Tuesday: Haikus and Mysteries XVII

April 26, 2011

Desperate, shameless pitch:
Please donate to iMentor!
I’ll match two-to-one!

Today’s mystery: What is the least happy day of the week (in London, at least)?   Take a guess!  It’s buried about halfway in.

Fine print: Match applies on contributions received through April 30th, up to some high number that doesn’t render me insolvent.


Tuesday: Haikus and Mysteries XVI

April 19, 2011

a half-assed haiku:
this is seven syllables
followed by five more

Today’s mystery: Blog comment spam.  Thank goodness WordPress protects me from it.  What an interesting business problem.  It’s humbling to see how much of my meager “traffic” comes from spambots naively crawling the web in search of inbound traffic.  Good thing I’m doing this for my own amusement 🙂

Paper or Plastic

April 19, 2011

Rationalization is a fact of life.  We’re complex, our world is complex, and we often have to balance competing desires.  It shouldn’t be surprising that some of our decisions or patterns of behavior conflict with our stated beliefs and values.  One may think of oneself as “concerned about the environment” but have energy-intensive habits (or at least not be perfect about turning off the lights when one leaves home).  One may think of oneself as “in favor of small government” but like receiving certain benefits.  One may think of Wal-Mart as the root of all evil but shop there anyway.  Cognitive dissonance is uncomfortable, so one has to engage in some sort of rationalization (consciously or not) for the behavior in light of the stated beliefs.  I think it might be revealing to try for a day to take note of all my actions or inactions that cause me to rationalize, but even then I’m sure I would miss some.  I think it’s imperative, though, to look for such patterns over time and come to terms with them.

I’m brought to this discussion via Felix Salmon (thanks to YA) who calls attention to a really delightful takedown of JPMorgan Chase CEO Jamie Dimon, by Illinois Senator Dick Durbin, on the subject of debit interchange.  (Here’s one example of cognitive dissonance: I like to believe I’m a nice person, but I always enjoy a snarky slam when it comes from a place of righteousness – like a priceless Frank Bruni critique of an awful restaurant.)

It really shouldn’t be controversial to assert that interchange (on debit and credit transactions) is too damn high.  There’s a religious debate to be had over whether (and how) government should intervene in oligopolies that are superficially competitive but, really, collectively extract huge economic rents. 

I’m more interested in how people (including myself) rationalize their usage of debit and credit cards as payment mechanisms in light of what we know about interchange fees.  Put simply: it cost merchants something to accept card payments.  This cost can be relatively small, in the case of a PIN-based debit transaction; or it can be several percentage points, in the case of an American Express transaction.  The merchant receives some benefit from this arrangement, such as the volume that results from people’s tendency to spend more freely on plastic, as well as the security of not having to handle as much cash on premises.  The customer receives some benefit too, which is generally proportional to the fee charged to the merchant.  A PIN-based debit transaction only gets me the benefit of not having to carry cash for my purchases.  An AmEx transaction gets me that benefit as well as loyalty points, an interest-free grace period before I actually have to pay my bill, and whatever cachet AmEx seems to think it confers.

Here’s what should cause dissonance, though: credit cards, particularly when used at low-margin businesses, generally transfer wealth from less-affluent customers to more-affluent customers (and large financial institutions).  Progressives hate this concept in the general case, but seem to accept it as a consequence of their (our) payment choices.

When I use my AmEx at a fancy restaurant, I think it’s a clear win for everyone.  It’s hard to guess what my spending would look like in a world without plastic, but it’s almost certainly true that I would spend less freely and less often.  So the restaurant probably ends up incrementally better off, which can be possible even at a lower margin if there’s an offsetting increase in sales volume.  As such, they would not necessarily need to raise prices. 

But the dynamics are different when I use my AmEx at a neighborhood grocery store.  Grocery retailing is generally a competitive, commoditized business.  Operating margins tend to be in the single digits.  My basket of groceries at D’Agostino’s (or Stop & Shop, etc.) is probably about as profitable as a pensioner’s or middle-class family’s.  There are plenty of grocery stores within walking distance, so no store can be too much of an outlier on price.  When AmEx takes a few percentage points off the top, it can be very meaningful to the grocer’s overall economics.  That lost margin needs to be made up somehow.  It’s not volume; I’m not likely to buy more eggs just because I have plastic instead of cash.  To some extent, the grocer can push back on its suppliers; but the largest of these, too, are low-margin, competitive businesses.  To some extent, the grocer can try to shift me to higher-margin products, like store-brands or fancy organic foods; but I’ll buy what I want to buy.  The other lever is simply to charge higher prices across the board.  Implicitly, this means that everyone pays higher prices for benefits that accrue only to credit card users and the financial institutions behind them.  This is what I mean by wealth transfer.

A progressive person should prefer to pay cash, or use PIN-based debit transactions, in order to minimize the cost to merchants (and, by extension, the costs that are passed on to other consumers).  But the prisoner’s dilemma gives him or her an easy out for rationalization: someone else is going to use a credit card, which means there is going to be a mark-up on prices anyway – so I might as well get my points too!

Maybe it doesn’t occur to people that it costs merchants something to process a card transaction.  But I think the more likely explanation is that card usage creates externalities, and people (including myself) generally have an easy time rationalizing decisions when the harm is vague and diffuse, but the benefit is clear and personal.  (Wonder why we have a $14 trillion national debt?)

Be Thankful I Don’t Take It All

April 18, 2011

Happy Tax Deadline, America!

I happen to be part of the very small minority that doesn’t really mind the process of preparing and filing my tax return.  I enjoy it in part because I happen to generally enjoy math, organization, and logic puzzles, which are basically the main components of a tax filing.  The bigger driver, however, is that my tax situation is pretty simple.  I’m not self-employed, I don’t have dependents, I don’t trade too actively in my investment accounts, and (for better or worse) I tend not to fall into any of the myriad constituencies that have special benefits and pitfalls hidden in the tax code for them.   The types of itemized deductions I can claim are generally the same from year to year, so it’s pretty easy to keep good records of these expenses as I incur them.  H&R Block and TurboTax both make very good, inexpensive software that saves me the headaches of actual form-filling and calculation.  In all, it’s a pretty undramatic process for me, so I have very little to complain about.

There are absolutely ways I could have lived a more tax-efficient year/life, as I realize in hindsight.  In particular, I probably could have incurred a variety of meaningful, non-deductible expenses under the structure of a business or foundation that could have made use of them.  My goal would have been to fully comply with the law.  That compliance would have cost something: for example, whatever organizational books and records I would need to maintain, and the research I (or an accountant) would need to do in order to be sure my activities were all within bounds.  But if the cost of compliance were more than offset by the tax savings I could have realized, it would have been rational (if unpatriotic?) to take those steps. (In my case, I attributed an extremely high value to my own time and cognitive bandwidth, so I can live with the thought that Uncle Sam might have gotten more out of me than strictly necessary.) 

The fact that I even think about how to conduct my affairs more tax-efficiently is an example of the sort of unproductive complexity that, I think, most people agree with eliminating in the abstract, at least until it threatens to increase their effective tax rate.

In the spirit of the season, I’ll recommend a couple of very good pieces that are only slightly diminished by their points that reinforce my claim that many smart people say Ridiculous Things about taxes. 

I completely agree with the last paragraph of this piece by influential blogger Matt Yglesias, which in my mind points out the Ridiculous Thing in Arthur Laffer’s otherwise excellent op-ed in today’s WSJ.  The Ridiculous Thing he does is attribute the complexity of deriving “taxable income” from a person’s income and expenses to the fact that the tax code is progressive.  The complexity is attributable only to the provisions and loopholes that affect the derivation of taxable income.  A system like the one I proposed yesterday, with flat taxes at progressive marginal rates, and with a definition of income that eliminates the arbitrage between various flavors (e.g., wages, dividends), would be both progressive and non-complex.

Apart from that, I think Laffer’s piece nicely points out a few of the hidden costs of a complex tax code and the types of tax-efficiency games that rational actors play – and may in fact be bound to do so as fiduciaries!

The Ridiculous Thing in Yglesias’ piece, however, is the suggestion to pre-populate tax returns for individuals the IRS thinks are likely to have relatively simple tax situations (i.e., a significant population of lower-earning households).  In my ideal world of a non-complex, progressive tax code, this would work pretty well.  In the status quo, however, this suggestion is both inefficient and unfair to the people it purports to help. 

I doubt the IRS has a good way to predict a priori whether a taxpayer is better off itemizing.  A family’s unreimbursed medical expenditures may be very high in some years, for example, which the IRS wouldn’t know.  Similarly, there are tax credits for child and dependent care expenses that are very meaningful to lower-income households that the IRS wouldn’t know about, either.  Maybe the IRS could write in big letters: “If you have a lot of X, Y, or Z expenses, you should file a tax return yourself and not just send in a check.”  But the point is that the IRS can only err on the side of overcharging these taxpayers; if you believe that people don’t want to be bothered to file their tax returns, this is what will happen.  Otherwise, you end up building an infrastructure to pre-populate tax returns that people will have to double-check themselves anyway.

I used to volunteer as an income tax preparer for low-income families – one of several services, by the way, that make it easier for individuals with simple tax situations to reduce their burden of compliance. (The free versions of H&R Block and TurboTax software are another.)  Inevitably there were clients who decided they would rather take a lower refund than return home to pick up the paperwork they would need to claim the credits they were entitled to.  I’m worried about the prospect of replicating this on a larger scale by creating a default that can only overcharge taxpayers.

Here’s to a non-complex, tax-efficient 2011 for all of us!

Yeah, I’m the Taxman

April 17, 2011

As the deadline for filing tax returns approaches, amidst a great political pseudo-debate about whether to finally get serious about the deficit (hint: the answer will be, “not really”), it seems timely to reflect on just how our tax payments fit into the overall picture of America’s public finances.  The Washington Post and New York Times have put out some great interactive graphics that are well worth browsing for a few minutes to pick up some facts.

I think people generally become pretty irrational when asked to think about taxes.  My guess is that more than 95% of people feel that they are individually paying their “fair share” of taxes, but that they also believe that at least 25% of the country does not – this 25% for the Left tends to consist of high-earners, whereas for the Right it tends to consist of net recipients of government largesse.  People have religious debates over how to define one’s “fair share” of the burden of paying for public services, which are difficult to disaggregate from questions about: the proper role of government, the relative merits of publicly-managed vs. privately-managed provision of government services (even those that are ultimately funded with public dollars), whether (or, better: which kind) of taxes are good or bad for growth and by extension aggregate social welfare (not to mention whether this is a fair link to make), and the general fitness of government agents to spend public funds as wisely as they would their own.  These are all difficult and worthwhile questions, but I call these religious debates because I think they are usually not informed by facts – actually, people look at the same facts (e.g., that the top 1% of earners pay N% of all taxes) and draw different conclusions about whether N is too high or too low based on their prior views on all of the questions above.

My favorite ridiculous claim about taxes from the Left is that high-earners actually want to pay higher taxes, but they just haven’t been asked to do so.  When the President says it, it’s almost too incredible to imagine.  I also find it amusing when billionaires make the same claim, without any apparent sense of irony that they have deliberately (1) taken advantage of the arbitrage between income tax rates and capital gains tax rates to build enormous tax-deferred wealth over time & (2) dispensed the overwhelming majority of that wealth into tax-exempt non-profits who do the bulk of their work outside of America.  These claims clearly fail the revealed-preferences test: of course Obama or Buffett or I can pay higher taxes if we want to.  The Treasury department is very clear that gifts to the United States are always welcome as a patriotic expression.  I think it’s fair to ask why anyone who claims to be in favor of higher taxes for his income bracket doesn’t voluntarily pay those taxes himself.

My favorite ridiculous claim about taxes from the Right is that high-earners are chomping at the bit to use any incremental after-tax income from lower marginal income tax rates solely for the purpose of creating jobs (rather than, say, hoarding wealth).  It is true that tax rates are relevant for businesses’ and individuals’ investment decisions.  I think there are worthwhile arguments to be made about lowering business tax rates (at the level of payrolls and of the corporate entity) while raising them for dividends and long-term capital gains (and possibly also individual consumption) if we want to change the relative incentives for businesses to reinvest earnings rather than distribute them to their generally affluent stakeholders.  But, even though I think Buffett is disingenuous in discussing his willingness to pay higher taxes, I think he is correct in asserting that “trickle down” has worked much better in theory than practice.

Even though I’m skeptical that our political process will be able to make meaningful progress on tax reform, I’m glad that the subject is at least being discussed.  Since our plan seems to be to borrow trillions of dollars during the next decade anyway, it seems hard to imagine that we can construct a tax code that is worse-equipped to generate the growth and revenue we will need to have any shot at fiscal balance.  Now would seem like a perfect time to conduct a radical experiment in simplification.  I think the concept of multiple income tax brackets with progressive marginal rates is sensible.  There probably should be something like a millionaire’s bracket with an even higher marginal rate.  Crucially, though, we would need to stop using the tax code as a set of levers for social engineering if we want to stop people from paying lower effective tax rates than we intend for them to from a public finance perspective.  If we want to incentivize specific behavior, it seems drastically more efficient to do so through a mechanism like a “mail-in rebate” – at the very least it would make clear the cost of the policy, and make it easier to monitor for fraud.

I’m convinced that there are ways to increase total tax revenue without compromising economic growth, competitiveness, and job creation: when the pie is bigger, everyone gets more pie.  But I think it will be hard to figure out what exactly those ways are, if we’re forced to consider them in the context of a system that is already complex, opaque, and under-resourced to stop cheating and fraud.

Tuesday: Haikus and Mysteries XV

April 12, 2011

Who knew that haiku
could win you a blackberry
but not an ipad 😦

Today’s mystery: Whatever happened to Steve Urkel?

Cobra Libre!

April 9, 2011

There was a bit of a stir around Gotham a short while back when it emerged that a venomous Egyptian cobra had gone missing from the Bronx Zoo.  We’ve grown accustomed to enduring risks great and small as part of life in this city, perhaps to the point of becoming too jaded by them.  One highlight of the whole affair was an exceptional Twitter feed imagining how a modern snake on the town might entertain herself (my favorite: “Holding very still in the snake exhibit at the Museum of Natural History. This is gonna be hilarious!”).  My younger self, who harbored a mortal fear of snakes (not usually the most obvious source of terror for a city kid), would probably not have been as amused.  But all’s well that ends well, I suppose, and I hope the Bronx Zoo gets a nice uptick in tourist traffic for its trouble (and maybe a few leftover stimulus dollars for better security?).

With snakes on the brain and the subject of fear not far from my memory, I found myself thinking about “snake oil” and the multi-billion dollar industry of products and services that cater to our desires and vulnerabilities without the burden of unbiased empirical proof.  If I were to lose some of my capacity for shame in a tragic personality-accident, I would immediately start a career developing and marketing nutritional supplements.  Sites like Drugstore.com and Vitacost.com (both of which I frequent) read like catalogues of human insecurity.  Too fat?  Too thin?  Too much hair?  Too little hair?  Are you worried that your feeling of fatigue at the end of the day might be a sign of heart disease, cancer, or Restless Leg Syndrome?  There are dozens of pills, creams, and yoga regimens on DVD for each of those.

One of many valuable lessons I acquired from years of weekend trips to the racetrack is: be skeptical of offers that defy the logic economic self-interest.  If a handicapper were unnaturally skilled at picking winners, why would he publish his recommendations and thereby dilute the returns he’d be able to get from making bets himself? (Or, even better: launching a hedge fund to bet other people’s money!)  Why wouldn’t he have earned so much money from his wagering prowess that he could afford to stop running a business every day?  Investment managers operate similarly, by the way.  “Talking your book” – i.e., persuading people of your investment case for or against a security – can be a pretty good way to create the marginal buyer or seller that pushes a trade in the direction you want it to go.  The issue isn’t that the handicapper or the investor can’t have good ideas — it’s that their greater economic incentive is to convince you that they are right rather than to just be right.  So one should approach such ideas skeptically, and even more so if one is being asked to pay for them.

If it were really true that a supplement could reliably make you thinner, why would there still be so many overweight people?  Well, one answer might be that the treatment is prohibitively expensive, but that is not the case for most supplements out in the market.  (As a sidebar, I think there’s an interesting debate to be had about subsidizing gastric bypass surgery, for example, as a way to fight the health complications and public cost implications of morbid obesity; another story for another time.)  Another answer might be that it only works on certain individuals, or in combination with other supplements, practices, environmental factors, etc.  Perhaps – there is a lot we don’t know about health, medicine, and wellness.  Yet another answer might be that the market just isn’t aware of the benefits of the supplement.  This explanation has the added benefit of giving the consumer the sense that he is in on a special secret that will give him a leg up on the Joneses and Smiths.

None of these explanations is as simple as the racetrack-tout test.  The economic imperative is to convince you that the supplement works, not to create a supplement that works.  If the supplement works, that’s gravy for the distributor and the consumer.  The placebo effect is a win-win.  Why we have a heavily regulated prescription drug industry that places billions of dollars on the line over tiny observable statistical effects (that may not even correlate to health outcomes!) alongside a parallel universe of snake oil businesses wrapped in pseudoscience, nature-shamanism, and shameless exploitation of celebrity is beyond my comprehension.  (Actually, it’s not: there are obviously entrenched economic interests on both sides.)

I will be the first to admit that I am a complete sucker for supplements of all kinds, in spite of everything I’ve just written.  The dissonance reminds me of Pascal’s gambit: if I take this supplement, maybe it does nothing and I lose some money, but maybe it works and I avoid cancer!!! My rational consumer heuristics short-circuit a bit when inconceivably good or bad outcomes are thrown in the mix.  I rarely consider whether the supplement could be actively harmful, even though that seems like the most reasonable prior assumption (after all, it’s something foreign to disrupt my highly evolved homeostasis) and should therefore bias me strongly against taking anything.

Perhaps this episode should teach me to be less worried about snakes on the town than about the snake oil in my medicine cabinet.