Saturday, December 19, 2009

The Law and the Profits: Part 2

The Law and the Profits, by C. Northcote Parkinson (of Parkinson's Law fame). Chapter 1, continued.

Chapter 1 delves into the reasons for increasing taxation before attempting to persuade concerning the evils of excessive taxation. In short, he attributes the trend increase to "temporary" wartime increases that are never fully decreased once the war is over. This long paragraph, excerpted from the beginning of Chapter 1 is too well-written to attempt a paraphrase:

Governmental as opposed to individual income is historically linked with the incidence of war. In all systems of revenue there has always been the provision for the temporary expenses of conflict. During a time of emergency, with our interests, our beliefs, our pride, or even our existence at stake, we agree to pay almost anything as the price of victory. In theory the revenue should fall to something like its previous level. In practice it seldom does. While the governmental income remains almost at its wartime level, peacetime expenditure rises to meet it. In times past the action of this law was slightly restrained, to be sure, by two considerations which no longer apply. In the first place, it was usually felt that taxes had to be reduced somewhat in time of peace in order to allow for their being raised again in time of war. During a century, however, when each successive war is judged to be the last, this theory finds no further support. In the second place, there are types of extravagance which yield only a diminishing return. To the provision of banquets and the enjoyment of dancing girls there is (eventually) a physical limit. The same is not true, unfortunately, of departmental and technical luxuriance. Economic and cultural advisers can multiply beyond the point at which concubines might be thought a bore; beyond the point even at which they might be thought unbearable. Financially, as well as aesthetically, the situation has become infinitely worse.
One can look into the history of the United States to understand when taxation has been introduced. Article 1 of the U.S. Constitution provides for "Taxes, Duties, Imposts and Excises," of which primarily duties, imposts and excises were chiefly in force in the colonial period. The first instance of the income tax is in 1861 during the Civil War (at a mere 3% single top rate). Though struck down as unconstitutional, it was introduced again in 1894 during peacetime (at a mere 2% single top rate), but was struck down again as unconstitutional. It was revived permanently (thus far) in 1913 following ratification of the Sixteenth Amendment. The highest rates were increased from 7% to 77% between 1916 and 1918 during World War 1. Following the war, the rates were reduced (generously, we might think) to (only) 24%, though it took until 1929 to reach this nadir. Rates went up again (to 81% by 1941) to combat the Great Depression, increased further to 94% (by 1942) during World War 2. Rates came down (only) to 82% (by 1949), then increased again to 92% in 1952-1953 (the onset of stalemate in the Korean War). Since then, rates have trended downward to the present highest rate of 35%. (See this Wikipedia article for the details.)

Payroll taxes were introduced to combat the Great Depression (Social Security) and the War on Poverty (Medicare), and have been expanded several times over several decades to increase revenue and expand public services.

It is clear simply from U.S. history that Parkinson observed correctly. Taxation does not seem to return to pre-war levels, giving rise to the statement of the second law, that expenditure must inevitably rise to meet the increased level of taxation.

In the next article, we shall take up the details of taxation somewhat from the civil service and political viewpoint.

Thursday, December 17, 2009

The Law and the Profits (Part 1)

Earlier this year, I read The Law and the Profits, by C. Northcote Parkinson (of Parkinson's Law fame). This book was first published in 1960, and though the subject of the analysis is Great Britain and the supporting figures are many decades old, the theme is still true and relevant today in the United States.

(My 1960 first edition American printing was recently shredded and eaten by my two dogs, so I have since acquired--for around fifteen dollars--a replacement 1960 first edition London printing from Alibris. The drawings within are different, but the text appears to be the same. This survey of the book is based on the first edition.)

I have not found (by Google search) any material about this book, save a brief mention in this Wikipedia article concerning Parkinson's Law, and then only to call it a corollary to the first law. It is in fact Parkinson's Second Law--claimed so by the author himself in Chapter 1.

Chapter 1 is titled "Parkinson's Second Law" and opens thus:
Expenditure rises to meet income. Parkinson's Second Law, like the first, is a matter of everyday experience, manifest as soon as it is stated, as obvious as it is simple.
The first example is of a family implicitly obeying this law. However, the subject of the book is government, and to that he moves in the second paragraph and rarely leaves this subject again for the remainder of the book.
It is less widely recognized that what is true of individuals is also true of governments. Whatever the revenue may be, there will always be the pressing need to spend it. But between governments and individuals there is this vital difference, that the government rarely pauses even to consider what its income is.
("What its income is" does not refer merely to accounting, although the early 20th-century British government appears to have had a problem even with this. Rather, this phrase, as we will see in later installments, refers particularly to the nature of the income and not merely its quantity.)

It is arguable that governments that annually rely on deficit spending are described perfectly by this statement. I will need to return to this topic later.

With this simple understanding of Parkinson's Second Law, let me quote now from the "Preface:"
The first purpose of this book is to show that there are limits to the collection of revenue and that evils multiply when these limits are ignored. However, the tendency to cross these limits appears to be universal, eternal and all but irresistable: the growth of taxation is clearly subject to a law.

The second purpose of this book is to show that a greatly reduced revenue would bring about an improvement, not decline, in the public services. It is the paradox of administration that fewer people have less to do and more time, therefore, in which to think about what they are doing. When funds are limitless, the only economy made is in thinking. The worst inefficiencies do not stem from a lack of funds, but from an initial failure to decide exactly what the object is. It is this muddled thinking that leads to waste, and often to waste on a colossal scale. Towards eliminating public waste an essential step is to reduce the total revenue. Officials are less inclined to squander what is not there. A knowledge of the law which governs expenditure should ensure that the profits from taxation are rarely thrown away.
I believe that Professor Parkinson succeeded completely in this book achieving his first purpose. I will determine through this survey whether I think he succeeded in the second.

I have observed in recent decades in the United States that the reduction in revenue was tried in the 1980's, but because a reduction in spending was politically impossible and that seemingly limitless borrowings were available to fund the annual deficit, that the government-reducing scheme was a failure. I do not think that this disproves Parkinson's second purpose, because I do not think he imagined a government with a fiat currency. The second purpose would hold if government were somehow constrained to spend within its means.

This quote leaps out at me: "When funds are limitless, the only economy made is in thinking. The worst inefficiencies do not stem from a lack of funds, but from an initial failure to decide exactly what the object is. It is this muddled thinking that leads to waste, and often to waste on a colossal scale." If you substitute the concept of "family" or "small business" or "association" or "church" in place of "government" in the preface, the raw and personal truth of these statements becomes clear. If it were my own money and my own decision, I would be inclined to be thrifty and clear on what I spend it.

Next in the series, I will continue with Chapter 1 concerning the rise in taxation over time.

Sunday, November 22, 2009

The Santa Instantiation Hypothesis

Today, Kathy and I spent the afternoon at the mall marketing our veterinary business next to the Pictures with Santa fantasyland. At one point, I explained to Kathy that in the moment that the picture is taken, the real Santa momentarily exchanges places with the fake Santa. In this way, the picture with Santa is always with the real article, and the real Santa can spend his time preparing for Christmas.

She didn't believe me.

Seen on a T-Shirt

"I've just kidnapped myself. Give me $100 or you'll never see me again."

Monday, November 9, 2009

Politically Powerful Dinner Guests

Let's say that you are into the health care reform debate in a big way. Let's also say that a Democrat leader from the Senate is your Thanksgiving dinner guest this year. (Let's also pretend momentarily that your fellow hosts have not forbidden political discourse--which they actually have for the sake of peace and harmony.) What questions would you have to ask your guest? Here are mine:
  1. The U.S. spends considerably more per capita on health care. Leaving aside the assertion of disparate outcomes, how much is the spending influenced by demand factors such as demographics (particularly age and other factors), lifestyle choices, wealth and income effects, geography and population density (see also the demographics link); by supply factors such as pharmaceutical (PDF) and capital equipment expenses (and associated research and development expense), labor expense (and associated regulatory costs, such as licensing, the Fair Labor Standards Act, etc.), and facilities expense (and associated regulatory code compliance expense); and by price factors such as state insurance mandates (PDF), Federal regulations, insurance market structure, foreign price controls on pharmaceuticals, and financial market performance (both for access to credit and for investment income purposes)? Is the comparison influenced by currency exchange rates, or is a more stable method of exchange utilized?
  2. Where does the Constitution grant Congress the authority to compel a private citizen to purchase health insurance? Does this conceptually abrogate the freedom of the private citizen to contract with providers of goods and services? What is the limit to what Congress may compel the private citizen to purchase? Can Congress compel a private citizen to associate with any group, regardless of whether the mission and values of the group are antithetical to the beliefs of the private citizen? If we pierce the veil, isn't the "tax" upon the private citizen for failing to purchase health insurance really a penalty or fine? What does the concept of "liberty" mean, and does it include the freedom to not act just as much as it includes the freedom to act.
  3. What is the contribution to the rate of growth of private sector health care costs that is attributable to price caps enforced for public sector health costs? (Mathematically, if the growth rate of the public sector half of the health care spending is artificially lowered, then the growth rate of the remaining private sector half must be artifically higher in order to balance to the average growth rate of the entire amount spent--which I assume is presently based on demand, not on government decree. In equation form, P1 * Q1 + P2 * Q2 = Pavg * Qavg. where P is price, Q is quantity, 1 is the public sector, and 2 is the private sector.)
  4. What is the contribution to the expense of health care costs in general and on insurance premiums in particular due to government regulation, such as state mandates (PDF), prohibition on interstate commerce in insurance policies, and Medicare and other Federal rules for providers and insurers?
  5. What are the desired effects of health insurance reform on Medicare, and what is the intended and estimated impact on the $36.4 trillion unfunded liability (pg. 69, infinite time horizon)?
  6. With Medicare fraud in the billions of dollars, can the Federal government contain fraud in a Federally sponsored/managed insurer?
  7. Why refuse to extend the Hyde Amendment to insurance subsidies contemplated in congressional health reform bills?
  8. Why refuse to use the Systematic Alien Verification for Entitlement (SAVE) Program to prevent illegal aliens from utilizing Federal spending contemplated in congressional health reform bills?
  9. How do ten years of revenues and six (House bill) or seven (Senate bill) years of expenditure produce a stable, long-term program?

I doubt that I could get many Federal politicians (of any party) to answer these questions without prevarication. If you watch enough of the BBC series "Yes, Minister", the reasons become evident rather quickly.

I think I'll stick to eating and drinking this Thanksgiving.

I'm a Tenther.... How about you?

Sticking "-er" to the end of the topic du jour seems to be in vogue: "birthers", "tea baggers", "truthers", etc. Tonight I decided that I am a "Tenther". That is, I am a believer in the Tenth Amendment to the Constitution. (That's the one that reserves to the states and the people all powers not granted to the Federal Government and all those powers not prohibited to the states.)

Wikipedia has an article about the Tenther Movement. I didn't know this name was already in use, so I feel smart for having coined it myself. (If Leibniz can get credit for developing calculus along with Isaac Newton, I can also get credit for coining the term.)

Note: Being a "tenther" doesn't make me a secessionist. There are good reasons to have a federal government. Too bad so many of those reasons are obscured by present practices.

Thursday, November 5, 2009

Quote of the Day

"Congress is becoming increasingly corrupt. Pretty soon, they could put a fence around the Capitol and turn it into a minimum-security federal prison."

--Tommy Butler, WSJ Commenter

Article: Senate Alters Taxes for Big Companies

Thursday, October 29, 2009

The GM Takeover by the Government

I don't agree with the takeover of GM (or Chrysler), but it is instructive to learn why and how it was done from the person who was at the pointy end of the spear.

Thursday, October 22, 2009

Quote of the Day

To be GOVERNED is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right nor the wisdom nor the virtue to do so. To be GOVERNED is to be at every operation, at every transaction noted, registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished. It is, under pretext of public utility, and in the name of the general interest, to be place[d] under contribution, drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonored. That is government; that is its justice; that is its morality.
(P.-J. Proudhon, General Idea of the Revolution in the Nineteenth Century, translated by John Beverly Robinson (London: Freedom Press, 1923), pp. 293-294.)

Thursday, August 20, 2009

Health Insurance Facts, Part 2: Why is Medical Insurance Different?

Link: Health Insurance Facts, Part 1

I have been brooding over the question of "Why Medical Insurance is Different" for many days now, trying to get succinct evidence to share. I have found it, and will present it shortly.

Medical insurance seems to have been first considered in 1694 [1], and first introduced into the United States in 1850 [2]. It was intended to cover injuries due to accidents, and seems to have been related to modern disability insurance. Sickness insurance followed in 1890, and employer-sponsored group disability insurance was first issued in 1911. [1]

Hospital and medical expense policies were introduced during the first half of the 20th century. During the 1920s, individual hospitals began offering services to individuals on a pre-paid basis, eventually leading to the development of Blue Cross organizations. The predecessors of today's Health Maintenance Organizations (HMOs) originated beginning in 1929, through the 1930s and on during World War II. [1]
The wage controls imposed during World War II are often cited as the leading cause of the importance of employer-sponsored medical insurance. With companies unable to offer greater wages to their workers by law, they turned to fattened benefits in order to compete for talented workers. Medical insurance policies covered more things as a result. This was fine for those individuals and families whose employers provided such benefits, but did no good for those employed elsewhere, such as by small businesses unable to afford such benefits, or unemployed (whether voluntarily or not).

Enter the states. Before I describe insurance mandates, let me take a moment to address the question of federal regulation of interstate commerce of health insurance.

The Health Care Choice Act, a bill introduced unsuccessfully into the House of Representatives in 2005 and 2007 has attempted to allow medical insurance to be sold across state lines, amending the Public Health Service Act (42 U.S.C. 300gg et seq.). I need more time to determine whether sections 300gg et seq. prevents interstate commerce with respect to medical insurance policies, but I think it is safe to say that if a bill in Congress is attempting to achieve the opposite, then it is safe to assume (for this article) that Congress has in fact prevented it.

Therefore, states have a monopoly on the chartering and regulation of medical insurance companies. Large insurers compete in states by creating (or acquiring) a subsidiary in the state in which they wish to do business, but all policies therein are unique to that state, even though the subsidiary is financially backed up by a multi-state parent insurance company. This type of organization raises the costs of entering the market in another state, and is therefore a barrier of entry to competition, and is one factor in the oft-cited fact that a few large insurers dominate the market in many states.

Add to this barrier of entry the manifold regulations by the states of what must be in policies. The Center for Affordable Health Insurance has catalogued 2,133 policy benefits mandated by the states in a 2009 report (pdf). (These 2133 mandates overlap considerably.) The report shows the mandates by state, and estimates the contribution of each mandate to the cost of the state's required policy. This means that medical insurance has evolved, under employers' hands and the state governments' hands, into something more comprehensive. What was once known simply as Accident Insurance, then (over time and as coverage increased) Hospital Insurance, Major Medical Insurance, and just plain Medical Insurance, now is known as Health Insurance, covering arcane things such as contraception and AIDS testing.

The method of payment for claims has also changed considerably over time. Insurance policies were once "indemnity" policies, meaning that we submitted our own claims and were reimbursed afterwards for whatever was covered. Later, insurance companies formed Health Maintenance Organizations (HMOs) and Preferred Provider Organizations (PPOs). In HMOs, the insurance companies own and operate the means of providing care, and employ the doctors and nurses. In PPOs, the insurance companies negotiate fees with the providers, and do not necessarily own the means of providing care. In HMOs, we pay whatever is not covered by our policy, and there is no extra paperwork between the provider and the insurer. In PPOs, the provider generally bills our insurer on our behalf, and collects the difference between what is covered and what is not directly from us. Preferred providers go a step further by waiving any part of their usual fee not allowed by the insurer (due to fee negotations). In short, we have become separated from the costs of care, because we no longer bear the full cost, no matter how temporarily, because the providers and insurers float the costs through their accounts payable/receivable. We once did the paperwork with the insurer for free; now we (or rather, our insurer) pay the provider to do it on our behalf.

I am forced to conclude that medical insurance is different from auto insurance and home insurance because we the people, ostensibly through our employers and elected representatives, have chosen it to be this way, for better or worse.

Friday, August 14, 2009

Wednesday, August 12, 2009

Quote of the Day: Health Care

"Health insurance companies refuse to cover pre-existing conditions for the same reason that you can't insure your automobile after you crash it." --Robert Tracinski, Real Debate Is Individualism vs Collectivism

The article is excellent throughout and pre-figures my Part 2 for understanding Health Insurance.

Saturday, August 8, 2009

Quote of the Day

"The founding of this country was the result of a tax revolt."

--Breck Collingsworth, a Wall Street Journal subscriber, commenting on an article about Town Hall revolts in Maryland.

Perhaps those in the White House and in Congress who wish to tax us more (and more "progressively") should better remember our nation's history.

Monday, August 3, 2009

Health Insurance Facts, Part 1: What is Insurance?

On July 24, protesters picketed the Richmond headquaters of Anthem, a subsidiary of WellPoint, a national health insurance group. One of my relatives was among the picketers.

Before dinner the next evening, I had the opportunity to speak with my relative concerning the protest, and I discovered that certain facts had been asserted, and certain negative opinions had been formed. I recommended that she examine Anthem's financial statements, freely available online from the Securities and Exchange Commission, and to especially read the Management's Discussion and Analysis section. Not only does this check the asserted facts, but it puts the protester into the shareholder's and manager's perspective, inviting them to see the real constraints encountered in the health insurance industry, but also challeging them to think of what they would do better, and if that is the real substance of their protest.

I want to provide first a general discussion about insurance and learn what I can without deifying or demonizing any particular company. Second, I want to understand better why medical insurance (AKA health insurance) is different from other types of insurance. Third, I want to examine the real financial statements of a large health insurer and understand what events are occurring and what choices management is making.

Let us begin by answering the questions, Why do we have insurance, and what is it? In the simplest approach to insurance, one person who is going to perform a risky activity (the insured) contracts with another person (the insurer) who is willing to accept the cost if an adverse outcome occurs. The liklihood of the adverse outcome is usually low, and the cost is usually very high. The insurer charges an amount (proportional to the risk) for the insurance (the premium) and sets it aside until the insurance contract expires. If the adverse outcome occurs, then the insurer covers the cost, usually more than the value of the premium. If the adverse outcome does not occur, then the insurer profits from the premium, and the insured endures an additional, unneccessary in hindsight, cost of doing business.

One early use of insurance was to protect the owners of shipping vessels. Then, as now, shipping goods over the sea was a risky enterprise. The loss of a vessel was a real and substantial threat to the solvency of a shipping company. Those with money to invest would insure the shipping companies. If an insured ship was lost at sea, the insurer would compensate the owner for the goods and the vessel. Since the amounts at stake were so large, syndicates of investors would be formed for the duration of the insurance contract, and these syndicates would provide the necessary financial backing. By syndicating the risk, the value insured could be much larger than any single investor might be willing to lose.

It might seem that the insurer's profit can be quite large when the adverse outcome does not occur, but if you repeat the insurance contract over and over again, the insurer will pay according to the likelihood of the adverse outcome, and profit the rest of the time. A smart insurer will therefore set the premium large enough to break even over the long run, plus a bit more for the remaining uncertainty. The lesson here is that large insurance profits in one time period are no guide to the morality of these profits over the long run.

An extension of the single-event insurer is the cooperative insurer. The non-profit version of these insurers, often called mutuals, exist for the benefit of their members, and are often owned by their members. For-profit versions are also common, and transfer the risk of loss away from the policyholders and onto the owners of the insurer. The latter type is most familiar to us, having names like Allstate, Geico, Wellpoint, and Aetna.

The idea behind the cooperative insurer is that adverse outcomes do in fact occur over the long run, and that it is prudent to save over the long run in order to offset the eventual cost of these adverse outcomes. Ideally, all of our adverse outcomes would occur after we have had a chance to save for their costs. The reality is that it usually happens before we have saved enough. By joining together into a cooperative, we increase the likelihood that we will have enough resources to cover every individual adverse outcome, because the likelihood of them happening in large enough clusters in short periods of time in a way that exceeds our collective savings is very low. We benefit most when we are all long run members of these cooperatives.

The modern financial markets provide the insurer with an opportunity to turn these collective savings into investments that earn income. This income can then be combined with premiums to cover the costs of adverse outcomes (or claims). The greater the savings cushion, the greater the investment income, the lower that premiums need to be. The basic equation for an insurer is quite simple:

Investment Income + Premiums = Claims + Fraud, Waste, & Abuse + Overhead + Profit (or Loss).

(Reality adds more variables to each side, but the concept is unaffected.)

Profit is used in two ways: to reward the owner of the insurer for bearing the risk of loss, and to increase the amount of savings earning investment income. Loss reduces the amount of savings, and hence the investment income. (In a mutual, there is only the increase in savings when the insurer profits.)

Now there are some general points to draw from this model of an insurance company.

1) If claims exceed premiums and savings, then the company is insolvent.

2) If investment income falls, then premiums must rise.

3) Fraud, waste, and abuse, and overhead must be controlled if the insurer is to profit, and therefore leave its savings intact.

4) In a for-profit insurer, the owners provide the initial capital that funds overhead and claims until premiums and investment income are sufficient over the long run, and own the increases in the insurers savings.

Next: Health Insurance Facts, Part 2: Why is Medical Insurance Different?

EDIT: Added link to Wellpoint's financial statements at Edgar.

EDIT: Clarified for-profit cooperatives by providing named examples.

NOTE: About my use of the word "cooperative" in this article, I use it in a conceptual way, rather than in the manner of a legal organization. The article's concept of a cooperative is as a long-run, multi-participant insurance construct, as opposed to a single insurance contract between an insurer and an insured. I'll cover the legal organization in a later article. I suggest this article and this organization as starters.

Monday, July 20, 2009

TARP Inspector General Reports

This article summarizes the outlays and insurance-like guarantees made by the Federal Government to prop up the economy. The total? $23.7 TRILLION.

TARP has come to include 12 separate programs that include a total of as much as $3 trillion

Thursday, July 16, 2009

The Congressional Budget Office Speaks Out

The Director of the Congressional Budget Office felt it necessary to cut through the lies and misinformation in order to educate us citizens. Here is the post.

He discusses the long-term debt problem (as a percent of GDP) and the deficit problem (AKA excess costs).

People like me who read the Annual Report of the United States have known this for a long time, have written to elected officials for a long time, have supported candidates who have the right ideas for dealing with this problem correctly, and have been disappointed (for a long time) in the inability of the elected leaders to a) understand the problem or b) do something about it.

Just like state and local governments in today's economic crisis, the federal government needs to do some soul-searching on what the Constitution requires it to do and what additional that we can actually afford. It also needs to come to grips with what the Constitution says it should not do, which would unburden the budget a lot in short order. But that's a rant for another day.

Thursday, July 2, 2009

Fixing Health Care

First, wrap your head around actual facts here, here, and here.

Senator Jim DeMint (R-SC) provides a laundry list of ways in which the Federal Government interferes with the market for healthcare and insurance.

Here is an example of how the Commonwealth of Virginia is getting out of the way of small businesses, by reducing health insurance policy requirements so that basic plans can be affordable and at least effective in a catastrophe.

The bottom line is that when we hear that the Federal Government needs to take over health care financing (and who pays calls the shots!) that it is a crock of you-know-what and it stinketh mightily. Fedzilla and state governments need to remove impediments, not insert themselves as a monumentally larger impediment.

And it wouldn't hurt if the Federal Government would take border security and the economic problems of illegal immigration seriously. Please, it's been nearly eight years since 9/11, and we are only now getting this report from the Department of Justice?

It seems that conservatives know these things intuitively. Kathy says we must all be too busy working to make a show of force. She may be right.

The Second Amendment

I find it ridiculous that the Second Amendment is under attack still following the remarkable majority decision (penned by Justice Scalia) in Heller v. D.C. upholding our individual rights to own and use ordinary weapons. (If you have the time and wit to do so, I recommend reading at least the first half of Scalia's opinion. I have not had so much fun reading the gradual but inexorable takedown of stupidity in all my life. It's like watching Julia Sugarbaker take someone down with superior intelligence, but longer and better.)

This article in Reason Magazine is an interview with the attorney who won the Heller v. D.C. case and highlights the ongoing stupdity in D.C. and other jurisdictions. That we have to fight these cases in all their absurdity is a result of poor choices by the electorate and successful power-hungry politicians who install similarly power-hungry judges.

This is the long range effect of elections--the shifting of the judiciary between originalist interpretation and "living document" interpretation of the Constitution. Something we take for granted, like the Bill of Rights, is in jeopardy every time a constitutional case comes before a divided court.

Remember that next time you vote (or think not to).

Tuesday, June 9, 2009

Apologetics for Dummies

I am studying apologetics in Bible Study. This very interesting subject covers one-third of Aristotle's three different types of rhetorical proof--logos.

Logos is the use of logic and reason to persuade one of the truth of a premise. With the lost, it is difficult to start with "The Bible says....", and apologetics demonstrates that there are preliminary steps we can take to help persuade that the Bible is a source of truth. To me, that seems to be the biggest hurdle, and one in which the Holy Spirit plays the fundamental part.

The study is a book written by Norman Geisler entitled When Critics Ask: A Handbook on Christian Evidences. In the first chapter, he reminds us that God commanded us to be ready to give answer to all men for what we believe. The study of apologetics is part of the foundation for winning the lost to Christ.

Apologetics by itself is insufficient. Citing Aristotle again, we learn that pathos and ethos are the other two types of rhetorical proof, both of which are important to our witness.

Pathos is the use of emotion to persuade. The best example of this to me is sharing one's testimony. I have never failed to be moved by the Spirit when hearing the testimony of one who has been saved from a life of sin, whether that life was similar to or different from my own. Having been saved since age 4, I can only guess what the lost experience on hearing a testimony.

Ethos is the use of authority to persuade. As Christians, we should be perceived as authorities on Christianity. The world will readily point to the divorce rate among Christians (equal to that of non-Christians) or the corruption of clergy (Catholic and Protestant alike) or the hypocrisy of churchgoers (not necessarily Christians) as a way of judging all Christians. However, this is the fallacy of the false generalization. Just because a few Christians are hypocrites or corrupt does not mean that all Christians are the same, or that Christianity is empty or antithetical to its stated values. Only by demonstrating in our own lives the struggle for holiness and the miracle of salvation do we make clear our authority as Christians to share the Gospel.

Combining these three modes of persuasion in the service of the Gospel was recognized by St. Augustine in the 4th Century. It lives on in the sermons of pastors around the world. Learn to recognize the use of these persuasive elements and to integrate them appropriately into your own witness. You may find yourself a better prepared tool for Christ in ministry.

Monday, May 11, 2009

Star Trek Movie Review (Caution: Spoilers)

It is fitting that I watched the latest Star Trek movie on Mother's Day. With only slight exception, I have watched every Star Trek movie with my mother. (For some reason I cannot remember, we missed Star Trek II: The Wrath of Khan in the theater, and she passed away before Nemesis was made.) She was an original trekkie and fueled my innate desire to become one as well. We did not have cable when I grew up, but somehow I managed to watch most of the episodes of the original series.

When I turned in straight A's in First Grade, she took me (just the two of us) to Fort Walton Beach (a thirty minute drive) to see Star Trek: The Motion Picture. I remember very little of that evening, except an image of the part of town at night and my emotional excitement at seeing this movie. When the movie was released much later on VHS, I it became one of my favorites. (In fact, I can highly recommend the Director's Cut, which improves many of the visual effects without giving the movie an adversely different feel.)

To sum up the new Star Trek simply: I think my mother would have liked it as much as I did, though for perhaps different reasons. After watching Generations, she decided that it was the end of the old and the beginning of the new. She did not watch much of the new, though it did not stop her from seeing the Next Generation movies with me. The new Star Trek would have put her back in familiar territory.

As I write this review, I watch Star Trek II: The Wrath of Khan. (My wife is away in D.C. through the evening, so it is my night to watch what I want.) I can tell you that the writers for the new Star Trek integrated many little details that were developed in the shows and in the movies. For instance, in the new Star Trek, Kirk has an allergic reaction after McCoy inoculates him with a particular vaccine in order to sneak Kirk to the Enterprise. Do you remember that the elder Kirk received spectacles as a gift because he was allergic to the available vision-correcting drug? The elder McCoy nodded knowingly and said, "Exactly!"

There are a few things I dislike about the new Star Trek, and some things at which I shook my head at their Hollywood triteness. But that which I liked far outweighed these few things.

That which I shook my head at:
1. They really don't observe black hole physics. To the scientifically informed, this is unconscionable in a good science fiction story. As this movie is more about characters and action, I can understand the choice to jettison known reality.

2. Why do we have to have monsters on the ice planet? Isn't a successful 16km trek across the ice pretty much guaranteed? Kirk could have met the future Spock at the outpost. That's where they ended up anyway. And not to dwell too long, the big bug monster looked a lot like a similar bug monster in Attack of the Clones in the arena scene.

3. Kirk being made captain of the Enterprise before graduating from Starfleet Academy. He may have scored off the charts on the aptitude tests, and may have saved Earth (I suppose this is the first of now three times), but is that really sufficient experience to manage a crew of hundreds and spend the next five years dealing with entirely new and novel situations? This will pose a credibility problem for the writers of future movies, as they must allow Kirk's lack of experience and wealth of bravado to cause problems, or else be accused of creating an unrealistic superhuman character.

4. The main ensemble characters came together very quickly--too quickly for credibility. It takes time to build good teams and to get them to perform at a high level. This is even more important given the raw brilliance of each main character. They did a good job of rapidly working out the usual team-building dynamics, so my criticism is limited to the low likelihood of the short timing.

5. Why does Scotty need a midget alien sidekick? Haven't we milked the short sidekick thing too long already? And why does he get treated like a dog or child? Didn't Warwick Davis demonstrate long ago that little people can act well?

Now the few things I did not like:
1. Why did the engineering spaces on the Enterprise look like a 20th century factory? In every episode and every movie of every series (including Enterprise), the engineering spaces were spartan and high tech. I hope that this was a funding problem and not a failure of imagination.

2. Why is ejecting the core the magical solution to so many Star Trek plots?

3. I could add "Yet another Time Travel plot" to this list, but it worked in this movie, being narrowly focused. The creation of an alternate timeline is exactly what was needed to make this reincarnation of Star Trek believable. The destruction of Vulcan and the death of Spock's mother will definitely shake things up, as will his meeting with (and continued existence of) his future self.

4. What is Star Fleet doing sending all but nine ships completely out of range of Vulcan (and completely away from the story)? Yes, the galaxy is large, and Vulcan is relatively close to Earth. But what about commercial vessels? They did not expect an attack; they were trying to prepare an emergency evacuation of 6 billion Vulcans and solve the seismic problems. Hundreds of cadets lost their lives in seconds, and nothing was said of this in the end.

To the best of my limited memory, that is all that I had a problem with in this movie. The rest... I liked it! I'm looking forward to the next installment in the new movie series. (Just please don't screw them up! And don't fall prey to the Odd-Even Curse!)

The Things I Really Liked:
1. Admiral Pike: Excellent character, and well-played by Bruce Greenwood. In the alternate universe, he is the reason Kirk joins Star Fleet. In the original universe, it was Kirk's father. I got the impression that Pike had watched out for young Kirk for at least part of his post-adolescent life, providing some fatherly stability. Did you pick up on the fact that he ended up in a wheelchair? He did as well in the original series, though under different circumstances. A small detail, but a familiar one to us original trekkies.

2. The opening scene was well-done. It balanced the anguish of the no-win moment with enough exposition of Kirk's mother and father to make us empathize with Kirk later and to give a foundation to Kirk's intelligence and future loyalty to his friends and crew.

3. Leonard Nimoy's role as the elder Spock: Serving as the bridge between the former future and the new past, he provides perspective to young Kirk and Spock on their need for one another. This was not a cameo, nor was it played tongue-in-cheek. The contrast between the elder Spock and the younger Spock was well drawn, and demonstrated that even Spock was young and wild (in his own way) like Kirk.

4. Uhura never got a big role in the series and movies. I was happy to see that she had special abilities that made her essential to the high-performance of the team we know and love. She is no longer a radio operator and secretary, and I hope that she will continue to play an important part in future installments.

5. Uhura and Spock are lovers? This did not work for some people I know, but I appreciated it for many reasons. First, Spock is a complex blend of Vulcan and Human emotions controlled by a continuing act of will. To see him love another on a regular basis is a refreshing break from Pon Farr every seven years, which is animalistic and hormonal, not loving. It also makes Spock more like his father, who admitted to marrying Amanda for love.

6. Sarek and Spock are loving to one another throughout the movie. The movie does not show whether Sarek was angry with Spock for going to Star Fleet (which is made clear in episodes and movies before this one), but their rapid reconciliation and understanding of one another following the destruction of Vulcan makes likely that we will be able to see this relationship develop in ways that it could not (until Star Trek IV) in the original timeline. Beginning with Star Trek IV, we got to see the fruits of reconciliation between father and son (a situation not unfamiliar to me), and I wished then that we could have seen more. (The Next Generation was able to do some of this before Mark Lenard's death in 1996.) I do hope that the writers will take advantage of this change and develop the father-son dynamic. (And Ben Cross is a good choice for Sarek. I first saw him as Harold Abraham in Chariots of Fire, then as King Arthur's nemesis in First Knight. He has aged well and brings gravitas to a highly-respected character.)

7. Dr. McCoy: When I heard that Karl Urban was playing McCoy, I was skeptical. I did not like how he played Eomer in the Lord of the Rings (nor how the character was altered by the writers), but I liked the way he played McCoy. The humor was classically McCoy, re-using the best jokes and one-liners from vintage DeForest Kelley days. He was at once new and familiar. I thoroughly enjoyed watching him run after Kirk (during Kirk's allergic reaction) yelling "I can fix that!" And I enjoyed watching him quote rules and regulations in order to get his way--again, classic McCoy!

8. In the original series (and movies), Kirk, McCoy and Spock make up the triumvirate about which most plots revolve and among which the best interplay occurs. The future of plots highlighting other characters is likely to be much like the past--they will likely be excellent supporting characters again--but the actors chosen for the "main three" will do credit to the roles and give us cause to continue spending our hard-earned money at the theaters to see what they do next.

Star Trek is going where no Star Trek show or movie has gone before. They have erased what was and must now live in a significantly altered universe thrust suddenly upon them. There are certainties only regarding the inborn nature of each character. The experiences that shaped them to become what we are familiar with are no longer certain. We get to experience this new past with our characters, and that is going to be half the fun!

I hope you enjoy(ed) Star Trek as much as I did. See it again if you can manage. In the meantime, Live long and prosper!

Friday, May 8, 2009

What kind of buyer are you?

I came across this excerpt from Geoffrey Miller's book Spent via Marginal Revolution and couldn't resist passing it on.

Some common themes emerge from these slightly whimsical suggestions. One is that buying new, real, branded premium products at full price from chain-store retailers is the last refuge of the unimaginable consumer, and it should be your last option. It offers low narrative value -- no stories to tell about interesting people, places, and events associated with the product's design, provenance, acquisition, or use. It reveals nothing about you except your spending capacity and your gullibility, conformism, and unconsciousness as a consumer.

Are you "unimaginable", or do you take delight in the "people, places, and events associated with the product's design, provenance, acquisition, or use"?

I'm not generally a big consumer, and I do not think I possess a knack for choosing fine things. Yet as I have traveled around this country and overseas, I think more about the hands that made the objects I buy.

When in Germany I read "Made in China" on many supposedly local items, I realized I was about to be duped and had the sense to leave well enough alone.

In Hungary, I had a different experience: All of the items I bought were handmade by local artisans. They were indeed crafted goods, and I held them in greater value.

I have brought these thoughts back to the United States, and now look for where something is made. I eschew "Made in China" unless I have no ready substitute. I see names of countries that I did not realize made such a product as an export, and I think of what I know of these countries and the people that inhabit them.

Sometimes, it makes me more likely to buy, to bias the circular flow of money in their direction. Economic growth, it has been asserted, is the greatest means of lifting vast numbers of people from poverty.

I can take comfort in a smart buy.

Thursday, May 7, 2009

Jeff Sessions to replace Arlen Specter on Senate Judiciary Committee

This is good news (from Reason Magazine). The Republican senators are putting the RINOs on the back burner and putting forward solid conservatives.

In my opinion, the RINOs have split the ability of the Republicans to have a coherent message. Rather than have a nuanced approach in order to have a larger tent, I prefer that each party be somewhat pure. This gives rise to multiple parties (or even better, no parties and just legislative caucuses). The Federalist Papers (No. 10) covers this topic rather cleanly, and is a recommended read. (Wikipedia has an excellent write-up, and here is a link to the text for No. 10.)

It is regrettable that we strayed from this wisdom so near the beginning of our Republic.

Government Intrusion: Yard Sales

This item from Reason Magazine (a libertarian source of news and analysis) touches on new guidance from the Consumer Product Safety Commission claiming that their reach includes your yard sale.

Is there no end to the nanny state?

Monday, April 27, 2009

Taxes greater than 50 percent --> Loss of National Competitiveness

So argues Andrew Lloyd Webber in an op-ed to the Daily Mail.

In business, prices are loosely based on cost. In order to remain in business, prices must be above cost. But how much above?

The answer is "what the market will bear." That is, people will pay what they are willing to pay. And generally, the higher the price, the less they will buy.

Thus what separates competitors is their individual unit cost of production. The business with lower cost will reap more profit, which attracts greater investment, which leads to greater growth of revenue-producing assets, which leads to more market share than the competition, which can eventually lead to the demise of the weakest competition (those with the lowest profit/highest unit cost).

Consider whether the same is true of government.

Government has more control over competition (tariffs, quotas, work visas), but these work on imports of goods and services. In a free country such as the United States, there is no restriction on the individual worker exporting themselves to a foreign country to work. (There is, however, a punitive tax on moving financial assets out of the country--for ten years, an ex-patriate must continue to pay taxes.)

Certainly patriotism must be considered as a reason workers dissatisfied with Government regulation and taxation do not leave despite their desire to do so. However, I consider it yet another abuse by Government when this patriotism is abused in order to trap the workers' assets and income for tax purposes.

Government can take a last bite out of those who flee, but ultimately cannot prevent the loss of workers or their talents (or the taxes that they pay).

State governments understand the competitive nature of taxation very well. If you are a big business, state and local governments will mortgage their future revenue streams in order to lure you. (Small businesses like mine are not so fortunate. We end up making up for the subsidies to bigger businesses.)

The national government usually does not need to consider competition. Yet in times of high taxation, worker flight is inevitable. They will take their talents, capital and their income with them.

National Governments, take heed!

Friday, April 24, 2009

Keynes v Hayek

Roger Garrison of Auburn University has put together three fantastic PowerPoint presentations demonstrating Keynes' Circular Flow Theory and Hayek's Means-Ends Analysis and how they work together in a more sophisticated way than Keynes envisioned to explain Boom-Bust cycles and the dangers of monetary intervention.

In my opinion, Keynes was right to identify the Paradox of Thrift, but he was wrong to rule out possible mechanisms for undoing the paradox. Hayek showed clearly how to resolve the problem, but Keynes was dismissive. It seems that Hayek's explanation did not fit Keynes' world view.

Most of what economists do well is qualitative analysis. They generally disagree when numbers enter the picture, and you should be skeptical of any claim to forecast the economic future. But do learn economic principles and the qualitative effects that are described by these principles. Use your own experience and be your own judge as to the magnitude of each effect and whether they reinforce or cancel one another.

Doing so is another step on the road to living intelligently in a world of humans that does not always act or react rationally.

Physics Joke Winner

The winner of the first round of the Reverse Joke contest was number 4.

4. It's a Schroedinger's Cow problem. The milk is in the pail if you don't look in it. (JM)
Round two has begun, and the following entries are in contention:

1. Why do dairymen sell so many empty buckets to blind people? (JM)

2. What did the bad magician say after his famous "milking the invisible cow" trick failed? (ST)

3. What did Charlotte say to Wilbur when she did not cry over spilled milk? (JM)

4. What the milkmaid told her father after the "Counting Chickens" incident. (CT)

Tuesday, April 21, 2009

Finally, true images of Saturn

These images of Saturn are phenomenal!

Rings, moons, moonlets, gravity distortions of the rings, unusual above-plane formations in one of the rings....

Produced by the Cassini Spacecraft in orbit round Saturn.

Friday, April 10, 2009

The Business, Professional, & Occupational License (BPOL) Tax: Facts and Economic Considerations

I wrote this analysis back when Stafford County was debating swapping their Merchants Capital Tax for the Business, Professional, & Occupational License Tax. I've tried to be as qualitative as possible regarding effects, and I must caution in considering effects that any one effect rarely occurs in isolation. Other effects can reinforce or mask any effect I mention below. That does not mean that the effect did not happen. It just means that our ability to measure it independently may be limited or non-existent.

I am accustomed to paying the BPOL as a business owner. I am well aware of the effects of this tax and other taxes on my ability to adjust prices. It is important to remember that prices are related to costs, but that prices are pushed down by external factors like competition, substitution effects, and individual assessment of benefits. That is to say, the market determines the price. My analysis touches on this problem by separating goods and services according to their "price elasticity of demand". The bottom line is that some businesses are hurt by the BPOL, and some are not. My own business is not hurt by the BPOL, but I am also a consumer of goods and services and understand the costs of providing them.

Jerry Logan (Spotsylvania Supervisor) is not a fan of the BPOL and has been trying to build support for changing or eliminating it (ht Dan Telvock, here). Supervisors and citizens should be well-informed of the characteristics of this tax before they speak for or against it and before they suggest modifications. In politics, it seems that Unintended Consequences are rarely considered, even though they are easily forseeable (e.g., making food into fuel causing food prices to spike around the world). At least do the homework and try to limit the Unintended Consequences!

The BPOL Tax is similar to the Retail Sales Tax, except

  • It taxes services as well as goods;
  • The rate differs according to the type of business; in Spotsylvania County,
    • 0.0025% for wholesale merchants
    • 0.08% for contractors
    • 0.10% for direct sellers, itinerant merchants and peddlers, and retail merchants
    • 0.18% for amusements, business services, developers, miscellaneous, photographers, personal services, rentals, and repair services
    • 0.29% for financial, real estate, and professionals
  • The tax is not shown on invoices or sales receipts;
  • There is a threshold below which taxes are not collected nor returns filed;
    • Spotsylvania: $200,000
  • There is a standard deduction that reduces the tax liability;
    • Spotsylvania: $50,000 [1]
  • It does not matter whether the business is profitable or not;
  • Annual limits on the amount a business is liable to pay reduces the effective tax rate for that business;
    • Spotsylvania: $150,000 [2]

Consumers ultimately pay the BPOL Tax.

  • Cash flow in a business ultimately comes from only three sources:
    • Investment by owners
    • Borrowing from creditors
    • Revenue from consumers
  • Owners do not add new money to pay the BPOL;
  • The business does not borrow from its creditors to pay the BPOL;
  • Therefore, the BPOL is paid from revenue, just like all other business expenses.
  • Not all consumers are county residents. This is an important part of the decision whether to tax capital or revenue.

Businesses and Government in the County incur additional cost to collect the BPOL tax if it does not replace an existing collection effort.

  • Businesses must file annual returns stating their revenue derived in the County;
  • These returns must be handled, processed, and stored by the government;
  • The government must send out reminders to report revenues;
  • The government must send out invoices to collect the tax;
  • Businesses must pay the tax invoices;
  • The government must pursue late or missing payments;
  • The government must pursue and prosecute non-filers;

The BPOL tax system collects data on business activity for every business over the filing threshold.

  • The government can derive measures of economic activity from the collected data;
  • The measures of economic activity can be combined with other sources such as Retail Sales Tax reporting to obtain estimates of economic activity in below-threshold retail goods businesses;
  • Service-businesses below the filing threshold must be measured in one or more other ways;

To the extent that the BPOL tax is greater than the tax(es) it replaces, micro-economic activity might fall, in some cases temporarily, in others, permanently.

  • To pay for the net tax increase, businesses will raise prices and accept lower profits in varying proportions;
  • Prices have variable measures of elasticity:
    • Sales revenue of relatively inelastic goods and services will rise when prices rise;
      • “Goods and services that are more essential to everyday living, and that have fewer substitutes” are inelastic; [3]
      • Lower profits are less likely to result, since prices may be increased to cover a greater share of the BPOL tax without causing an equal or greater magnitude adverse effect on demand for goods and services;
    • Sales revenue of relatively elastic goods and services will fall when prices rise;
      • “Goods and services with many substitutes, or that are not essential [to everyday living], have higher elasticity”; [4]
      • Lower profits are more likely to result, since prices may not be increased due to the adverse impact on demand for goods and services;
  • To the extent that sales revenue of inelastic goods and services is greater than sales revenue of elastic goods and services, net tax revenues will increase;
  • To the extent that sales revenue of inelastic goods and services is less than sales revenue of elastic goods and services, net tax revenues will decrease;
  • Producers of elastic goods and services will suffer the greatest adverse effects, since the market will not readily bear higher prices, with lowered demand reducing sales revenue more than higher prices would have increased it; (Pi x Qi >Pf x Qf, where “P” is price, “Q” is quantity, “i” is initial value, and “f” is final value).
    • Reductions in aggregate demand reduces the growth rate of producers;
    • If the growth rate becomes negative, then producers must shrink;
    • Producers that must shrink will choose from a variety of methods to reduce costs:
      • Substitute lower-cost supplies or labor;
        • This can result in reduced consumer choice or product quality;
      • Reduce labor hours or staffing;
      • Sell non-productive assets
        • Sometimes at a gain;
        • Sometimes at a loss;
      • Delay purchase or lease of new or replacement assets;
    • Those producers that must shrink below their ability to remain viable will close;
      • This will result in
        • Reduction in consumer choice;
        • Less price instability as a new equilibrium point is reached;
        • Lower employment within a given industry;
    • To the extent that laid-off workers are immediately unable to find re-employment,
      • The government will incur the cost of unemployment benefits;
      • Retail sales tax revenue (and similarly BPOL tax revenue) growth will fall while laid-off workers curtail discretionary spending;
      • Property tax revenue growth will fall while laid-off workers curtail durable goods spending;
      • The risk of foreclosure and eviction will increase for laid-off workers;
        • Foreclosures adversely affect property values, thereby reducing real estate tax revenue growth;
    • If, as in the past, aggregate wages increase at a greater rate than prices, then macroeconomic activity will recover; however, the change in the makeup of producers and consumers and the level of innovation that occurs in the interim makes the specifics of this recovery less predictable. It might or might not result in increased employment or increased business and tax revenue.

The BPOL Tax is willfully ignorant of the business's profitability

  • This is likely due to the difficulty of taxing businesses that do not derive 100% of their revenue (and therefore profits) within the county.
  • For instance, big boxes like Walmart and Target are multi-national companies. How do you tax their profits derived solely from doing business in Spotsylvania County?
  • Revenue is the only measure other than assets that can be allocated accurately to the county level.

Maximum Revenue Taxed Under the BPOL

  • The maximum revenue taxed differs according to the type of business; in Spotsylvania County,
    • $60 billion (in gross purchases) for wholesale merchants
    • $187.5 million for contractors
    • $150 million for direct sellers, itinerant merchants and peddlers, and retail merchants
    • $83.3 million for amusements, business services, developers, miscellaneous, photographers, personal services, rentals, and repair services
    • $51.7 million for financial, real estate, and professionals
  • The rationale behind the differing amounts and the differing rates is not clear, and are subject to manipulation by special interests.
    • In New Mexico, which has a had a statewide BPOL for more than 40 years, there are concerns over special interest carve-outs and “tax pyramiding”, wherein taxes are levied again on goods or services on which taxes were already levied at an earlier stage of production. [5]

[1] For businesses with less than $1 million in gross receipts.

Wednesday, April 8, 2009

What is the joke to these possible answers?

1) Consider a spherical cow [in a vacuum]. (JM)

2) Consider a frictionless cow that lactates uniformly in all directions. (ST)

3) Perform a small-scale test using a Gaussian goat and a Poisson pail. (CT)

4) It's a Schroedinger's cow problem. The milk is in the pail if you do not look at it. (JM)

5) Consider a cow traveling at the speed of light. A stationary observer is standing by. It follows intuitively that accidental cow tipping will undo creation. (CT & AT)

6) (Inexplicably missing)

7) Consider a cow suspended by a linear spring. (JM)

8) Imagine a cow sliding down an inclined plane with coefficient of sliding friction 0.2. (ST)

9) Okay, assume three unit cows are orthogonal to each other. (JM)

10) Okay, haven't you guys ever heard of evaporated milk? (JM)

11) A cow enters the event horizon of a singularity. One result certainly is condensed milk. (CT)

12) First use Schwartzchild's radius and look for black holes. (TC)

Monday, April 6, 2009

Making growth pay for itself

Dan Telvock of the Free-Lance Star writes in his blog about an op-ed written by Clark Lemings, a land-use attorney and founding member of the Stafford Council for Progress. Mr. Lemings has an idea that residences above a certain value do pay for themselves without need for subsidies from local government.

It is a common refrain that growth should pay for itself. But what does that mean? What is the cost of growth? How is it paid for now (if it is in fact completely paid for ever)? Who pays for it?

The existing county residents don't want to pay additional taxes to cover new (or expanded) roads, utilities, schools, libraries, etc., that are necessary to support new residents. New residents (and the developers who seem to do the building for most of them) don't want to pay high impact fees just to gain access to those same roads, utilities, schools, libraries, etc. How should local government untie this Gordian knot?

It occurred very quickly to me after reading this that the answer lies in accounting. Not the cash-based accounting in which government budgets are usually presented. No, the answer lies in accrual-based accounting. If you will pardon the pun, accrual-based accounting uncovers the lies politicians tell us when they present the budget. I'm not sure these are intentional lies, but rather are lies borne of ignorance to the nuances of accrual-based accounting.

So, without explaining accrual-based accounting in this post, let me explain how it helps us solve the cost allocation problem for new growth. Unfortunately, I do not have the figures I need to show this quantitatively, so I must confine myself to a qualitative discussion of the process.

First, the expenses of the county on an accrual basis include depreciation and exclude capital purchases and principal repayment on debt. You cannot talk about the cost of new assets (or of improving existing assets) without including depreciation.

Consider for this argument a limited situation. Only residences use public utilities and services, and the real estate tax is the only tax. (The concept is easily extendible to businesses. I leave that to the reader.)

If you divide this total expense figure by the number of existing residences, you get the average cost per residence of public utilities and services. This is the minimum average real estate tax that you must place on each residence. (You have to charge more if there are principal repayments on existing debt or capital purchases not funded by debt issuance.) As Mr. Lemings asserts, under these limited circumstances residences that are taxed above the average amount pay for themselves.

Assuming that all existing public assets have remaining capacity, you can add new residences at will without incurring additional cost. The advantage to existing residences is greater sharing of the costs, which means a lower average cost per residence, which should mean lower taxes per household. It is reasonable to expect new residences under these circumstances to "buy into" the existing public assets.

But what happens when existing public assets do not have sufficient remaining capacity--i.e., the water treatment facility must be expanded, or a new well is needed, or a new school must be built, etc.? Who pays for the new assets, how much, and why?

In reality, most new or expanded facilities benefit existing residences as well as new residences. The solution is to allocate the cost fairly among these two groups.

Public facilities have a design goal of supporting a planned number of residents, who arrive to occupy new residences or else accumulate the usual way in existing residences. The cost of the facility construction or expansion then is allocable in an estimatable way before it is even constructed!

It is not difficult to compute the cost allocable to existing residences versus new residences. If a facility supports 10,000 residences, and 8,000 are currently using it, then 20% of the cost of the facility should be paid for by the next 2000 new residences that will use the facility.

Start with basic principles.

1) New residents should compensate existing residents for any capital loss due to early retirement of existing facilities due to replacement.

2) New residents should pay their portion of capital costs (including financing) for new or expanded facilities (assuming that the facilities were adequate for existing residents beforehand).

3) If the new residences will not be built all at once, then the real cost (accounting for inflation) of (1) and (2) must be recovered over time, with the outstanding balance being adjusted upward for inflation each year. In nominal terms, more cash will be recovered than initially layed out for the public facilities; but in real terms, the recovery will approximately equal the initial outlay.

4) If growth stops, then existing residences must finish paying for the new or expanded facilities, and future new residences must "buy into" the facilities.

5) Implicitly, every existing residence represents ownership of existing assets. Treat them the way you would treat owners of assets held by shareholders of a non-profit corporation.

There are two ways of recovering the costs. The first is through impact fees on new residences. The second is through a cost recovery district that levies a special real estate tax on new residences.

First, the impact fees. This fee sums up the new residence's cost all at once and up front as it is approved for construction. Depending on the costs being allocated, this could be a large and unwieldy sum. The fee would necessarily be increased annually to keep the real value of the cost recovery neutral with the initial outlay. If the number of new residences does not meet the planned amount, then the full cost will not be recovered.

Enter the cost recovery district. Approved lots are placed in the district. Costs for new or expanded facilities are allocated to the district. No matter how few or how many residences are built, no matter how long it takes to build out the residences, the district pays an additional tax to recover the initial outlay. The tax ends when the costs are paid. At that point, these new residences become "existing residences" and are subject to compensation by new residences who add their use to existing facilities.

There are additional benefits to a cost recovery district. Take for instance a senior community. These residences do not demand schools, and therefore should not have to "buy into" existing schools, nor share in the capital cost of new schools. The allocation for these residences can be lessened, leading to a faster satisfaction of costs, and lower annual costs of living for retirees.

Costs can be allocated narrowly to parts of the county (like specific subdivisions), or broadly by applying a county-wide cost recovery district. These districts should be layerable, so that each recovery goal is separate and time-limited (that is, it has a finite life). Each incremental investment decision can be weighed on its own merits, and the costs can be recovered more easily from those who enjoy its benefits.

Finally, debt issuance and service can be tied to specific cost recovery districts, dedicating revenue streams to repayment. Transfers from the general fund to cover cash flow shortages due to slower than planned growth can be properly accounted and repaid to the general fund when applying principles (3) and (4). This can improve the likelihood of receiving favorable financing terms.

In conclusion, it is possible to estimate and allocate the costs of growth. Furthermore, there are means to recover these costs fairly from the existing and new users of public assets. With a little financing assistance from the general fund, even long-duration development costs can be recovered fairly. The idea is to ascribe ownership to existing residents, and to make new residents smartly "buy into" existing assets, and pay their portion of investment in new or expanded assets.

In praise of Dan Telvock, FLS reporter

One of my first ideas for a blog two years ago was to cover Spotsylvania County government, especially with a small business slant, because I felt that the Free-Lance Star, our local paper, was doing a poor job.

Enter Dan Telvock, who joined the FLS staff as a reporter and was given the Spotsylvania beat. This man got into local goings-on and provided the information I had felt was missing. Not only does Dan write articles for the FLS, he also maintains a blog on the FLS website, into which he puts most of the information that he can't get his editor to print.

Thanks to Dan, I get the information I want and the opportunity to add my two cents in the comments of his blog entries. Twice now, I have gotten ideas for blog entries of my own from his blog (confirmed at least once by Stafford County studpidity), but didn't have my own blog yet in which to put them. The best part is that I don't have to do the primary research. Truth is, I never had time to do it myself, and don't now either, and Dan does a much better job of it than I ever could.

So, Dan, here are two topics that are going to go into this blog really soon. (You've seen them touched upon in your comments section, so I will be going into more detail now that I am not confined to 812 characters per post.)

1) Local taxes. Specifically, I'll show a qualitative economic analysis (with a couple of quantitative examples) of the Gross Receipts Tax levied on businesses as part of business licensing.

2) Making growth pay for itself in a reasonably fair and balanced way.

The first will be from the points of view of an economist and a small business owner. The second will be my inner accountant and economist coming out to 'splain things.

If the Spotsy supervisors ever take up the GRT, then hopefully I can provide you with some hard analysis with which to question them.

In the meantime, keep up the good work, Dan, and I'll keep reading and ruminating.

Sunday, April 5, 2009

Random Thought

Kathy and I had a picnic by the Rappahannock River this fine evening. The water is high and fast due to heavy rains we have experienced recently. It is also very clouded with silt.

Well this got us thinking! Does a fish in fast-moving silty water experience something similar to a human in a sandstorm in the desert? Does it hurt? Does it damage their eyes, mouth, gills, or skin? Does is impact respiration in the gills?

The wading birds were also in the water, which made us wonder how they catch any fish when they can't see through the water. Is this a catch-22 for the fish?

Saturday, April 4, 2009

Our Agrarian Roots

Kathy and I re-watched "Seabiscuit" tonight. This is a movie about how a strong heart (figuratively speaking) can bring about unexpected success. It is also about trust and friendship, and second chances.

Horses have been an enabler of mankind's mobility for thousands of years. The ascent of trains and automobiles relegated horses to dwindling numbers of farms and ranches, and more a plaything of the monied than a mainstay of modern civilization.

The character of Charles Howard, Seabiscuit's owner, becomes wealthy selling automobiles in San Francisco, yet goes on to put faith in a small horse's ability to be great; always looking to the future, yet drawing comfort and passion from the past.

Will we come to a time where some humans no longer know or understand the natural world, nor remember its history, having grown up within a completely manmade environment? What are the consequences of this disconnect with the natural world on the decisions and actions of these who are ignorant of the division between the works of nature and the works of man?

What are the consequences on the artistry of these people? They may well know the paintings, sculptures, plays, operas, symphonies, etc., that are the hallmark of man-made fine art, and derive maximum pleasure from creating or admiring these works. Are they any less pleased for having never seen ten thousand verdant leaves shimmering in the summer breeze, having never heard the waves thundering ceaselessly upon the ocean shore, having never smelled the lasting fragrance from a bed of vividly painted flowers? Is it really just a case of, "To each, his own?"

We are steadily moving away from our agrarian roots. Only two percent of the U.S. population now live and work on farms, twice as many as are actually needed. The rest live now in cities and suburbs. There are people in cities who have grown up having never seen the Milky Way, much less only a few of the brightest stars. How does this impact our national attempt to return to our Moon? How does this affect their understanding of history, lived and recorded by men and women who were less mobile, less connected outside of their home towns, and less aware of scientific truth concerning the world in which they lived?

When we become disconnected from the natural world and our own history within it, how do we know when we are doing the right thing in the future?

To one thing constant never...

The name of this blog comes from Shakespeare's "Much Ado About Nothing", quoted here:

Sigh no more, ladies, sigh no more
Men were deceivers ever;
One foot in sea, and one on shore,
To one thing constant never.
Then sigh not so,
But let them go,
And be you blithe and bonny,
Converting all your sound of woe
Into Hey nonny, nonny.

My goal in writing is to cover a broad range of subjects ("To one thing constant never") and to find humor ("Hey nonny, nonny") even on topics that ordinarily make me angry ("all your sound of woe").

I expect some posts will be superficial and worthless, serving only my self-interest. Others, I think, will be more revealing and thought-provoking.

You may find math, economics, philosophy, religion, politics, art, poetry, photography, astronomy, and more. These are my interests, and I want to share them in a manner that respects your interests above my own. I don't want to push this through email to my friends; I'd rather you pull it at your leisure.

So with that firmly established, let us begin.