Coyote Blog

Todd Zywicki has a nice post on the The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke by Professor Elizabeth Warren and Amelia Warren Tyagi. 

In his writings on the tactics for engineering the communist state, Karl Marx talked a lot about the need to "proletarianize the middle class."  This has been a very popular tactic among leftish writers and politicians today, attempting to convince the middle class that they never had it so bad.

I won't repeat Zywicki's whole post, but the books author's argument revolve around examples which purport to show that as families go from one to two earners, their costs (health care, child care, cars, mortgage, etc.) go up by more than the additional income, making them poorer on a discretionary spending basis.

Zywicki first points out the same thing I immediately thought of when I read a summary of the book:

It is not clear what to make of all of this, except that it is hard to
see how this confirms the central hypothesis of "The Two-Income Trap"
that "necessary" expenses such as mortgage, car payments, and health
insurance are the primary draing on the modern family's budget. And
again, this unrealistically assumes that all increased spending on
houses and cars is exogenously determined, ignoring the possibility
that an increase in income leads to an endogenous decision by some
households to increase their expenditures on items such as houses and
cars.

While the assumption seems crazy, it makes sense in the context of leftish ideology, which holds that the middle class have only limited free will and tend to have their decision making corrupted by advertising and other corporate pressures.

But Zywicki goes further, and actually digs into the author's numbers.  He finds that the authors are surprisingly coy about addressing changes in taxation in their numbers.   Zywicki then uses the authors' own numbers, this time with taxes factored in using the authors' own assumptions, and gets these two charts:

As Zywicki summarizes:

As can readily be seen, expenses for health insurance, mortgage, and automobile, have actually declined
as a percentage of the household budget. Child care is a new expense.
But even this new expenditure is about a quarter less than the increase
in taxes. Moreover, unlike new taxes and the child care expenses
incurred to pay them, increases in the cost of housing and automobiles
are offset by increases in the value of real and personal property as
household assets that are acquired in exchange.

Overall, the typical family in the 2000s pays substantially
more in taxes than in their mortgage, automobile expenses, and health
insurance costs combined. And the growth in the tax obligation
between the two periods is substantially greater the growth in
mortgage, automobile expenses, and health insurance costs combined. And
note, this is using the data taken directly from Warren and Tiyagi's
book.

If the word "environmentalist" wasn't so corrupted, I would consider myself to be one.  For years, the main charity I have supported with my money and my advocacy has been private land trusts like The Nature Conservancy.  Just because I don't think that governments should quash individual rights to force people not to develop their own land does not mean that I don't think certain pieces of land are worth protecting from development.  But I do it the old-fashioned way -- I and others spend money to buy that land.  Here is more on why I (mostly) like  groups like the Nature Conservancy and here is a post wherein I lament the shift in charity from spending your money to achieve goals to spending money to lobby the government to force other people to achieve your goals.

Of course, my claim to be an environmentalist just because I, you know, spend my money and time on private conservation efforts would be laughed off because I take the wrong stand on certain litmus test environmental issues (e.g. global warming, of course).  In this world, someone who buys a silly and environmentally worthless $19.99 carbon offset has more environmental street-cred than I do.

So I guess it is nice, at least for once, to be in agreement with those "real" environmentalists:

The government's bid to make fuel consumption more environmentally
friendly will involve petrol and diesel being mandatory blended with
2.5pc biofuel from this April and the country's leading supermarket
chain is aiming to use twice this amount at over 300 of its petrol
stations.

But campaigners believe this is not the green alternative people think they are getting.

Jenn
Parkhouse from Norwich Friends of the Earth said: "From April, people
will have no choice but to contribute to the destruction of forests,
the eviction of small farmers and rising food prices which will mean
more hunger.

"More and more people now realise the need for a
strong movement to stop the destruction caused by the biofuel industry
and the legislation which encourages it."

If you want to have mood lighting in your house that dims and doesn't turn everything a weird color, then go out and stock up on light bulbs today because the new energy bill just passed**.  I have already blogged plenty about the stupid stuff in this bill, but apparently Kevin Drum thinks its a good step.  I don't see how anyone of any political stripe can see this as a good bill.  Its just stupid in so many ways.  Yes, I understand as a libertarian, my energy bill would look like:

1. get out of the way

But I can for a moment place myself in a position where I would imagine being worried about CO2 and dependence on fossil fuels.  For someone who really cares about these things, here is what a rational energy plan would look like:

1. large federal carbon tax, offset by reduction in income and/or payroll taxes
2. streamlined program for licensing new nuclear reactors
3. get out of the way

** I personally have replaced most of the bulbs in my house, out of rational economic self-interest, with CF bulbs.  However, there are about 6 where CF's just won't do the job I need and about 6 more (3 above my shower and 3 outside) where current CF bulbs do not hold up to the moisture.   The desire by government to micro-manage me into using an inferior solution for these 12 locations is the same compulsion that has led to my not having a single toilet in my house that works  (the shower also sucked too until I figured out how to remove the government-mandated flow restricter from the shower head).

From Steven Malloy:

Congress
began investigating the carbon offset industry this week. The inquiry
could produce some "inconvenient truths" for Al Gore and the nascent
offset industry.

Carbon offsets ostensibly allow buyers to
expunge their consciences of the new eco-sin of using energy derived
from fossil fuels. Worried about the 8 tons of carbon dioxide (CO2)
emitted each year by your SUV? Similar to the indulgences offered by
Pope Leo X in the 16th century, you can absolve yourself of sin by
purchasing $96 worth of CO2 offsets "“ typically offered at $12 per ton
of CO2 emitted "“ from offset brokers who, in turn, supposedly use your
cash to pay someone else to produce electricity with low or no CO2
emissions....

A
Capitol Hill staffer told me that the congressional inquiry would look
into the possibility of "double-dipping" in the offset industry.

Only double-dipping?  Earlier, I argued that the purveyors of offsets may be triple dipping:

1. Their energy projects produce electricity, which they sell to
   consumers.  Since the
   electricity is often expensive, they sell it as "CO2-free"
   electricity.  This is possible in some sates -- for example in Texas,
   where Whole Foods made headlines by buying only CO2-free power.  So the
   carbon offset is in the bundle that they sell to
   electricity customers.  That is sale number one. 
2. The company most assuredly seeks out and gets
   government subsidies.  These subsidies are based on the power being
   "CO2-free".  This is sale number two, in exchange for subsidies. 
3. They still have to finance the initial construction of the plant, though.  Regular heartless
   investors require a, you know, return on capital.  So Terrapass
   finances their projects in part by selling these little certificates that you
   saw at the Oscars.  This is a way of financing their plants from people
   to whom they don't have to pay dividends or interest "”just the feel-good
   sense of abatement.  This is the third sale of the carbon credits.

Anybody who has been a part of a productive business (e.g. so this excludes almost all politicians and academics) will probably have experience with some type of profit improvement program.  Usually you are doing about a hundred things simultaneously to reduce costs.  When costs actually go down, you find yourself scratching you head - what actually made the difference.  Everyone will claim that their program or initiatives saved the company X amount of money, but when you add up all the X's, you get a number four or five times the actual improvement. 

Well, apparently the same dynamic occurs in carbon offsets:

An investigation by the Financial Times
suggests that many carbon offsets are illusory, and that there is
little assurance that purchasing carbon offsets does much of anything
to reduce carbon dioxide emissions. Specifically, the report found:

-
Widespread instances of people and organisations buying worthless
credits that do not yield any reductions in carbon emissions.

- Industrial companies profiting from doing very little "“ or from
gaining carbon credits on the basis of efficiency gains from which they
have already benefited substantially.

- Brokers providing services of questionable or no value.

- A shortage of verification, making it difficult for buyers to assess the true value of carbon credits.

Who in the world would have every predicted this?  Well, it turns out a lot of people did, including me.  For example, I suggested that companies like Terrapass are probably selling their CO2 offsets at least three times:

1. Their energy projects produce electricity, which they sell to
   consumers.  Since the
   electricity is often expensive, they sell it as "CO2-free"
   electricity.  This is possible in some sates -- for example in Texas,
   where Whole Foods made headlines by buying only CO2-free power.  So the
   carbon offset is in the bundle that they sell to
   electricity customers.  That is sale number one. 
2. The company most assuredly seeks out and gets
   government subsidies.  These subsidies are based on the power being
   "CO2-free".  This is sale number two, in exchange for subsidies. 
3. They still have to finance the initial construction of the plant, though.  Regular heartless
   investors require a, you know, return on capital.  So Terrapass
   finances their projects in part by selling these little certificates that you
   saw at the Oscars.  This is a way of financing their plants from people
   to whom they don't have to pay dividends or interest "”just the feel-good
   sense of abatement.  This is the third sale of the carbon credits.

I also suggested that there is an incredible opportunity for outright fraud:

This type of thing is incredibly amenable to fraud.  If you sell more
than 100% of an investment, eventually the day of reckoning will come
when you can't pay everyone their shares (a la the Producers).  But if
people are investing in CO2 abatement -- you can sell the same ton over
and over and no one will ever know.

Finally I argued that many of the abatement numbers make no sense:

Something smells here, and it is not the cow-poop methane.  This 100,000 pound [CO2 Offset] coupon retails for $399.75 (5x79.95) on the TerraPass web site.
First, this rate implies that all 300 million Americans could offset
their CO2 emissions for about $100 billion a year, a ridiculously low
figure that would be great news if true. 

Lets look at solar, something I know because I live in Arizona and have looked at it a few times.  Here is the smallest, cheapest installation
I can find.  It produces 295 CO2-free Kw-hours in a month if you live
in Phoenix, less everywhere else.  That is enough to run one PC 24
hours a day -- and nothing else.  Or, it is enough to run about 10
75-watt light bulbs 12 hours a day -- and nothing else.  In other
words, it is way, way, way short of powering up a star's Beverly Hills
mansion, not to mention their car and private jet.  It would not run
one of the air conditioning units on my house.  And it costs $12,000!
Even with a 20 year life and a 0% discount rate, that still is more
than $399.75 a year.  For TerraPass's offset claim to be correct, they
have to have a technology that is one and probably two orders of
magnitude more efficient than solar in Arizona.

[update:  Al Gore's house 221,000 kwH last year.  Call it 18,400KwH
per month, that would require about 62 of these solar installations for
$744,000.  I don't think $399.75 is really offsetting it]

Who would have ever predicted this...

BARNET, VT. -- Sara Demetry thought she had found a way to atone for her personal contribution to global warming.

The
psychotherapist clicked on a website that helped her calculate how much
heat-trapping carbon dioxide she and her fiance emitted each year,
mostly by driving and heating their home. Then she paid $150 to e-BlueHorizons.com, a company that promises to offset emissions.

But Demetry's
money did not make as much difference as she thought it would. While
half of it went to plant trees to absorb carbon dioxide, the other half
went to a Bethlehem, N.H., facility that destroys methane -- a gas that
contributes to global warming. The facility has been operating since
2001 -- years before the company began selling offsets -- and Demetry's money did not lead the company to destroy any more methane than it would have anyway.

Well, I predicted it:

I don't have any inside information on TerraPass, the company made
famous by providing the $399.75 certificates that offset all your
emissions for a year.  I do know that the numbers don't seem to add up,
as I wrote here and Protein Wisdom similarly wrote here.

However, I thought about their business model some (since I have been on a role with new business models) and it strikes me that it is brilliant.  Because I am almost positive that they are (legally) reselling the same carbon credits at least three times!...

1. Their energy projects produce electricity, which they sell to
   consumers.  Since the
   electricity is often expensive, they sell it as "CO2-free"
   electricity.  This is possible in some sates -- for example in Texas,
   where Whole Foods made headlines by buying only CO2-free power.  So the
   carbon offset is in the bundle that they sell to
   electricity customers.  That is sale number one. 
2. The company most assuredly seeks out and gets
   government subsidies.  These subsidies are based on the power being
   "CO2-free".  This is sale number two, in exchange for subsidies. 
3. They still have to finance the initial construction of the plant, though.  Regular heartless
   investors require a, you know, return on capital.  So Terrapass
   finances their projects in part by selling these little certificates that you
   saw at the Oscars.  This is a way of financing their plants from people
   to whom they don't have to pay dividends or interest "”just the feel-good
   sense of abatement.  This is the third sale of the carbon credits.

My guess is that the majority of carbon offsets sold are for projects that would have gone ahead anyway, without the purchase of the offset (for example, planting trees or building power plants).  In this case, e-BlueHorizons is doing #3 after the plant was commissioned.   Caveat Emptor.  HT: Maggie's Farm

I don't have any inside information on TerraPass, the company made famous by providing the $399.75 certificates that offset all your emissions for a year.  I do know that the numbers don't seem to add up, as I wrote here and Protein Wisdom similarly wrote here.

However, I thought about their business model some (since I have been on a role with new business models) and it strikes me that it is brilliant.  Because I am almost positive that they are (legally) reselling the same carbon credits at least three times!

Think of TerraPass not as a company that hands out little certificates, but as a business who makes money through energy projects.  These projects generate electricity without producing CO2 (e.g. wind), or in the case of their cow-poop projects they generate electricity by converting a very bad greenhouse gas (methane) to a less bad one (CO2).

So, for each Kw they generate, there is a certain number of tons of greenhouse gas emissions avoided vs. if they had generated the same Kilowatts with fossil fuels.  (How many tons depends on what fuel you assume the power would have been made with -- my guess is they assume coal, since that gives them the biggest offset, though in fact the marginal fuel in most areas is natural gas in peaking turbines, which produces a lot less CO2).

Anyway, they can claim some number of tons of avoided CO2.  But I am pretty sure they are reselling these abated tons at least three times!  Here is how I think it works:

1. Their energy projects produce electricity, which they sell to consumers.  Since the
   electricity is often expensive, they sell it as "CO2-free"
   electricity.  This is possible in some sates -- for example in Texas, where Whole Foods made headlines by buying only CO2-free power.  So the carbon offset is in the bundle that they sell to
   electricity customers.  That is sale number one. 
2. The company most assuredly seeks out and gets
   government subsidies.  These subsidies are based on the power being
   "CO2-free".  This is sale number two, in exchange for subsidies. 
3. They still have to finance the initial construction of the plant, though.  Regular heartless
   investors require a, you know, return on capital.  So Terrapass
   finances their projects in part by selling these little certificates that you
   saw at the Oscars.  This is a way of financing their plants from people
   to whom they don't have to pay dividends or interest "”just the feel-good
   sense of abatement.  This is the third sale of the carbon credits.

All, by the way, entirely legal, though perhaps not wholly ethical if you really care about reducing CO2 emissions and not just being able to cover your ass to smugly deflect criticism.  This is actually a brilliant way to finance electricity projects, one that Enron wasn't even smart enough to dream up.

And there is nothing wrong with buying these certificates.  The International Star Registry has sold thousands (millions?) of people on the idea that they can have a star named after themselves.  Of course, no actual official body that names stars accepts these as real names, but that's OK, the certificate kind of makes a cool graduation gift (friends of ours did the ISF thing for my father-in-law after he died and my wife really liked it).

Postscript:  By the way, this ignores the ability of such a company to resell the same credits to multiple certificate holders, since the whole CO2 credit thing is pretty damn hard to audit and no one is even trying.  I don't think these guys are doing so, but someone will think of it.

For RSS readers who probably don't get the updates to posts, I have added a number of updates to my post on smugness coupons, also known as offset certificates.

Apparently one of the reasons all those stars at the Oscars were so pleased with themselves is that they all got a smugness coupon in their gift bags (emphasis added):

Hollywood's wealthy liberals can now avoid any guilt they might feel
for consuming so much non-renewable fossil fuel in their private jets,
their SUVs, and their multiple air-conditioned mansions. This year's
Oscar goodie bag contained gift certificates representing 100,000
pounds of greenhouse gas reductions from TerraPass, which describes
itself as a "carbon offset retailer." The 100,000 pounds "are enough to
balance out an average year in the life of an Academy Award presenter,"
a press release from TerraPass asserts. "For example, 100,000 pounds is
the total amount of carbon dioxide created by 20,000 miles of driving,
40,000 miles on commercial airlines, 20 hours in a private jet and a
large house in Los Angeles. The greenhouse gas reductions will be
accomplished through TerraPass' [program] of verified wind energy, cow
power [collecting methane from manure] and efficiency projects." Voila,
guilt-free consumption! It reminds us of the era when rich Catholics
paid the church for "dispensations" that would shorten their terms in
Purgatory.

Something smells here, and it is not the cow-poop methane.  This 100,000 pound coupon retails for $399.75 (5x79.95) on the TerraPass web site.  First, this rate implies that all 300 million Americans could offset their CO2 emissions for about $100 billion a year, a ridiculously low figure that would be great news if true. 

Lets look at solar, something I know because I live in Arizona and have looked at it a few times.  Here is the smallest, cheapest installation I can find.  It produces 295 CO2-free Kw-hours in a month if you live in Phoenix, less everywhere else.  That is enough to run one PC 24 hours a day -- and nothing else.  Or, it is enough to run about 10 75-watt light bulbs 12 hours a day -- and nothing else.  In other words, it is way, way, way short of powering up a star's Beverly Hills mansion, not to mention their car and private jet.  It would not run one of the air conditioning units on my house.  And it costs $12,000!  Even with a 20 year life and a 0% discount rate, that still is more than $399.75 a year.  For TerraPass's offset claim to be correct, they have to have a technology that is one and probably two orders of magnitude more efficient than solar in Arizona.

[update:  Al Gore's house 221,000 kwH last year.  Call it 18,400KwH per month, that would require about 62 of these solar installations for $744,000.  I don't think $399.75 is really offsetting it]

So if Al Gore and the Hollywood-ites start whipping out these coupons and claiming to be green, be very, very skeptical.  My guess is that TerraPass is less like a real carbon offset and more like, say, the International Star Registry, where you get a nice certificate for the wall and the internal glow of having a star named after you (which, officially, it really is not).  Both the star registry and TerraPass are selling the exact same thing -- fluff.  Actually, TerraPass's certificate is a bit cheaper than the star registry.  Smugness on sale!  Think of it as the "International Earth Good-Guy Registry."

Update:  This type of thing is incredibly amenable to fraud.  If you sell more than 100% of an investment, eventually the day of reckoning will come when you can't pay everyone their shares (a la the Producers).  But if people are investing in CO2 abatement -- you can sell the same ton over and over and no one will ever know.

Also, this is a brilliant way to finance a power station.  Say you want to build a wind power station.  Actual regular investors will, you know, want a return paid to them on their investment.  But TerraPass has apparently found a way to get capital from people without paying any return.  They just give these people a feel-good share of the lack of CO2 emissions and a little certificate for the wall, and TerraPass gets capital they never have to repay to build a power station they likely would have built anyway that they can then in turn sell the power from and not have to give any of the revenues to investors.  Smart.

More thoughts:  My guess is that TerraPass, when it sells the electricity from these projects to customers, is selling it on the basis that it is earth-friendly and causes no CO2 emissions.  This lack of emissions is likely part of the "bundle" sold to electricity customers.  But note that this would be selling the same lack of emissions twice -- once to TerraPass certificate holders, and once to the electricity customers.  I am sure they are both told they are avoiding X tons of emissions, but it is the same X tons, sold twice (at least).  Even Enron didn't try this. 

I really wish I had fewer scruples, because this would be a fabulous business model -- free capital, the ability to sell the same goods multiple times to different people, all the while getting lauded for saving the world in the press and getting invited to the Academy Awards.

Update #2:  LOL. IowaHawk is offering the same thing, but for the discounted rate of $9.95!  And with much better bumper stickers.  He also suggests a multi-level marketing approach.  Here are just two of many choices:

Via Volokh:

Richard Branson is offering a $25 million prize for the development of a technology capable of removing carbon dioxide from the atmosphere.

I Win!

OK, I get that he is actually looking for some solar-powered device that plates out carbon from the air on a cathode, or whatever.  Or maybe a big nuclear-powered Air Products plant pumping liquid CO2 down an old oil well. 

By the way, I wonder if it will occur to anyone that if you really want to offset carbon, you probably need to clear cut old growth forests, bury the logs, and plant new trees.  I would guess that a newly growing forest absorbs a lot more CO2 than old-growth redwoods (anyone know?)  And no, I am not really suggesting it.  I got in enough email hot water a year ago when I suggested that if global warming was really to become a problem, we could reverse it pretty quickly with about 30 man-made Krakatoa's, made from the creative use of some of those H-bombs still lying around.  Maybe we could even use them to dig a new canal across Nicaragua, killing two birds with one stone.

Anyway, I like Branson's idea.  This kind of price approach has yielded some interesting results in other fields.

While we all argue about man's impact on the climate (my most recent take here), why isn't anyone checking the thermostat?

The New
Scientist report, along with other scientific assessments warning of
global cooling, also come as a blow to the campaign -- led by David
Suzuki and one of the directors of his foundation -- to portray all who
raise doubts about climate change theory -- so-called skeptics -- as
pawns of corporate PR thugs manipulating opinion. If the Suzuki claim
is true, then the tentacles of Exxon-Mobil reach deeper into science
than anyone has so far imagined.

Dramatic global temperature fluctuations, as New Scientist
reports, are the norm. A Little Ice Age struck Europe in the 17th
century. New Yorkers once walked from Manhattan to Staten Island across
a frozen harbour. About 200 years earlier, New Scientist reminds us, a
sharp downturn in temperatures turned fertile Greenland into Arctic
wasteland.

These and other temperature swings corresponded with changing
solar activity. "It's a boom-bust system, and I expect a crash soon,"
says Nigel Weiss, a solar physicist at the University of Cambridge.
Scientists cannot say precisely how big the coming cooling will be, but
it could at minimum be enough to offset the current theoretical impact
of man-made global warming. Sam Solanki, of the Max Planck Institute
for Solar System Research in Germany, says declining solar activity
could drop global temperatures by 0.2 degrees Celsius. "It might not
sound like much," says New Scientist writer Stuart Clark, "but this
temperature reversal would be as big as the most optimistic estimate of
the results of restricting greenhouse-gas emissions until 2050 in line
with the Kyoto protocol."

It turns out that while we may be encountering some of the highest temperatures in a couple of centuries, the sun's output is also at its highest point in centuries:

I originally got to this post at Carls Talk because of the cool map I put in this post.  However, I was really struck by his lament that foreign companies won't sell into Norway because it is too small.  Given that Norway has a trade surplus, you would think that given all the whining in the US about trade deficits that everything would be hunky-dory in Norway and that they would be thrilled that foreign companies wouldn't sell there.  But check this out:

When seeing Norway's GDP in the context of this map, one realizes
why Norway often is one of the last countries U.S. companies consider when
expanding to Europe.

Norway might be an unattractive market when considering expansion
because the market is so small and as a result there is little domestic
competition.  This  has enabled local players to
build monopolies or duopolies with substantial  entry-barriers in many
industries.  Furthermore, the government has sheltered the domestic
market against international competition by adding a hefty import tax
and inconvenient delivery methods on goods purchased outside the
country, rendering international online merchants at a disadvantage
when competing on price and convenience.

On the flip side, if you manage to establish your business here, you
can overcharge your customers and get away with horrendous customer
service.  The average Norwegian customer is not used to good service
and competitive prices.  Online merchants are slow.  Recently it took
four weeks before I received a book shipped to me from a local
merchant.  On a recent trip I recently purchased shoes for our kids in
the U.S.  The selection was superior, and the price:  1/4th of what the
local Norwegian merchant was charging. 

Gee, you mean there is a price consumers pay for protectionism that might offset a few job gains in sugar growing and textiles?

Readers of this blog know that I consider most campaign finance laws to in fact be carefully crafted incumbent protection acts.  Incumbents in major political offices get millions and millions of dollars in free advertising just from their day-to-day ability to get on the evening news.  This free publicity combined with strong name recognition means that upstarts often have to seriously outspend the incumbent to have a chance of defeating them.  So campaign finance laws act as a powerful protection device for these incumbents, limiting the amount upstarts can spend while in no way limiting the incumbents's ability to use their office (and taxpayer money) to shamelessly promote and publicize themselves.

And there is no one better at using elected office to shamelessly publicize himself than new NY Governor Eliot Spitzer.  So absolutely no one should be surprised at this:

Moving swiftly in his efforts to change the culture of
Albany, Governor-elect Eliot Spitzer said Thursday that he would
unilaterally stop accepting campaign contributions greater than
$10,000, which is less than a fifth of the $50,100 in individual
donations currently allowed by state law.

Mr. Spitzer also said that from now on he would refuse to take
advantage of several notorious loopholes in the state's campaign
finance laws that allow corporations and limited liability companies to
circumvent donation limits by contributing through subsidiaries and
other related entities.

Note that he only took these steps just days after he was elected governor the first time.  Spitzer knows that no one can probably offset the PR advantage he wields, but to be on the safe side, this is the opening shot to make sure that no future challenger is going to have the cash to threaten his position in office.

Generally, Eliot Spitzer irritates the hell out of me.  But I will say for one brief period in college, Spitzer, as the butt of a huge campus-wide joke, brought be great mirth.

It is not surprising that that a debate like the one over estate taxes that attracts so many class warfare fanatics should miss the point on a lot of issues.  However, the estate tax debate has been handled in the media perhaps worse than even other tax debates, which is a pretty low bar to try to crawl under.  The reason I say this is that the most serious "end the estate tax" type proposals out there have two parts, only one of which I have ever seen mentioned in the press:

1. End the federal tax on estates (this, of course, is the part that gets the press)
2. End the stepping-up of the cost basis of financial assets at death (this part never gets mentioned)

This 2nd piece of the proposal may seem arcane to some -- let me explain.  Most large estates (ie, the ones that estate tax supporters are concerned about) are dominated by financial assets (e.g. stocks, bonds).  These financial assets, typically held for years, tend to have a cost basis far below their current market value.  An example might be shares of Microsoft held for 10 years that were purchased for only a small fraction of the current price.  The cost basis of a financial asset is generally its purchase price plus commissions and other transaction charges.

Lets take a gentleman who dies and whose estate is made up entirely of $10 million worth of Coca-Cola stock bought years ago for just $5 million.  The estate all goes to his one daughter.  Under estate law, two things would happen.  The estate pays a large tax on the $10 million, and the remainder flows through to his daughter.  Lets say taxes take half, and his daughter now has $5 million of stock with an original price of $2.5 million.  The other thing that happens is the basis of assets is stepped up to current market value.  That means that as far as the IRS is concerned, his daughter owns stock worth $5 million with a basis of $5 million.  If she immediately sold the stock, she would have no capital gains tax.

There are a couple of good arguments against the estate tax.  From an efficiency standpoint, it diverts large pools of capital from private investments into the hands of the Federal Government, where only the most ardent statist would argue that it is better spent.  Also, billions and billions of dollars are spent every year with lawyers, accountants and financial planners to find ways to dampen the impact of the estate tax.  This is all wasted, unproductive effort that would immediately be redirected to more productive uses if the estate tax were eliminated.

From a fairness standpoint, the estate tax acts as a second tax on income that has already been taxed before.  In our example, though the $5 million capital gain is getting taxed for the first time in the estate, the $5 million original costs, which must have come from taxed income at one time, is getting taxed for at least a second time.  The other fairness problem becomes visible if we change the name of the stock from Coca-Cola to "Dad's private company."  For family businesses, ownership is not as easily divisible - you can't sell half or two-thirds that easily in part because there is not much market for minority shares of small family businesses.  What therefore happens in practice is that the daughter must sell the family business to pay the taxes.

The estate tax reform plan outlined above eliminates both these latter problems.  Under these rules, the daughter would inherit the full $10 million of stock, but, unlike today, her basis would remain the same as her dad's -- in this case, $5 million.  She would not pay any tax until she sold any of the assets.  And then she would pay capital gains taxes using the lower basis of her father's.

This results in two beneficial outcomes:  a)  taxes are only charged on the part of estates that have not already faced income taxes and b)  taxes are only paid when the individuals who inherit choose to make an asset sale and convert assets to cash.  The timing of assets sales drive taxes, whereas today, in all too many cases, taxes drive the timing of asset sales.  (By the way, supporters of the estate tax also argue that it is good because the estate tax incentivizes charitable giving.  The argument is that the tax is so confiscatory, and that the government so well-known as a black hole for money, that rich people decide it is better to give it away than to let the government take it all.  This is an odd argument for statists to make, but they do.  Note that in this estate tax proposal, the daughter would inherit a lot of low-basis stocks.  The same charitable giving incentives exist for low-basis stocks, since the IRS will give you credit for the market value as a deductible gift but you don't have to pay the capital gains).

Asymmetrical Information has been on this case for a while:

There is no case for saying, as the New York Times inexplicably does, that "Repeal would shield
the estates of the very wealthiest Americans from the tax." It does not. It
does, however, defer taxation. Because basis will no longer be 'stepped-up'
after death (except for a $1.3 million exemption) they will simply be taxed like
all other capital gains - at the time those gains are realized.

Stepped-up basis is one of the four legs of the estate-planning stool along
with the life insurance tax exemption, minority discount valuations and the division of income and
principal interests (such as the "estate
freeze"). It is not entirely clear that beneficiaries of large estates are
better off after repeal when the full toolkit of estate planning techniques is
taken into account - unless capital gains tax is done away with altogether and
the states stop taxing estates. Neither is likely to happen.

Given the large estates I've seen avoid taxes, I am skeptical of analyses
that suggest an enormous impact to revenues from this repeal. I don't believe
they factor in the new potential revenues from carryover basis outside the
traditional estate tax shelter vehicles. Certainly, the capital gains rate is
lower than the estate rate, but when estate tax shelter vehicles dwindle away,
more assets will ultimately be subject to capital gains taxation. Based on what
estate planning professionals tell me, it will be a wash in many cases and more
expensive in some significant estates. In other words, with respect to the
Estate Tax, we may still be in the fat part of the Laffer curve, where a lower statutory rate may yield higher
revenues over time (due to avoidance behavior, not a lack of work
incentives).

This post also cites a study that says that increased capital gains taxes on inherited assets could offset estate tax losses to the government.  That seems aggressive, assuming a lot of assets are getting passed in vehicles (trusts?) that avoid or limit estate taxes, but the offset is there never-the-less and is something you will never ever see in a newspaper article about the estate tax.

I haven't paid attention to the current Congressional proposals out there, but the post goes on to argue that Congress, as is its wont, has chosen the worst of both worlds while maximizing rent-seeking opportunities.

postscript: By the way, shame on all of those accountants, lawyers, and others in the estate planning profession.  They all tell their clients that the estate tax is confiscatory, and can go on for hours with a client about various things that are unfair in the system.  But at the same time they run to Congress begging them to keep the whole tottering complex system in place to protect the rent they extract from inefficiencies in the system

President Bush's call for Katrina spending to be offset by budget cuts has spurred a blogosphere effort to identify local pork urge Congress to cut the pork.  I am 98% behind this effort (the missing 2% being that the effort is spurred by a desire to spend the money somewhere else, rather than sending it back to taxpayers where it belongs).  Glenn Reynolds post that got the ball rolling is here.  His followup posts are here and here.  I will note the irony that I recently compared Don Young (of Alaska bridge to nowhere fame) to Huey Long (of multiple bridges to nowhere fame), given that we are looking to cut Don Young's pork to help Huey Long's old stomping ground.

Edward at Zonitics has already identified one of the most visible chunks of AZ pork, that is our earmarks in the recent highway bill.  These include nearly five million for a couple of pedestrian bridges, plus hundreds of millions for a rail system to run empty trains to compete with our empty buses.  Why does the rest of the country need to pay for Phoenix's growth?  Heck, we just took the money the feds saved us on this junk and spent it subsidizing a stadium for the Cardinals, for god's sakes.   I will note that of the mere 8 people who voted against the highway bill, 2 were from Arizona, including my 3rd district Congressman John Shadegg and libertarian Jeff Flake.  Flake, consistent with his libertarian principles (or in retribution for them?) represents the only district in the country without an earmark in the highway bill.

So, to push the ball forward, I will add another bit of Arizona pork.  I wanted to include some items form the energy bill, but I can't find a state by state impact.  But I can find, thanks to the environmental working group, a nice summary of farm subsidies to Arizona.  Here is a summary for the most recent year they have data:

And here is the same data but cut by recipient, with just the top 20 included:

I don't know all these folks, but I can say that all of the first three have extremely profitable casinos they operate.

I am writing my letter now to the my Congressman and Senators, and will post a copy as an update when I am done.  The ubiquitous NZ Bear has a data base he is building of pork identified.

Technorati tag:  porkbusters.

Reason has a good article on helping Africa.  To some extent, their arguments echo the ones I made in my previous post:

Despite political pressures, increasing the U.S. foreign aid budget would be a
mistake. The true cause of Africa's poverty is the continent's long history of
crippling misgovernance"”a problem that is exacerbated by rich countries' trade
protectionism, particularly with respect to agriculture....

The aid is ineffective because of the appalling way in which Africa is
governed. In recent decades, of each dollar given to Africa in aid, 80 cents
were stolen by corrupt leaders and transferred back into Western bank accounts.
In total, Nigerian President Olusegun Obasanjo estimated, "corrupt African
leaders have stolen at least $140 billion from their people in the [four]
decades since independence." All that is left when these regimes eventually
collapse is a massive public debt.

The article discusses how US and European agricultural subsidies really hurt the poorest nations:

While advocates of current market-distorting agricultural policies do not
intend to harm developing nations, the collective effect of U.S. farm policies
is devastating for producers of agricultural goods worldwide. American farm
policies might provide short-term benefits for agricultural producers in the
U.S., but those benefits are more than offset by the cost to American consumers
who pay higher taxes to support the U.S. farmers and higher prices for
agricultural products. Meanwhile, U.S. tariffs, quotas, and export subsidies
exacerbate poverty in regions like sub-Saharan Africa where people are heavily
dependent upon agriculture....

U.S. agriculture policy undermines U.S. efforts to alleviate poverty because
it drives down global agricultural prices, which in turn cost developing
countries hundreds of millions of dollars in lost export earnings. The losses
associated with cotton subsidies alone exceed the value of U.S. aid programs to
the countries concerned. The British aid organization Oxfam charges that U.S.
subsidies directly led to losses of more than $300 million in potential revenue
in sub-Saharan Africa during the 2001/02 season. More than 12 million people in
this region depend directly on the crop, with a typical small-scale producer
making less than $400 on an annual cotton harvest. By damaging the livelihoods
of people already on the edge of subsistence, U.S. agricultural policies take
away with the right hand what the left hand gives in aid and development
assistance.

If you were to make a list of 10 people in the 20th Century who had the ability to rethink whole industries, you might come up with names like Sam Walton or Herb Kelleher.  One guy you might not think of, but who should make the list, is Bill James.  James has helped to single-handedly rethink the game of baseball, one of the great bastions of not-invented-here thinking.  Here is an interview of James that is pretty interesting.  Hat Tip to Cafe Hayek, who also has some thoughts on James the economist.

James sounds a lot like Hayek, and more recent authors like Virginia Postrel, when he says things like this:

If I were in politics and presented myself as a Republican, I would be
admired by Democrats by despised by my fellow Republicans. If I
presented myself as a Democrat, I would popular with Republicans but
jeered and hooted by the Democrats.
        I believe in a universe that is too complex for any of us to
really understand. Each of us has an organized way of thinking about
the world"”a paradigm, if you will"”and we need those, of course; you
can't get through the day unless you have some organized way of
thinking about the world. But the problem is that the real world is
vastly more complicated than the image of it that we carry around in
our heads. Many things are real and important that are not explained by
our theories"”no matter who we are, no matter how intelligent we are.
        As in politics we have left and right"”neither of which explains
the world or explains how to live successfully in the world"”in baseball
we have the analytical camp and the traditional camp, or the
sabermetricians against the scouts, however you want to characterize
it. I created a good part of the analytical paradigm that the
statistical analysts advocate, and certainly I believe in that paradigm
and I advocate it within the Red Sox front office. But at the same
time, the real world is too complicated to be explained by that
paradigm.

Or this, closer to the sports world:

Honestly, major league baseball"”and all sports"”would be far better off
if they would permit teams to do more to make one park distinctive from
another"”even so far as making the bases 85 feet apart in one park and
95 in another. Standardization is an evil idea. Let's pound everybody
flat, so that nobody has any unfair advantage. Diversity enriches us,
almost without exception. Who would want to live in a world in which
all women looked the same, or all restaurants were the same, or all TV
shows used the same format?
        People forget that into the 1960s, NBA basketball courts were
not all the same size--and the NBA would be a far better game today if
they had never standardized the courts. What has happened to the NBA
is, the players have gotten too large for the court. If they hadn't
standardized the courts, they would have eventually noticed that a
larger court makes a better game"”a more open, active game. And the same
in baseball. We would have a better game, ultimately, if the teams were
more free to experiment with different options.
        The only reason baseball didn't standardize its park
dimensions, honestly, is that at the time that standardization was a
dominant idea, they just couldn't. Because of Fenway and a few other
parks, baseball couldn't standardize its field dimensions in the
1960s"”and thus dodged a mistake that they would otherwise quite
certainly have made.
         Standardization destroys the ability to adapt. Take the high
mounds of the 1960s. We "standardized" that by enforcing the rules, and
I'm in favor of enforcing the rules, but suppose that the rules allowed
some reasonable variation in the height of the pitching mound? What
would have happened then would have been that, in the mid-1990s, when
the hitting numbers began to explode, teams would have begun to push
their pitching mounds up higher in order to offset the hitting
explosion. The game would have adapted naturally to prevent the home
run hitters from entirely having their own way. Standardization leads
to rigidity, and rigidity causes things to break.

I love it.  Maybe those guys who want to use baseball as a paradigm for life had something after all.

This is pretty funny, as highlighted in Reason's Hit and Run:

Under the plan, any person seeking a new job would be required to obtain an updated "counterfeit-proof" Social Security card, equipped with a digitized photo and an electronic identification strip containing the person's legal status. To offset fears of government intrusion, the card would be clearly marked, "This is not a national ID card," [California Republican congressman David] Dreier said.

Gosh, what a great solution.  Think of the applications.  All Phillip Morris has to do is write "this is not a cigarette" on each Marlboro and poof: all that nasty regulation and litigation goes away.  I guess I would not need a liquor license to sell Budweiser's labeled "this is not beer".  Or maybe Pamela Anderson can get a T-shirt that says "these are real".  LOL.

By the way, for business owners, don't miss this gem later in the article:

Employers would have to check a prospective employee's legal status against a new employment eligibility database either by swiping the card or calling a hot line. Those who fail to do so, or knowingly hire an undocumented worker, would face fines of up to $50,000 and five years in prison for each occurrence.

Nothing like spending 5 years in the slam for having one of your managers forget to check the ID of someone they hired.

Here is a quick scorecard of the Convenience Store convention today.

Scope: B decent mix of vendors but repetitious in some odd categories

Relevance to me: C- unfortunately, not many vendors of the type I was looking for

Venue: C Las Vegas convention hall, been there, done that. Positive of new Star Trek show next door offset by the fact the monorail was broken and traffic, as usual, sucked.

Food and Bev: A+ Awesome. This is basically 60% a snack food show and everyone had samples. Plus, all the beer manufacturers there in the middle pouring cold ones

Booth Babes: B- Kind of disappointing -- couldn't hold a candle to the consumer electronics or even better, the auto shows. Would have been a C+ but presence of vendor booths for Playboy, Penthouse, and Hustler staffed, uh, how you might think they would be staffed, brought up the score.

Other: B+ Got two good autographs, one from Raleigh Fingers (sp?) and one from Ed McCaffery. Skipped on the centerfold and Dallas Cowboys Cheerleader autograph lines (which, interestingly enough, were filled with women waiting for autgraphs).

Feet are killing me.