Detailed Abstractions

In yet another tax on the citizenry in the form of regulation, Washington DC has decided to sue AT&T (here):

NEW YORK (Reuters) – The attorney general for Washington D.C. has filed a lawsuit against an AT&T Inc (T.N) unit, seeking to recover consumers’ unused balances on prepaid calling cards….

Why?  Because, unused minutes on a prepaid calling card is identical in the plaintiffs’ eyes as if you were to own a house and die without relatives or a will:

…”AT&T’s prepaid calling cards must be treated as unclaimed property under district law,” the attorney general’s office said in a statement….

But not to worry – using official government logic, they reason since we’re already doing wrong in one place, why not here?

…States and municipalities have often similarly used unclaimed property laws, known as escheat laws, to claim ownership of unused retail gift card balances….

I’m sure the states did this out of the kindness of their hearts though – they weren’t looking for any additional revenue stream, only to make sure those with unused balances could rightfully claim them…  As if that were easy to do.  As most know, the original purchaser of the card is unlikely to be the end recipient.  As for me personally, I tend to get gift cards from various people and usually just pass them to my daughter – so at this point, the intended recipient wasn’t even the final recipient.

Not only that, but if you buy a gift $50 dollar gift card, leave $5 indefinitely and businesses are required to have a program to capture that, process it, file it, and eventually write the state a check with your name attached to it… well, all of that increases overhead and lowers profit, which raises prices and reduces new entries into the market.

Lastly, these laws don’t take into account the time value of money.  As we all know, inflation is constant even if stable and relatively slow.  Meaning, what I can buy for $10 today, I will likely not be able to purchase the same amount of stuff with $10 in a year.

Of course unused amounts on gift cards is a recent invention.  So let’s first look at this law historically.  Escheat laws were meant to cover real property (here):

…The term is often now applied to the transfer of the title to a person’s property to the state when the person dies intestate without any other person capable of taking the property as heir. For example, a common-law jurisdiction’s intestacy statute might provide that when someone dies without a will, and is not survived by a spouse, descendants, parents, grandparents, descendants of parents, children or grandchildren of grandparents, or great-grandchildren of grandparents, then the person’s estate will escheat to the state….

Which makes complete sense.  For example – If I bought a prime piece of real estate in Manhattan and died without will or heirs…. what should happen?  Any decent legal framework which includes property rights needs an answer as leaving property in such an unknown state isn’t a good idea.

Unlike real property however, unused minutes don’t really exist.   Even though recent TV commercials might have confused the DC attorney general, they aren’t little plastic orange discs logging actual time.

Additionally, the escheat law in this case isn’t needed as it’s being handled without issue in a private contract.  Sort of like a will is used when distributing someone’s estate.  Currently, the contract for AT&T prepaid cell phones, which each buyer assumes on purchase, expires unused minutes if not used within 90 days (IE – they revert back to the company).

Lastly, according to the attorney general, the industry knows unused minutes account for 5 to 20 percent of the minutes purchased.  Unlike unused gift cards, treating unsure minutes has an additional consequence.  Without fully knowing, but recognizing the very competitive market that is the cell phone industry – it is likely true that the average unused portion is factored in the current pricing structure.

Therefore changing that from 5 to 20 percent unused minutes to always zero and increasing overall administration costs, will only result in higher prices for the end consumers.

But they are going after an evil company, right?

Over @Rueters Blog, Felix Salmon has a recent post titled, Why the Plutocrats will return where he makes an interesting point:

…Remember too that when you have a progressive tax system, especially when there are surcharges on people making seven-figure incomes, you also have a system where for any given level of national income, the greater the inequality, the greater the government’s tax revenues. And indeed federal revenues have been rising faster than median wages for decades now, thanks to the rich getting ever richer….

Now I don’t believe in a big conspiracy, but I do pretty much believe in the selectorate theory… I say pretty much only because I’m still digesting all the information as well as the proofs, but basically the theory utilizes game theory and historical data to model political institutions, governments, leaders, etc, etc & their behaviors.  It has also been used as a predictive tool for the CIA, DOD, and others through one of the primary author’s (Bruce Bruce Bueno de Mesquita) work with amazing accuracy (here).

As one who loves understanding critical thinking, I was at first very skeptical towards the idea that math could model international predictions well.   Which isn’t to say I think math is limited, I do not.  For instance, I firmly believe that if we could ever measure all the variables in a dice throw, we could accurately predict the outcome.  Therefore the issue isn’t one of math, but of the ability to model such complex systems.

For the die throw, it’s an issue of accuracy.  Sure, we know the air pressure to the thousandth degree, but why not the millionth?  Billionth?  For predictions through modeling behavior, the complexity is not only accuracy since people’s motives aren’t always clear, but in the interactions with additional groups of people as well.    The number of interactions which might be analyzed in a group of only 5 people is 120, with 6 – 720, with 535 people in congress…. 535!

With computers of course we can crunch very large data sets these days in smaller and smaller amounts of time, but the theory is also powerful due to its simplicity.  It states that leaders will pay back those people that helped them become leaders in order to stay leaders.  This seems fairly intuitive and agrees with most understanding of incentives, but from here they can make predictions based upon the ratio between what they call W, the Winning Coalition, and S, the selectorate or those who can affect who the leader is.

To start with, we assume the leaders real ability to incentivize those in the winning coalition is to tax and spend.  They bring in revenues and use those revenues in such a way as to stay in power.  The have only two ways to allocate those resources, either through private expenditures or public spending.

The corollary with W/S is that when W is small as compared to S, the revenues spent will be mainly private and conversely if W is large compared to S, expenditures will be mostly public.

So if we take mainly free societies of today, where the selectorate is made up of the voting population which is usually only constrained by age, the winning coalition is theoretically 50% + 1 voter of the selectorate.  Due to the shear size of W in this case, the leaders incentives line up with public spending because she would be unable to to spend enough on each member of the coalition privately to ensure re-election.

Conversely in more closed systems, where the selectorate is controlled to a great deal (Iran, China, etc) and even if you are a member of the selectorate, the winning coalition is controlled and smaller, spending private money can keep the smaller coalition in tact.

Following the model and Mr. Salmon’s post on returning to a plutocracy, it makes sense that putting people into poverty can actually align with the incentives of our government.  The more people in need of assistance means keeping power is easier as more people are in need of the public expenditures.

I’m not saying I agree with all of this it total just yet, but at first glance Mr. Salmon’s intuitive thoughts seem to be backed up by known game theory modeling to present a interesting conclusion which I think goes to further underscore the idea that limited government is required for long term societal health.

This morning, news outlets everywhere carried recent news out of the Treasury Department.  The Pay Czar, who is certainly living up to the moniker Czar, announced today (WallStreetJournal):

The U.S. pay czar will cut in half the average compensation for 175 employees at firms receiving large sums of government aid, with the vast majority of salaries coming in under $500,000, according to people familiar with the government’s plans.

As expected, the biggest cut will be to salaries, which will drop by 90% on average. Kenneth Feinberg, the Treasury Department’s special master for compensation, also intends to demand a host of corporate governance changes at those firms….

Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

Beyond that, this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment.

In a free society, within reason, individuals should be able to contract for any reason they want.  In this case, you have employees who have privately contracted with their employers for certain remuneration based upon their perceived worth to the company.

I say perceived work, because obviously not all hiring decisions work out for the company even if the employee does very well at their job.  Personality conflicts, culture conflicts, and even performance problems are some of the reasons why a new hire might not work out as expected.  Unless specifically stated in the employment contract, even in these cases the employer’s general resource is firing, not taking back pay.

Adding to this is the simple, real, true fact that this is by its very nature an ex post facto punishment for perceived mismanagement.  It has been a legal tradition for centuries, a that passing laws, which retroactively punish people, is against a free in democratic society.

In fact it’s in the US Constitution and universally recognized by a number of treaties including Universal Declaration of Human Rights and American Declaration of the Rights and Duties of Man (from Wiki):

…no person be held guilty of any criminal law that did not exist at the time of offence nor suffer any penalty heavier than what existed at the time of offense. It does however permit application of either domestic or international law….

To be fair, there are some uses for ex post facto laws which have been recognized by our supreme court including allowing for Congress to grant administrative agencies the ability to do just this thing.  So legally speaking, this might be ok, however to anyone who proposes to value freedom, it should be obvious that even allowing administrative agencies this power was a massive failure of all branches of the government.  They are supposed to protect our freedoms, not remove them one at a time.

Either way – it’s intuitive that both contract rights & ex post facto laws are required for a free society.  If the government can interfere at will in private contracts and retroactively punish you for perceived wrongdoings, you have no ability to make relevant decisions for your life as you have no ability to be secure that those decisions will continue to hold true.

This insecurity is what creates instability in most third world countries today.  This lack of basic economic & legal foundation is what continues to plague most of the planet and yet we seem to be moving on the same path.

A week ago or so, a Democratic non-profit held a focus group of GOP members & Independents (here).  Among other interesting things they found, they noted how the GOP members opposed the President because they felt he was attempting to fundamentally move away from our founding principles.

They went further to note how this differed from Independents “underscoring the extreme disconnect of the conservative Republican base voters”.

I will say this move is absolute proof that the GOP members have it right.  If the administration allows this travesty, it is without a doubt a complete move away from not only our founding principles, but away from freedom in general.

Unless you were lucky enough to be traveling or otherwise unavailable on Sunday, you were likely deluged with Mr. Obama’s media storm to sell not only health care, but apparently many other items as well.

First, it should be noted that this WH is above all, extremely insecure.  The President could be seen on 5 Sunday news shows: NBC, ABC, CBS, CNN and Univision.   But he didn’t have time for Fox, the number one rated Sunday news show…

Regardless of the WH being extremely petty and worrying more about perceived injustices than an honest discussion with those who might disagree, what he actually said is far more serious.

When asked if a health care mandate was a tax increase on ABC’s this week, the President responded:

…”I absolutely reject that notion,” the president said….

“What it’s saying is, is that we’re not going to have other people carrying your burdens for you anymore,” said Obama. “Right now everybody in America, just about, has to get auto insurance . Nobody considers that a tax increase.”…

Using flawed logic is nothing new for Presidents, but this one isn’t even close.  Hhe’s analogizing the privilege of driving with the “privilege” of being a citizen.

The difference of course as that by my very birth, I have a “right” to be a citizen, whereas driving has always remained a privilege with constraints.  You see, I can forgo auto insurance, so long as I don’t drive.  There are many ways around without a car in this day and age, but if I “choose” to drive, then constraints can be placed on me.

Health care on the other hand would be required simply because I existed and no other reason.  & If the government says, “You have to buy this” – it is a tax increase as not paying it can land you in very serious legal troubles.

On CBS’s Face the Nation, with an omnipotent sense of when health care, our fearless leader goes further:

…Obama put his support behind the idea of taxing employers that offer high-cost insurance plans.

“I do think that giving a disincentive to insurance companies to offer Cadillac plans that don’t make people healthier is part of the way that we’re going to bring down health care costs for everybody over the long term,” Obama said on NBC’s “Meet the Press.”…

Even ignoring the fact that this goes against his basic premise that more people need more health care, one wonders if there is anything our President doesn’t know.  So far, he’s taken over banks, car companies, told car companies with whom to merge, who to hire, who to fire, what to build… and now we find out he knows how much health care is too much.

But let’s not stop there.  Not only is our community organizer one of the smartest men in America when it comes to economics and health care, he’s also a brilliant strategist with respects to Afghanistan:

…”What I’m not also gonna do, though, is put the resource question before the strategy question,” Obama told NBC’s David Gregory on “Meet the Press.” “Until I’m satisfied that we’ve got the right strategy I’m not gonna be sending some young man or woman over there- beyond what we already have.”…

I’m not sure exactly what happens to man to think he has the answers to every single last question. Maybe it’s just arrogance and ignorance, as Hayek stated:

If most people are not willing to see the difficulty, this is mainly because, consciously or unconsciously, they assume that it will be they who will settle these questions for the others, and because they are convinced of their own capacity to do this.

Whatever the reason he believes so strongly in his ability to decide what’s best for our own good, history shows us without question where this inevitably leads.  Hayek again:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

Let’s hope we begin to understand the value of humility before we do too much damage.

This weekend during a radio address, Obama used his time to tell us all about the plight Americans have in dealing with credit card companies.

WaPo Article:

President Obama used his weekly radio and Internet address to reiterate his call for credit card reform, saying the nation can no longer tolerate an “anything goes” mentality by the credit card companies…

It seems he has lost the understanding that when two entities enter freely into a contract, capitalism ensues and the government should only need to be involved in a very limited fashion which is to ensure the contracts are followed.

But, when there is blame to go around, we know Obama will blame business first:

“Americans know that they have a responsibility to live within their means and pay what they owe. But they also have a right to not get ripped off by the sudden rate hikes, unfair penalties, and hidden fees that have become all-too common in our credit card industry,” he says in the address. “You shouldn’t have to fear that any new credit card is going to come with strings attached, nor should you need a magnifying glass and a reference book to read a credit card application.”

I’m unsure of all these “stings attached” and “hidden fees” on the dozens of cards I’ve had in my lifetime, but maybe I’ve just been lucky.

One thing I do know is that not one single American has had to consult accountants, lawyers or specialized software in order to sign up, receive, and use a credit card.

I  however know of only 2 people who are brave enough to figure their taxes without any professional help.

So I ask you Mr. President, with all due respect, could we possibly use some of this same logic on the tax code and governmental problems with hidden fees, unfair penalties, and sudden rate hikes?

The President today has announced his plan to go after those pesky multinational companies who have hired overseas’ workers using investment money.

From FT.com (article):

President Barack Obama on Monday outlined plans to claw back more than $100bn in tax revenues by preventing US multinational companies from offsetting overseas investment against their taxable income…

The basic argument seems to be for US companies, is that if you plan to invest, you must invest in the US to receive any investment tax benefits.  As is plain, an removal of a tax deduction is a tax increase, and any tax increase on a company will be visited by higher prices to the consumer.  This logic seems to have once again alluded our government, but not multi-national businesses:

…In a letter to Congress six weeks ago, more than 200 companies, including General Electric, Caterpillar and Johnson & Johnson, warned that repealing the ability to defer US taxes by investing abroad would upset “the competitive balance between US and foreign companies. This will result in a loss of jobs for Americans and serious negative impacts on the US economy.”…

That doesn’t stop our fearless leader nor his appointees:

…Mr Obama said the aim was ”ending indefensible tax breaks and loopholes, which allow some companies and some well-off citizens to evade the rules that the rest of America lives by”. …

…Tim Geithner, US Treasury secretary, said they were “common sense changes designed to restore balance to our tax code.”…

For basic logic – it appears to be like this, “It’s too expensive to invest in these jobs here in the US, so we should make it more expensive to invest in those same jobs overseas”.

Glad to see our answer to a global crisis is to put additional hardships on the poorer nations in the world while at the same time giving companies incentives to relocate their headquarters to other countries.