uninsured people.  My argument was always that there were many people who choose to self-insure, and that the real "problem," if there is one, is how many people there are who need care but can't get it (a much much smaller number that is never discussed). Just look at the attached bill - the justification is that there are people uninsured, not that there are people unserved.  Now we can see the end result:  Instead of fixing the actual problem, which is people who need care not getting it, they fix the problem as it was discussed:  they literally forced people to get health insurance, even if they don't want or need it.  Now some elected weenie can say "in Massachusetts, we have licked the problem of people without health insurance."  Reminds me of this Rush song.

Like many parallel bills proposed in other states, this one requires businesses to provide health insurance or to pay into a state fund if they don't.  But the bill also has this scary provision:

The Free Rider surcharge will be imposed on employers who do not provide health insurance and whose employees use free care. Imposition of the surcharge will be triggered when an employee receives free care more than three times, or a company has five or more instances of employees receiving free care in a year.

First, as an employer, why am I a free rider?  It is not me that received any free services or care.  My employees medical problem is not my fault (or else it would be workers comp).  If I hire someone that takes advantage of government loans to send their kids to college, am I a free rider?  If my employees choose subsidized mass transportation over driving their own cars, am I a free rider? 

Second, I sure hope all you poorer folks with health problems understand that it is now going to be really hard to find a job in Massachusetts.  No employer in their right mind is going to hire someone who may trigger this liability.  This provision would be a disaster for our company, since we tend to hire older retired people (with lots of health problems) for seasonal work (for which it is impossible to structure a health insurance plan).  Fortunately, I guess, Massachusetts is one of the states our company red-lined years ago as a place we will never do business, so this does not change our strategy much.

I have no idea what this will cost taxpayers and businesses in Mass.,
but I am positive it is substantially more than the bill's sponsors have
let on.  And there is a lot of hand-waving going on by supporters who insist that this bill will drive premium costs way down that strikes me as bullshit as well.

Update:  This article in Business Week provides some insight into the 500,000 uninsured in Mass.  Supporters of the bill claim that 100,000 of these are poor people who qualify for Medicare but haven't bothered to sign up.  200,000 are higher income folks who could afford insurance but choose not to buy it.  The other 200,000 are people they claim can't afford it, but surely even if they could, some portion would choose not to buy it.  So by the admission of the bill's supporters, at least 60% and probably more of the uninsured are that way because they choose to be.   Lets come up with a costly socialization of the medical industry in order to force on people something they don't necessarily want or need.

My father-in-law Steven Groves died today of injuries he suffered when his bicycle was hit by a car. 

Steve and I did not always agree politically, be we shared a lot of the same eclecticism in our interests.  I seldom found anything, no matter how arcane, that I found interesting that Steve did not as well (even if we might come to different conclusions about it). Steve had a scientist's passion for fact-based analysis, and was one of the very few people I have ever met truly willing to change his stance on an issue as he came to understand it better.  My enduring memory of Steve is of him listening and questioning.  He was always interested in learning more about... whatever it was that we were talking about.  I can't tell you how many of my best posts on this blog evolved from a discussion I had with Steve.

Of all the people I have ever know who were actively interested in political / economic / social issues, Steve was by far the most consistent in matching his behaviors to his beliefs.  A lifelong environmentalist, Steve was surely one of the few who eschewed dryers for clotheslines, power mowers for reel mowers, and cars for his bicycle.  Considering this last item, one could say he died for his beliefs.

Blogging will be light this week, as my wife is back home with her family and I am playing single parent.  I was working on a post last weekend in honor of my 44th birthday, to reflect on the fact that contrary to conventional wisdom that people's beliefs become pretty set with age, mine have migrated pretty far since I was 22.  I will still get to this post in time.

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it. 

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one. 

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

From Robert Bidnotto, echoing thoughts I had here and also here, but he writes much more eloquently:

Okay, I have had it.

Not a damned thing distinguishes the Republicans from the Democrats
anymore...not a damned thing. "No Child Left Behind" in essence, and
unconstitutionally, federalized education. The GOP-engineered federal
prescription drug subsidy program for seniors was another huge and
costly step toward total socialized medicine. The Administration's
response to recent natural disasters -- here and abroad -- establishes
the premise of federalizing all local emergencies globally, and  reducing the U.S. military into becoming the logistics wing of the International Red Cross.

And so on, and so on....

To the Left, government should whip individuals into collective
lockstep regarding its PC-egalitarian agenda on such issues as smoking,
diets, guns, cars, nature-worship, land use, political speech and
rhetoric, equality of income and "access" to things that don't belong
to you, drafting kids for "national service," using schools to push PC
propaganda, etc.

To the Right, government should whip individuals into collective
lockstep regarding its traditional moral agenda, including abortion,
sex, Darwin, cultural speech and rhetoric, marriage, national
demographic purity, drafting kids for military service, using schools
to push religious values, etc.

Neither side wants a government of limited powers, and
rejects the initiation of force against others. Neither side respects
individual rights, and rejects using the "fearful" power of government
to compel the independent individual to toe its party line. Neither
side recognizes property rights, and rejects the redistributionist
welfare state.

More fundamentally, neither side rejects the cannibalistic "morality" of sacrificing the individual to the group.

Left and Right both agree that the individual is their private
plaything, a sacrificial lamb for their respective pet causes. The only
thing that they really disagree about is which individuals they are
going to sacrifice, for whose benefit, and in the name of what cause.

While the "she was asking for it" defense has thankfully been purged from most rape trials (at least those involving strangers), it seems to be alive and well in the civil trial world.  Last week, a jury held that the terrorists who bombed the World Trade Center in 1993 were only 32% responsible for their actions.  The real villain in this terrorist attack was ... the Port Authority, owner of the facility, who so thoughtlessly allowed themselves to get bombed.  More via Volokh and Overlawyered.  Based on joint and several liability, the PA now is on the hook for the entire $1.8 billion verdict.

By the way, the "smoking gun" in the trial was apparently a recommendation the PA received (one of hundreds and perhaps thousands of suggestions of wildly varying quality) to close the parking lot to cars to prevent car bombs.  This helps reinforce my earlier point of why litigation insanity like this actually works to make the world less safe, because such litigation provides a strong disincentive for an entity to have any internal discourse on safety, since notes from this discourse can be held against it later. 

It is always useful to think about what consistently applied policy would have satisfied the jury that the PA was not liable.  In this case, the jury's verdict was clearly "they should have closed the garage to prevent car bombings."  Now, lets apply that everywhere consistently.  This would basically mean that we close every car parking garage in the country, since they are all equally vulnerable to a car bomb.  Applying this further, wouldn't this same standard also result in closing all tall buildings to prevent airplane attack, closing all airports to prevent hijackings, and closing all government buildings to prevent bombings (well, maybe thats not so bad).  I have posted before about finding the absurdity from translating a jury's civil verdict into a consistent policy.  Here is one example:

the exact wording on the complaint against the railroad is even better than I thought:

"The
[engineer] did not stop the train in a timely manner, and failed to
yield the right of way to a pedestrian walking along the tracks in
plain view"

A freight train's topping distance is measured in miles, even with full emergency braking.

She and her attorney's further argue:

that
the railroad was negligent for failing to post signs warning 'of the
dangers of walking near train tracks and that the tracks were actively
in useLets

leave aside the obvious point
about individual responsibility, and ask what would happen if this were
the legal standard, to have such signs.  To make sure someone saw one,
you would have to have one say every 30 feet.  Since there are just over 200,000 miles of freight railroads in the North America that works out to a bit over 35,000,000 signs that need to be posted.  At $100 per sign this would cost $3.5 billion.

Here is the serious point:  Never would any legislature
pass a law that said there had to be warning signs every 30 feet on
railroads.  It would be way too costly for little benefit.  At grade
crossings today, we have signs and flashing lights and even gates and
still thousands of people a year drive in front of trains on grade
crossings.  So, if we would never require it legislatively, how have we
gotten to a point where a jury might effectively retroactively require
such signs, and assess a multi-million dollar penalty for not doing it?

I got a fair amount of grief for being unfair when I posted this about Louisiana politics.  Based on emerging evidence, I stand by my assessment:

Acting New Orleans Police Superintendent Warren Riley said Thursday
that as many as 40 officers from the department's 3rd District,
including the commanding captain, are "under scrutiny" for possibly
bolting the city in the clutch and heading to Baton Rouge in Cadillacs
from a New Orleans dealership.

As many as 200 cars may have been stolen from this dealership by police deserting their posts in New Orleans.  Those trying to defend the police as merely commandeering the vehicles in an emergency will have to explain why 1) They were leaving the city without leave from their commanders and 2) Why Cadillacs are missing but Chevy's from the same district appear to be mostly undisturbed.

My mom, who lives in Houston, spent much of today trying to get out.  Getting on Interstate 10 about 4AM, she doesn't seem to have made even 60 miles my 8PM at night, where she just plain couldn't drive any more.  Since she somehow got separated from my sister in their driving convoy, she pulled to the side of the road to rest.  Fortunately, a local minister and a fireman took her to a local shelter at a fire station to sleep tonight, where she reports all is well (many props to those folks).  Hopefully she can make it to San Antonio tomorrow, and hopefully they have not given away her reservation.

She reports that gas availability seems to worry folks the most.  No one was running their air conditioning, to save gas, and traffic was moving so slow that several were pushing their cars with the engine off down the road rather than running the engine.  There is apparently gas in inventory in the area, but tank trucks can't get to stations since inbound traffic is blocked.  Also, cars seem to be taking literally hours just to get to the next exit.  Yuk.

Since I grew up in Houston and know the people there fairly well, I can make one prediction:  They will evacuate this time, if only as part of the post-Katrina panic, but if the city is not leveled they are not going to do it again any time soon, no matter what is coming at them.

Update: Mom is back on the road this morning, and traffic is moving much better.  She reports she is 99 miles from San Antonio and has a half tank of gas.  That means in her first 27 hours of travel she made less than 100 miles of progress.  She says that there are hundreds of cars by the sides of the road that have run out of gas.

Final Update:  Mom reached SA OK, and in fact as of Monday morning is back at home in Houston.  The power is on, the cable is running, and the house is fine.  Mom lives does not live in a low-lying area, and her house has survived many hurricanes.  I know that Rita veered off from Houston, but was it really safer for her to be on the road for 30 hours, with no place to sleep at night, worrying every minute about running out of gas?

Technorati Tags:  Katrina

Originally, the environmental movement counted many in its leadership with scientific backgrounds who were thoughtful advocates of improving the environment.  Unlike many "conservatives", as a libertarian that thinks more about being for property rights rather than just "pro-business", I understand that emissions guidelines are critical to the proper functioning of free markets:

In fact, environmental laws are as critical to a nation with strong
property rights as is contract law. Why? Imagine a world without any
environmental legislation but with strong property rights. What happens
when the first molecule of smoke from my iron furnace or from my farm
tractor crosses over on to your land. I have violated your property
rights, have I not, by sending unwanted substances onto your land, into
your water, or into your airspace. To stop me, you might sue me. And so
might the next guy downwind, etc. We would end up in an economic
gridlock with everyone slapping injunctions on each other. Since
economic activity is almost impossible without impacting surrounding
property owners, at least in small ways, we need a framework for
setting out maximums for this impact - e.g., environmental legislation.

Unfortunately, while many thoughtful people still call themselves an environmentalist, reasonable and scientific people no longer run the environmental movement.  Increasingly, the environmental movement has been taken over by
anti-growth and anti-technology Luddites as well as anti-free-market
socialists.

As evidence, I offer what has become an effective thirty-year moratorium on refinery construction. Forget for this post the obvious effect this has on gasoline supply stability, particularly with the EPA-mandated proliferation of special local gasoline blends.  Think instead about the true environmental implication:

The opposition to building new refineries ignores the dramatic
technological improvements that have been made since an oil refinery
was last constructed here in 1976. New, clean refineries emit far less
pollution than older refineries, with new scrubbers and design changes
that dramatically reduce sulfur and other emissions. And at the same
time our ability to model and map emission characteristics and
distribution lets us choose the best locations for new facilities "“
where they will have the least possible impact on people and the
environment.

Refineries are dirty places.  There are thousands of seals and flanges and safety valves that are going to leak some hydrocarbons.  But think on this:  Every single refinery in this country was built with at least 30 year old technology.  Sure there have been upgrades, but much of the core is still there.  I was an engineer at a refinery near Houston for 3 years and we had equipment still operating that was 50 years old, and that was twenty years ago and much of it is still there.

So what does this mean?  Imagine if every car in this country was over 30 years old.  Think of the improvements we have made in fuel efficiency and pollution control over the last 30 years- no cars would possess any of this technology.  The roads are full of cars with modern technology that are fuel efficient and relatively clean because we don't moronically prevent them from being replaced with new ones.

But this is exactly the case with refineries.  The single best, most intelligent thing we could do today for the environment, as far as refineries are concerned, is to let about 10 brand new ones be built with all modern technology, and let these newer refineries compete the older ones into closure.  And who is blocking this single most impactfull environmental step?  Environmentalists, of course.

This is not an unusual issue. I wrote about this same issue with new source review rules and Bush's Clear Skies initiative:

New source review is long and complicated, but basically
says that existing power plants don't have to upgrade to new
technologies, but new ones have to go through a very extensive
environmental review and permitting process and have a suite of
government mandated pollution control technologies installed.  OK, that
has all been clear for 3+ decades.  The rub comes when a company
considers upgrading or replacing a portion of a power plant.
For most of the life of the Clean Air Act, the government allowed
utilities to upgrade and modernize plants without having to install the
expensive suite of new controls.  The Clinton administration clamped
down on this, making it harder to upgrade existing plants.  All the
recent hullabaloo has occurred as GWB proposed to go back to the
pre-Clinton rules.

This issue is a great test for environmentalists, because
it separates them into those who really understand the issues and the
science and legitimately want improvement, and those who care more
about symbolism and politics.  Those who like symbolism have cast this
move as a roll-back, and are fighting it tooth and nail.  Those who
care about results know the following:

Experience under the Clinton rules has shown that most old
plants will never be upgraded if they have to go through the planning
process and install the new scrubbing and other technologies.  So, they
will just keep running inefficiently, as-is, until they are finally
shut down.  However, if allowed to be upgraded without review and new
scrubbers, etc., they will become much more efficient.  No, they won't
have the most modern scrubbing technology, but because they are more
efficient, they burn less fuel (coal) to make the same amount of
electricity and therefore will pollute less.  In some cases these rules
even prevent switching to cleaner fuels like natural gas. 

In other words, most scientists, including
scientific-oriented environmentalists, agree that GWB's proposal will
result in less pollution, but environmentalists still oppose it because
they don't like the symbolism of any pollution regulation appearing to
be rolled back.  You can read a lot more about New Source Review and how it actually increases pollution in practice here.

Technorati Tags:  Environment, Economics

This morning, as I drove to work and stopped to get gas, I noticed that they were sold out of two of their three grades (only premium was left).  The manager told me that several folks had come in today saying that this was the fourth or fifth place they looked for gas, though I will say the next two stations down the street seemed to have gas and I did not see lines anywhere.

Phoenix is one of those funny gas markets, where due to government regulations, we have a unique gas blend that can only be made in one place by left handed Eskimos, or whatever.  Several companies have tried for years to get a refinery permitted to serve this market, but the Arizona state government has consistently blocked it.  As a result, we get some strange ups and downs here, including gas lines last year when the only pipeline into town from the only refinery that makes gas that can be sold here broke.

Its a bit too early for Katrina to be actually affecting wholesale gasoline supplies (update:  or maybe not), but it is not too early for Katrina-led expectations to be draining gasoline inventories.  I explained previously about how an expectation among consumers that gas will be short can become a self-fulfilling prophecy:

Take
the example of 1972, and we will use typical numbers of that era.  Lets
say there were 100 million cars each with an average 20 gallon tank.
Lets say normally, people refill their tank when it is ¼ full, so on
average their tank is 5/8 full.  Doing the math, there are 5/8 times 20
times 100 million gallons actually in cars or about 1,250 million
gallons.  That's right - one of the largest single inventories of gas
in this country is in people's tanks.

Now,
lets say due to supply panic, everyone suddenly refills at ¾ full. No
one wants to be caught short (I remember in the 1970's, people would
wait in line to put a gallon or two in their tanks -- it was nuts).  In
this case, on average they are 7/8 full or there are a total of 1750
Million gallons in cars' tanks.  So, in the space of what might be two
or three days, people suddenly demand 500 million gallons above and
beyond their normal usage to increase their tank's inventory.  Boom,
stations are out of gas, which causes people to feel even less secure
without a full tank, so they inventory more (many in spare gas cans)
and the problem gets worse.

Here is my previous post on why I am hoping for gas price gouging.

Katrina News at Technorati

An email from a friend recently got me thinking about why, despite rising prices and tight worldwide demand, we aren't seeing gas station lines this year, like we did during oil shocks of the early and late 70's.  I remember both well, but the later shocks resonate with me more because as a newly minted 16-year-old driver, I was given the family job of driving around town hunting for gas for the family cars.

My first thought was that it was related to the speed and sharpness of the supply discontinuity.  Certainly the 1972 embargo represented a sharp supply change which took the world market a while to absorb, and what we have seen of late has been more gradual.  This is certainly part of the explanation, but incomplete, as the gas lines of the late 1970's were not accompanied by a similar discontinuity.  I might add that many economists at the time might have said that the speed should not matter that much, since it was accepted at the time that energy demand was inelastic, that it did not change much with price.  Therefore, the speed would not matter, since the market's corrective mechanism of price would not work well anyway.  Since then, we have learned that energy demand is very elastic, and that usage will adjust itself based on price.

My second thought was that regulation has a role in the explanantion.  Usually, when you see people queing up for a product or service, it means that prices or supply or both have been artificially limited.  Certainly last year's gas lines we got in Phoenix were almost entirely due to regulation.  Here in Phoenix, the government requires a blend of gas used no where else in the country.  The gas comes in from another state via a single pipeline.  Mobil tried for years to build a small refinery here to produce this blend closer to the market, but were never allowed by state regulators.  So, last year when the pipeline broke, we had shortages.  Our intrepid governor, as most politicians love to do in an oil shortage, blamed greedy gas station operators and oil companies for the problem.  However, when it came time to issuing her plan for dealing with the crisis, here were the first three steps:

• Temporarily repeal regulations setting the unique gas blend for Phoenix
• Temporarily repeal regulations on truckers to allow them to better take up the transportation slack
• Reevaluate regulations that have restricted the construction of a refinery in Arizona

LOL, so it is all the oil companies' faults but the solution was to repeal three sets of government regulations.  Much the same situation occured in the early 70's.  Richard Nixon was probably one of the worst presidents from an economics standpoint that we have had in the last half century.  Few people remember just how close we got to a government program of gas rationing and how loud the calls were for nationalisatoin of oil companies.  Fortunately this never happened, but other bad stuff did.  For example, the markets ability to close the supply-demand gap were limited by a number of pricing controls on oil and other energy subsitutes, regulations that were not repealed until nearly a decade later.  Even weirder, the US government put in place distribution rules that said that oil companies had to send each market (I think it was done county by county) the same proportion of supply as in the year before the embargo.  I am not sure what fear drove this rule, but the result was chaotic.  For example, the previous summer lots of people drove cross-country for vacation, filling up out on the interstate in the countryside.  With shortages, no one wanted to drive long distance.  As a result, rural areas typically had plenty of gas, and cities were running out.  Demand patterns shifted (duh) but the government would not allow supply distribution to shift to match.

The final, and perhaps most important reason, though, that we have not had long gas lines is because people are not expecting them.  Fear of gas lines is a self-fulfilling prophacy, for the following reason:

Take the example of 1972, and we will use typical numbers of that era.  Lets say there were 100 million cars each with an average 20 gallon tank.  Lets
say normally, people refill their tank when it is ¼ full, so on
average their tank is 5/8 full.  Doing the math, there are 5/8 times 20 times 100
million gallons actually in cars or about 1,250 million gallons.  That's right - one of the largest single inventories of gas in this country is in people's tanks.

Now, lets say
due to supply panic, everyone suddenly refills at ¾ full. No one wants to be caught short (I remember in the 1970's, people would wait in line to put a gallon or two in their tanks -- it was nuts).  In this case, on average they
are 7/8 full or there are a total of 1750 Million gallons in cars' tanks.  So, in the space of
what might be two or three days, people suddenly demand 500 million gallons above and
beyond their normal usage to increase their tank's inventory.  Boom, stations are
out of gas, which causes people to feel even less secure without a full tank, so
they inventory more (many in spare gas cans) and the problem gets
worse.

One of the conspiracy theories of the 1970's was that we had gas lines because oil companies were holding tankers offshore waiting for prices to rise (the early 1970's were the point in time where the leadership banner for conspiracy theory nuts was handed off from the right wing to the left).  The irony is that the answer to the "mystery" of where all the gasoline inventory went was right under people's noses.  If an average tanker of the time carried 500,000 barrels of oil, and each barrel of crude oil produces about 20 gallons of gasoline (in addition to all of the other fuels) then then the act of gassing up cars faster caused 50 tanker loads of oil to disapear into people's gas tanks.  The "missing oil" was right in their garage!

Its good to be back in the USA, though my wife and I had a great time in Paris.  In the extended post, I have some pictures from our trip.  However, don't expect any tourist sites.  My business-related travelogue includes pictures of a gas station, a few cool new cars, my restaurant bill from hell, and other stuff...

Continue reading ‘Some Final Observations from Paris (with Pictures!)’ »

After a couple of days here, some impressions:

• The airline flights that dump you off in Europe at 7am which seemed so convivial when I was consulting are less so when I am a tourist.  We had the experience of arriving at our hotel about 8am, which of course did not yet have a room anywhere near ready.  We had a nice day walking around, but we sure were exhausted by the time we got to our room and had a nap.  Note:  American Airlines 767's have very very uncomfortable business class seats - really a disgrace nowadays.
• The Louvre is magnificent, but is ridiculously big.  It is impossible to digest.  You really have to find a branch of art, like the Flemish painters, and stay in that area.  The Musee d'Orsay, which focuses on 19th century French art, is much more digestible.  Also, it has a cool location in a train station, which was a very important part of 19th century life.
• The French smoking thing has been joked about so much it is almost a caricature, but it is still a shock the first time in a restaurant.  We observed many American smokers reveling in their smoking freedom.  I wonder if there is a business opportunity to sponsor smoking trips to Paris, much like those Asia sex trips to Thailand.
• Wow, the food is expensive!  $50-80 entrees in some places, and for that you can get two slices of tenderloin.  It was good though, and we have yet to have a bad, or even so-so, meal.
• I would feel safer in a golf cart than some of the cars here.  You can really see the trade-offs with fuel economy we make in the US by having crash test standards.  Over here with no crash tests and $6.00 gas, you get lots of tiny cars.  Mini-coopers look average to large-sized here.
• The Champs d'elysees was amazing on Sunday afternoon - a sea of people going up the hill.  It looked like those pictures of the start of the NY marathon, but it went as far as the eye can see.  Amazingly, with all this foot traffic past the door, half the businesses were closed that day (welcome to Europe, I guess)
• There are more shoe stores here than fast food restaurants in Phoenix.  And my wife has stopped in every one of them

When I first heard the GM ad campaign to give consumers access to the same discounts their employees get, I had two reactions:

• I sure hope that they have some alternative employee incentive lined up.  I remember when I applied to GM as an engineer, this car discount was high on the list of how they sold the job.  Now what are employees thinking, since their employment buys them nothing on this dimension?  They are probably thinking they weren't getting much of a discount if GM can offer that discount to everyone
• If I were a stockholder, I would be selling, because it sure smacks as desperation.  If you think of all the incentives GM has offered over the years, if they are offering an incentive that is unprecedented in their 80+ year history, then you know there must be some panic in the boardroom

Only GM could come up with a program that makes both employees and shareholders upset.  George's Emploment Blawg has more thoughts along these lines.  This all assumes that "same pricing as employees"  means just that -- remember that this is the industry where "invoice pricing" means nothing of the sort.

Many people have analyzed GM's problems.  It is tempting to say that their main problem is that they have not good cars, but I want to be careful not to substitute my preferences for market research.  So, instead, I will point out a couple of facts:

• GM makes most of its profit from SUV's
• All the profit in a car line, given high fixed costs, come from the last 10-15% of the cars produced.

So, as gas prices rise and silly tax loopholes are closed [thanks Mark], SUV sales only need to fall 10-15% to wipe out most of GM's profitability.

Generally, in any discussion of taxes, I focus on the foundations of
property rights, to argue that taxation is no different than
stealing.    Most of us agree that grabbing someone else's money at
gunpoint is immoral.  I do not hold to a theory of government that says
that this immoral action is suddenly moral if 51% of my neighbors
sanction it.

Anyway, I am going to leave behind the moral basis (or lack thereof)
for taxes and focus instead on five practical problems that a
well-crafted tax system should be able to avoid.

1.  Complexity and Preparation Time

I probably don't need to go into great depth on this one to convince you that taxes and tax returns are ridiculously complex.  We all know how complicated even the individual 1040 has become, so much so that using tax preparation software is nearly de riguer for most middle class taxpayers.  Last year, our federal and state income tax returns for the company were over 400 pages long.

For a small business, the tax preparation burden goes much further.  For example, the burden of payroll tax preparation, not to mention staying on top of compliance issues, is so high that no sane business person does payroll in house any more.  Quarterly state and federal unemployment and withholding tax returns must be filed, with salary detail to the last penny for every single employee.   As a result, everyone uses a service like ADP, and though this solves the workload problem, it still costs money - about $12,000 a year in our case.  That's not the tax bill, just the cost to keep up with the government paperwork. 

But with payroll taken care of, businesses still must file sales tax returns, excise tax returns, detailed property tax returns, census data requests, labor and commerce department surveys, and of course income tax returns.  Each of these typically have to be done at the state level and in many cases separately for every single county and city where we do business.  Each in and of itself is horribly time consuming - see this example for property taxes, this one for sales taxes, and this one for government surveys. 

In Kentucky, for example, we have to file quarterly state withholding tax returns, quarterly payroll withholding returns in each county we operate in, a quarterly state unemployment return, an annual property tax return in each county, and annual income tax return at the state level, an annual income tax return in each county, a monthly sales tax return, a monthly survey for the US Department of Labor about Kentucky headcount levels, an annual foreign corporation renewal, a new hire report whenever we hire a new employee, and a monthly report to the workers comp state fund

2.  Disguising the Tax Load

Quick, how much total do you pay in taxes?  Perhaps the greatest innovation of statists in the 20th century was the tax load shell game - the clever balkanization of the tax load that makes it nearly impossible for the average person to truly know how much they pay in taxes to the government.

Start with income taxes.  OK, April 15 has just passed, but even so, how many people know how much they paid in income taxes last year?  For many people, this is the single largest expense they have, but the total amount is disguised by the fact that most income taxes are taken out as direct payroll deduction.  Statists and leftists everywhere in the US should get up in the morning and give thanks for direct payroll deduction -- without it, if every American had to write a single check once a year for the sum total of their annual income taxes, there would have long since been a revolution.

OK, so you don't know how much you paid in federal, state and local income taxes.  But in addition to that, how much did you pay in social security and medicare (typically about 8% of salary)?  Property taxes (typically 1-2% of your home value)?  How about sales taxes (typically 6-9% of your purchases)?  What about vehicle licensing fees and special taxes on hotels and airfare and rent cars?  If you add all these up, the average American pays about 30% of his/her salary in taxes.  The Tax Foundation has a great chart summarizing this shell game, with relative burdens expressed as days of work each year required to pay the tax.  Note that on average, your federal income tax is only 1/3 of the total of what you are paying:

 
So those are the direct ones, but how much are you also paying in higher prices due to government import duties?  What about the 8% FICA and medicare that employers pay on your behalf - how much higher might your salary be if they did not have to pay these?  What about corporate taxes - you may not pay them directly, but they certainly get passed on to you in the form of higher prices and lower dividends.  What else? - try this list on for size.

3.  Taxes on Wealth and Savings

Most taxes are on income or sales, and so they are at least marginally calibrated with an individual's cash flows.  The exceptions to this are property taxes and inheritance taxes.  These two taxes both go after an individual's savings -- property taxes mainly on the home, the primary savings vehicle for most Americans, and inheritance taxes on everything you've saved when you die.

Lets take property taxes first.  Many people complain that modern life has become a treadmill, forcing families to work harder and harder to keep up their lifestyle.  To a large extent, I think this is a myth - people may be working harder but their effective standard of living is way, way higher than say 30 years ago.  But one of the things that definitely creates a treadmill are property taxes. 

Many people have worked hard to pay off their mortgage, thinking they could settle down into their retirement in a paid off house.  Unfortunately, they may find that their home has increased in value so much that their property taxes at retirement are actually much higher than their original payment on the house.  Take the case of a couple who bought their house in an urban area for $25,000 and find its now worth $375,000 forty years later (this is an average urban price increase over the last 40 years).  For simplicity, we will assume the effective tax rate has stayed at $1.50 per $100 for these forty years (though its more likely to have gone up).  In 1965, they paid $375 a year in taxes.  Today, they have to pay $5,625.  In other words, their property taxes today are over 22.5% a year of the original price they paid for the house.  Now, this is all fine if the couple strove to work up the corporate ladder and get promotions and grow their income proportionately.  But what if they didn't want to?  What if they just wanted to buy that house, pay it off, and live modestly selling driftwood sculptures at farmers markets, or whatever.  The answer is, because of property taxes, they can't.  Likely they will have to sell this house, give up the urban life they wanted, and either move to an urban dump they can afford the property taxes on, or they move out to the country.  Here is an example, via Reason, of this process of property taxes forcing out urban residents living small in favor of yuppies living the dream.  It is ironic that a tax initially invented for populist reasons to cut back on wealth accumulation hurts the lower income brackets and those trying to step off of the capitalist treadmill the most.  In fact, it was the poor in the Great Depression who typically lobbied for laws to put moratoriums on property tax collections.

The estate tax has many of the same origins and issues.  The biggest downside of the estate tax is that it tends to force premature sales of productive business assets to pay the tax.  Rather than leaving small businesses in the family, who have the experience and passion to make them work, they typically must be sold to third parties outside the family to pay the estate taxes.  Again, the law of unintended consequences crops up - estate taxes and the sales they force have done more to contribute to merger and acquisition activity, which in turn drives consolidation of economic assets into fewer and fewer corporations.  The tax meant to stifle wealth accumulation among individuals has in fact spurred wealth accumulation among corporations.  While used for many purposes today, LBO's, that bogeyman of the left, were invented to manage this estate tax forced sale problem.

Asymmetrical Information has a thoughtful series of posts going on estate taxes.

4.  Picking Favorites for Special Treatment

One of the defining characteristics of statist politicians of both the left and the right is that they think they are smarter and more moral than the average American, and certainly than the average American businessman.  Statists and technocrats distrust markets and assume that they can succeed in managing the economy in general and individual decision-making in particular where markets have "failed" to reach whatever end-state politicians would prefer.

Therefore politicians insist on using tax policy to reinforce (or discourage) certain behaviors or to influence certain outcomes or to frankly enrich some favored group.  Examples are all around us, but include:

• Subsidizing farmers and propping up farm commodity prices for no apparent reason than because farmers somehow have a moral halo around them that other businessmen do not.  This is not a big-small issue, since much of these subsidies go to huge conglomerates and millionaires.
• Subsidizing corporations in many industries
• Subsidizing local relocation of favored industries
• Subsidizing billionaire sports team owners  and the local lodging industry
• Subsidizing billionaire movie producers
• Taxing certain non-politically-correct products (and more)
• Subsidizing home buyers vs. home renters
• Subsidizing corporate debt vs. corporate equity

5.  Class Warfare and Punishing Success

Many of the taxes we pay - income, property, estate - have strong class warfare origins.  Heck, the income tax and the Constitutional Amendment that made it possible because Americans were told that only the richest 1% or so would ever have to pay it.  Today, tax debate is littered with class warfare arguments. 

Today, the richest 1% of Americans pay about a third of the total individual taxes, and the richest 10% pay two-thirds.  The richest 50% of Americans pay 100% of the taxes (in the other half, some pay a bit, and some get a bit back in EITC, but the net is zero).  So, a small percentage of Americans pay for the services and government
cash subsidies enjoyed by the majority.  So how do we treat these
people?  As heroes, or benefactors, or as the most productive?  No we treat them as evil parasites who are not
doing their fair share.

By the way, These shares paid by the rich actually went up after the Bush tax cuts (yes, that's not a typo).  The very fact that this statement might seem unbelievable points to how much ridiculous class warfare demagoguery permeated the last election.  By the way, these numbers are for income taxes.   The numbers for total taxes, including the regressive payroll taxes, yields slightly different numbers but the same results, as outlined in TaxProfBlog today.

The fact is that most "progressive" taxes are in fact punishing the successful and most productive.  The Left loves to wave Paris Hilton around as an example of the useless and unproductive rich who presumably should be taxed into poverty.  They want to obscure the fact that 99% of the rich got to be rich honestly, through hard work, and via the uncoerced interaction with others.  Because saying that your government rewards success with its highest tax rates and confiscates the vast majority of its operating funds from the people who would employ this money the most productively, um, doesn't sound very good.

UPDATE:  I have more here, including a rebuttal of Kevin Drum.

Reason reports that the ACLU is jumping into the fray to try to prevent Las Vegas from levying a special sales tax on strippers (emphasis added)

A Nevada bill that would impose a
10 percent tax on strip club dancing will be struck down in
court if lawmakers pass it, an American Civil Liberties Union
lawyer said on Wednesday.

"You can not have a special tax aimed at First Amendment
activity based on content," said Allen Lichtenstein, general
counsel of the ACLU of Nevada.

"Adult entertainment, which is protected by the First
Amendment, is being targeted to bear the burden of taxes where
other businesses are not," Lichtenstein said, referring to the
bill. "To single out a particular business based on content and
tax it with a special tax is unconstitutional."

Don't get me wrong, I am certainly happy that the ACLU has suddenly discovered the rights of taxpayers, but they seem a bit late to the party.  I mean, states that charge the same tax to every business, especially the same sales tax rate, are the exception.  States all charge special hotel rates, rent car taxes, airport fees, long distance surcharges, etc etc.  For example, here are just a few of the special unique industry-specific taxes on the California BOE site (by the way, you know you live in a socialist state when your tax department is called the "Board of Equalization"):

• Alcoholic Beverage Tax
• Alternative Cigarette Tax Stamp Program (ACTS)
• California Cigarette & Tobacco Products Licensing Act of 2003
• California Tire Fee
• Cigarette and Tobacco Products Tax
• Emergency Telephone Users Surcharge
• Energy Resources Surcharge
• Integrated Waste Management Fee
• Natural Gas Surcharge
• Tax on Insurers
• Oil Spill Response, Prevention and Administration Fee
• Underground Storage Tank Maintenance Fee
• Childhood Lead Poisoning Prevention Fee
• International Fuel Tax Agreement (IFTA)
• Interstate User Diesel Fuel Tax (DI) Program
• Motor Fuels
• Aircraft jet fuel tax
• Diesel fuel tax
• Motor vehicle fuel license tax
• Motor vehicle fuel tax
• Use fuel tax
•  Hazardous Substance Tax
• Environmental Fee
• Facility Fee
• Generator Fee
• Disposal Fee
• Tiered Permitting Fee
• Activity Fee
• Occupational Lead Poisoning Prevention Fee
• Ballast Water Management Fee
• Rent car taxes (by city and county)
• Hotel/motel special tax (by city and county)

This is far from a complete list, but you get the idea. This article from the Tax Policy Center explains that narrow industry specific excise taxes have a very long history in this country.  And this completely leaves off the issues of subsidies that are targeted at particular industries, such as the billions in direct subsidies received by farmers, not to mention the additional billions in price supports they get as well.  (Reason, by the way, has done some entertaining research on the millions of dollars of farm subsidies received by the family of Farm-aid founder John Cougar Mellancamp).  I am eager to see the ACLU begin tackling these other "special taxes" on "particular businesses".

I am not sure what motivated the ACLU to finally join the taxpayer cause, other than perhaps a personal financial interest their leadership team might have in this particular tax, but I for one am happy to welcome them to the cause.

Update: I am still having fun trying to imagine how the ACLU, the supposed protector of individual rights that has never had a problem up 'till now with our class warfare tax rates that are zero on some Americans and 40+% on others, suddenly had an epiphany about unequal levels of taxation when it comes to taxing strippers.  I have this visual picture in my head of the local head of the ACLU slipping a five into an entertainers g-string but getting mad when he couldn't get the two extra quarters in there to pay the tax.

Update #2: By the way, for all the flippancy in my post about the ACLU, they are absolutely right in this case, if way too narrowly focused.  I criticize the ACLU often because of the 21 policy areas it considers critical to individual rights, none have anything to do with property rights or economic freedom.  However, the ACLU is a strong and consistent defender of free political speech during a time when speech is under attack from all sides of the political spectrum.  The ACLU realized early on something the left still won't acknowledge, that it is impossible to separate regulation on spending for speech from restrictions on speech itself. 

Unfortunately, what the ACLU refuses to recognize is that all commerce, not just purchasing political ads or buying couch dances, is a form of communication and free expression.  The economy is nothing more than individuals, millions of times a day, communicating and reaching agreements to trade for mutual benefit.   Why is it any less of a restriction of free speech when the government places restrictions on this communication, say by restricting the range of wages I can offer an employee?  Or, more obviously, how can the government place regulations on what I can say about my company in an advertisement, but not on what I say about a political candidate?

The ACLU in this case seeks to evade sanctioning free speech in that dirty commercial world by apparently arguing that stripping is not commerce but artistic expression.  But by that logic, the government shouldn't be allowed to tax building and construction, for surely buildings are a strong and lasting form of art and expression.  Or how about cars - I certainly consider a Ferrari a much higher form of expression than a couch dance.  How can the government tax cars?  Or what about T-shirts with a political message -- can governments charge sales taxes on those?  What about the lawn service I pay to have a beautiful green lawn, which is the ultimate form of suburban expression?

At the end of the day, it is impossible to separate money and commerce and property from speech and expression.  Commerce is the most ubiquitous and important form of free expression we have in this country.  So far, the ACLU seems to acknowledge this fact only for topless dancers and politicians.  I wish they would extend their efforts to protect both free speech and free commerce to the rest of us.

As a follow-on to the issues I raised in this post about the FDA making our risk-reward choices for us, comes this tongue-in-cheek suggestions from Café Hayek:  Lets start the FCA, the Federal Car Administration, to approve cars for consumer use:

Choices would be few.  Because of the high costs of the approval process, only cars that appealed to large numbers of consumers would receive attention from the manufacturers.  On the plus side, the cars that did survive the process would be very safe and very good cars.  They'd have to be.  Manufacturers would want to reduce the odds of failure to avoid a ten year approval process that resulted in rejection.

It would be great, assuming the bureaucrats in Washington would make exactly the same choices that you would.  In other words, it would be great if we all wanted to drive identical Ford Taurus's.

If you think this suggestion is just ridiculous humor, ask yourself whether this is what Ralph Nader has been after all along.

I bet you thought I was kidding here when I said I might pursue my new niche in parking lot blogging.  Not so - here today is an idea from Ross Mayfield:

My uncle was a guru on wall street when I asked him where I should invest my paper route money. He said to visit the parking lots of Silicon Valley companies during the weekend. If the parking lot was full, there was a good chance they were close to a breakthrough or release.

At the corporations I worked for, this would probably just mean that everyone was working on Powerpoint presentation for an upcoming planning conference.  Anyway, I don't know much about Silicon Valley, so I don't know if it will work, but this is an interesting suggestion to use the Internet to gather intelligence:

But with enough mobloggers, a panopticon of performance may be a great leading indicator.  So this weekend I started the Parking Lot Indicatr group and people have taken interest.

Hopefully, the cars are not all there responding to an SEC inquiry.

OK, since I am car-blogging tonight, I will tackle another critical and substantive automotive topic.  Why do some people back into parking spaces?  And further, why are a large percentage of the people who back into spaces driving pickup trucks?  Here I am talking about backing into perpendicular spaces, like at the mall, not parallel parking.  Also, I am not talking about parking at a busy sporting event, where I often back in so that I can more easily pull forward into the inevitable post-gram traffic.

Backing up is at least 10 times harder than going forward.  Just try to drive a straight line backward - you will probably look like someone who is DWI. 

So lets think about parking.  When you are pulling in, you are generally going from a wide area to a very narrow area.  When you are pulling out, you are conversely going from a narrow area to a wide area.  If you did both of these forward, just to make things apples and apples, I think most people would agree that pulling in to the space is much harder than driving out.  So why do people do the harder move (pulling in) the harder way (backing up)? 

I have only had two people even try to give me an explanation for this.  The first was that they had read that most parking accidents happen pulling out of spaces, which is probably true.  But this is sloppy analysis.  I would argue that most accidents happen pulling out because people are backing up.  I would restate this stat as most parking accidents happen when people are backing up.  If everyone backed into spaces, most parking accidents would probably occur pulling in.  The second person told me that "this is how his dad always did it".  That explanation I buy.  I have found a lot of small habits like this that people stick by all their life stem from the way one of their parents taught them.

The only other advantage I can come up with is that backing in / pulling forward out might be safer in very busy lots where pedestrians and cars are constantly passing across the space and there is some danger of backing into them pulling out.  This may be, though I still see people laboriously backing up into narrow spaces at my office, where there is zero traffic in the parking lot.  And none of this explains why pickup trucks do it so much more often than sedans.  I would think that pickups would especially want to head in , since this leaves the bed accessible.

Update:

In the picture below, note the one car that is backed in along the line of perpendicular spaces at the bottom - a pickup!

Update #2: LOL - getting more comments on my parking lot observation than my post that questioned why drugs and prostitution were illegal.  I guess I may be finding my niche in the blogosphere.  Parking blogging.  Anyway, thanks to all the backer-uppers out there for the comments.  I have come to the conclusion that maybe I am just a bad driver in reverse.  If I tried to back into a space between two cars, I would probably scratch a car a week.  I do understand that at least that does not hurt anyone, while backing out can indeed hurt someone, particularly small hard-to-see kids.  (By the way, I will think the best of my readers and not assume they are attracted by one other benefit of backing in -- that if you back in and hit a car, it is likely unoccupied and you can make a run for it; if you hit a car backing out, it will be occupied and you are busted).