Frequently, when an existing road is proposed to be widened, the anti-widening folks will often make the following argument: "Yes, the road is clogged now, but if we expand it, it'll eventually become congested again, so let's not build it."
This just doesn't strike me as a good argument in a country with a growing population. Yes, the road might become congested again, in fact, it probably will. However, it'll become congested while carrying significantly more people. This means that new jobs will be created, new office parks, new shopping centers, movie theaters, etc. will be built.
Here on the east coast, we have Interstate 95, which runs parallel to Route 1. Route 1 is an old road: in New England, it is the old Boston Post Road, which is older than the United States. In the 1950s, when I-95 was built, I'm sure that Route 1 was very crowded. Of course, I-95 is often a standstill today, but that doesn't mean we should have never built I-95. If it had never been built, Route 1 certainly wouldn't be carrying all the cars that I-95 carries today, but the entire region would be much less developed, meaning that thee were fewer jobs, fewer houses, and fewer cars.
You may think that is a good thing. However, since we have a growing population (our birth rate is about replacement level, but we have many immigrants), we need to accommodate this growing population by building the infrastructure necessary. And we need a growing population to fund social security and other ponzi-esque pension schemes.
Monday, October 30, 2006
Tuesday, October 24, 2006
Should Health Insurance be Required?
Should health insurance be required? While I am generally free-market oriented, I think that there's a strong case that could be made for requiring health insurance, a la Mitt Romney's plan in Massachusetts.
When someone is brought to an emergency room, he or she must be treated, and the payment issues are worked out later. This is a good thing, because many people that are brought to the emergency room are rather incapacitated, and may not even be able to tell you their name, much less their insurance policy number. Furthermore, it would seem odd to reject someone who is having an acute emergency because they didn't have insurance. I mean, even the most die-hard free marketeer probably wouldn't advocate the end to this rule.
Some people claim that forcing people to buy insurance is a personal responsibility issue: let them take the risks. However, because hospitals have to accept all emergency room patients, who exactly ends up taking the risk? True, the operation may cost thousands of dollars, which would have been covered by a policy that cost a few hundred per year, but if the operation is so expensive that someone couldn't pay it, the hospital is essentially still out the money. There's always going to be a free rider problem for those who could have afforded insurance, but who can't afford the actual treatment (and don't have sufficient assets). These people will declare bankruptcy. I would imagine that many single 20-something males fall into this category.
I would hope that any obligatory insurance plan required by the state would allow individuals to purchase various plans that would have different levels of coverage, as long as they all had emergency coverage. Furthermore, the insurance companies should be allowed to price these policies as they see fit, using whatever risk factors they deem appropriate (e.g., they could charge identical twins different rates if one smoked and the other didn't).
However, forcing basic emergency coverage for all those who can afford it seems entirely reasonable to me. Why should the hospitals have to take the risk?
When someone is brought to an emergency room, he or she must be treated, and the payment issues are worked out later. This is a good thing, because many people that are brought to the emergency room are rather incapacitated, and may not even be able to tell you their name, much less their insurance policy number. Furthermore, it would seem odd to reject someone who is having an acute emergency because they didn't have insurance. I mean, even the most die-hard free marketeer probably wouldn't advocate the end to this rule.
Some people claim that forcing people to buy insurance is a personal responsibility issue: let them take the risks. However, because hospitals have to accept all emergency room patients, who exactly ends up taking the risk? True, the operation may cost thousands of dollars, which would have been covered by a policy that cost a few hundred per year, but if the operation is so expensive that someone couldn't pay it, the hospital is essentially still out the money. There's always going to be a free rider problem for those who could have afforded insurance, but who can't afford the actual treatment (and don't have sufficient assets). These people will declare bankruptcy. I would imagine that many single 20-something males fall into this category.
I would hope that any obligatory insurance plan required by the state would allow individuals to purchase various plans that would have different levels of coverage, as long as they all had emergency coverage. Furthermore, the insurance companies should be allowed to price these policies as they see fit, using whatever risk factors they deem appropriate (e.g., they could charge identical twins different rates if one smoked and the other didn't).
However, forcing basic emergency coverage for all those who can afford it seems entirely reasonable to me. Why should the hospitals have to take the risk?
Wednesday, October 04, 2006
Don't Cross that Line!
In the United States, many people live in one state but work in another. In some states, like Colorado, this number is quite small since a small portion of the population lives near the state line. In other states, like Connecticut, this number can be quite substantial.
This has an impact on local tax policy. In Connecticut, various politicians talk about the rich paying their "fair share", which always seems to be more. The problem for Connecticut is that many of the wealthiest residents pay no income taxes on wages ot the state of Connecticut, since they work in New York state, and pay income taxes to New York instead. Raising the top bracket of Connecticut's income tax won't have an impact on these people until the Connecticut top bracket surpasses New York's top bracket, since you don't have to pay income taxes twice if you cross state lines on the way to your job.
Connecticut has about 3.5 million people. About 38% of these are either under 18 or over 65, so are not likely to be in the work force. According to Metro North, the commuter railroad that takes people to New York City and intermediate points, about 80,000 commuters get on the trains every day in Connecticut. A few more Connecticut residents probably board at Port Chester (the first train station in New York, right over the Greenwich border), and there are also some that drive their cars or take a bus over the Hudson line in New York state and take the train into the city from there (indeed, my town, Ridgefield, has the shuttle bus which runs 8 times per day to the Katonah train station in New York).
There are some commuters -- not many -- who take the train to other Connecticut towns, and there are some New Yorkers who commute outwards to Connecticut. But I would estimate that conservatively, there are 50,000 net train commuters from Connecticut into New York.
Some people drive from Fairfield county to Westchester county, but I would imagine that these people cancel each other out. The Massachusetts/Connecticut people probably also cancel each other out. There may be more Rhode Islanders coming in than Connecticut residents heading into Rhode Island, since Connecticut has two large casinos (Foxwoods and Mohegan Sun) located near the Rhode Island border. However, these are mainly low wage jobs, and thus don't generate much in the way of income taxes for the state.
These 50,000 or however many commuters into New York are mainly high wage earners. Monthly tickets from Greenwich to Grand Central station in New York City cost $237, and they get more expensive as you go further out. So the salary has to be worth the cost and approximate hour of commuting time.
New York has a graduated income tax that hits 7.7% after $500,000 (7.375% after $100,000). Connecticut reaches 5% at $10,000 and stays there. So for the top rate, Connecticut would not receive any income taxes from cross-border commuters until it topped the 7.7% level.
I don't have any statistics available, but I would imagine that as a percentage of income earned, Connecticut probably has the highest percentage being earned out of state. New Hampshire has a lot of commuters going into Boston, but since New Hampshire doesn't have income tax, this becomes irrelevant. New Jersey of course is also a commuter heavy state, both in the north (to New York) and south (to Philadelphia), but it's a much bigger state than Connecticut. Maryland has a decent percentage that commute into D.C., but it appears that there is some sort of agreement in place that means those residents pay taxes to Maryland and not DC (however, Maryland commuters to Delaware don't seem to have this agreement.
In any event, when a large portion of your biggest income producers commute out of state, and are thus not subject to your taxes, it's difficult to promise that raising taxes on the rich is going to bring in lots of new revenue.
One Conencticut state senator, Ed Meyer, said he would favor raising the top rate to 18.97%, which would make Connecticut the highest taxed state by far. This would of course pull in some money (18.97% minus 7.7% paid to New York) from the wealthy cross-border commuters, at least until they moved closer to their jobs, in the low tax jurisdiction of Westchester County, New York.
This has an impact on local tax policy. In Connecticut, various politicians talk about the rich paying their "fair share", which always seems to be more. The problem for Connecticut is that many of the wealthiest residents pay no income taxes on wages ot the state of Connecticut, since they work in New York state, and pay income taxes to New York instead. Raising the top bracket of Connecticut's income tax won't have an impact on these people until the Connecticut top bracket surpasses New York's top bracket, since you don't have to pay income taxes twice if you cross state lines on the way to your job.
Connecticut has about 3.5 million people. About 38% of these are either under 18 or over 65, so are not likely to be in the work force. According to Metro North, the commuter railroad that takes people to New York City and intermediate points, about 80,000 commuters get on the trains every day in Connecticut. A few more Connecticut residents probably board at Port Chester (the first train station in New York, right over the Greenwich border), and there are also some that drive their cars or take a bus over the Hudson line in New York state and take the train into the city from there (indeed, my town, Ridgefield, has the shuttle bus which runs 8 times per day to the Katonah train station in New York).
There are some commuters -- not many -- who take the train to other Connecticut towns, and there are some New Yorkers who commute outwards to Connecticut. But I would estimate that conservatively, there are 50,000 net train commuters from Connecticut into New York.
Some people drive from Fairfield county to Westchester county, but I would imagine that these people cancel each other out. The Massachusetts/Connecticut people probably also cancel each other out. There may be more Rhode Islanders coming in than Connecticut residents heading into Rhode Island, since Connecticut has two large casinos (Foxwoods and Mohegan Sun) located near the Rhode Island border. However, these are mainly low wage jobs, and thus don't generate much in the way of income taxes for the state.
These 50,000 or however many commuters into New York are mainly high wage earners. Monthly tickets from Greenwich to Grand Central station in New York City cost $237, and they get more expensive as you go further out. So the salary has to be worth the cost and approximate hour of commuting time.
New York has a graduated income tax that hits 7.7% after $500,000 (7.375% after $100,000). Connecticut reaches 5% at $10,000 and stays there. So for the top rate, Connecticut would not receive any income taxes from cross-border commuters until it topped the 7.7% level.
I don't have any statistics available, but I would imagine that as a percentage of income earned, Connecticut probably has the highest percentage being earned out of state. New Hampshire has a lot of commuters going into Boston, but since New Hampshire doesn't have income tax, this becomes irrelevant. New Jersey of course is also a commuter heavy state, both in the north (to New York) and south (to Philadelphia), but it's a much bigger state than Connecticut. Maryland has a decent percentage that commute into D.C., but it appears that there is some sort of agreement in place that means those residents pay taxes to Maryland and not DC (however, Maryland commuters to Delaware don't seem to have this agreement.
In any event, when a large portion of your biggest income producers commute out of state, and are thus not subject to your taxes, it's difficult to promise that raising taxes on the rich is going to bring in lots of new revenue.
One Conencticut state senator, Ed Meyer, said he would favor raising the top rate to 18.97%, which would make Connecticut the highest taxed state by far. This would of course pull in some money (18.97% minus 7.7% paid to New York) from the wealthy cross-border commuters, at least until they moved closer to their jobs, in the low tax jurisdiction of Westchester County, New York.
Tuesday, September 26, 2006
Dairy Farms? No Thanks, I'll take tract housing
Connecticut gubernatorial candidate John DeStefano has a plan for Connecticut Dairy farmers. You can click on the link, but in essence, he doesn't think they are getting enough money, so he wants to give them $5 million of state funds, have some sort of summit, have an insurance fund for dairy farmers, and put into place some more price supports and subsidies.
My question is, why should the Connecticut government try to keep these dairy farms open when they obviously are uncompetitive with dairy farms in other states, which have less rain, cheaper electricity, and a lot cheaper land?
If milk is too cheap (and it's a heck of a lot more than gasoline per gallon), why don't these farmers close up shop, sell their equipment, and sell their land and do something else, or even retire?
Someone else could then buy the land who could put it to better use than trying to lobby the state and federal government for subisidies because what they produce can't be produced profitably.
Connecticut has very expensive land, so this land might be suitable to build new houses. Perhaps instead of subsidizing farmers, and then having to form committees to determine why housing is so expensive, we could just eliminate the subsidies to farmers, and then if they couldn't survive, they'd sell their land and the land could be put to more productive use.
Now, you might say that this would cause all Connecticut dairy farms to go under. Well, that doesn't mean we wouldn't have milk in the grocery store. We have orange juice but there are no orange trees in the state. This is because we have highways and railroads, which cross the state line and keep going to where these things come from. Apparently they can even bring milk in on refrigerated trucks.
Some of the dairy farms would probably survive: they'd be competitive enough (they might not be as cheap as Wisconsin, but after adding in transportation costs, they could probably compete).
Believe me, if the government doesn't provide price supports, milk is still going to get produced and pasteurized and distributed. We don't need governments trying to keep dairy farms in business when they cannot compete. Especially in a state where developable land is a scarce commodity.
My question is, why should the Connecticut government try to keep these dairy farms open when they obviously are uncompetitive with dairy farms in other states, which have less rain, cheaper electricity, and a lot cheaper land?
If milk is too cheap (and it's a heck of a lot more than gasoline per gallon), why don't these farmers close up shop, sell their equipment, and sell their land and do something else, or even retire?
Someone else could then buy the land who could put it to better use than trying to lobby the state and federal government for subisidies because what they produce can't be produced profitably.
Connecticut has very expensive land, so this land might be suitable to build new houses. Perhaps instead of subsidizing farmers, and then having to form committees to determine why housing is so expensive, we could just eliminate the subsidies to farmers, and then if they couldn't survive, they'd sell their land and the land could be put to more productive use.
Now, you might say that this would cause all Connecticut dairy farms to go under. Well, that doesn't mean we wouldn't have milk in the grocery store. We have orange juice but there are no orange trees in the state. This is because we have highways and railroads, which cross the state line and keep going to where these things come from. Apparently they can even bring milk in on refrigerated trucks.
Some of the dairy farms would probably survive: they'd be competitive enough (they might not be as cheap as Wisconsin, but after adding in transportation costs, they could probably compete).
Believe me, if the government doesn't provide price supports, milk is still going to get produced and pasteurized and distributed. We don't need governments trying to keep dairy farms in business when they cannot compete. Especially in a state where developable land is a scarce commodity.
Friday, September 22, 2006
From Sixteen Volts to Zero
Well, it's more than apparent that Ilkka Kokkarinen's blog, Sixteen Volts was forcibly shut down.
For those of you who didn't know Sixteen Volts, Ilkka Kokkarinen is a professor of Computer Science at Ryerson University in Toronto. Mr. Kokkarinen is a native of Finland, but moved to Canada several years ago to try living in a more free market economy than Finland's. On his blog, he regularly chastised Feminists, as well as many other leftists, for their hypocrisy., often using biting sarcasm...
He supported nuclear power, but was also an avid proponent of public transportation (so much so in fact, that neither he nor his wife owned a car. He commuted via public transportation to Ryerson from the Toronto suburb of Mississauga, while his wife was able to walk to work). He seemed to write about 2 entries per day, fairly long entries at that, and it was quite an entertaining read. In mid September 2006, someone at his college distributed some blog entries he had written, albeit grossly out of context. Ilkka commented that he spoke to the student newspaper about the misquote, but idly wondered if something would happen akin to what happened in I am Charlotte Simmons, a recent novel written by Tom Wolfe.
Well, apparently the Feminists or anti-nuclear power people or whomever he offended managed to force the removal of his entire blog archive (a few weeks ago, Ilkka commented that all his blog entries could likely fill a book), and post an apology. While it was rare that any blog entry of his would get more than 3 or 4 comments, this apology has gotten 58 comments from people lamenting that he's quit blogging. I guess the leftists that were offended couldn't make counter arguments on their own blog, or even in the comments section on his blog, but instead wanted to ensure that no one else could read such offensive material like the stuff Ilkka wrote, which showed that they often contradicted themselves.
Shutting down his blog speaks volumes about how leftists engage in debate. As Ilkka liked to say, "While chasing the rabbit, the hunter is blind to the mountains."
Let's hope that Ilkka starts blogging again, albeit with a pseudonym, as I do... And let's hope that he blogs in English instead of Finnish. Finnish is just too damned hard to learn. I speak German fluently, and can figure out Dutch/Afrikaans. In Swedish, Norwegian or Danish, I can pick out certain words. But Finnish is of course not an Indo-European language, and the only major languages related to Finnish are Estonian and Hungarian (English is distantly related to Sanskrit, Russian and most of the languages of Europe, and it's closely related to the other Germanic languages, albeit with significant influence from French and Latin). Finnish is not a widely spoken language, nothing like English, so let's hope Ilkka blogs again in English!
Seventeen volts anyone?
For those of you who didn't know Sixteen Volts, Ilkka Kokkarinen is a professor of Computer Science at Ryerson University in Toronto. Mr. Kokkarinen is a native of Finland, but moved to Canada several years ago to try living in a more free market economy than Finland's. On his blog, he regularly chastised Feminists, as well as many other leftists, for their hypocrisy., often using biting sarcasm...
He supported nuclear power, but was also an avid proponent of public transportation (so much so in fact, that neither he nor his wife owned a car. He commuted via public transportation to Ryerson from the Toronto suburb of Mississauga, while his wife was able to walk to work). He seemed to write about 2 entries per day, fairly long entries at that, and it was quite an entertaining read. In mid September 2006, someone at his college distributed some blog entries he had written, albeit grossly out of context. Ilkka commented that he spoke to the student newspaper about the misquote, but idly wondered if something would happen akin to what happened in I am Charlotte Simmons, a recent novel written by Tom Wolfe.
Well, apparently the Feminists or anti-nuclear power people or whomever he offended managed to force the removal of his entire blog archive (a few weeks ago, Ilkka commented that all his blog entries could likely fill a book), and post an apology. While it was rare that any blog entry of his would get more than 3 or 4 comments, this apology has gotten 58 comments from people lamenting that he's quit blogging. I guess the leftists that were offended couldn't make counter arguments on their own blog, or even in the comments section on his blog, but instead wanted to ensure that no one else could read such offensive material like the stuff Ilkka wrote, which showed that they often contradicted themselves.
Shutting down his blog speaks volumes about how leftists engage in debate. As Ilkka liked to say, "While chasing the rabbit, the hunter is blind to the mountains."
Let's hope that Ilkka starts blogging again, albeit with a pseudonym, as I do... And let's hope that he blogs in English instead of Finnish. Finnish is just too damned hard to learn. I speak German fluently, and can figure out Dutch/Afrikaans. In Swedish, Norwegian or Danish, I can pick out certain words. But Finnish is of course not an Indo-European language, and the only major languages related to Finnish are Estonian and Hungarian (English is distantly related to Sanskrit, Russian and most of the languages of Europe, and it's closely related to the other Germanic languages, albeit with significant influence from French and Latin). Finnish is not a widely spoken language, nothing like English, so let's hope Ilkka blogs again in English!
Seventeen volts anyone?
Sunday, September 17, 2006
Who Should Pay for Metro North?
The Metro North Railroad takes commuters from Connecticut, Westchester and Long Island to Manhattan (and intermediate points).
The railroad is currently in the process of buying new railroad cars for the New Haven line (which goes from New Haven, Connecticut into New York, plus a few additional spur lines). These new Kawasaki railroad cars are being paid for by both Connecticut and New York state, with Connecticut picking up 65% of the tab and New York taking on 35% of the cost. This ratio was worked out by the number of riders from each state.
However, I think that this is a totally unfair division of costs. In the United States, if you work in one state and work in another, you pay income tax to the state where you work. Then, when you file your taxes, you get a credit for those taxes. So if your home state has a lower rate than the state you work in, you will wind up paying nothing in income tax to your home state. This is the case with Connecticut and New York. New York's income tax rates are higher, so Connecticut natives who work in New York pay taxes to New York. For those New Yorkers that work in Connecticut, they pay income taxes to Connecticut, and then since New York taxes are higher, they make up the difference by paying New York the additional amount.
Many more people commute into Manhattan from Connecticut than commute out of Manhattan to Connecticut. While there are some commuters from Fairfield county to Westchester and vice-versa, I would imagine most of these people drive.
My question is, even if Connecticut residents make up 65% of the passengers (or 65% of the passenger miles or whatever metric they used based on ridership), why should it foot 65% of the bill? Most of the Connecticut residents riding the train pay nothing to Connecticut in income taxes! Shouldn't the split be done instead on commuter destination?
Suppose Connecticut cut its funding. The railroads would be no fun to ride. People would either move out of Connecticut (but from an economy perspective the loss is minimal: they didn't work here) or find jobs in Connecticut that they could drive to. This would boost tax revenues (plus add in the fact that we aren't spending money on the railroad).
Since New York gets a big tax bonus by having better commuter trains (which makes commuting easier, which means more commuters), shouldn't it pay for the trains? It just seems odd that Connecticut would spend lots of money so rich people could commute to another state and end up paying nothing in income taxes to Connecticut.
Isn't it also a bit odd that Metro North is subsidized at all in the first place? Yeah, I know, highways are subisidized too. I don't like that, and I don't like this subsidy any better. This is a subsidy so mainly wealthy can take the train to work: in 1998, the average commuter earned nearly $100,000. Why exactly are we subsidizing the entire railroad? And if you say that there are poor people who can't afford the tickets, couldn't we figure out some way to give just the income qualified people a discount?
The railroad is currently in the process of buying new railroad cars for the New Haven line (which goes from New Haven, Connecticut into New York, plus a few additional spur lines). These new Kawasaki railroad cars are being paid for by both Connecticut and New York state, with Connecticut picking up 65% of the tab and New York taking on 35% of the cost. This ratio was worked out by the number of riders from each state.
However, I think that this is a totally unfair division of costs. In the United States, if you work in one state and work in another, you pay income tax to the state where you work. Then, when you file your taxes, you get a credit for those taxes. So if your home state has a lower rate than the state you work in, you will wind up paying nothing in income tax to your home state. This is the case with Connecticut and New York. New York's income tax rates are higher, so Connecticut natives who work in New York pay taxes to New York. For those New Yorkers that work in Connecticut, they pay income taxes to Connecticut, and then since New York taxes are higher, they make up the difference by paying New York the additional amount.
Many more people commute into Manhattan from Connecticut than commute out of Manhattan to Connecticut. While there are some commuters from Fairfield county to Westchester and vice-versa, I would imagine most of these people drive.
My question is, even if Connecticut residents make up 65% of the passengers (or 65% of the passenger miles or whatever metric they used based on ridership), why should it foot 65% of the bill? Most of the Connecticut residents riding the train pay nothing to Connecticut in income taxes! Shouldn't the split be done instead on commuter destination?
Suppose Connecticut cut its funding. The railroads would be no fun to ride. People would either move out of Connecticut (but from an economy perspective the loss is minimal: they didn't work here) or find jobs in Connecticut that they could drive to. This would boost tax revenues (plus add in the fact that we aren't spending money on the railroad).
Since New York gets a big tax bonus by having better commuter trains (which makes commuting easier, which means more commuters), shouldn't it pay for the trains? It just seems odd that Connecticut would spend lots of money so rich people could commute to another state and end up paying nothing in income taxes to Connecticut.
Isn't it also a bit odd that Metro North is subsidized at all in the first place? Yeah, I know, highways are subisidized too. I don't like that, and I don't like this subsidy any better. This is a subsidy so mainly wealthy can take the train to work: in 1998, the average commuter earned nearly $100,000. Why exactly are we subsidizing the entire railroad? And if you say that there are poor people who can't afford the tickets, couldn't we figure out some way to give just the income qualified people a discount?
Tuesday, September 05, 2006
Insurance Politics
Connecticut is the historic home of the insurance industry in the United States. Yet Attorney General Richard Blumenthal and a few state representatives seem to have little concept of how insurance works.
Connecticut borders Long Island Sound, and recently, Andover Cos. began requiring policyholders who live within 3/4 of a mile from the Sound to install storm shutters.
Why would Andover require storm shutters? They don't own a storm shutter company, so won't profit directly. Rather, Andover will reduce its risk exposure. According to Wikipedia, storm shutters prevent windows from being broken, and also prevent air pressure from building up in a house, which can ultimately cause structural collapse.
However, politicans don't like the fact that homeowners may have to install these shutters.
While this standard is apparently unprecedented in Connecticut, I fail to see how Andover's new policy is unfair or unreasonable (obviously, Andover would have to honor all existing claims on existing policies which terms have not yet expired). Insurance companies require all sorts of things all the time to qualify for lower priced insurance: we need to wear seat belts, not smoke, etc. to get lower rates.
We live in a competitive society, and somewhere out there, an insurance company should be willing to sell you insurance for the right price. If someone is convinced that storm shutters are not necessary, then they don't have to install them, and they can purchase insurance from one of the many other companies that sell insurance. Andover's market share is less than 1%.
There's talk of the economic hardship this would cause, and says it could cost up to $100,000 per house to install these shutters. Yet the same article quotes one contractor as saying they cost between $12 and $45 per square foot. At $45 per square foot, the upper range, that would cover 2,222 square feet of windows. Even if you have large 2 foot by 3 foot windows, you'd need 370 windows to hit $100,000.
Let the insurance companies decide what to require or not require in their policies. With competition, people will be able to choose among the various companies, and will be able to do their own cost-benefit analysis of installing shutters, wearing seatbelts, or quit smoking. And if they'd prefer not to do these things, they'll still be able to find insurance from someone. Just please don't get Mr. Blumenthal involved. But there doesn't seem to be any insurance against that...
Connecticut borders Long Island Sound, and recently, Andover Cos. began requiring policyholders who live within 3/4 of a mile from the Sound to install storm shutters.
Why would Andover require storm shutters? They don't own a storm shutter company, so won't profit directly. Rather, Andover will reduce its risk exposure. According to Wikipedia, storm shutters prevent windows from being broken, and also prevent air pressure from building up in a house, which can ultimately cause structural collapse.
However, politicans don't like the fact that homeowners may have to install these shutters.
But Attorney General Richard Blumenthal and Speaker of the House James Amann are calling for a reversal of the new practice, saying it unfairly punishes homeowners. They fear that other insurance companies will copy Andover's requirement, forcing more coastal homeowners to install expensive shutters.
"This standard is unfair, unreasonable and unprecedented," Blumenthal said Thursday.
While this standard is apparently unprecedented in Connecticut, I fail to see how Andover's new policy is unfair or unreasonable (obviously, Andover would have to honor all existing claims on existing policies which terms have not yet expired). Insurance companies require all sorts of things all the time to qualify for lower priced insurance: we need to wear seat belts, not smoke, etc. to get lower rates.
We live in a competitive society, and somewhere out there, an insurance company should be willing to sell you insurance for the right price. If someone is convinced that storm shutters are not necessary, then they don't have to install them, and they can purchase insurance from one of the many other companies that sell insurance. Andover's market share is less than 1%.
There's talk of the economic hardship this would cause, and says it could cost up to $100,000 per house to install these shutters. Yet the same article quotes one contractor as saying they cost between $12 and $45 per square foot. At $45 per square foot, the upper range, that would cover 2,222 square feet of windows. Even if you have large 2 foot by 3 foot windows, you'd need 370 windows to hit $100,000.
Let the insurance companies decide what to require or not require in their policies. With competition, people will be able to choose among the various companies, and will be able to do their own cost-benefit analysis of installing shutters, wearing seatbelts, or quit smoking. And if they'd prefer not to do these things, they'll still be able to find insurance from someone. Just please don't get Mr. Blumenthal involved. But there doesn't seem to be any insurance against that...
Monday, September 04, 2006
Should Corporations give to Charity?
When I was in business school, a bunch of people interviewed with some company. There was a question that went something like this: if you were managing the company, and made an unexpected profit windfall (like you discovered oil on otherwise worthless property), what would you do with the profits? The answer they were looking for was that you should give 10% to charity.
I've always wondered why corporations should give money to charity. After all, it's not really their money: it's the shareholders', and shouldn't the shareholders have the right to decide? I'm all for compassion, but for me, compassion means donating your own money or time, not someone else's (this is why I don't think that governments can be compassionate: it's just redistribution. It may in times be necessary, but that doesn't make it compassionate).
There are a few times when I think a corporation should give to charity. The first is if it's not really charity: on the surface, it looks like charity, but so much good will is generated, that it's a win-win. Sponsoring a little league team may bring the company free advertising or it may boost employee morale (if many of the workers' children play for the team). In other instances, charity may help source more employees (such as giving to a local tech school). Donations to certain public policy think tanks may result in more favorable laws being passed. These activities are obviously in the shareholders' best interest.
The second type of charity that I'd support is if a corportion were trying to reverse an earlier wrong. Even without the PR benefit. (For instance, if a record company distributed a CD that advocated cop killing, which is within the first amendment rights, but then someone followed the advice. The corporation may not have acted illegally, but it certainly didn't act responsibly).
Finally, I'd support general charity to whatever organization if the board truly believed that the shareholders wanted to give to these charities. This is obviously easier to ascertain when you have only a few shareholders. The reason for this is taxes. For instance, if a company has five shareholders, and they all think that Planned Parenthood (or the National Right to Life) is great, then the corporation giving away the money is more efficient from a tax perspective. If the corporation gives $100 to the organization, it actually only costs about $66 less in profit because taxes will be less now that income has dropped by $100.
If however, the corporation keeps the $100, then it pays $33 in taxes on it. Then it has $67. IT distributes this to the shareholders, who have to pay 20% tax on the dividends received, so they're left with about $54 (donating this will then bring them a tax benefit, but in a 33% bracket would be about $18).
However, in most cases, I would not support corporate charity. It's not really charity. Under most circumstances, large corporations with a diverse shareholder base have no business giving away their shareholders' money. Let the shareholders do that.
I've always wondered why corporations should give money to charity. After all, it's not really their money: it's the shareholders', and shouldn't the shareholders have the right to decide? I'm all for compassion, but for me, compassion means donating your own money or time, not someone else's (this is why I don't think that governments can be compassionate: it's just redistribution. It may in times be necessary, but that doesn't make it compassionate).
There are a few times when I think a corporation should give to charity. The first is if it's not really charity: on the surface, it looks like charity, but so much good will is generated, that it's a win-win. Sponsoring a little league team may bring the company free advertising or it may boost employee morale (if many of the workers' children play for the team). In other instances, charity may help source more employees (such as giving to a local tech school). Donations to certain public policy think tanks may result in more favorable laws being passed. These activities are obviously in the shareholders' best interest.
The second type of charity that I'd support is if a corportion were trying to reverse an earlier wrong. Even without the PR benefit. (For instance, if a record company distributed a CD that advocated cop killing, which is within the first amendment rights, but then someone followed the advice. The corporation may not have acted illegally, but it certainly didn't act responsibly).
Finally, I'd support general charity to whatever organization if the board truly believed that the shareholders wanted to give to these charities. This is obviously easier to ascertain when you have only a few shareholders. The reason for this is taxes. For instance, if a company has five shareholders, and they all think that Planned Parenthood (or the National Right to Life) is great, then the corporation giving away the money is more efficient from a tax perspective. If the corporation gives $100 to the organization, it actually only costs about $66 less in profit because taxes will be less now that income has dropped by $100.
If however, the corporation keeps the $100, then it pays $33 in taxes on it. Then it has $67. IT distributes this to the shareholders, who have to pay 20% tax on the dividends received, so they're left with about $54 (donating this will then bring them a tax benefit, but in a 33% bracket would be about $18).
However, in most cases, I would not support corporate charity. It's not really charity. Under most circumstances, large corporations with a diverse shareholder base have no business giving away their shareholders' money. Let the shareholders do that.
Friday, September 01, 2006
Gasoline Taxes and Road Building
While I'm all for low taxes, I believe that gasoline taxes and tolls on highways can be perfectly reasonable, provided, however, that there are some constraints to them.
Roads cost money to build and maintain, and therefore, I think it's fair that the people that actually use the roads pay for their use. If someone has managed to position their life so they can walk to work and walk to the stores they need, why should they have to pay taxes so I can drive a car? However, the collary should also be true: if I drive, why should the gas taxes and tolls go to items other than those that are necessary to maintain the road?
I favor congestion-based tolls. These would be tolls that would be charged only during peak periods: by peak periods, I mean only those times when traffic moves less than the speed limit. As I wrote in a previous blog entry, these tolls would be set at such a rate so that enough people were deterred from using the road until the speed limit could then be attained. I believe this would be a more sensible allocation of a limited resource than to force everyone to sit in a traffic jam.
Now, if the congestion-based tolls are throwing out so much money that no other funding for roads is needed, this would tell me that the road infrastructure is woefully inadequate. The excess funds should be used to build more roads. The objective with congestion-based tolls isn't to raise revenue, it's simply to reallocate resources to those willing to pay for them.
Regular tolls are fine, as long as the toll can be collected efficiently. I hate having to wait 20 minutes to pay $1 for a toll. Gasoline taxes and various property taxes on cars are also acceptable, so long as these funds are not diverted to other sources.
So whatever gasoline taxes and tolls would have to be to maintain the road system is where I think the taxes should be set. However, there's one slight problem here. If a small state, such as Rhode Island, needed to have higher taxes than the neighboring states (perhaps because of more miles driven by its residents, more miles per car, or whatever), this could cause locals to cross state lines when making purchases. Taxes need to be high enough to cover costs, but not so high that people start finding alternative fuel sources in other states. States like these would probably have to revert to more tolls. Traffic fines should also be used solely for the road system.
The cost of the road system are construction costs, repair, snowplowing, traffic police salaries, and the cost for emergency rescue personnel for the portion that they deal with automobile accidents.
So would this make gas taxes higher or lower?
Currently, gasoline is taxed at $0.184 per gallon by the federal government, and then the states add their own taxes. This brings in about $30 billion to $40 billion per year, according to various estimates. The most recent highway bill signed by Bush had $286.4 billion in spending over six years, which right there is more than the gas taxes collected. This would indicate that the gas taxes aren't enough to fund federal transportation spending. Add to the fact that much of the $0.184 collected is block granted back to the states, and it looks like the federal gas tax is woefully short of where it should be. The highway bill was also filled with lots of local projects, not for the interstate highway system. The bridge to nowhere in Alaska is only the most ridiculous example.
Republicans and Democrats alike call for tax holidays of the gas tax. I guess my question would be: during this time, would you still build and repair roads, have police and fire units, etc? If so, then who's going to pay for it all if not the drivers. If I set up my life so that I don't need to drive, why should my income taxes go up to pay so people can drive?
At the same time, gas taxes shouldn't be thought of as a piggy bank to fund other non-road related projects.
There's a few other things I haven't mentioned. Pollution. In my above proposal, there's no allocation for pollution. I would definitely favor some sort of duty on pollution to encourage people to reduce their own. Charge each car based on the amount of particulates per mile times the number of miles driven; this will encourage people to get cars that pollute less. I don't really care if the car is a hybrid or runs on ehanol. Base it on the output. I never understood why there should be tax breaks for hybrids. Why not tax breaks for really fuel efficient cars, most of which happen to be hybrids. But what if someone else came up with a different way? Like reducing the number of cylinders in use when on a highway.
Public transportation. Many governments seem to think that drivers should pay for public transportation, because for every guy on the railroad, he's not on the road. However, if we were going to have a closed system, in which gas taxes and tolls and fines pay for roads and highways, then why should the drivers pay for the railroad riders? Yeah, they reduce congestion. So what. If a factory were to build worker housing next to the factory, should the owner get the same tax break because he's reducing congestion as well? Or if a company allows its employees to work from home or have flex commuting, should they get a tax break? Well, they sort of would, because under my proposal congestion wouldn't happen often: except when there was a wreck, there should be little congestion due to peak tolls.
So in any event, keep road taxes and tolls as high as necessary to maintain and build the roads. Don't expect subsidies, and don't expect to subsidize anyone else...
Roads cost money to build and maintain, and therefore, I think it's fair that the people that actually use the roads pay for their use. If someone has managed to position their life so they can walk to work and walk to the stores they need, why should they have to pay taxes so I can drive a car? However, the collary should also be true: if I drive, why should the gas taxes and tolls go to items other than those that are necessary to maintain the road?
I favor congestion-based tolls. These would be tolls that would be charged only during peak periods: by peak periods, I mean only those times when traffic moves less than the speed limit. As I wrote in a previous blog entry, these tolls would be set at such a rate so that enough people were deterred from using the road until the speed limit could then be attained. I believe this would be a more sensible allocation of a limited resource than to force everyone to sit in a traffic jam.
Now, if the congestion-based tolls are throwing out so much money that no other funding for roads is needed, this would tell me that the road infrastructure is woefully inadequate. The excess funds should be used to build more roads. The objective with congestion-based tolls isn't to raise revenue, it's simply to reallocate resources to those willing to pay for them.
Regular tolls are fine, as long as the toll can be collected efficiently. I hate having to wait 20 minutes to pay $1 for a toll. Gasoline taxes and various property taxes on cars are also acceptable, so long as these funds are not diverted to other sources.
So whatever gasoline taxes and tolls would have to be to maintain the road system is where I think the taxes should be set. However, there's one slight problem here. If a small state, such as Rhode Island, needed to have higher taxes than the neighboring states (perhaps because of more miles driven by its residents, more miles per car, or whatever), this could cause locals to cross state lines when making purchases. Taxes need to be high enough to cover costs, but not so high that people start finding alternative fuel sources in other states. States like these would probably have to revert to more tolls. Traffic fines should also be used solely for the road system.
The cost of the road system are construction costs, repair, snowplowing, traffic police salaries, and the cost for emergency rescue personnel for the portion that they deal with automobile accidents.
So would this make gas taxes higher or lower?
Currently, gasoline is taxed at $0.184 per gallon by the federal government, and then the states add their own taxes. This brings in about $30 billion to $40 billion per year, according to various estimates. The most recent highway bill signed by Bush had $286.4 billion in spending over six years, which right there is more than the gas taxes collected. This would indicate that the gas taxes aren't enough to fund federal transportation spending. Add to the fact that much of the $0.184 collected is block granted back to the states, and it looks like the federal gas tax is woefully short of where it should be. The highway bill was also filled with lots of local projects, not for the interstate highway system. The bridge to nowhere in Alaska is only the most ridiculous example.
Republicans and Democrats alike call for tax holidays of the gas tax. I guess my question would be: during this time, would you still build and repair roads, have police and fire units, etc? If so, then who's going to pay for it all if not the drivers. If I set up my life so that I don't need to drive, why should my income taxes go up to pay so people can drive?
At the same time, gas taxes shouldn't be thought of as a piggy bank to fund other non-road related projects.
There's a few other things I haven't mentioned. Pollution. In my above proposal, there's no allocation for pollution. I would definitely favor some sort of duty on pollution to encourage people to reduce their own. Charge each car based on the amount of particulates per mile times the number of miles driven; this will encourage people to get cars that pollute less. I don't really care if the car is a hybrid or runs on ehanol. Base it on the output. I never understood why there should be tax breaks for hybrids. Why not tax breaks for really fuel efficient cars, most of which happen to be hybrids. But what if someone else came up with a different way? Like reducing the number of cylinders in use when on a highway.
Public transportation. Many governments seem to think that drivers should pay for public transportation, because for every guy on the railroad, he's not on the road. However, if we were going to have a closed system, in which gas taxes and tolls and fines pay for roads and highways, then why should the drivers pay for the railroad riders? Yeah, they reduce congestion. So what. If a factory were to build worker housing next to the factory, should the owner get the same tax break because he's reducing congestion as well? Or if a company allows its employees to work from home or have flex commuting, should they get a tax break? Well, they sort of would, because under my proposal congestion wouldn't happen often: except when there was a wreck, there should be little congestion due to peak tolls.
So in any event, keep road taxes and tolls as high as necessary to maintain and build the roads. Don't expect subsidies, and don't expect to subsidize anyone else...
Tuesday, August 29, 2006
100 Years of non-violent Government Changes
In the past 100 years, how many of the world's approximately 200 countries have either not had a violent overthrow of their government or have not been occupied by a foreign power?
The answer is only 8.
Australia
Canada
New Zealand
South Africa
Sweden
Switzerland
United Kingdom
United States
You may think more countries belong on the list. But Mexico had its revolution in 1910 (not really ending until the 1920s, but the consitution was established in 1917), most of Europe was occupied by the Germans or Russians during World War II. Most of Africa was colonized until the 1960s. I wonder if South Africa really belongs on the list, as it was a nominal British colony after the Boer War (1899-1902), but Transvaal had home rule beginning in 1906, and the Orange Free State in 1907, and the Union of South Africa wasn't created until 1910 (when it became a self-governing dominion under the British crown). So if we move the start date to 1910, then South Africa joins the list, because although it had a racist government, it was never occupied by a foreign power since that date and it did not have a violent overthrow of its government when the transition to majority rule took place in 1994.
In any event, it's interesting, but probably coincidental, that of the 8 countries, 6 of them have their institutions and legal codes rooted in the British system (the exceptions being Sweden and Switzerland).
100 years is not a huge amount of time, and while it seems unlikely that in 100 years, there will be only 8 countries who haven't been occupied or haven't had a violent transition of power, things can change pretty quickly. I wonder if 100 years ago anyone thought only 8 countries would make it for 100 years without being occupied or having a violent overthrow.
The answer is only 8.
Australia
Canada
New Zealand
South Africa
Sweden
Switzerland
United Kingdom
United States
You may think more countries belong on the list. But Mexico had its revolution in 1910 (not really ending until the 1920s, but the consitution was established in 1917), most of Europe was occupied by the Germans or Russians during World War II. Most of Africa was colonized until the 1960s. I wonder if South Africa really belongs on the list, as it was a nominal British colony after the Boer War (1899-1902), but Transvaal had home rule beginning in 1906, and the Orange Free State in 1907, and the Union of South Africa wasn't created until 1910 (when it became a self-governing dominion under the British crown). So if we move the start date to 1910, then South Africa joins the list, because although it had a racist government, it was never occupied by a foreign power since that date and it did not have a violent overthrow of its government when the transition to majority rule took place in 1994.
In any event, it's interesting, but probably coincidental, that of the 8 countries, 6 of them have their institutions and legal codes rooted in the British system (the exceptions being Sweden and Switzerland).
100 years is not a huge amount of time, and while it seems unlikely that in 100 years, there will be only 8 countries who haven't been occupied or haven't had a violent transition of power, things can change pretty quickly. I wonder if 100 years ago anyone thought only 8 countries would make it for 100 years without being occupied or having a violent overthrow.
Saturday, August 26, 2006
HOV lanes and People who need to get there fast
Why do traffic jams exist? The answer is either 1) there's an obstruction: a wreck, construction, tree in the road, etc., and thus the capacity of the road is limited [reduced supply]; 2) there are too many cars on the road versus the capacity of the road [increased demand], 3) there's not an obstruction, but there's some event that causes people to slow down to have a look (like a wreck that's been moved off the road so it no longer is blocking traffic).
Most traffic jams result because of the capacity issue. There are simply too many cars for the road (and this often leads to wrecks, which causes further delays). The problem with highways is that the cost is almost always fixed, regardless of the time of day that the road is being used. Roads are funded through gasoline taxes and tolls, and tolls are usually fixed. Furthermore, while the lanes going into the city may be backed up for a few hours each day in the morning, most of the time it's smooth sailing.
Traffic jams cost drivers money in that they can't be doing something else, like working (this is "opportunity cost"). For an unemployed guy driving somewhere, the opportunity cost of sitting in a traffic jam is basically negligible. For a lawyer who sits in a traffic jam, the opportunity cost can be quite high.
Governments have two methods of reducing traffic jams resulting from capacity issues: increase supply or decrease demand. Increasing supply means adding more lanes, or alternate routes: an expensive proposition. States currently have fairly clumsy methods of reducing demand during peak periods: one of the more prevalent methods is to promote carpooling through HOV lanes, adding public transportation with more robust schedules during peak times, etc.
Why not charge drivers a high toll during peak periods? The key would be to have lower tolls outside the peak periods, when there's excess capacity. This would encourage some drivers to shift their work schedules so they'd start and end work during non-peak times (the first to do so would be workers who could shift their hours without a great impact [such as computer programmers]).
In addition to having the toll be reduced (or even eliminated) during non-peak times, there would also have to be a good collection mechanism (probably via electronic devices like EZPass) in place so that drivers wouldn't have to wait to pay a toll, thus negating the benefit of paying the toll in the first place. I believe that the technology to do this exists well enough right now.
Convert the HOV lanes into "pay to drive faster" lanes. This way, poor people could afford to drive, it would just take them longer (but they don't value their time that highly). Meanwhile, people whose time was very valuable could pay to drive in the HOV lanes.
What would the cost of the pay lanes have to be? Well, there would have to be some sort of mechanism to determine the price: at what price does traffic again move at the speed limit? That's where the price should be set.
Roads are a limited resource, and when you have a fixed price (i.e., the gasoline tax or a fixed toll) for a scarce good, you are going to get a shortage of that good (in this case, the good is a lane of pavement as long as your car and four car lengths to the next car). By raising the price of the good, you get rid of the shortage.
While local governments would probably make money by implementing this system, I do not think it should be viewed by municipalities as a way to keep getting lots of money (rather, it should be viewed like fines: attempting to control behavior). With current technology, it would probably be quite easy to reset the price every month for each hour window based on the demand. The price would be set so that at any given time, there would not be a backup (so most of the night, there should probably be no toll).
Many of you might say this would just hurt the poor working man who needs to get to work by a certain time, and why should he be penalized (if free lanes didn't exist next to pay lanes). My answer would be that he could leave earlier when there were no tolls. If he wants to consume a limited resource, he needs to pay for it (at 5:00 AM, roads usually aren't a limited resource, so tolls then could be free). He could carpool with others who wanted to drive during the peak period but could not afford to do so alone. Or he could lobby his employer to shift his working hours. If his employer refused, he might then find alternative employment that did allow for more flexible hours. This would eventually cause employers to have to raise their wages for lower-income people who work normal business hours. It would also provide an incentive for people who had normal working hours to live closer to their employer (or at least not in the same direction as all other commuters).
By having rates that vary according to demand, we'd eliminate the shortages. That's what done in almost every other facet of our lives, so why not with the highways as well?
Most traffic jams result because of the capacity issue. There are simply too many cars for the road (and this often leads to wrecks, which causes further delays). The problem with highways is that the cost is almost always fixed, regardless of the time of day that the road is being used. Roads are funded through gasoline taxes and tolls, and tolls are usually fixed. Furthermore, while the lanes going into the city may be backed up for a few hours each day in the morning, most of the time it's smooth sailing.
Traffic jams cost drivers money in that they can't be doing something else, like working (this is "opportunity cost"). For an unemployed guy driving somewhere, the opportunity cost of sitting in a traffic jam is basically negligible. For a lawyer who sits in a traffic jam, the opportunity cost can be quite high.
Governments have two methods of reducing traffic jams resulting from capacity issues: increase supply or decrease demand. Increasing supply means adding more lanes, or alternate routes: an expensive proposition. States currently have fairly clumsy methods of reducing demand during peak periods: one of the more prevalent methods is to promote carpooling through HOV lanes, adding public transportation with more robust schedules during peak times, etc.
Why not charge drivers a high toll during peak periods? The key would be to have lower tolls outside the peak periods, when there's excess capacity. This would encourage some drivers to shift their work schedules so they'd start and end work during non-peak times (the first to do so would be workers who could shift their hours without a great impact [such as computer programmers]).
In addition to having the toll be reduced (or even eliminated) during non-peak times, there would also have to be a good collection mechanism (probably via electronic devices like EZPass) in place so that drivers wouldn't have to wait to pay a toll, thus negating the benefit of paying the toll in the first place. I believe that the technology to do this exists well enough right now.
Convert the HOV lanes into "pay to drive faster" lanes. This way, poor people could afford to drive, it would just take them longer (but they don't value their time that highly). Meanwhile, people whose time was very valuable could pay to drive in the HOV lanes.
What would the cost of the pay lanes have to be? Well, there would have to be some sort of mechanism to determine the price: at what price does traffic again move at the speed limit? That's where the price should be set.
Roads are a limited resource, and when you have a fixed price (i.e., the gasoline tax or a fixed toll) for a scarce good, you are going to get a shortage of that good (in this case, the good is a lane of pavement as long as your car and four car lengths to the next car). By raising the price of the good, you get rid of the shortage.
While local governments would probably make money by implementing this system, I do not think it should be viewed by municipalities as a way to keep getting lots of money (rather, it should be viewed like fines: attempting to control behavior). With current technology, it would probably be quite easy to reset the price every month for each hour window based on the demand. The price would be set so that at any given time, there would not be a backup (so most of the night, there should probably be no toll).
Many of you might say this would just hurt the poor working man who needs to get to work by a certain time, and why should he be penalized (if free lanes didn't exist next to pay lanes). My answer would be that he could leave earlier when there were no tolls. If he wants to consume a limited resource, he needs to pay for it (at 5:00 AM, roads usually aren't a limited resource, so tolls then could be free). He could carpool with others who wanted to drive during the peak period but could not afford to do so alone. Or he could lobby his employer to shift his working hours. If his employer refused, he might then find alternative employment that did allow for more flexible hours. This would eventually cause employers to have to raise their wages for lower-income people who work normal business hours. It would also provide an incentive for people who had normal working hours to live closer to their employer (or at least not in the same direction as all other commuters).
By having rates that vary according to demand, we'd eliminate the shortages. That's what done in almost every other facet of our lives, so why not with the highways as well?
Tuesday, August 15, 2006
Why Subsidize Multinational Corporations?
I'm a free-market capitalist. I don't think corporations are evil. I think that they can almost always provide a good or service more efficiently than a governmental entity.
However, many suburbs give various tax abatements to encourage corporations to move their headquarters or factory or whatever to their community. I think that this practice is ridiculous and patently unfair, even if the company is providing a bunch of jobs, even if it's helping local businesses such as restaurants, even if it's a net win for the community under whatever metric.
For instance, UBS AG got $145 million in incentives, primarily tax credits, when it moved its headquarters from New York City to Stamford, CT.
However, if no municipality had offered UBS AG a tax incentive, it wouldn't have gone out of business. It would have either kept its headquarters in New York, or it would have moved someplace else. It may not have chosen Stamford without the tax breaks, but it would have chosen SOMEWHERE. Yet when municipalities compete with each other, all that ends up happening is that the large corporation ends up paying less in taxes, but everyone else has to pay more.
Now, you may ask yourself, how can someone who says he is so much in favor of free markets be against competition? Isn't competition the basis of free markets?
Yes, competition is essential for a free market to work. And I would have no problem if Stamford or Westport of Newark or Jersey City or whomever lowered their property tax rates for EVERYONE. However, a government picking and choosing what companies it provides tax incentives to simply creates distortions. Instead of the market deciding what companies will be located where, personal connections and other arbitrary factors lead to cities giving tax breaks to one company and the expense of the others. If a 10 person boutique firm moves from NYC to Stamford, no one gets a tax break. Why should UBS get a tax break simply because it's larger?
Suppose UBS paid the same property tax rate as every other business in Stamford. But then at the end of the year, Stamford decided to write a check to UBS for the amount of its taxes paid. Would that make you upset? Because that's essentially what Stamford has done.
I say this even if you can produce some analysis that after the inital 10 year (or however long it may be) tax holiday, UBS will pay taxes, and that will be a net win for Stamford. Except that they weren't paying taxes for 10 years. You may say, well they wouldn't have paid taxes if they hadn't moved here. But they would have had to have been SOMEWHERE and they'd be paying taxes there if no municipality offered these ridiculous tax breaks.
When property taxes aren't assessed at the same rate for all properties (and properties need to be reassessed regularly), then you've got an unfair system. You have the high ratepayers subsidizing the lower ratepayers. In a few cases, you may be able to get away with multiple rates (a special rate for a particular sewer district, or lower taxes for commercial properties on the theory that they don't send kids to school or whatever). But other than these few cases, keep property taxes at the same (hopefully very low) rate across a municipality. Don't tax someone at one rate simply because they may threaten to leave, or wouldn't have come, or whatever. If your tax rates are such that companies won't locate there without incentives, here's a thought: lower your taxes for everyone. Maybe the problem is that your taxes are too high.
However, many suburbs give various tax abatements to encourage corporations to move their headquarters or factory or whatever to their community. I think that this practice is ridiculous and patently unfair, even if the company is providing a bunch of jobs, even if it's helping local businesses such as restaurants, even if it's a net win for the community under whatever metric.
For instance, UBS AG got $145 million in incentives, primarily tax credits, when it moved its headquarters from New York City to Stamford, CT.
However, if no municipality had offered UBS AG a tax incentive, it wouldn't have gone out of business. It would have either kept its headquarters in New York, or it would have moved someplace else. It may not have chosen Stamford without the tax breaks, but it would have chosen SOMEWHERE. Yet when municipalities compete with each other, all that ends up happening is that the large corporation ends up paying less in taxes, but everyone else has to pay more.
Now, you may ask yourself, how can someone who says he is so much in favor of free markets be against competition? Isn't competition the basis of free markets?
Yes, competition is essential for a free market to work. And I would have no problem if Stamford or Westport of Newark or Jersey City or whomever lowered their property tax rates for EVERYONE. However, a government picking and choosing what companies it provides tax incentives to simply creates distortions. Instead of the market deciding what companies will be located where, personal connections and other arbitrary factors lead to cities giving tax breaks to one company and the expense of the others. If a 10 person boutique firm moves from NYC to Stamford, no one gets a tax break. Why should UBS get a tax break simply because it's larger?
Suppose UBS paid the same property tax rate as every other business in Stamford. But then at the end of the year, Stamford decided to write a check to UBS for the amount of its taxes paid. Would that make you upset? Because that's essentially what Stamford has done.
I say this even if you can produce some analysis that after the inital 10 year (or however long it may be) tax holiday, UBS will pay taxes, and that will be a net win for Stamford. Except that they weren't paying taxes for 10 years. You may say, well they wouldn't have paid taxes if they hadn't moved here. But they would have had to have been SOMEWHERE and they'd be paying taxes there if no municipality offered these ridiculous tax breaks.
When property taxes aren't assessed at the same rate for all properties (and properties need to be reassessed regularly), then you've got an unfair system. You have the high ratepayers subsidizing the lower ratepayers. In a few cases, you may be able to get away with multiple rates (a special rate for a particular sewer district, or lower taxes for commercial properties on the theory that they don't send kids to school or whatever). But other than these few cases, keep property taxes at the same (hopefully very low) rate across a municipality. Don't tax someone at one rate simply because they may threaten to leave, or wouldn't have come, or whatever. If your tax rates are such that companies won't locate there without incentives, here's a thought: lower your taxes for everyone. Maybe the problem is that your taxes are too high.
Wednesday, August 09, 2006
Conservatives and Property Taxes
What is it about conservatives that causes many of them to propose and embrace completely crazy property tax "reform"?
The latest is Ron Paul, a libertarian-Republican congressman from Texas who is often regarded as being the most free-market congressman, and who's revered by various free-market think tanks. He says that he wishes that in Texas, the state legislature would consider the following proposal:
Now, I'm all for lower taxes, but they have to be lower for everyone. Ron Paul's proposal is simply crazy, and for several reasons.
First, it gives no incentive for people to elect conservatives who want to limit spending. Why? Because, under his proposal, their taxes cannot go up! Normally, when a community goes off and elects some liberals who want to spend a lot of money, they find that their taxes go up (and then as the tax base shrinks, their taxes go up some more). They start to question what value they're getting. However, Paul's proposal completely decouples these two things. The local populace can vote for all kinds of things, knowing that future home buyers are going to have to foot the bill.
Second, his proposal is simply unfair. It amounts to a subsidy from new homeowners to long-term homeowners. This is because without annual assessments, the increased tax burden will fall on the new homeowners. If you want lower taxes, fine. But if you don't apply the taxes uniformly, then you're not really having lower taxes, you have subsidizing by the unfavored group to the favored group. What about corporations or limited partnerships? The LP or LLC or whatever will own the property. Shares in that company can change hands, but without revaluation, the property taxes will be fixed in time.
Third, why should the government discourage mobility? Our economy is dynamic because people move to where the jobs are. (Compare this to a country like Germany, where people rarely move from one region to another). When the kids have left for college, the parents can buy a smaller house. But under this scenario of Paul's, there's a reward for not relocating, in lower property taxes. And downsizing to a smaller house may result in significantly higher property taxes. So people will be reluctant to relocate.
It also makes the cost of housing more expensive for younger people, who must buy a new house and therefore must shoulder a larger tax burden than older people who have lived in the same place.
Imagine the following quote:
So how is a fixed property tax different from rent control? Now, you can say that you own the property and shouldn't be forced to pay taxes on it. Fine, but then do away with property taxes for everyone and find a different revenue stream, like the sales tax or income tax, to fund the government. The fact is, the government needs some money. Even the most die-hard libertarian realizes you need a court system, a law enforcement system, and some other items. You can debate how much government is ideal, but you need some. Therefore, you need some taxes. If you don't like property taxes, then abolish them for everyone. But if you are going to impose property taxes, impose them equitably.
Don't assess two identical houses at massively different rates. As for the argument that seniors cannot afford the increased taxes, there are sadly no guarantees in life. You buy an SUV and gas prices skyrocket, and you can't get gas at the old fixed price. Rents go up. When prices rise, you can either pay, or not purchase that product anymore. Not purchasing here implies that either you vote for conservatives who lower taxes, or you sell your house so you need not pay property taxes anymore.
Property taxes going up means that your house value is probably rising as well. This means that you could take out a Home Equity Line of Credit and pay the property taxes. Due to price appreciation, when you sell the house, you can pay the loan back.
Conservatives often propose similar schemes to Ron Paul's for property taxes. California has it in the form of Proposition 13. However, I think that conservatives would be better served if they proposed limits on increases in spending, or if they set a maximum tax rate on properties, but allowed those properties to be regularly reassessed. Taxes should be low, but they should also be fair.
Any tax cut that is not distributed among all people fairly is essentially a subsidy. Suppose that all houses in a neighborhood were regularly reassessed, and then were taxed at 1%. Everyone sent in their checks. Then the government figured out what the assessed rate was whenever you bought the house, and sent you a check for the difference. Some people would get nothing, some people would get a little and some people would get a lot.
Would you object to that? If not, why not? And if so, don't you also object to Ron Paul's proposal? Because in the end, it's the same thing. Everyone has the exact same cash flow under both my scenario and Ron Paul's proposal.
Keep this in mind during any property tax reform. Never altering the assessment creates massive distortions.
The latest is Ron Paul, a libertarian-Republican congressman from Texas who is often regarded as being the most free-market congressman, and who's revered by various free-market think tanks. He says that he wishes that in Texas, the state legislature would consider the following proposal:
Specifically, end the practice of annual assessments. Properties should be reassessed for tax purposes only when sold or ownership is otherwise transferred. The current system is terrifying for seniors forced to pay more and more each year, with no idea where they will find the money. And unlike other bills, property taxes must be paid or else one’s home can be taken away. My office hears from seniors who may have no choice but to leave Texas altogether because they cannot live with the uncertainty of arbitrary property tax increases. They literally fear losing their homes.
Now, I'm all for lower taxes, but they have to be lower for everyone. Ron Paul's proposal is simply crazy, and for several reasons.
First, it gives no incentive for people to elect conservatives who want to limit spending. Why? Because, under his proposal, their taxes cannot go up! Normally, when a community goes off and elects some liberals who want to spend a lot of money, they find that their taxes go up (and then as the tax base shrinks, their taxes go up some more). They start to question what value they're getting. However, Paul's proposal completely decouples these two things. The local populace can vote for all kinds of things, knowing that future home buyers are going to have to foot the bill.
Second, his proposal is simply unfair. It amounts to a subsidy from new homeowners to long-term homeowners. This is because without annual assessments, the increased tax burden will fall on the new homeowners. If you want lower taxes, fine. But if you don't apply the taxes uniformly, then you're not really having lower taxes, you have subsidizing by the unfavored group to the favored group. What about corporations or limited partnerships? The LP or LLC or whatever will own the property. Shares in that company can change hands, but without revaluation, the property taxes will be fixed in time.
Third, why should the government discourage mobility? Our economy is dynamic because people move to where the jobs are. (Compare this to a country like Germany, where people rarely move from one region to another). When the kids have left for college, the parents can buy a smaller house. But under this scenario of Paul's, there's a reward for not relocating, in lower property taxes. And downsizing to a smaller house may result in significantly higher property taxes. So people will be reluctant to relocate.
It also makes the cost of housing more expensive for younger people, who must buy a new house and therefore must shoulder a larger tax burden than older people who have lived in the same place.
Imagine the following quote:
Specifically, end the practice of annual rent increases. Rents should be raised only when the tenant ends the lease. The current system is terrifying for seniors forced to pay more and more each year, with no idea where they will find the money. And unlike other bills, rents must be paid or else one can be evicted. My office hears from seniors who may have no choice but to leave Texas altogether because they cannot live with the uncertainty of arbitrary rent increases. They literally fear losing their homes.
So how is a fixed property tax different from rent control? Now, you can say that you own the property and shouldn't be forced to pay taxes on it. Fine, but then do away with property taxes for everyone and find a different revenue stream, like the sales tax or income tax, to fund the government. The fact is, the government needs some money. Even the most die-hard libertarian realizes you need a court system, a law enforcement system, and some other items. You can debate how much government is ideal, but you need some. Therefore, you need some taxes. If you don't like property taxes, then abolish them for everyone. But if you are going to impose property taxes, impose them equitably.
Don't assess two identical houses at massively different rates. As for the argument that seniors cannot afford the increased taxes, there are sadly no guarantees in life. You buy an SUV and gas prices skyrocket, and you can't get gas at the old fixed price. Rents go up. When prices rise, you can either pay, or not purchase that product anymore. Not purchasing here implies that either you vote for conservatives who lower taxes, or you sell your house so you need not pay property taxes anymore.
Property taxes going up means that your house value is probably rising as well. This means that you could take out a Home Equity Line of Credit and pay the property taxes. Due to price appreciation, when you sell the house, you can pay the loan back.
Conservatives often propose similar schemes to Ron Paul's for property taxes. California has it in the form of Proposition 13. However, I think that conservatives would be better served if they proposed limits on increases in spending, or if they set a maximum tax rate on properties, but allowed those properties to be regularly reassessed. Taxes should be low, but they should also be fair.
Any tax cut that is not distributed among all people fairly is essentially a subsidy. Suppose that all houses in a neighborhood were regularly reassessed, and then were taxed at 1%. Everyone sent in their checks. Then the government figured out what the assessed rate was whenever you bought the house, and sent you a check for the difference. Some people would get nothing, some people would get a little and some people would get a lot.
Would you object to that? If not, why not? And if so, don't you also object to Ron Paul's proposal? Because in the end, it's the same thing. Everyone has the exact same cash flow under both my scenario and Ron Paul's proposal.
Keep this in mind during any property tax reform. Never altering the assessment creates massive distortions.
Friday, July 28, 2006
Equal Pay for Equality Bureaucrats
"Equal pay for equal work" has been one of those slogans that's been around for a while. Women on average make less than men (72% is the number usually cited, which I don't doubt). According to various women's groups, there must be discrimination out there, and no other explanation could really be feasible.
There's an organization that promotes it. On its Q&A page, we find out that the whole equal pay for equal work concept is really equal pay for jobs that some government entity thinks require the same skill level, but aren't really equal, but they're equivalent:
Later, it goes on to say:
So here we are going to need a government agency to determine which jobs are equivalent even if the work performed is different. The site goes on to say that employers would set wages, but that a non-discriminatory system would be used to set wages. It also says that "Fair Play can lead to greater productivity by raising morale among workers who expect to receive fair pay for their work." I guess my question is, if something is going to lead to more productive employees without really costing anything, why wouldn't the companies implement the policies that are being advocated? Why do we need to require a government bureaucracy to do this? Companies are in the business of maximizing their profits.
An example the page gives of equivalent jobs is registered nursing assistants and compared with plumbers. While the jobs may have the same basic skill level (although I'm not really sure), they aren't the same. How the hell are they even similar? I certainly wouldn't want a nursing assistant to come over if my toilet was all stopped up, and I wouldn't want to see a plumber if my intenstines were all stopped up and I couldn't use the toilet (although in both cases, the end result would be an empty septic tank).
Right now, if there's a shortage of plumbers, you raise the wages offered, and you'll get more plumbers. If there's a shortage of nursing assistants, raise their wages, and you'll find enough nursing assistants. Might not be instantaneous (people have to study to be these things, or move to the area, or quit what they are doing), but it'll happen. But if you have a shortage of plumbers and you raise the nursing assistant's salaries, that's not going to help me find a guy to fix my toilet.
The top 10 reasons for pay inequity are provided. One of the points is that market forces aren't eliminating discrimination, because pay levels are different. Say what? Warren Farrel in Forbes had a good statement on this:
He goes on to say that women and men make different choices, and these lead to men valuing money over flexibility, fulfillment, autonomy and safety, while for women, money ranked lower. (Although this goes against the liberal belief that men and women are exactly the same except in anatomy]. He also wrote a book explaining why men earn more.
Now, this pay equity thing may just be some looney-toon website by some marginal organization, and their bill probably has essentially no chance of passing. However, here in Connecticut, John deStefano is running for governor, and this is one of his Campaign Themes.
His proposal would "establish within one year a set of standards for evaluating pay equity in municipalities and in businesses and industries employing more than 50 people." (What does businesses and industries mean? Does he mean businesses and organizations or businesses and partners?)
Fortunately for us, deStefano doesn't look like a winner on election day. And he's going to get beaten by a woman. What's an equivalent job to governor? CEO? The governor probably makes less. I'd tell her she should become a CEO.
There's an organization that promotes it. On its Q&A page, we find out that the whole equal pay for equal work concept is really equal pay for jobs that some government entity thinks require the same skill level, but aren't really equal, but they're equivalent:
The major provision of the Fair Pay Act prohibits wage discrimination based on sex, race, or national origin among employees for work in "equivalent jobs." Equivalent jobs are those whose composite of skill, effort, responsibility, and working conditions are equivalent in value, even if the jobs are dissimilar. The Act is a natural extension of the 1963 Equal Pay Act, which is limited to sex-based discrimination in the same jobs. For enforcement purposes, the Fair Pay Act allows class action lawsuits to be filed and provides for compensatory and punitive damages. It also fills the information gap for workers by requiring some employers to disclose to the Equal Employment Opportunity Commission (EEOC) general job classifications and their pay statistics (although it maintains individual confidentiality). The bill prohibits a company from lowering any employee's wage rate in order to implement fair pay.
Later, it goes on to say:
Women are still often steered into the more traditional female occupations - such as nurse, teacher, clerical worker, or retail sales clerk. This has perpetuated sex-based occupational segregation, which is beyond the reach of the Equal Pay Act alone. Requiring equal pay for workers in equivalent jobs, even when the work performed is different, is the surest way of eliminating the enduring biases against jobs held predominantly by women and people of color.
So here we are going to need a government agency to determine which jobs are equivalent even if the work performed is different. The site goes on to say that employers would set wages, but that a non-discriminatory system would be used to set wages. It also says that "Fair Play can lead to greater productivity by raising morale among workers who expect to receive fair pay for their work." I guess my question is, if something is going to lead to more productive employees without really costing anything, why wouldn't the companies implement the policies that are being advocated? Why do we need to require a government bureaucracy to do this? Companies are in the business of maximizing their profits.
An example the page gives of equivalent jobs is registered nursing assistants and compared with plumbers. While the jobs may have the same basic skill level (although I'm not really sure), they aren't the same. How the hell are they even similar? I certainly wouldn't want a nursing assistant to come over if my toilet was all stopped up, and I wouldn't want to see a plumber if my intenstines were all stopped up and I couldn't use the toilet (although in both cases, the end result would be an empty septic tank).
Right now, if there's a shortage of plumbers, you raise the wages offered, and you'll get more plumbers. If there's a shortage of nursing assistants, raise their wages, and you'll find enough nursing assistants. Might not be instantaneous (people have to study to be these things, or move to the area, or quit what they are doing), but it'll happen. But if you have a shortage of plumbers and you raise the nursing assistant's salaries, that's not going to help me find a guy to fix my toilet.
The top 10 reasons for pay inequity are provided. One of the points is that market forces aren't eliminating discrimination, because pay levels are different. Say what? Warren Farrel in Forbes had a good statement on this:
When I was on the board of directors for the National Organization for Women in New York City during the 1970s, I led protests against the pay gap. I wore a "59 Cents" pin to reflect my objection to the discrimination I felt was the cause of women earning only 59 cents to each dollar earned by men. Now, since I'm a husband and father, discrimination against women isn't just political, it's personal.
But one question haunted me through the years: If an employer has to pay a man one dollar for the same work a woman would do for 59 cents, why would anyone hire a man? If women do produce more for less, I thought, women who own their own businesses should earn more than male business owners. So I checked. I found that women entrepreneurs earn 50% less than their male counterparts.
He goes on to say that women and men make different choices, and these lead to men valuing money over flexibility, fulfillment, autonomy and safety, while for women, money ranked lower. (Although this goes against the liberal belief that men and women are exactly the same except in anatomy]. He also wrote a book explaining why men earn more.
Now, this pay equity thing may just be some looney-toon website by some marginal organization, and their bill probably has essentially no chance of passing. However, here in Connecticut, John deStefano is running for governor, and this is one of his Campaign Themes.
His proposal would "establish within one year a set of standards for evaluating pay equity in municipalities and in businesses and industries employing more than 50 people." (What does businesses and industries mean? Does he mean businesses and organizations or businesses and partners?)
Fortunately for us, deStefano doesn't look like a winner on election day. And he's going to get beaten by a woman. What's an equivalent job to governor? CEO? The governor probably makes less. I'd tell her she should become a CEO.
Thursday, July 27, 2006
Are You Better Off Today than you would have been 25 or 50 years ago?
Here in Connecticut, New Haven Mayor John deStefano is running for Governor, and his ads lament the fact that the middle class is “hurting.” One advertisement says, “My dad was a police officer. Back then, working people could scrimp and save and become middle-class. It was a different time,” while a 1957 Chevrolet appears in the picture.
DeStefano is right about one thing, it was a different time. And he certainly isn’t the first, nor will he be the last to make such a claim that somehow, 50 years ago or 25 years ago was a better time for the middle class. Katherine Newman was touting that in 1993 in her book. More doom and gloom about the declining standard of living are Here or Here or Tamara Drault's recent book, Strapped.
However, what all these claims fail to realize is simply how different “middle class” is today from back then. If most “hurting” middle class members tried to live like people did 50 years ago or 25 years ago, they’d find that the old times weren’t so great, and what people had to scrimp and save for pales in comparison to what we’ve got today.
It’s akin to someone lamenting that a baseball team doesn’t hit as many home runs as they did 25 years ago, without mentioning that their new ball park has an outfield wall that’s 60 feet farther from home plate.
What are some of the things that people take for granted today but were oblivious to 25 and/or 50 years ago? I’m going to try to give some indications of how people lived in 1956, 1981 and today, and the costs of these choices. At the end of each section, I summarize these cost savings, and I assume 130 million households in the United States. This is to live today at a standard roughly comparable with 1956. I'm not going to compare what people spent on X in 1956/1981 versus today, but instead I am going to compare what they spend today versus what they'd have to spend to get the same level of product or service prevalent in 1956 or 1981.
Big Houses: NPR reports that the average house size has doubled since the 1950s, and now stands at 2,349 square feet. Writes NPR:
Air Conditioning: in 1953, sales of room air conditioning units exceeded 1 million for the first time. However, almost no houses had central air, while by 1997, 47% of houses had central air conditioning and 25% had wall or window units according to the US Department of Energy. 93% of people in the south had air conditioners in 1997, and the average American household spent $140 on energy for air conditioning. The average cost of a central air system for your typical house is somewhere around $4,000, which means an extra $24.63 per month on your mortgage at 6.25%. To make the comparison the same fo the 1956 standard of living, supposing the average house had one window unit, with the average cost to run a window unit costs about $20 per month, you’d need to run it about 3 months, for $60 per year. So the average household spends about $80 per year more on energy than it would need to to maintain a 1956 standard of living. I'm going to assume that 1981 was equivalent to today in terms of air conditioning. It was probably a little less, but I'm not going to count it here.
Cell Phones: 195 million people had cell phones in 2005 in the United States compared to essentially zero in 1981 and zero in 1956. The average monthly cell phone bill is just under $50 according to the CTIA. Since I'm analyzing households, I'm going to say there are 1.5 phones per household on average. Thus, there's a savings of $75 per month if you wanted to live like they did in 1956 or 1981.
Computers: No one had a home computer in 1956. In 1981, a few techno-geeks had TRS-80s, Commodore 64s or early Apples. Today, most middle class families wouldn’t conceive of not having a fairly modern PC with an internet connection, and probably a wireless router, inkjet printer and large color monitor. In 1981, modems were practically unhead of. If you figure that the average home PC with a monitor and basic printer costs about $700 and has about a three year life before replacement, this equates to about $20 per month in equipment costs for the computer per month. Add in another $30 per month for an internet connection. Then add another $25 for the occasional purchases of non-game software, printer ink and printer paper, recordable DVDs and CDs, and it’s likely that the typical household spends $75 per month on their home computer. Shelling out a few bucks at a yard sale would probably get you a much better computer than existed in 1981 in the most advanced research laboratory.
Video Games: most people in 1956 would not have been able to conceive of video games. In 1981, there were some rudimentary systems with lame games. Today, there are some serious game consoles that can display graphics that in 1981 could only be dreamt of. In 2004, in the United States, we spent $6.2 billion on console and portable game software, $3.7 billion on game hardware and $1.1 billion on PC games according to Wikipedia. This equates to about $84.61 per household per year. If you want to have a 1981 style video game unit right now, you can purchase a joystick with 10 embedded games from the early 1980s for $17.99.
Televisions: In 1955 (I don’t have data for 1956), 67% of households had a television set, but only 4% had more than one television. Recall in Back to the Future how Marty was thought to be joking when he tells the 1955 McFlys that he had two televisions. In 1955, no one had color television sets. By 1980, 98% of the population had television, 50% of families had more than one TV and 83% of families had a color TV. However, television sizes were certainly significantly smaller, no one had plasma or LCD screens, and no one had stereo. In 2001, the average family had 2.4 televisions. In 2005, Americans spent $17 billion on digital televisions. Assuming three quarters of these purchases were for houses and the remainder for businesses, that would amount to $98.07 per household spent on digital television. Assuming the average non-HDTV set costs about $200, and a household purchases a set every four years (the average household has 2.4 sets, so this means that the life is around 8 years), the average household spends $50 on tube-TVs per year. To get to a 1956 standard of one black and white television, no remote, screen size of 12 inches or less, you’d probably have to shell out about $25, if you could actually find a B&W TV. By 1981, I'd imagine my family was normal: we had a color TV downstairs and the old black and white TV upstairs. To meet this standard, expect to shell out about $250. Assuming a life of 8 years, to get to 1956 standards, you’d need to spend $3 per year on TVs, and to get to 1981 standards, you’d need to spend $30. This is versus $148 for our standard today.
Cable TV: No one could even conceive of cable TV in 1956. In 1981, only 20% of the population had cable, and our most basic package would look like some sort of super system to someone in 1981. The average cable bill in 2004 was $50.98 per month, although my cable bill is sadly much higher. Assuming that it would cost $20 to get a 1981 package, we’re spending $31 more per month than we would to get to a 1981 standard of living, and $51 more per month versus a 1956 standard of living.
VCRs: The first videocassette recorder, the Ampex, was introduced in 1956. However, with a $50,000 price tag, only large TV stations could afford it. No middle class households owned one. 1981 was the height of the Betamax-VHS fight. Still, in 1981, most households didn’t own a VCR (in 1985, only 14% did, while this would hit 66% by 1990). Today, of course, you can purchase VCRs for about $30. So I'm not going to even factor in a cost savings, since if a VCR has a four year life, that's only a saving of less than a dollar per month.
DVDs: The first DVD players and discs didn’t hit the market until 1996 in Japan and 1997 in the United States. So in 1981 and 1956, you couldn’t have had a DVD player, which can now be purchased for approximately $50.
Movie Rentals and Purchases: Americans spend about $8.8 billion on video rentals per year, or about $67.69 per family per year. According toHome Media Research, consumers spend $15.9 billion on purchasing movies (primarily DVDs). This is about $122.30 per household. I'd say that works out to about six movies per year on average, which seems about right. I'm not sure what people spent in 1981 when VCRs were new. Of course, most people didn't own a VCR, but I'm going to say the average family rented 6 movies, which would run you $30 today.
Radio: There was of course Radio in 1956 and 1981, but FM stereo didn’t exist until the 1960s. Now, of course, we have satellite radio. In 1956, the satellite hadn’t yet left the drawing board (Sputnik was launched in October 1957). In 1981, no one of course had satellite radio. Today, there are about 6.5 million subscribers of XM and 4 million of Sirius according to Wikipedia.
Prescriptions: In 1956 or in 1981, a whole host of medicines was unavailable versus what we have at our disposal. Lipitor, Viagra, Zocor, Claritin, Crestor, Zetia, Zoloft, Nexium, etc. Any health plan that has prescription coverage inherently covers medicines developed since 1981: all medicines that were available in 1956 or 1981 are now available as generics, which means that they’re dirt cheap. If you don't have health care and your doctor happens to prescribe you medicine that has been around for 25 years (and there are indeed some of these medications), you can probably get it at your pharmacy for a few dollars. In the United States, pharmaceutical sales in 2004 were $235.4 billion. Most Americans, of course, don’t pay for pharmaceuticals directly, but instead have their insurance companies pay. Some Americans don’t take any pharmaceuticals, but other Americans pop pills incessantly. In any event, the pharmaceuticals do get paid for, and any businesses paying them will pass through the costs to their employees via lower salaries or higher insurance premiums. Americans spend an average of $1,810.76 on drugs per household. Assuming that 10% of these are for generics that were around in 1956 or 1981, the supplemental increase on drugs is about $1,629.69. Back in the 1950s or 1980s, there was no lipitor, and thus the hardness in your arteries in your heart couldn't be stopped. Back in the 1950s or 1980s, there was no Viagra and the softness in your...
Medical Care: many people bemoan how expensive medical care has gotten, and it’s almost too bad that there isn’t an option to buy an insurance plan that would only cover medical achievements up to a certain year. That way, people could get an idea of advances in medical care. The first CT scan was in 1972, and was incredibly primitive by today’s standards. Between 1956 and 1981, there was the first successful transfer of a pancreas, liver, heart, and heart/lung; since 1981, there have been a few others which seem mainly experimental to me, but I'm not a doctor (nor do I play one on TV as the silly ad campaign of the 1970s stated). Ultrasounds were still very experimental in 1956. And in case you don't think all this medical stuff really does any good, life expectancy tables might convince you, as average life expectancy of someone born in 1950 was 68.2 years versus 77.3 years in 2002. Not all of this is related to medicine (some is to better cars, see below, as well as more safety on various industrial and consumer machinery, etc). I have no idea what I'd price 1956-level health care would cost, but I would imagine that the savings would be substantial (I'm also not convinced you could tell a doctor, "Don't use any equipment developed after 1956"). Medical imaging (MRI, CAT, etc) costs $100 billion per year, which is equivalent to $769.23 per household. Even if you didn't get any images, you paid for it through your insurance. I'm not sure what was available in 1981, but let's say $100, because ultrasounds were available.
Automobiles: many people think of the late 1950s as the golden age of the US automobile, but what they don’t realize is that today’s car available to the typical consumer packs features that were practically unheard of in the 1950s. Safety systems such as lap belts, crumple zones, radial-ply tires, and front and side-impact airbags are often standard on today’s cars. In 1953, the chances of dying in an auto accident was four times as great as today. Some of this is due to medical advances, and some due to improved drunk-driving laws. Electric mirrors, power steering, anti-lock brakes, cruise control, eight speaker stereo systems and heated seats are also not limited to a few expensive luxury models. In order to have the same basic functionality of a typical 1956 car, you’d likely not be able to choose anything but the most basic car available today, and even then, the performance and safety would exceed the average 1956 car. I’m going to assume that if the typical American purchases a new car for $25,000, (according to the the FTC, it’s $28,400 ), he could get 1956 functionality for $13,000. In 1955, there were 1.16 cars per household, whereas in 2003, there were 2.03 cars per household. Thus, living at a 1956 standard of living would require you to spend $15,080 for 1.16 inferior cars versus $50,000 today (actually a little should be knocked off each one of these as businesses and local governments own cars). Assuming cars last eight years, this amounts to additional spending of $4,365 per year on cars to live beyond a 1956 standard. Due to business ownership, let’s cut that to an even $4,000. In 1981, the average household owned 1.72 cars, and while cars today are better, there isn’t as much of a difference as with 1956. I would say instead of $4,000 per year, the difference is probably closer to $1,500.
Lots of other stuff: There are a whole slew of things that are of course better now than 25 or 50 years ago. Some of them are somewhat silly, but people still shell out additional money to get titanium golf clubs, even if their game isn’t helped at all. Digital cameras allow the almost instant production of photographs, as opposed to waiting a few days for the local shop to develop them. I-pods allow the creation of digitally-pure music track lists, an improved airport structure allows people to travel more freely about the country. Long distance calls currently are often part of a flat-rate package, and most Americans think nothing of calling their friends across the country, while in 1956, few places had direct dial of long distance. In 1981, long distance was prevalent, but families reserved long distance calls for either late at night or on special occasions. You also sat next to the phone that was wired to the wall; there were no cordless phones in 1956, and in 1981, they were extremely rare. Food was radically different: in 1956, fruits and vegetables were really available only when they were “in season”, as shipping fruits from South America or even from California to the midwest was difficult. People didn’t have stainless steel propane grills or stainless steel refrigerators in 1956 or even in 1981. There were no ATMs in 1956, and in 1981, they were practically non-existent. In order to withdraw funds from your account, you had to visit the bank during business hours. Clothing styles are apparently much better today than in the 1950s or 1980s, but since I have no nose for fashion, I have no idea how to measure this. But shoes seem to be a lot nicer today, and athlete’s shoes seem to be better for impact, and dress shoes seem to be a lot more comfortable. Dishwashers didn’t catch on until the 1950s
I’ve heard a lot of people say that all this new stuff doesn’t make people any happier, and for a lot of people, that may be true (but for the guy who has a cholesterol level of 188 instead of 250 thanks to Lipitor, he may disagree, and while this would be a great place for a Viagra joke, I'll refrain). However, the middle class and even those who are at the lower end of the economic spectrum still shell out money for these things, and no one is forcing them to. Another common claim is that we have no leisure time today versus in previous decades. However, this report by the Federal Reserve shows that since 1965, Americans have more leisure time, not less.
So as you’re sitting there reading this on your 19 inch color computer monitor while listening to your Ipod and enjoying your 68 degree room cooled by central air conditioning and while eating an apple that is nine months out of season, and while you hear your cellphone ring, and while you just noticed someone sent you digital photos of yesterday’s fun times, and while you’ve got your plasma TV tuned in to a tennis match halfway around the world, can you really be certain that 1956 or 1981 was a better time?
50 years ago, half the families in the country earned less than the median household income. Today, again, half of families are below the median. But that median is so much higher than the median of 50 years ago. And 50 years from now, our median is going to seem primitive.
Here is a Summary of annual cost increases versus 1956 lifestyle. These are just my estimates, and of course your situation is going to be different.
(Note: the housing costs have been reduced by 25% to account for the fact that mortgage interest is tax deductible)
So in any event, the 1956 standard of living is $12,255 cheaper, and with a 25% tax bracket, the above represent about $16,000 in additional wages. And this doesn’t even begin to contemplate lots of other expenses like better golf clubs, long distance direct dialing, and so on. It’s anyone’s guess what this would all cost, but I sincerely believe that if a typical middle class family today decided they were going to live close to the standard of a 1956 middle class family, and watch only the big networks on a small black and white tv, have no internet, have one phone, one car, etc., that their total savings would be well over $20,000 pre-tax, or nearly half of the $44,389 median household income.
Mayor deStefano, the 1950s were indeed a different time.
DeStefano is right about one thing, it was a different time. And he certainly isn’t the first, nor will he be the last to make such a claim that somehow, 50 years ago or 25 years ago was a better time for the middle class. Katherine Newman was touting that in 1993 in her book. More doom and gloom about the declining standard of living are Here or Here or Tamara Drault's recent book, Strapped.
However, what all these claims fail to realize is simply how different “middle class” is today from back then. If most “hurting” middle class members tried to live like people did 50 years ago or 25 years ago, they’d find that the old times weren’t so great, and what people had to scrimp and save for pales in comparison to what we’ve got today.
It’s akin to someone lamenting that a baseball team doesn’t hit as many home runs as they did 25 years ago, without mentioning that their new ball park has an outfield wall that’s 60 feet farther from home plate.
What are some of the things that people take for granted today but were oblivious to 25 and/or 50 years ago? I’m going to try to give some indications of how people lived in 1956, 1981 and today, and the costs of these choices. At the end of each section, I summarize these cost savings, and I assume 130 million households in the United States. This is to live today at a standard roughly comparable with 1956. I'm not going to compare what people spent on X in 1956/1981 versus today, but instead I am going to compare what they spend today versus what they'd have to spend to get the same level of product or service prevalent in 1956 or 1981.
Big Houses: NPR reports that the average house size has doubled since the 1950s, and now stands at 2,349 square feet. Writes NPR:
Consider: Back in the 1950s and '60s, people thought it was normal for a family to have one bathroom, or for two or three growing boys to share a bedroom. Well-off people summered in tiny beach cottages on Cape Cod or off the coast of California. Now, many of those cottages have been replaced with bigger houses.”What does this extra space end up costing? B4ubuild reports that an average house costs $45 to $150 per square foot to build. I’m going to assume that the extra 1,100 feet of living space now would skew a little to the lower end (since the “extra” space that people have now consists mainly of bedrooms and extra living rooms, not an extra kitchen). At $45 per square foot, an extra 1,000 square feet will add $49,500 to the price of a house. With an average mortgage rate of 6.25%, this equates to $304.78 in additional cost per month just for the added square footage (assuming a thirty year mortgage). I don’t know what the average size house was in 1981, but if we split the difference, this works out to about $152 in extra mortgage costs for the extra square footage.
| YEAR | SAVINGS |
| 1956 | $3,657.36 |
| 1981 | $1,828.68 |
Air Conditioning: in 1953, sales of room air conditioning units exceeded 1 million for the first time. However, almost no houses had central air, while by 1997, 47% of houses had central air conditioning and 25% had wall or window units according to the US Department of Energy. 93% of people in the south had air conditioners in 1997, and the average American household spent $140 on energy for air conditioning. The average cost of a central air system for your typical house is somewhere around $4,000, which means an extra $24.63 per month on your mortgage at 6.25%. To make the comparison the same fo the 1956 standard of living, supposing the average house had one window unit, with the average cost to run a window unit costs about $20 per month, you’d need to run it about 3 months, for $60 per year. So the average household spends about $80 per year more on energy than it would need to to maintain a 1956 standard of living. I'm going to assume that 1981 was equivalent to today in terms of air conditioning. It was probably a little less, but I'm not going to count it here.
| YEAR | SAVINGS |
| 1956 | $375.55 |
| 1981 | $0.00 |
Cell Phones: 195 million people had cell phones in 2005 in the United States compared to essentially zero in 1981 and zero in 1956. The average monthly cell phone bill is just under $50 according to the CTIA. Since I'm analyzing households, I'm going to say there are 1.5 phones per household on average. Thus, there's a savings of $75 per month if you wanted to live like they did in 1956 or 1981.
| YEAR | SAVINGS |
| 1956 | $900.00 |
| 1981 | $900.00 |
Computers: No one had a home computer in 1956. In 1981, a few techno-geeks had TRS-80s, Commodore 64s or early Apples. Today, most middle class families wouldn’t conceive of not having a fairly modern PC with an internet connection, and probably a wireless router, inkjet printer and large color monitor. In 1981, modems were practically unhead of. If you figure that the average home PC with a monitor and basic printer costs about $700 and has about a three year life before replacement, this equates to about $20 per month in equipment costs for the computer per month. Add in another $30 per month for an internet connection. Then add another $25 for the occasional purchases of non-game software, printer ink and printer paper, recordable DVDs and CDs, and it’s likely that the typical household spends $75 per month on their home computer. Shelling out a few bucks at a yard sale would probably get you a much better computer than existed in 1981 in the most advanced research laboratory.
| YEAR | SAVINGS |
| 1956 | $900.00 |
| 1981 | $900.00 |
Video Games: most people in 1956 would not have been able to conceive of video games. In 1981, there were some rudimentary systems with lame games. Today, there are some serious game consoles that can display graphics that in 1981 could only be dreamt of. In 2004, in the United States, we spent $6.2 billion on console and portable game software, $3.7 billion on game hardware and $1.1 billion on PC games according to Wikipedia. This equates to about $84.61 per household per year. If you want to have a 1981 style video game unit right now, you can purchase a joystick with 10 embedded games from the early 1980s for $17.99.
| YEAR | SAVINGS |
| 1956 | $84.61 |
| 1981 | $84.61 |
Televisions: In 1955 (I don’t have data for 1956), 67% of households had a television set, but only 4% had more than one television. Recall in Back to the Future how Marty was thought to be joking when he tells the 1955 McFlys that he had two televisions. In 1955, no one had color television sets. By 1980, 98% of the population had television, 50% of families had more than one TV and 83% of families had a color TV. However, television sizes were certainly significantly smaller, no one had plasma or LCD screens, and no one had stereo. In 2001, the average family had 2.4 televisions. In 2005, Americans spent $17 billion on digital televisions. Assuming three quarters of these purchases were for houses and the remainder for businesses, that would amount to $98.07 per household spent on digital television. Assuming the average non-HDTV set costs about $200, and a household purchases a set every four years (the average household has 2.4 sets, so this means that the life is around 8 years), the average household spends $50 on tube-TVs per year. To get to a 1956 standard of one black and white television, no remote, screen size of 12 inches or less, you’d probably have to shell out about $25, if you could actually find a B&W TV. By 1981, I'd imagine my family was normal: we had a color TV downstairs and the old black and white TV upstairs. To meet this standard, expect to shell out about $250. Assuming a life of 8 years, to get to 1956 standards, you’d need to spend $3 per year on TVs, and to get to 1981 standards, you’d need to spend $30. This is versus $148 for our standard today.
| YEAR | SAVINGS |
| 1956 | $145.00 |
| 1981 | $118.00 |
Cable TV: No one could even conceive of cable TV in 1956. In 1981, only 20% of the population had cable, and our most basic package would look like some sort of super system to someone in 1981. The average cable bill in 2004 was $50.98 per month, although my cable bill is sadly much higher. Assuming that it would cost $20 to get a 1981 package, we’re spending $31 more per month than we would to get to a 1981 standard of living, and $51 more per month versus a 1956 standard of living.
| YEAR | SAVINGS |
| 1956 | $611.76 |
| 1981 | $371.76 |
VCRs: The first videocassette recorder, the Ampex, was introduced in 1956. However, with a $50,000 price tag, only large TV stations could afford it. No middle class households owned one. 1981 was the height of the Betamax-VHS fight. Still, in 1981, most households didn’t own a VCR (in 1985, only 14% did, while this would hit 66% by 1990). Today, of course, you can purchase VCRs for about $30. So I'm not going to even factor in a cost savings, since if a VCR has a four year life, that's only a saving of less than a dollar per month.
DVDs: The first DVD players and discs didn’t hit the market until 1996 in Japan and 1997 in the United States. So in 1981 and 1956, you couldn’t have had a DVD player, which can now be purchased for approximately $50.
Movie Rentals and Purchases: Americans spend about $8.8 billion on video rentals per year, or about $67.69 per family per year. According toHome Media Research, consumers spend $15.9 billion on purchasing movies (primarily DVDs). This is about $122.30 per household. I'd say that works out to about six movies per year on average, which seems about right. I'm not sure what people spent in 1981 when VCRs were new. Of course, most people didn't own a VCR, but I'm going to say the average family rented 6 movies, which would run you $30 today.
| YEAR | SAVINGS |
| 1956 | $189.99 |
| 1981 | $159.99 |
Radio: There was of course Radio in 1956 and 1981, but FM stereo didn’t exist until the 1960s. Now, of course, we have satellite radio. In 1956, the satellite hadn’t yet left the drawing board (Sputnik was launched in October 1957). In 1981, no one of course had satellite radio. Today, there are about 6.5 million subscribers of XM and 4 million of Sirius according to Wikipedia.
Prescriptions: In 1956 or in 1981, a whole host of medicines was unavailable versus what we have at our disposal. Lipitor, Viagra, Zocor, Claritin, Crestor, Zetia, Zoloft, Nexium, etc. Any health plan that has prescription coverage inherently covers medicines developed since 1981: all medicines that were available in 1956 or 1981 are now available as generics, which means that they’re dirt cheap. If you don't have health care and your doctor happens to prescribe you medicine that has been around for 25 years (and there are indeed some of these medications), you can probably get it at your pharmacy for a few dollars. In the United States, pharmaceutical sales in 2004 were $235.4 billion. Most Americans, of course, don’t pay for pharmaceuticals directly, but instead have their insurance companies pay. Some Americans don’t take any pharmaceuticals, but other Americans pop pills incessantly. In any event, the pharmaceuticals do get paid for, and any businesses paying them will pass through the costs to their employees via lower salaries or higher insurance premiums. Americans spend an average of $1,810.76 on drugs per household. Assuming that 10% of these are for generics that were around in 1956 or 1981, the supplemental increase on drugs is about $1,629.69. Back in the 1950s or 1980s, there was no lipitor, and thus the hardness in your arteries in your heart couldn't be stopped. Back in the 1950s or 1980s, there was no Viagra and the softness in your...
| YEAR | SAVINGS |
| 1956 | $1,629.69 |
| 1981 | $1,629.69 |
Medical Care: many people bemoan how expensive medical care has gotten, and it’s almost too bad that there isn’t an option to buy an insurance plan that would only cover medical achievements up to a certain year. That way, people could get an idea of advances in medical care. The first CT scan was in 1972, and was incredibly primitive by today’s standards. Between 1956 and 1981, there was the first successful transfer of a pancreas, liver, heart, and heart/lung; since 1981, there have been a few others which seem mainly experimental to me, but I'm not a doctor (nor do I play one on TV as the silly ad campaign of the 1970s stated). Ultrasounds were still very experimental in 1956. And in case you don't think all this medical stuff really does any good, life expectancy tables might convince you, as average life expectancy of someone born in 1950 was 68.2 years versus 77.3 years in 2002. Not all of this is related to medicine (some is to better cars, see below, as well as more safety on various industrial and consumer machinery, etc). I have no idea what I'd price 1956-level health care would cost, but I would imagine that the savings would be substantial (I'm also not convinced you could tell a doctor, "Don't use any equipment developed after 1956"). Medical imaging (MRI, CAT, etc) costs $100 billion per year, which is equivalent to $769.23 per household. Even if you didn't get any images, you paid for it through your insurance. I'm not sure what was available in 1981, but let's say $100, because ultrasounds were available.
| YEAR | SAVINGS |
| 1956 | $769.23 |
| 1981 | $669.23 |
Automobiles: many people think of the late 1950s as the golden age of the US automobile, but what they don’t realize is that today’s car available to the typical consumer packs features that were practically unheard of in the 1950s. Safety systems such as lap belts, crumple zones, radial-ply tires, and front and side-impact airbags are often standard on today’s cars. In 1953, the chances of dying in an auto accident was four times as great as today. Some of this is due to medical advances, and some due to improved drunk-driving laws. Electric mirrors, power steering, anti-lock brakes, cruise control, eight speaker stereo systems and heated seats are also not limited to a few expensive luxury models. In order to have the same basic functionality of a typical 1956 car, you’d likely not be able to choose anything but the most basic car available today, and even then, the performance and safety would exceed the average 1956 car. I’m going to assume that if the typical American purchases a new car for $25,000, (according to the the FTC, it’s $28,400 ), he could get 1956 functionality for $13,000. In 1955, there were 1.16 cars per household, whereas in 2003, there were 2.03 cars per household. Thus, living at a 1956 standard of living would require you to spend $15,080 for 1.16 inferior cars versus $50,000 today (actually a little should be knocked off each one of these as businesses and local governments own cars). Assuming cars last eight years, this amounts to additional spending of $4,365 per year on cars to live beyond a 1956 standard. Due to business ownership, let’s cut that to an even $4,000. In 1981, the average household owned 1.72 cars, and while cars today are better, there isn’t as much of a difference as with 1956. I would say instead of $4,000 per year, the difference is probably closer to $1,500.
| YEAR | SAVINGS |
| 1956 | $4,000.00 |
| 1981 | $1,500.00 |
Lots of other stuff: There are a whole slew of things that are of course better now than 25 or 50 years ago. Some of them are somewhat silly, but people still shell out additional money to get titanium golf clubs, even if their game isn’t helped at all. Digital cameras allow the almost instant production of photographs, as opposed to waiting a few days for the local shop to develop them. I-pods allow the creation of digitally-pure music track lists, an improved airport structure allows people to travel more freely about the country. Long distance calls currently are often part of a flat-rate package, and most Americans think nothing of calling their friends across the country, while in 1956, few places had direct dial of long distance. In 1981, long distance was prevalent, but families reserved long distance calls for either late at night or on special occasions. You also sat next to the phone that was wired to the wall; there were no cordless phones in 1956, and in 1981, they were extremely rare. Food was radically different: in 1956, fruits and vegetables were really available only when they were “in season”, as shipping fruits from South America or even from California to the midwest was difficult. People didn’t have stainless steel propane grills or stainless steel refrigerators in 1956 or even in 1981. There were no ATMs in 1956, and in 1981, they were practically non-existent. In order to withdraw funds from your account, you had to visit the bank during business hours. Clothing styles are apparently much better today than in the 1950s or 1980s, but since I have no nose for fashion, I have no idea how to measure this. But shoes seem to be a lot nicer today, and athlete’s shoes seem to be better for impact, and dress shoes seem to be a lot more comfortable. Dishwashers didn’t catch on until the 1950s
I’ve heard a lot of people say that all this new stuff doesn’t make people any happier, and for a lot of people, that may be true (but for the guy who has a cholesterol level of 188 instead of 250 thanks to Lipitor, he may disagree, and while this would be a great place for a Viagra joke, I'll refrain). However, the middle class and even those who are at the lower end of the economic spectrum still shell out money for these things, and no one is forcing them to. Another common claim is that we have no leisure time today versus in previous decades. However, this report by the Federal Reserve shows that since 1965, Americans have more leisure time, not less.
So as you’re sitting there reading this on your 19 inch color computer monitor while listening to your Ipod and enjoying your 68 degree room cooled by central air conditioning and while eating an apple that is nine months out of season, and while you hear your cellphone ring, and while you just noticed someone sent you digital photos of yesterday’s fun times, and while you’ve got your plasma TV tuned in to a tennis match halfway around the world, can you really be certain that 1956 or 1981 was a better time?
50 years ago, half the families in the country earned less than the median household income. Today, again, half of families are below the median. But that median is so much higher than the median of 50 years ago. And 50 years from now, our median is going to seem primitive.
Here is a Summary of annual cost increases versus 1956 lifestyle. These are just my estimates, and of course your situation is going to be different.
| Item | 1956 | 1981 |
| Larger House | $2,743.02 | $1,371.51 |
| Air Conditioning | $281.66 | $0.00 |
| Cell Phone | $900.00 | $900.00 |
| Computers | $900.00 | $900.00 |
| Video Games | $84.61 | $84.61 |
| TV | $145.00 | $118.00 |
| Cable | $611.76 | $371.76 |
| Movie Rental | $189.99 | $159.99 |
| Prescriptions | $1,629.69 | $1,629.69 |
| Medical Imaging | $769.23 | $669.23 |
| Cars | $4,000.00 | $1,500.00 |
| Total | $12,254.96 | $7,704.79 |
(Note: the housing costs have been reduced by 25% to account for the fact that mortgage interest is tax deductible)
So in any event, the 1956 standard of living is $12,255 cheaper, and with a 25% tax bracket, the above represent about $16,000 in additional wages. And this doesn’t even begin to contemplate lots of other expenses like better golf clubs, long distance direct dialing, and so on. It’s anyone’s guess what this would all cost, but I sincerely believe that if a typical middle class family today decided they were going to live close to the standard of a 1956 middle class family, and watch only the big networks on a small black and white tv, have no internet, have one phone, one car, etc., that their total savings would be well over $20,000 pre-tax, or nearly half of the $44,389 median household income.
Mayor deStefano, the 1950s were indeed a different time.
Monday, July 24, 2006
DVD Region Codes and Pharmaceutical Safety
At first blush, you might not think that region codes on DVDs and complains about imported pharmaceuticals being unsafe, but the two concepts are indeed very similar.
Books, movies, computer software and pharmaceuticals have similar cost structures: they require an incredible amount of effort to make the first item, and then a tiny amount of effort to make each additional item. Once the book is written, the movie filmed, the software developed or the drug researched, it's pretty easy to make the next item. (Books that retail for $25 cost only a few dollars to print; a CD for computer software costs pennies, and the actual chemicals in each pharmaceutical prescription are usually not a significant portion of the cost). Up to a point, airlines and hotels are similar: flying an airplane that is half full costs almost the same as flying one that is full, and having a hotel room with half the rooms empty doesn't cost the hotel much less than having all the rooms occupied.
Translating a book, movie or computer software into a foreign language requires some effort, but not nearly as much effort as was required to produce it originally. Pharmaceuticals of course work just the same if your mother language is English or Italian or anything else.
Companies often sell products in different markets, where there are different regulations, different competitors, different incomes, etc. Therefore, these companies attempt to price these market segments differently. These markets need not be separate countries: they can be separate groups of individuals.
Book publishers bring out hardbacks months before paperbacks. Hardbacks have a much higher profit margin (paperbacks cost less to print, but not that much less). The hardback buyers are the "must have this now" types, and are the ones really eager to read the book. The paperback buyers are less enthusiastic about the book, but by bringing out the paperback after the hardback, you can sell to those who are really willing to pay a lot, and then after they've bought the hardbacks, you release the paperbacks in the general market for the "nice to have" types who aren't willing to pay as much.
Airlines charge less if you're staying over Saturday night. Does it cost them any less to fly you if you stay over a Saturday night? No. But the airlines know that business travelers are willing to pay more, and they also know that few business travelers are willing to stay over a Saturday night.
The key to serving different markets, where the people are willing to pay different prices for the same good, is to prevent the expensive group from buying the product that is aimed at the cheap group. If the expensive group can buy at the cheap price, then your total scheme fails, and you can have only one price.
Books, movies and software sell in different countries, with significantly different prices. However, the language barrier prevents Americans from purchasing Tagalog versions of Windows or the latest thriller from Tom Clancy. Books are also relatively bulky, and shipping them around the world may eliminate any savings. Currently, In English-speaking countries, prices for the exact same book can be very different.
Take Thomas Friedman's The World is Flat, which is the current #1 bestseller on Amazon. It retails in the United States for $30, but is available at Amazon for $18 in Hardback, with paperback not available yet. However, in India, the English language edition sells for Rs. 721.6 ($15.43). Thus, the list price in India is just over half the list price in the United States (Amazon is likely shaving most of its profit off the book to use it as a "lost leader"). The Indian online bookseller is likely not selling the book at a loss, and the wholesale price in India is likely quite a bit less than Rs. 721.6.
I would imagine that if someone began importing a large number of bestsellers from India, the US publishers would almost certainly attempt to stop it. There is almost certainly going to be a condition in that the Indian publisher can only sell in India and maybe some other countries. If there isn't a restriction, I am surprised that no one has started importing popular book titles from India since they can be purchased for significantly less.
DVDs usually have multiple audio channels, and when DVDs of American movies are sold in Europe, they almost always have the original English audio track, since enough people can understand English. Movie releases are usually different in Europe, and they are priced differently in various countries. In some cases, movies are released on DVD in North America before they even hit the theaters in Europe. If people could order DVDs from North America over the Internet, this could put a damper on movie ticket sales in Europe (especially in Spain and France, since DVDs sold in North America usually include Spanish and French audio tracks). How do movie companies prevent Europeans from buying American DVDs?
First, television standards are different in the US and Europe, but with the ability to watch DVDs on computer screens, this is not a major issue. DVD companies came up with another line of defense. They instituted DVD regions: DVDs come in six different regions, and a DVD purchased in North America won't work in another region, and vice versa (unless you get a DVD player that has been modified to allow the playing of discs from multiple regions).
Many liberals, including Hillary Clinton and Al Gore, have recently written books which are available in India at lower prices. Yet these same authors also claim that Americans should be able to reimport drugs from Canada, were they are priced cheaper.
Canada has a board that essentially determines the prices of pharmaceuticals. By and large, the pharmaceutical companies don't care that much: as long as the cost to produce the drug is less than the cost to sell it (and once the research is done, this is almost certainly going to be the case), the drug company is happy because they are getting some money from another market. If the drugs were priced at Canadian prices in the US market that would be a problem: the drug company wouldn't make enough to recover its investment in R&D, but if the drugs are sold only in Canada at the lower prices, it's no big deal. (In some cases, US companies simply license the drugs to a Canadian manufacturer, and then needs to do nothing else).
Just like an author doesn't really care that much if Indians pay less for his or her book, the pharmaceutical company isn't hurt substantially if foreigners pay less for the drugs. But if people reimported books from India in large numbers, then the author would receive less of a royalty and perhaps decide that writing books was probably not worth the few rupees he ended up getting.
The drug companies have tried to stop reimportation from Canada, and have used the safety bogeyman. This is not the true reason they oppose reimportation. It may have some merit, but if they were that concerned about safety, they probably would protest that Canadians could get their hands on fake drugs. Rather, the drug companies are worried that if large numbers of people reimport their prescriptions, this would cause their development overall not to be profitable.
Unlike DVD sellers, drug companies cannot put some sort of region coding in their drugs that would render the drugs ineffective if an American took a drug made in Europe or Canada. So remember that the next time some Hollywood star speaks out about unfair pharmaceutical prices, the same star benefits from almost the exact same principle by having region codes on the DVDs.
And I really hope that the next time Hillary Clinton writes a book, some enterprising import firm imports large numbers of them from India or whatever English language market has them really cheap, to undercut the local market. If the US publisher sues, then I think it would be hysterical to use the exact same argument to promote the book import as Hillary used to promote pharmaceutical imports from Canada. ("Americans cannot afford the high prices of Hillary's wisdom, and why are the evil publishing companies selling her tome in other countries for less? It's unfair, and we should be allowed to import books from overseas.")
(Actually, if enough prescriptions from Canada were imported that they started to have a major impact, US drug companies would likely fight hard by either making the Canadians pay the same price as Americans or by simply not selling at all in Canada. Shipping costs largely keep individual consumers from importing books, DVDs or software from other countries, as well as the language barrier. However, if these were being imported from cheap countries in large numbers, the companies would likely raise the prices in those markets to prevent the reimportation, as the US market is more important than these ancillary markets).
Books, movies, computer software and pharmaceuticals have similar cost structures: they require an incredible amount of effort to make the first item, and then a tiny amount of effort to make each additional item. Once the book is written, the movie filmed, the software developed or the drug researched, it's pretty easy to make the next item. (Books that retail for $25 cost only a few dollars to print; a CD for computer software costs pennies, and the actual chemicals in each pharmaceutical prescription are usually not a significant portion of the cost). Up to a point, airlines and hotels are similar: flying an airplane that is half full costs almost the same as flying one that is full, and having a hotel room with half the rooms empty doesn't cost the hotel much less than having all the rooms occupied.
Translating a book, movie or computer software into a foreign language requires some effort, but not nearly as much effort as was required to produce it originally. Pharmaceuticals of course work just the same if your mother language is English or Italian or anything else.
Companies often sell products in different markets, where there are different regulations, different competitors, different incomes, etc. Therefore, these companies attempt to price these market segments differently. These markets need not be separate countries: they can be separate groups of individuals.
Book publishers bring out hardbacks months before paperbacks. Hardbacks have a much higher profit margin (paperbacks cost less to print, but not that much less). The hardback buyers are the "must have this now" types, and are the ones really eager to read the book. The paperback buyers are less enthusiastic about the book, but by bringing out the paperback after the hardback, you can sell to those who are really willing to pay a lot, and then after they've bought the hardbacks, you release the paperbacks in the general market for the "nice to have" types who aren't willing to pay as much.
Airlines charge less if you're staying over Saturday night. Does it cost them any less to fly you if you stay over a Saturday night? No. But the airlines know that business travelers are willing to pay more, and they also know that few business travelers are willing to stay over a Saturday night.
The key to serving different markets, where the people are willing to pay different prices for the same good, is to prevent the expensive group from buying the product that is aimed at the cheap group. If the expensive group can buy at the cheap price, then your total scheme fails, and you can have only one price.
Books, movies and software sell in different countries, with significantly different prices. However, the language barrier prevents Americans from purchasing Tagalog versions of Windows or the latest thriller from Tom Clancy. Books are also relatively bulky, and shipping them around the world may eliminate any savings. Currently, In English-speaking countries, prices for the exact same book can be very different.
Take Thomas Friedman's The World is Flat, which is the current #1 bestseller on Amazon. It retails in the United States for $30, but is available at Amazon for $18 in Hardback, with paperback not available yet. However, in India, the English language edition sells for Rs. 721.6 ($15.43). Thus, the list price in India is just over half the list price in the United States (Amazon is likely shaving most of its profit off the book to use it as a "lost leader"). The Indian online bookseller is likely not selling the book at a loss, and the wholesale price in India is likely quite a bit less than Rs. 721.6.
I would imagine that if someone began importing a large number of bestsellers from India, the US publishers would almost certainly attempt to stop it. There is almost certainly going to be a condition in that the Indian publisher can only sell in India and maybe some other countries. If there isn't a restriction, I am surprised that no one has started importing popular book titles from India since they can be purchased for significantly less.
DVDs usually have multiple audio channels, and when DVDs of American movies are sold in Europe, they almost always have the original English audio track, since enough people can understand English. Movie releases are usually different in Europe, and they are priced differently in various countries. In some cases, movies are released on DVD in North America before they even hit the theaters in Europe. If people could order DVDs from North America over the Internet, this could put a damper on movie ticket sales in Europe (especially in Spain and France, since DVDs sold in North America usually include Spanish and French audio tracks). How do movie companies prevent Europeans from buying American DVDs?
First, television standards are different in the US and Europe, but with the ability to watch DVDs on computer screens, this is not a major issue. DVD companies came up with another line of defense. They instituted DVD regions: DVDs come in six different regions, and a DVD purchased in North America won't work in another region, and vice versa (unless you get a DVD player that has been modified to allow the playing of discs from multiple regions).
Many liberals, including Hillary Clinton and Al Gore, have recently written books which are available in India at lower prices. Yet these same authors also claim that Americans should be able to reimport drugs from Canada, were they are priced cheaper.
Canada has a board that essentially determines the prices of pharmaceuticals. By and large, the pharmaceutical companies don't care that much: as long as the cost to produce the drug is less than the cost to sell it (and once the research is done, this is almost certainly going to be the case), the drug company is happy because they are getting some money from another market. If the drugs were priced at Canadian prices in the US market that would be a problem: the drug company wouldn't make enough to recover its investment in R&D, but if the drugs are sold only in Canada at the lower prices, it's no big deal. (In some cases, US companies simply license the drugs to a Canadian manufacturer, and then needs to do nothing else).
Just like an author doesn't really care that much if Indians pay less for his or her book, the pharmaceutical company isn't hurt substantially if foreigners pay less for the drugs. But if people reimported books from India in large numbers, then the author would receive less of a royalty and perhaps decide that writing books was probably not worth the few rupees he ended up getting.
The drug companies have tried to stop reimportation from Canada, and have used the safety bogeyman. This is not the true reason they oppose reimportation. It may have some merit, but if they were that concerned about safety, they probably would protest that Canadians could get their hands on fake drugs. Rather, the drug companies are worried that if large numbers of people reimport their prescriptions, this would cause their development overall not to be profitable.
Unlike DVD sellers, drug companies cannot put some sort of region coding in their drugs that would render the drugs ineffective if an American took a drug made in Europe or Canada. So remember that the next time some Hollywood star speaks out about unfair pharmaceutical prices, the same star benefits from almost the exact same principle by having region codes on the DVDs.
And I really hope that the next time Hillary Clinton writes a book, some enterprising import firm imports large numbers of them from India or whatever English language market has them really cheap, to undercut the local market. If the US publisher sues, then I think it would be hysterical to use the exact same argument to promote the book import as Hillary used to promote pharmaceutical imports from Canada. ("Americans cannot afford the high prices of Hillary's wisdom, and why are the evil publishing companies selling her tome in other countries for less? It's unfair, and we should be allowed to import books from overseas.")
(Actually, if enough prescriptions from Canada were imported that they started to have a major impact, US drug companies would likely fight hard by either making the Canadians pay the same price as Americans or by simply not selling at all in Canada. Shipping costs largely keep individual consumers from importing books, DVDs or software from other countries, as well as the language barrier. However, if these were being imported from cheap countries in large numbers, the companies would likely raise the prices in those markets to prevent the reimportation, as the US market is more important than these ancillary markets).
Thursday, July 20, 2006
Stem Cell Veto: Patently Absurd?
Like just about 99.9% of the people that are taking a position on George Bush's stem cell veto, I really don't know much about the science involved. I'm not a biologist or biochemist, but I work in finance. What is clear is that 1) Bush stopped federal spending on embryonic stem-cell research; he didn't stop privately-funded research, and 2) it doesn't appear as if cures to major diseases like Alzheimer's are imminent. But they could happen in the future.
Most free-marketeers will say that research is the domain of private industry, not of the government, so we should just let the market work, and leave the government out of the business of research. Normally, I'd agree, but I'm not so sure I agree here.
Private companies engage in research if they can profit from the research. Pfizer spends billions of dollars researching potential new drugs because they hope that once a new drug is approved, it'll be able to sell that drug and make back its investment. After a drug is on the market for a few years, its patent expires and the drug goes generic, meaning that any pharmaceutical company can manufacture and sell the drug.
Venture capitalists can risk their money and their investors' money on investing in pharmaceutical start-ups that may have a promising new drug. With the market evaluating potential risks and rewards, the public benefits by being able to buy drugs like lipitor or viagra that were previously unavailable, and the drug companies that developed these drugs benefit their shareholders.
Now, I don't know if stem-cell research can lead to patentable results. If you find the cure for cancer or Alzheimers or whatever by using stem cells, can you patent that? It seems that the Wisconsin Alumni Research Foundation (WARF) holds some really broad patents on stem-cell research, but it is unclear if these patents are going to hold.
If new drugs or therapies or whatever that result from embryonic stem-cell research are patentable, then my position would be that the US government should not get involved in the research projects. This country has thousands of venture capital companies willing to deploy their money in various endeavours. If it's really possible that embryonic stem-cells can be used to cure cancer or Alzheimer's, and the result is patentable, there should be no shortage of venture capital available.
If, however, the result of stem-cell research will be such that it is not patentable, then it is going to be the domain of the government to do the research. Without patents, the research simply will not be done by private industry, since if company A spends $3 billion and comes up with a solution, company B will immediately copy the solution. No company will be willing to take on the risk.
So if the research results won't be patentable, then we need to evaluate the life-and-death questions about embryonic stem-cells, and I'm certainly inclined to side with the advocates of more stem-cell reseach, and I'm also willing to let the government fund most of the research.
I don't feel this way just about embryonic stem-cells, but pretty much about all other types of research. If there is research that will likely or even possibly lead to the improvement of mankind, but which can not be profited from, let the government do it. Obviously, we need to work out what risk/reward quotient works. With patentable research, keep the government out. Let industry and the free market work, if possible.
Most free-marketeers will say that research is the domain of private industry, not of the government, so we should just let the market work, and leave the government out of the business of research. Normally, I'd agree, but I'm not so sure I agree here.
Private companies engage in research if they can profit from the research. Pfizer spends billions of dollars researching potential new drugs because they hope that once a new drug is approved, it'll be able to sell that drug and make back its investment. After a drug is on the market for a few years, its patent expires and the drug goes generic, meaning that any pharmaceutical company can manufacture and sell the drug.
Venture capitalists can risk their money and their investors' money on investing in pharmaceutical start-ups that may have a promising new drug. With the market evaluating potential risks and rewards, the public benefits by being able to buy drugs like lipitor or viagra that were previously unavailable, and the drug companies that developed these drugs benefit their shareholders.
Now, I don't know if stem-cell research can lead to patentable results. If you find the cure for cancer or Alzheimers or whatever by using stem cells, can you patent that? It seems that the Wisconsin Alumni Research Foundation (WARF) holds some really broad patents on stem-cell research, but it is unclear if these patents are going to hold.
If new drugs or therapies or whatever that result from embryonic stem-cell research are patentable, then my position would be that the US government should not get involved in the research projects. This country has thousands of venture capital companies willing to deploy their money in various endeavours. If it's really possible that embryonic stem-cells can be used to cure cancer or Alzheimer's, and the result is patentable, there should be no shortage of venture capital available.
If, however, the result of stem-cell research will be such that it is not patentable, then it is going to be the domain of the government to do the research. Without patents, the research simply will not be done by private industry, since if company A spends $3 billion and comes up with a solution, company B will immediately copy the solution. No company will be willing to take on the risk.
So if the research results won't be patentable, then we need to evaluate the life-and-death questions about embryonic stem-cells, and I'm certainly inclined to side with the advocates of more stem-cell reseach, and I'm also willing to let the government fund most of the research.
I don't feel this way just about embryonic stem-cells, but pretty much about all other types of research. If there is research that will likely or even possibly lead to the improvement of mankind, but which can not be profited from, let the government do it. Obviously, we need to work out what risk/reward quotient works. With patentable research, keep the government out. Let industry and the free market work, if possible.
Tuesday, July 18, 2006
Does the Red state-Blue state divide start with charity?
There's been a ton written and said about the blue state-red state divide in this country. According to the various stereotypes, blue staters are a bit more refined: an art-house film will often be described as having no appeal in the red states. Blue staters feel deep down that they're superior to the red staters, who, while they might not be rednecks, are just not as sophisticated. Those red-staters like simpler books, simpler TV shows, action movies, and are ultra-religious. Of course, all the southern states are red states, and many of the stereotypes about the red states are more or less the same as for southern states.
Here in Ridgefield, Connecticut (median household income: $107K), and in many other towns around here, the local church has an Appalachian Service Project. Every spring break or some other time of year when high schoolers aren't in school, they head down to Kentucky or Alabama or wherever and help rebuild homes and I guess do some of the things that those Sally Struthers ads claimed to do, albeit a bit closer to home.
I don't doubt for a minute that the organizers of it are perfectly sincere, and having been to rural West Virginia and Virginia, I understand that there are areas where the standard of living is, shall we say, not as advanced as it is in our little hamlet.
However, I wonder if at the same time, the church project serves to perpuate negative stereotypes about the south, and makes us northerners feel just that much superior. After all, I'm sure that many of the kids going on these projects haven't been to the south (Florida doesn't count), and when they are taken down there, they'll drive in a van to some really wretched area. And then there are the kids who don't go, but every week in the sermon for the four or five weeks before the trip they keep hearing about how this trip is so important because that place down there is so backward, and the people there need OUR help. Hear this every year from the time you're 7 or 8 until you're 18 and you must get the impression that that area of the country is really messed up.
I'm not against helping people, or even helping people in the South. I just wonder if this type of organization within the church helps to perpetuate stereotypes. Does it make high school students think of themselves as superior to students in other states? Does it make sense to always focus on Appalachia, and to call the group the Appalachian Service Project?
If the local paper in Connecticut ran a story about a group of kids from a South Carolina church who every year came to Bridgeport (where The Mayor has admitted to using cocaine while in office, and he replaced the mayor that went to jail for taking kickbacks) to help the nearly 20% of the population living below the poverty line, do you think you might feel a bit put off? Do you think the letters to the editor would be in favor of this mission?
I just can't help but think that this type of project is the first step in making local kids feel superior, without them realizing that the entire south isn't a prejudiced, backwards society that needs help from the north.
Here in Ridgefield, Connecticut (median household income: $107K), and in many other towns around here, the local church has an Appalachian Service Project. Every spring break or some other time of year when high schoolers aren't in school, they head down to Kentucky or Alabama or wherever and help rebuild homes and I guess do some of the things that those Sally Struthers ads claimed to do, albeit a bit closer to home.
I don't doubt for a minute that the organizers of it are perfectly sincere, and having been to rural West Virginia and Virginia, I understand that there are areas where the standard of living is, shall we say, not as advanced as it is in our little hamlet.
However, I wonder if at the same time, the church project serves to perpuate negative stereotypes about the south, and makes us northerners feel just that much superior. After all, I'm sure that many of the kids going on these projects haven't been to the south (Florida doesn't count), and when they are taken down there, they'll drive in a van to some really wretched area. And then there are the kids who don't go, but every week in the sermon for the four or five weeks before the trip they keep hearing about how this trip is so important because that place down there is so backward, and the people there need OUR help. Hear this every year from the time you're 7 or 8 until you're 18 and you must get the impression that that area of the country is really messed up.
I'm not against helping people, or even helping people in the South. I just wonder if this type of organization within the church helps to perpetuate stereotypes. Does it make high school students think of themselves as superior to students in other states? Does it make sense to always focus on Appalachia, and to call the group the Appalachian Service Project?
If the local paper in Connecticut ran a story about a group of kids from a South Carolina church who every year came to Bridgeport (where The Mayor has admitted to using cocaine while in office, and he replaced the mayor that went to jail for taking kickbacks) to help the nearly 20% of the population living below the poverty line, do you think you might feel a bit put off? Do you think the letters to the editor would be in favor of this mission?
I just can't help but think that this type of project is the first step in making local kids feel superior, without them realizing that the entire south isn't a prejudiced, backwards society that needs help from the north.
Saturday, July 15, 2006
Property Tax Reform
In various states around the country, property tax reform seems to be creeping up as an issue. While I'm all for lower taxes, I'm skeptical of exactly how property tax reform might be implemented.
To me, the only fair property tax seems to be one that has the same rate for everyone in a given municipality (unless there is a legimitate reason not to, such as a special sewer district), and the assessments are based as closely as possible to actual market rates, which means if the owner sold it, what would he or she get for it? Any transfer of the property (besides those among family members, because those won't necessarily be at market rates) would automatically trigger a reassessment at the purchase price.
Any deviance from this system seems to me to end up in a complete distortion: some people will have lower rates because they're preferred, while the others will have to carry the burden.
Many people make the claim that they're on a fixed income, and by golly, since they bought the property 40 years ago, the assessment has gone way up and now they cannot afford property taxes. Well, I wouldn't be opposed if the town could put some sort of lien on the property so that when it was sold, the town would receive the extra property tax plus interest. This way, the town wouldn't be out money, and the only reason the homeowner was paying extra taxes is because the value of their house increased so much that the assessment went up, but when they sold the house, they'd presumambly be way ahead. If you buy a car and then the price of gas goes up, people don't expect the gas station to cut you a break. Why should the local government cut you a break?
Many of the property tax reforms floating around limit how much assessments can go up, and they limit the tax rate. California has a 2% maximum increase in assessments and a 1% tax rate. I'm ok with the latter, but the former doesn't seem fair. You can wind up with two identical houses next to each other, but they'll have massively different assessments and therefore property taxes, because when you sell your house in California, it's reassessed.
If you don't reassess houses when they are sold, then you are going to favor people who live in old houses versus people who live in new houses, because new houses built after the law goes into effect will have their initial assessment done at market rates. If you reassess houses when they are sold, then you'll end up favoring long-term homeowners over younger homeowners.
If you want to keep property taxes down, then limit spending. If you limit spending, then property taxes will be kept in check. But if you don't limit spending, but you limit property taxes, then either 1) other taxes will have to be raised, or 2) the municipality will go deeper into debt.
When two people are taxed differently for the exact same wage or exact same property, then you get massive distortions, with certain people benefiting for no reason.
Another thing that bugs me about property tax reform is that it can actually lead to higher spending. If you limit the amount that someone's property taxes can go up each year, but you reassess when the house is sold, this means that newer property owners will pay more due to their higher assessments. But for the older people, when there's an election, why would they vote for someone who wanted to not increase spending fast? Their property taxes can't go up more than x%. Think about it: if we had a guarantee that our taxes wouldn't rise, but someone else's would, do you think we'd vote for many candidates that promised to cut spending?
Property tax reform has to include market rates for assessments and a consistent tax rate. Anything else is just playing favoritism, in which one group gets to benefit at the expense of another.
To me, the only fair property tax seems to be one that has the same rate for everyone in a given municipality (unless there is a legimitate reason not to, such as a special sewer district), and the assessments are based as closely as possible to actual market rates, which means if the owner sold it, what would he or she get for it? Any transfer of the property (besides those among family members, because those won't necessarily be at market rates) would automatically trigger a reassessment at the purchase price.
Any deviance from this system seems to me to end up in a complete distortion: some people will have lower rates because they're preferred, while the others will have to carry the burden.
Many people make the claim that they're on a fixed income, and by golly, since they bought the property 40 years ago, the assessment has gone way up and now they cannot afford property taxes. Well, I wouldn't be opposed if the town could put some sort of lien on the property so that when it was sold, the town would receive the extra property tax plus interest. This way, the town wouldn't be out money, and the only reason the homeowner was paying extra taxes is because the value of their house increased so much that the assessment went up, but when they sold the house, they'd presumambly be way ahead. If you buy a car and then the price of gas goes up, people don't expect the gas station to cut you a break. Why should the local government cut you a break?
Many of the property tax reforms floating around limit how much assessments can go up, and they limit the tax rate. California has a 2% maximum increase in assessments and a 1% tax rate. I'm ok with the latter, but the former doesn't seem fair. You can wind up with two identical houses next to each other, but they'll have massively different assessments and therefore property taxes, because when you sell your house in California, it's reassessed.
If you don't reassess houses when they are sold, then you are going to favor people who live in old houses versus people who live in new houses, because new houses built after the law goes into effect will have their initial assessment done at market rates. If you reassess houses when they are sold, then you'll end up favoring long-term homeowners over younger homeowners.
If you want to keep property taxes down, then limit spending. If you limit spending, then property taxes will be kept in check. But if you don't limit spending, but you limit property taxes, then either 1) other taxes will have to be raised, or 2) the municipality will go deeper into debt.
When two people are taxed differently for the exact same wage or exact same property, then you get massive distortions, with certain people benefiting for no reason.
Another thing that bugs me about property tax reform is that it can actually lead to higher spending. If you limit the amount that someone's property taxes can go up each year, but you reassess when the house is sold, this means that newer property owners will pay more due to their higher assessments. But for the older people, when there's an election, why would they vote for someone who wanted to not increase spending fast? Their property taxes can't go up more than x%. Think about it: if we had a guarantee that our taxes wouldn't rise, but someone else's would, do you think we'd vote for many candidates that promised to cut spending?
Property tax reform has to include market rates for assessments and a consistent tax rate. Anything else is just playing favoritism, in which one group gets to benefit at the expense of another.
Tuesday, July 11, 2006
Incentives and Old Houses
I've traveled around to various cities in the country, and have often taken a city tour. In many cities, the cheerful tour guide likes to point out some ridiculous architectural detail, and state that it was the result of some strange tax that they had way back then.
Countless cities seemed to tax houses based on their widths, so people built really narrow houses. This happened in Frederickburg, VA, Amsterdam, Holland, Charleston, SC, Hanoi, Vietnam and New Orleans.
Charleston also taxed doors, so people would enter and leave the house through a window that went floor to ceiling. In Savannah, the Marhsall House hotel veranda is accessible only though windows because doors were taxed.
There are all kinds of other examples: you'd be taxed on the number of stories at the front of the house, so people would build houses that were one floor at the street but then two or three floors in the back (so called Camel houses because they had a hump).
Sometimes homeowners were taxed on the square footage of the ground floor, so they'd use jetties to make the second floor stick out.
However, I'm not mentioning this because I'm a big fan of architecture. But I think that it does show how much people will change their behavior in order to avoid paying taxes. They'll enter through windows, live in narrow houses, have strange looking houses with strange humps or with the second floor larger than the first, etc.
Since the income tax has been established, people do all sorts of things, both legal and illegal, to avoid the taxman.
Yet, today, when various politicians say they're going to raise taxes on the rich, they believe that the rich aren't going to alter their behavior (like moving to another state, setting up various trusts, deferring income, etc). And while it's true that some wealthy people have strong connections to the local community or can't easily relocate, some can. More importantly, those of us who are not wealthy yet may decide to locate in a more dynamic state with lower taxes.
Countless cities seemed to tax houses based on their widths, so people built really narrow houses. This happened in Frederickburg, VA, Amsterdam, Holland, Charleston, SC, Hanoi, Vietnam and New Orleans.
Charleston also taxed doors, so people would enter and leave the house through a window that went floor to ceiling. In Savannah, the Marhsall House hotel veranda is accessible only though windows because doors were taxed.
There are all kinds of other examples: you'd be taxed on the number of stories at the front of the house, so people would build houses that were one floor at the street but then two or three floors in the back (so called Camel houses because they had a hump).
Sometimes homeowners were taxed on the square footage of the ground floor, so they'd use jetties to make the second floor stick out.
However, I'm not mentioning this because I'm a big fan of architecture. But I think that it does show how much people will change their behavior in order to avoid paying taxes. They'll enter through windows, live in narrow houses, have strange looking houses with strange humps or with the second floor larger than the first, etc.
Since the income tax has been established, people do all sorts of things, both legal and illegal, to avoid the taxman.
Yet, today, when various politicians say they're going to raise taxes on the rich, they believe that the rich aren't going to alter their behavior (like moving to another state, setting up various trusts, deferring income, etc). And while it's true that some wealthy people have strong connections to the local community or can't easily relocate, some can. More importantly, those of us who are not wealthy yet may decide to locate in a more dynamic state with lower taxes.
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