100 Economics Question of the Day: An Intermittent Blog: August 2006

Saturday, August 19, 2006

This is the MBA Administration?

If David Cay Johnston didn't exist, it would be embarrassing to have to invent him.
Within two weeks, the I.R.S. will turn over data on 12,500 taxpayers—each of whom owes $25,000 or less in back taxes—to three collection agencies....The move, an initiative of the Bush administration, represents the first step in a broader plan to outsource the collection of smaller tax debts to private companies over time. Although I.R.S. officials acknowledge that this will be much more expensive than doing it internally, they say that Congress has forced their hand by refusing to let them hire more revenue officers, who could pull in a lot of easy-to-collect money. [emphasis mine]

The cash flow choices are simple:
The private debt collection program is expected to bring in $1.4 billion over 10 years, with the collection agencies keeping about $330 million of that, or 22 to 24 cents on the dollar.

By hiring more revenue officers, the I.R.S. could collect more than $9 billion each year and spend only $296 million—or about three cents on the dollar—to do so, Charles O. Rossotti, the computer systems entrepreneur who was commissioner from 1997 to 2002, told Congress four years ago.

The math from that is also simple: Over ten years, the outside collection agencies will produce a net of $1.07B ($1.4B-0.33B). Over ten years, the IRS would produce $87.04B ($90B-$2.96B).

The net loss of owed tax revenues—all from low-level debtors—will therefore be approximately $85.97B.

And they're using reputable companies as well:
One of the three companies selected by the I.R.S. is a law firm in Austin, Tex., where a former partner, Juan Pena, admitted in 2002 that he paid bribes to win a collection contract from the city of San Antonio. He went to jail for the crime.

Last month the same law firm, Linebarger Goggan Blair & Sampson, was again in the news. One of its competitors, Municipal Services Bureau, also of Austin, sued Brownsville, Tex., charging that the city improperly gave the Linebarger firm a collections contract that it suggested was influenced by campaign contributions to two city commissioners.

And the reasoning is the same as the justification for outsourcing: capital classification advantages, not value maximization:
Under federal budget rules, money spent to hire tax collectors is treated as a discretionary expense, and Congress is cutting discretionary spending. In business terms, the rules treat the I.R.S. as a cost center, not as the government's profit center.

The private debt-collection program, however, is outside the budget rules because, except for the start-up costs, the collectors are to be paid from the proceeds.

So we have the failed outsourcing experiment, the failed privatization experiment, bogus accounting, and poor incentive alignment combined to produce nearly $86B in lost revenues. If there were any responsibility to the shareholders, the CEO would be fired.

(Cross-posted from Snark of the Day)

Reasons Capital Cannot be at the Efficient Frontier

Billmon notes an intriguing point about the recently-deceased housing bubble, one we all knew but never emphasized:
It's also why it took almost ten years for the last home price boom/bust cycle in California to come around again. According to the Office of Federal Housing Enterprise Oversight, the reg agency that tracks these things, home prices in the greater Los Angeles metro area didn't return to their 1990 peak until the spring of 2000. [emphasis mine]

Anecdotally, the New York area data is that the peak was in 1989 and the break-even was around early 2003.

I know several people, most on Long Island, who almost literally could not afford to move during the 1990s. And those were only the ones who might have wanted to do so. People with a two-hour commute each way, every day. (Which also implies that industry didn't follow the housing expansion.)

The bursting of a housing bubble—among other, more significant, things—creates a decent amount of endemic inefficiency in the system, much of which will not be reflected directly in data, since it is primarily opportunity cost. But it will be a loss nonetheless.

(Cross-posted from Marginal Utility)

Thursday, August 10, 2006

Charity Values

At Marginal Utility, I asked if there was any way to help Lebanese refugees.

Juan Cole provided one good answer. (Direct link here.)

Badger Tracker noted that Catholic Relief Services is working with folks on the ground as well.

It took until today to realise that there may be someone who reads here but not there.

This post will remain at the top of the blog until there is a cease-fire.

Wednesday, August 09, 2006

Risk Mismanagement, or, It's the Infrastructure, ******

Other than the Castro-is-in-great-shape comment, the other thing that caught my eye in the 29 July-4 August issue is this Economist story about the Queens blackout (may require subscription) is this 'graf three paragraphs from the end, almost a throwaway:
Indeed, one of the ironies of this week's power failures is that America is at last starting to grapple with the most entrenched problems in its electricity system. After the 2003 blackout, a joint American-Canadian taskforce delivered a withering 228-page report highlighting the failings of the utilities—which, among other things, had not been regularly monitoring the condition of transmission lines [emphasis mine].

It is difficult note to speculate that this situation was caused in no small part by the deregulation of the energy companies. But that's not (directly) what brings me to discussing this.

Rather, in a fortunate dovetail (via Mark Thoma), Brad DeLong notes that "the death of distance" is very dependent on having a functioning infrastructure. As such, one of the advantages of our tax code is that it is structured to ensure that infrastructure is maintained, at least within a given company.

The corollary to a need for infrastructure is our generous Depreciation and maintenance tax credits. Between them, there should never be an infrastructure maintenance issue for any firm that can fairly be described as a "going concern."

Everyone who owns a car or an appliance (including computers) is exposed to maintenance costs. It's a central tenet of the TCO religion that maintenance expenses should be considered before any purchase.

For companies, the compensation for having to replace machinery that is past its value, or to do maintenance is that they get tax credits and are allowed to depreciate the value of their assets. They can then effectively buy and replace capital assets at no net cost to the company (assuming the firm has the cash flows to cover such replacements, but we are talking about going concerns here, not a fly-by-night operation).

So, unlike my household, which "boasts" three 8-track players (one of which works, sometimes), there is no excuse for a company such as BP, whose latest Alaska oil spill came about:
BP discovered corrosion in the transit lines only after the Department of Transportation ordered an inspection following a 270,000-gallon spill in March at another section of the field....

BP officials said the line where the leak was found was last checked for weakness in 1992, using a technology called a "smart pig" in which a device is sent down the tubes to assess pipeline integrity. [emphases mine]

So we have a utility company that doesn't monitor the quality of its transmission lines and an oil companies that doesn't worry about its pipeline (in far from optimal conditions).

I don't monitor every little piece of my car, either--but I know well that Ray's people are going to charge me $65/hour and am willing to take the tradeoff between that and spending a couple of years in auto shop.

Who will charge BP and Con Edison? If the status quo remains, unfortunately, Attaturk provides the answer here.

When I was a wee trader, in the mid-1980s, our firm did its annual "let's-make-fun-of-ourselves-for-the-holidays" reel. One skit had a deal being done in the Cleveland office:
We'll book the profits in Cleveland, the risk in Dallas, and the expenses in Los Angeles.

Apparently, those bankers are now running BP. And Con Edison. And maybe you're infrastructure-dependent firm as well.

(Cross-posted from Marginal Utility)

Tuesday, August 08, 2006

What does this have to do with the price of oil? Everything.

It took me until reading Jenny Diski's Skating to Antarctica (and, iirc, reviewing Sage Walker's Whiteout around the same time) to realize why control of The Malvinas is of singular import to the British. (The 1982 war is remembered primarily two things: that one of the queen's sons served, and for the crack British programming that identified three incoming Exocet missiles as friendly; note the newspaper headline in this video for a flavor of the times.)

The treaty that prevented drilling in Antarctica expired in 2003. The nearest land mass to the continent—and therefore the place you most want to use for storage and/or processing of Antarctic crude—is the Malvinas.

Journalists who didn't mention that in 1982 might be forgiven, but those reporting on the islands now have little excuse. Which is why this:
It seems an unlikely scrap of land to squabble over. Treeless, remote, and blasted by the full fury of the South Atlantic, the Falkland Islands are home to less than 3,000 people, and thrilling only to those who love nature, big winds, and spectacular isolation.

is the type of disingenuous reporting I would expect from The Washington Times, not the Christian Science Monitor.

This is one of the times when the Economic Way of Thinking would make it clear there is a gap in the argument:
Britain says that as long as the islanders want to remain part of Britain there can be no question of ceding sovereignty, despite the annual £100 million ($191 million) bill of keeping 1,200 soldiers on the islands.

It is only near the end that the reporters examine the ROI, and only the current ROI at that:
The economic potential of the islands has not been lost on Argentina. It has repeatedly protested to Britain about oil prospecting and fishing activities in the waters around the islands. The fisheries, professionally run, have proved so lucrative in fact that several Falklanders have become millionaires in recent years. In response, the Argentines have strongly criticized the Falklands government for extending commercial fishing permits from one to 25 years.

This isn't generating anywhere near the 100MM quid in tax revenues referenced above, though. The economic reason to control the Malvinas is, quite simply, the option on Antarctic drilling.

(Cross-posted from Marginal Utility)

Monday, August 07, 2006

The Cost of Great Schools

One thing about Saint Christy's coke-inspired 1993 tax cuts is that they were always "deferred tax liabilities," as PGL at AngryBear puts it, not true cuts.

It's time to pay the piper--and is anyone surprised that the bill is being given mainly to those who reaped no benefit from the previous cuts?

Then again, this is sillynot quite accurate:
Gov. Jon S. Corzine of New Jersey said... “Our citizens pay through the roof for a tax that is imposed without any regard to income or ability to pay.”

It is true that I could not afford to buy my house right now; the property tax bill passed the mortgage last year, if not the one before. But it is also true that property taxes are assessed based on the value of the land and building one owns--those "property rights" one hears so much about. And one of those rights is the right to sell those assets. If you don't like living in the state that provides the highest per-pupil public education spending of any in the union, you are not forced to live in it. (On the other hand, if you want that benefit without any of the cost, then you're trying to cause a free rider problem.)

It should come as no surprise that several of the states with higher property taxes are those that face rising costs but do not use or have other tax options:
Earlier this year, legislators in South Carolina and Texas — two states in which the rise in property taxes has outstripped that of income by a wide margin — approved measures to relieve the burden with rebates or caps. And in Idaho, the governor has called a special session of the Legislature to address the issue.

It is only three 'grads later that Ford Fessenden gets around to mentioning that tax bills have to be paid with taxes, and what you call them affects changes, not the need to pay them:
New York City property taxes are rising rapidly as well, up 47 percent since 2000, compared with just 5 percent from 1995 to 2000. But city property taxes are lower than those in the suburbs because most of the city’s revenue comes from income and sales taxes.

And it is only at the end that we find the reality described:
Bob Vena, 63, a plumbing contractor in Hazlet, N.J., has been a beneficiary of the real estate boom. He bought his home from his parents 25 years ago, and he also owns a bungalow in Matawan. Today the houses are worth many times what he paid for them. [emphasis mine]

But the taxes on his homes have been rising steeply, he said, and now total $13,500. Business is good enough that he can afford them, Mr. Vena said, though it is becoming a strain. He said there was little he could do to increase the income from his plumbing business to keep pace.

“Eventually,” he said, “I hope to sell everything and just get out of New Jersey.”

The appreciation of those houses has been much more than enough to pay for the increase in Mr. Vena's total property tax bill. Will we see an article from Mr. Fessenden later about all the people who sell their New Jersey houses to live a life of privilege elsewhere?

(Cross-posted at Marginal Utility)