Taxes

Finished the Federal and Virginia tax returns yesterday. The good news: we are getting a few bucks back. The bad news: our 2009 income was way down from 2008 (my bonus is paid in January the following year so 2007 was good, 2008 not so much). The other good news: the energy efficiency tax credits make a big difference (we put in a tankless hot water heater last year) and we get $1300 on the TDI in 2010.

Bubbles

Still think the US has the best health care system in the world?

Butt

It seems that Virginia has joined the 21st century. Tim Kaine signed the restaurant smoking ban yesterday. That brings us into line with every other civilized state in the Union.

Spend

Like many, I'm ambivelant about the stimulus package that was passed. We probably needed to restructure the banks first (mostly by nationalizing or preprivatizing them or whatever you want to call it) before spending a ton of money.

I do like the website that is set up to track the spending program at recovery.gov. At least we will know where the money is going, which is a nice change of pace.

Water

The Economist has an alarming article about the state of the world's oceans in last week's issue. The article discusses the many environmental problems that will likely start to bite in the near future. The most alarming issues are all related to the levels of CO2 in the atmosphere and include rising sea levels due to ocean melt, an increase in the acidity of the sea and the spread of algae blooms (red tides). Although the consequences for the world's ecology are dire, the ramifications for people are severe.

To me, it was eye-opening to read such a bleak assessment in a paper that does not have a lefty agenda. I'd expect this kind of piece in The Nation, but from this source (they endorsed George Bush in 2000) it has more of an impact.

Voted

Since I will be out of town next Tuesday, I went over to the Municipal Building today and voted. It was a pretty easy process and I got the fun sticker to the left well ahead of all of my friends.

Response

I did get a response from all of our Congressional representation on the note opposing the bailout bill passed the other week. Basically, they thought the bill was good enough and needed to be done. I agree with the latter, but strongly disagree with the former. The bill was, and is, a joke. Correction: Congressman Goodlatte voted against the revised bill - I misread the roll call. He send a letter explaining his position which was basically that the bill wasn't missing a few key provisions on creating an insurance pool and wasn't guaranteed to work. There are no guarantees on this sort of thing, but I agree with his basic position.

At least Paulson has seen the sense of going the capitalization route instead of merely buying bad debt. I guess with the powers granted in the legislation, he could pretty much do anything he wants. We will see if the measures work to revive confidence in the banking system and at what ultimate cost. If the TED spread is any indicator, it hasn't done much yet to calm nerves about interbank lending.

Bailout

Below is the text of an email I sent to all of our Congressional representation (Goodlatte, Warner and Webb) this morning on the proposed Wall Street Bailout. It's a bad idea to act in haste without collecting the facts. That is part of the reason we have a bicameral legislature with a seperate executive branch capped by judicial review, but I digress.

I know email is not nearly as good as actually sending them a letter but they are getting serious pressure to "Do Something Now". The basic points are lifted directly from Robert Reich, who I thought had an early and accurate view of the proposal (and it seems that his points were incoporated into the legislation floated by Dodd)

Dear [insert name here],


Don't let fear drive a hasty decision towards a poorly structured bailout
that leaves the taxpayers holding the bag. Although some kind of bailout may be
a political necessity, there are some conditions that should be attached for
Wall Stree to see a dime of taxpayer money:


1. The government (i.e. taxpayers) gets an equity stake in every Wall
Street financial company proportional to the amount of bad debt that company
shoves onto the public (possibly through warrants or some other structure). If
Wall Street shares rise, taxpayers are rewarded for accepting so much risk.


2. Wall Street executives and directors of Wall Street firms relinquish
their current stock options and this year’s other forms of compensation, and
agree to future compensation linked to a rolling five-year average of firm
profitability.


3. All Wall Street executives immediately cease making campaign
contributions to any candidate for public office in this election cycle or next,
all Wall Street PACs be closed, and Wall Street lobbyists curtail their
activities unless specifically asked for information by policymakers.


4. Wall Street firms agree to comply with new regulations over disclosure,
capital requirements, conflicts of interest, and market manipulation. The
regulations will emerge in ninety days from a bi-partisan working group, to be
convened immediately. Inadequate regulation, lack of oversight and opaque
dealings got us into this mess.


5. Wall Street agrees to give bankruptcy judges the authority to modify the
terms of primary mortgages, so homeowners have a fighting chance to keep their
homes. This is an extraordinary measure, but this is an extraordinary request.


I know you stand for fiscal responsibility. If you can't bring yourself to
work against the bailout, at least give the taxpayer fair treatment instead of
handing billions of our children's dollars to Wall Street.

Chances are, they will pass a bad bill to "Do Something Now", but I can at least feel like I tried.

Hen

Before you ask, of course I'm voting for the Obama/Biden ticket. How many chances do you think I'm going to get to have a fellow Blue Hen in the House?

Laker

Not only is she the governor of Alaska, a hockey mom and darn good looking, but apparently she led the Lakers in 3-pointers in 1992.

21

I don't know whether to be relieved or distressed that this poll indicates that 21% of Americans are insane. When you sign mortgage papers, it is pretty clear how much you are going to have to pay back (all of it, plus interest) and what the consequences are if you don't. If you can't afford it, don't sign the papers. Nobody is holding a gun to your head.

Bailing people out of this creates a nasty moral hazard problem and penalizes all of us that play by the rules. If there were frauds perpetrated (and there were), take 1/1000 of the money allocated in the Senate bill and hire enough prosecutors to charge everyone involved under the appropriate statues (mail fraud for one if any documents were sent by USPS).

Nudge

The book of the week was Nudge by Richard Thaler and Cass Sunstein. The book is about helping people make better decisions by shaping the way choices are presented. These nudges can do a lot of good things among them increased rates of organ donation, improved diet and provide for a better retirement.

The principles of "choice architecture" are based on the same foundation as behavioral economics in general. In this view, people act human rather than as the automatons with perfect information and foresight presumed by simple economic theory. These principles are well explained in the part one which describe the way people tend to interpret data and make decisions. If you don't know much about behavioural economics, this is as good a short introduction as you will find.

There are many interesting examples throughout the book where they bring the power of choice architecture to bear. For example, in cases where the true cost is difficult for consumers to understand (e.g. credit cards, mobile phones), Thaler and Sunstein propose a disclosure regulation called RECAP for Record, Evaluate and Compare Alternative Prices. Mobile phone companies would be free to charge as much as they want. However, they would have to provide customers and potential customers with a clear and unambiguous presentation of exactly how much they would pay for each service. In this way, consumers could compare the costs of complex products in a way that would be of the most use for them.

The authors justify nudging people into making the right choices by what they call "libertarian paternalism". This idea holds that as long as people truly have a choice, structuring the choices so they are optimal for the individual and society as a whole is a good thing. The potential for conflicts of interest when structuring choice architecture is examined as a potential liability. Thaler and Sunstein believe that it would be relatively simple to control through the use of the publicity principle, where a policy should not be made unless it can be publicly defended.

As an econogeek, I found Nudge to be an enjoyable read. Even the less geeky would find the intuitive ideas compelling. Many of the policy suggestions are difficult to argue against and we may very well see some more of them happen.

Refined

I got an email from our Representative yesterday touting the fact that the House Republicans have put forth H.R. 3089, The No More Excuses Energy Act. Among other things, the bill would "allow the issuance of tax exempt facility bonds for the financing of domestic use oil refinery facilities." Since this amounts to a subsidy for constructing oil refineries in the US, it is probably at least worth considering if this would have any downward effect on the price of gasoline.

As shown in the chart to the right, there isn't much correlation (coefficient of correlation is 0.05) between the level of refinery utilization and the price of gasoline, at least for the three years of data I could lay my hands on at the EIA.

Another data point is the current profitability of companies that refine oil. Since the price of gasoline is high, they must be making a mint, right? Wrong. Demand for distillates is down as Americans drove 1.4 billion fewer highway miles in April 2008 than in April 2007 earlier, according the Department of Transportation. Since the primary profit driver for a refining company is being able refine as many barrels of oil as possible, the reduced demand is killing them.

Although this analysis is full of holes (what about imported distillates? etc.), it does indicate that the cause of high prices at the pump now is probably not due to a shortage of refining capacity. If I can figure this out with 15 minutes of work, why is the US Congress still trying to subsidize refining? Could it be lobbying influence? Nah.

6 Cents

Almost unbelievably in this time of hysteria surrounding gasoline prices, the Virginia Senate passed a bill to raise gas taxes by $0.06. That is 1.5% of the retail price of gasoline right now.

According to the API (pdf), the surrounding states all have higher tax rates currently and this increase would bring us into line with them and still well below the national average of $0.494. Considering the funding shortfall in Virgina's transportation budget, this seems like a small price to pay. I'd rather pay the money to VDOT than Saudi but I'm sure politics will rule and we will do without new roads instead of forcing politicians to go on the record favoring a tax increase that is probably in our long term interest, no matter how small.

Nice Going Jim

On this day after Memorial Day, I wanted to give a hat-tip to our junior Senator, Jim Webb, for making sure that the GI Bill allows veterans to attend college. The benefits had fallen behind tuition increases and need to be updated to fulfill the promises made to these young men and women.

Breakdown Street

One Thousand Barrels A Second by Peter Tertzakian provides excellent insight into the workings of the oil economy. Although it was written a few years ago (2006), the message is very relevant today as oil prices approach $140 a barrel. The author is the chief economist for ARC Financial, a Canadian company that invests in early stage energy companies.

The book based on Mr. Tertzakian's experience and research in the field. His analysis relies heavily on the concept of the energy "break point", an epoch which is rapidly approaching for petroleum. A break point when a specific source of energy enters a crisis period that ends with the reshuffling of the energy sources that serve as the main driver for an economy. This degree of change is wrenching and results in much dislocation. However, it is his assertion that the world is a better place after the shocks have died down.

Mr. Tertzakian goes on to describe the historical experience of breakpoints with whale oil and coal. The whale oil analogy seems somewhat stretched at times during the book, but the description of whales hunted to near extinction in the 1870s as whaler's chased them to the ends of the earth has interesting parallels with our own search for oil today in the nether regions of the world with chaotic prices and uncertain supplies.

He then covers the introduction of oil as the main energy source for industrial economies in the early 20th century. The coal breakpoint was driven primarily by the technical superiority of oil as a power source. Winston Churchill was an early proponent of shifting the British Navy from coal to oil before World War I because it offered a 33 percent improvement in the operating capacity (speed and range) of warships. It also showed similar technological and economic superiority for industrial applications but took many years to fully supplant coal in most of those because of existing investments (railroads are cited as the primary example of the long timeline for technical substitution of capital assets).

The scramble to secure resources of light, sweet crude oil (the easiest to refine and use) was on in full-effect by the end of World War I. Initially, the British dominated oil in the Middle East with their national oil companies, but America's independent oil companies had joined them by the end of the Second World War. The Seven Sisters (Standard Oil of New Jersey (Exxon), Royal Dutch/Shell, British Anglo-Persian (BP), Standard Oil of New York (Mobil), Texaco, Standard Oil of California (Chevron) and Gulf Oil) continued to dominate production until the rise of Arab nationalism and OPEC started to crack their domination. Mr. Tertzakian's description of this history is interesting and concise.

The OPEC-driven price rises in the 1970s inspired a first oil break point in the 1980s. In this breakpoint, oil was driven out of electricity production in the United States and replaced with coal and nuclear power by both government regulation and the price mechanism. In other countries, the reaction was more far reaching, with Japan and the United Kingdom imposing high tariffs on gasoline. Both of those countries use less oil today than in 1973.

Mr. Tertzakian measures the dependency on oil in an economy with the GDP elasticity of oil demand (how much more oil a country uses as it's economy grows) and notes that all industrialized countries have seen this oil dependency factor fall from the 1970s. However, the newly industrializing countries exhibit dependency factors that are similar to those shown by the United States in the 1960s. This is why the economic growth in China is having such a dramatic effect on the oil markets. Not only is China growing fast, but it's oil consumption is growing even faster than it would in the US if we were to have a similar rate of growth. He does not fall victim to linear thinking that China could actually continue on this pace, but even on realistic estimates of Chinese consumption, the world oil markets are going to be very tight. This tightness will precipitate chaotic pricing and supply issues that will ultimately result in the reshuffling of our energy consumption away from oil.

The coming oil break point (the subtitle of the book) will not be met with a pure technological solution in the near term. The infrastructure and technical requirements for replacing oil with, say, hydrogen are just too formidable. Instead, Mr. Tertzakian believes that the mix of oil usage in our economy will change through a mixture of conservation, life-style changes and technological evolution. He sees more efficient use of oil in transportation as one of the first things to change: smaller cars, more diesels and more hybrids. Far-flung suburbs will have to form more cohesive units to facilitate less travel and more telecommuting. Lastly, introduction of different sources of oil (bitumen, shale, sands, etc.) from a reliance on the more and more elusive light sweet crude will curb the price gyrations, albeit at a higher price level than before. Eventually, we may have technological replacement for oil, but certainly not in the next 10 years.

These shifts will not be pleasant and will not be driven wholly by the pricing mechanism. In his view, governments will have to mandate some changes (as they did in the 1970s and 1980s) to make it work. In the end, he believes that we will have a more healthy mixture of energy consumption, less reliant on the availability of cheap oil for growth and stability. In many ways, this will be a good thing and create new opportunities for riches along the lines of Edison, Rockefeller and Gates.

Overall, this was a good read if you are interested in the dynamics of oil markets and energy sources. The arguments are well-written, credible and backed with data. If I had read this two years ago and followed the advice given (basically, invest in energy efficiency and energy production as the break point approaches), I would be better off. This book has strengthened my resolve not to replace my older car until I see something that will dramatically improve my fuel economy and to make sure that energy efficiency is taken into account when making major decisions (e.g. all of the new appliances in our house will be Energy Star from here on out). It has also made me believe even more firmly that the gasoline excise tax in the United States needs to be raised dramatically with the funds used for both infrastructure projects and incentives to help push the pace of the changes. The break point is coming. How will it affect you?

Size Does Matter

This is another article in the popular press describing the benefits of smaller schools, those with 400 or so students. Again, why is Patrick Henry four times this size?

Still Deciding

Our local Roanoke elections are Tuesday this week and I'm still deciding who to vote for. During the last election cycle in 2006, there was a large, contentious issue (for Roanoke) on the table: the disposition of Victory Stadium. It was razed and turned into athletic fields - a decision I was 100% in favor of and benefit from because that is where we have our girl's lacrosse practices and games.

Since that pivotal issue has been dealt with, we are faced with a more nebulous campaign that is more about the general approach that should be taken to solving the city's problems. In my opinion, the most pressing problem is the state of public education in the city. We have a 57% graduation rate in the city and, by some measures, have high schools that are ranked 298 and 299 out of 303 in the state. This is a complete disgrace and needs to be rectified.

I appreciate that we have a new superintendent who seems very qualified and dedicated, but she is rearranging deck chairs on the Titanic. Many of the problems are fundamental to the structure of the schools. For example, they are too large to be effective. Why is Patrick Henry 1900 students when most research indicates that schools with 800 or fewer students are better (pdf link)? If it is a matter of money, raise taxes and address the infrastructure issues.

In the absence of a sea change in sentiment and direction, our schools will continue to flounder and fail. Sometimes, that requires doing things that are outside of the mainstream. A idea I saw recently was a school district that was offering to pay the college tuition for any graduate of the high schools. Why not? This gives kids an additional incentive to finish up with school because they have something to do after they graduate. Plus, the skills imparted by a high school education are inadequate for the kind of jobs that provide a decent wage. A bold and innovative program like that would certainly attract attention and contribute positively to the reputation of our city.

Second, is establishing Roanoke as a place that people want to be and that takes good jobs. Economic growth has been a problem. By encouraging people who grow up here to stay here and getting "creative class" people to consider moving here, we can improve the vibrancy of the local economy. In some ways, this is a chicken and egg problem where you need to have the high value jobs to encourage people to come here and you need to have the high value people to start the businesses with the high value jobs. It's a tough problem to solve.

For people with school age children, this gets addressed somewhat by the education issue. When we moved here from Seattle in 2000, I remember thinking, "Roanoke is a nice place but the schools are pretty lousy" and it made the decision to come here (vs. say NOVA or Charlottesville) more difficult. Showing a serious commitment to education changes the perception of our city dramatically.

However, there are other ideas that could help cut the Gordian knot of kickstarting economic growth. Things like the new art museum help by getting some notice and appealing to people who value culture. To attract the attention of people that would otherwise never consider living in Roanoke, we need to pick something and be the best at it. We aren't going to be able to have the best climate or professional sports teams, but we can find something that becomes the "hedgehog concept" for the city and make it happen.

To me, something that makes sense would be to take advantage of the natural beauty, relatively mild climate and head start we have already with the existing greenways and endeavor to become the best small city for cycling the East. Why not? This would attract attention of the creatives that can contribute to economic growth, but would give us something we can take pride in and hopefully encourage people in our area to live a little healthier (you can get out and walk on a nice bicycle path as well as ride on it). This would cost money and take a lot focused effort, but is a much better use of limited resources than an amphitheater that would sit idle and empty most of the time and contribute little to our citizen's day to day lives.

A city with great schools and bike paths combined with a growing creative economy, natural beauty, a reasonable cost of living, a decent climate and Southern hospitality? Wow. That sounds like an excellent place to live.

After that rant, I still need to pick who I will vote for on Tuesday. Nobody seems that bold or innovative and it might be a bit much to ask of a city that took years to decide whether or not to demolish a dilapidated relic of a stadium, but hope springs eternal. In that light, I'll read up on the candidates carefully and try to pick the best people who might have a fresh vision of what Roanoke could be and have the courage to ask question "Why Not?"

Drop that butt, brother

Over the past six months, most of the places I've been in the USA have bar and restaurant smoking bans, Philadelphia included. The only one that didn't was Texas and do you really want to be in their company on anything?

Troglodytes

UPDATE: Even Indiana has a bar and restuarant smoking ban. It was quite a nice experience to have a beer without smoke wafting about.

I can't believe the Virginia legislature can't even get a bill to ban smoking in restaurants out of committee. I remember a few years back when they first instituted this ban in NYC thinking that it was a bit over the top, but the results were great. Now that this kind of thing has been in place for 5 years or more, it is time for Virginia to step up and restrict it by law. How can our legislature be so out of step with the times?