Mon, 31 Mar 2003

Tax exempt bonds

A Toronto company wants tax-exempt financing from the St. Lawrence County Industrial Development Agency to help reopen the former Zinc Corporation of America mines.

So goes the news report. It's unfortunate, of course, that the supply of zinc has gotten so much larger than the demand for it that the mines in St. Lawrence County are no longer profitable. Sad for the workers. Good, though, for anybody who makes anything that has zinc in it.

Should St. Lawrence County make the bonds tax exempt? Probably not, although they probably will. As the Watertown Daily Times article points out, the county incurs no financial liability from approving tax-exempt status, and would not have to pay anything if the company defaults on its debt or goes bankrupt. From the view of the legislature, the only visible cost is their time spent approving the tax-free status. You bet they'll approve it

Unfortunately, whenever a government meddles in the formerly-free market to give one company an advantage over another company, they are engaging in central planning. They are saying that that company's jobs are more important than other company's jobs. By reducing one company's taxes, they are forcing those taxes to be made up by everyone else. It's as if they took a few cents from every tax-payer and put it in the new company's pocket.

You see this all the time, in all sorts of flavors. Legislatures give tax breaks many more times than they would get away with direct subsidies. Taxpayers understand when money they paid flows to a private company. They don't understand that the very same thing happens when a company's cost is reduced by fiddling with taxes. Well, you read it here, so now you have no more excuses.

No welfare for the rich!

Posted [00:18] [Filed in: economics] [permalink] [Google for the title] [digg this]
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Sun, 30 Mar 2003

When you buy me, you buy my mistakes

Back when I was a freshman at Clarkson University (nee Thomas S. Clarkson Memorial College of Technology), I was paid to write programs on the PDP-8. Yeah, I was a smarty-pants. End of the two-week pay period, I would have to fill in my time card, telling Dr. Willmert how many hours I had worked that week.

Computers then were just like computers now; hit the wrong command and you can destroy hours of work. No, we can't blame everything computer that works poorly on Microsoft, since Microsoft didn't exist at the time. Well, while I was working, I can recall two instances where I destroyed several hours worth of work. Oops. I made the professional judgement that, when you buy my time, you buy my mistakes as well.

How can this be acceptable? Shouldn't there be some sort of mechanism for correcting for my mistakes? Shouldn't I split the loss between employer and employee?

No.

Let's say that I had mistake insurance, where my mistakes were covered by insurance. If I made a mistake, I would not bill my customer for the lost time, but instead would file an insurance claim. Wouldn't that seem to be a better solution? All my customers would pay the insurance, and none of them would have to pay if I made a mistake.

Well, that's a silly idea! Of course my customers are paying for the mistake -- in my mistake insurance premiums. I don't get to keep the money that they pay me which has to go to the insurance company, so as far as I'm concerned, I'm not making that money in the first place. So in order to get the same amount of money as without, I'd want to increase my rates to cover it.

Same thing if I didn't have insurance. Let's say that mistakes didn't cost me all that much. Instead of purchasing insurance, I simply self-insured. There's no real change in my situation. Instead of me paying that small amount per month to an insurance company, I'm paying it into a bank account. I withdraw money from the bank account whenever I don't charge a customer because I screwed up.

Now, take that money, and instead of me putting it into the bank account, I give it back to my customers. I charge all my customers a little bit less because I sometimes make mistakes for one or two of them. It's the same. Modulo overhead, the amount of money being flipped around is the same, and the effects on the customer and myself remain the same.

There remains two minor differences: when I make a mistake, I know that I made it. My customer doesn't necessarily recognize that I made a mistake. In an insurance regime, that might affect who asks for insurance. Also, when the customer pays for my mistakes, their payment is proportional to the difficulty of the job. If it's a hard job, then I might make more mistakes. On the other hand, it'll be worth more to them.

Anybody see any parallels to medical malpractice? You should, because that's what I was actually writing about, not programming.

Posted [13:40] [Filed in: economics] [permalink] [Google for the title] [digg this]
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Tue, 18 Mar 2003

Democracy is not always representative

Dave Farber runs a mailing list called Interesting-People. He mostly publishes things that interest him (even things he disagrees with), and which he thinks will be interesting to people he finds interesting. With over 10K readers, you could say that he runs the grand-daddy of all blogs. I'm going to spare the contributor who opined the following from any direct embarrassment, but if you really want to know who said it, you can examine Dave's archives.

At this point, all the economists in the audience start to twitter. It's well-known at least among the economically savant that in fact democracies do NOT necessarily represent the 'will of the people'. Let's take an issue and call it X (hoary, I know, but run with it). With any issue put before a legislature, people will not be affected equally. Some will benefit greatly, some perhaps little. With some issues, some benefit greatly, and others are harmed little.

Transfer payments, always a popular action among the representative set, are like that. Take a circle of a hundred people, each with a handful of nuts. Go around the circle and take a nut from everybody. Throw away fifty nuts. Pick someone at random and give them fifty nuts. They will be happy. Everyone else won't care much. This is the problem in a nutshell (buh-dum-dum).

Economists have noticed that a democratic government often does not accurately express the 'will of its people'. The problem is that the incentives to improve society are perverse. There exists a type of friction in the marketplace called transaction costs. Every time you make any kind of trade, there is always some waste. It's precisely analogous to friction in physics. A part of what you want is lost in the transfer.

When the value of a transaction is exceeded by the cost of the transaction, the transaction doesn't occur. More is destroyed by pursuing that transaction than is gained. When 99 people lost a single nut, they didn't care enough to stop that particular transaction. The cost of doing so was worth more than the value of the nut. On the other hand, the person who got the fifty nuts was very happy. They had a concentrated interest in the nut deal.

There are many cases in a democratic government where the cost to the multitude is small enough that they just don't care. The effort needed to stop X (remember X? This story is about X) is below the pain caused by X. On the other hand, the party who benefits from X is very interested in ensuring that X happens. They'll be willing to spend money to cause X to happen (those are the fifty nuts that got destroyed).

There are many, many examples of this effect. After reading this, I'm sure that you can name some. It's completely bogus to say that a democratic government follows the will of its people. That activity is observed more in the theory than the practice.

Posted [14:02] [Filed in: economics] [permalink] [Google for the title] [digg this]
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