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:

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:
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.


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.

Larger House$2,743.02$1,371.51
Air Conditioning$281.66$0.00
Cell Phone$900.00$900.00
Video Games$84.61$84.61
Movie Rental$189.99$159.99
Medical Imaging$769.23$669.23

(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).

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.

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.

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.

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.

Thursday, July 06, 2006

Gold-Plated Motorcycles

Here in Connecticut, and in several other states, motorcyclists don't have to wear helmets. It's touted as a personal responsibility issue, with the common argument being this isn't an area that the state need to concern itself with.

I consider myself very free-market oriented, but I think that no helmet rules are incredibly irresponsible, and frankly, I'm not entirely in favor of motorcycles in general.

Imagine that gold-plated cars became all the rage, and that lots of people starting driving gold-plated cars. Every fender-bender that normally costs $5,000 in repairs would now cost $80,000 if you were unfortunate enough to get in a wreck with one of these gold-plated cars. The consequences of this would be that insurance rates would skyrocket, and speed limits would probably be reduced.

Now, how is a motorcycle different from a gold-plated car? If you're in a wreck with a motorcycle, there's likely to be significant medical bills, whereas there'd often be none if the wreck was with another automobile.

Now, I know that many of you are probably saying, don't get in wrecks, watch where you're going, etc. However, no one is perfect. There are potholes, black ice, areas of poor vision around curves or over hills, etc. When you drive now, you have (or at least your insurance company has) a pretty good idea of what a wreck is going to cost. There are accidents that cost a great deal between two vehicles, but they're rare. A car versus helmetless motorcyclist is certainly going to be at the top of the range. A wreck with a regular motorcyclist probably isn't much better.

When a driver gets in his car, he knows the chance of his causing a massive financial liability is quite low if he hits another car. But hit a motorcycle, and there's practically a guarantee of a massive financial liability. When the number of motorcycles, or very expensive cars for that matter, goes up, this will cause insurance rates to rise. There aren't that many expensive cars on the road, mainly because expensive cars require, well, lots of money. But motorcyclists don't need a lot of money, they just need to ride their motorcycles.

Is there really any economic difference between a motorcycle and a gold-plated car? Besides the fact that pretty much any guy with a halfway decent job can afford to ride around on a motorcycle, while only a tiny percentage of the population could even fathom driving a gold-plated car? Don't motorcyclists, and anyone driving an abnormally expensive car, create an externality that the rest of us have to assume? If driving with infants Britney Spears style was legal, don't you think that would make insurance rates quite a bit higher, because if you rear ended someone going 10 mph, you'd cause serious injury as opposed to just a little bit of twisted metal?

Since no one is perfect (after all, you probably have insurance, don't you?), our society has essentially organized itself to have highways with certain speed limits (in some cases set too low for revenue enhancement by local municipalities). These speed limits are usually a reflection of the optimum trade-off between safety and speed. Wrecks are a fact of life, but with the condition of our highways and the speed limits, you know that if you are not driving like a complete maniac, are not drunk or high, that if you cause a wreck with another car, you'll likely not suffer or cause severe injuries, and your insurance company will handle the claim, and you'll go on to drive the next day (probably in a rental car provided by the insurance company), and that your rates will go up, but it's not the end of the world. Hit another motorcycle, however, and your insurance may not cover all the damages based on the maximum payment that the insurance company will make.

Now, you may say, shouldn't the same apply to tractor-trailers. I think not for a few major reasons. First, it's obviously inconceivable that everyone drive a tractor trailer. Second, there's no real substitute for tractor trailers. Our economy would break down if you forced tractor trailer shipments to be done by car. Finally, tractor trailer drivers are the minority in the world of cars, and since they are bigger, there is an extra onus on them to be extra careful. Truck drivers need a special license, can only drive for limited amounts each day, and are prohibited from driving on certain roads.

Finally, I'd like to add that there's no personal motivation on my part. I've never caused an accident (a lady rear ended me once on I-95, but I was stopped in a traffic jam, at least until she hit me and pushed me into the car stopped ahead of me). I don't plan on getting in a wreck in the future, but I can't promise perfection!