This is my letter to Representative Jason Chaffetz:
Mr. Congressman,
I see that Republicans like yourself are unwilling to vote for bills on health care reform proposed by the Democrats. You might recall that when former President Bush called on all of you to vote for the war in Iraq, many if not all Democrats heeded the call. I opposed the war, but conceded the majority voted.
When it comes to health care, you're not there. Republicans seem to think that having 40 million Americans without a viable health care option is the American Way. It's capitalism and if you don't have health care insurance, find a way to make more money. That appears to be the attitude of conservatism today.
It is worth noting that doctors here make twice as much money on average as the other industrialized countries. We absorb well over $300 billion in patent royalty costs as a part of health care every year. While the privileged few have all you can eat health care, the rest of us are one accident, or one illness away from bankruptcy.
I am willing to give Obama's plan a chance. Your job is the vote conscience of the people you represent, not just your own conscience. I am one of those people.
Please vote for Obama's plan.
Thank you.
Scott Dunn
One of your constituents
Saturday, August 08, 2009
Friday, July 03, 2009
The Internet Tax
I see that the LA Times is really, really upset about the lack of enthusiasm exhibited by Internet retailers when it comes to collecting sales or use tax. Their opinion piece for July 3rd makes the claim that the State of California is owed about a billion in spare change. It's an interesting claim in a recession, that people should pay an extra 9.5% in California for everything they buy from out of state retailers. What for? It's called the use tax. Everything you use is subject to the use tax.
The use tax and the sales tax are nearly synonymous. The sales tax is something you're already very familiar with - it's what you pay when you buy something at at brick and mortar store, like Target or Sears. The use tax is the same thing, except that you are required to pay it directly to the state when it's required to be paid. Instead of the retailer computing, collecting and paying it to the state, you do it. You usually pay the use tax when you buy something from out of state. At least, that's what the Times is saying people are required to do, but they don't.
The article points out that since about 1992, The Quill ruling from the U.S. Supreme Court has been a roadblock to the collection of sales or use taxes on Internet and out of state sales. Quill, Inc. is a corporation based in Delaware that was conducting interstate commerce with the people in the state of North Dakota. The state of North Dakota determined that Quill should have collected use taxes on the merchandise sold in that state. Quill refused, so the state of North Dakota sued.
In that case, the court rejected the notion that states could collect taxes on interstate commerce for a variety of reasons. Not just sales or use tax, they excluded *any* tax in their language. The decision runs through a number of issues relating to the due process and commerce clause of the Constitution. The ruling can be summarized as simply saying that Congress has exclusive power to regulate commerce among the states, and that no matter how the court thinks about it, they must defer to Congress.
I've seen discussion of state taxation of Internet sales since I've started using the Internet in 1994. Every few years or so since then, there has been grand talk of a unified tax code that all states can use to tax Internet sales. But it never happens. They need unification so that there can be no discrimination between in-state sales and interstate sales, as required by numerous court rulings and the Constitution. This is important because the framers of the Constitution recognized that if the states started charging tax on commerce between them, trade wars would emerge.
Even in the LA Times opinion piece, they discuss the California Board of Equalization. Why does the BOE even exist? The agency exists because the various counties within the state collect tax at different rates. They "equalize" the tax by collecting all of the sales tax due to the state from all of the counties and redistribute that tax among all the counties. Even the state of California has some concern for economic stability by regulating commerce among their counties. Apparently, some editors fail to see the need for equalization on a national level.
The Supreme Court also recognized that unless there was a physical nexus, and a minimal contact between the taxing state and the retail business, that the state couldn't impose a tax on commerce with another state. Just because the product is available through a mail order catalog, or a common carrier (the phone company or US Mail, and nowadays, the Internet), doesn't make it subject to a state's power of taxation. The reason for this is that taxation of this kind could become an undue burden on interstate commerce. This is also important in a recession, as we were in 1992. Take note that the lack of taxes on interstate commerce is what makes our economic system so strong as a union of states.
The Times article has noted a trend among the states, that several states are advancing their efforts to find some way to tax Internet sales. As if taxing more would fix their problem. The Times noted that Amazon has terminated affiliations with New York to remove their physical presence from that state so as to avoid in personam jurisdiction for sales tax liability. Overstock.com has terminated affiliations with 4 states, including California, to avoid being required to collect the sales/use tax, as well. They are terminating these affiliations even before a law is passed. This push for Internet tax legislation is disruptive to the economy and will only alienate the various state governments from their constituencies. And since only a few states at this time are bold enough to do it, a trade war among the states could ensue.
Some people have noticed that the State of California, like many other states, is in a constant battle regarding their budget, since there never seems to be enough money. Their budget dramas have been relatively constant since the late 70's, save for the rise in property tax revenue during the real estate bubble and the collapse of it. Notice that the bubble states were happy, sated and silent during the bubble. Now they want more money. I dare say that more money is not the solution to their problem. And imposing this tax, the use tax, in the manner that they seek to do, will only damage their economy further. They are again, attempting to circumvent the commerce clause of the US Constitution.
Even if all the states were to get their act together now, and come up with a uniform plan of taxation of interstate sales, I doubt very much that Congress would cede that jurisdiction to them anytime soon, if at all. This would create another level of bureaucracy, killing hundreds of trees in the process, and contribute to global warming.
This union of states has been together now for well over 200 years, and in all that time, the states could never cooperate enough, or have incentive enough, to put together a consistent plan of interstate taxation. If they haven't done it by now, I can't see it happening in the near future. I also find the timing of the LA Times article rather ironic. They are calling for more taxation a day before Independence Day, the American Revolution, with taxation without representation being one of the motives for declaring independence. As if we don't already have enough taxation.
Get over it, California, and any other state daring to traverse this path alone. Imposing taxes on Internet commerce may not be the answer, and could even become a problem. It's not going to happen in time to fix your budget, maybe not even in our lifetimes. So relax and find some other tax to collect.
The use tax and the sales tax are nearly synonymous. The sales tax is something you're already very familiar with - it's what you pay when you buy something at at brick and mortar store, like Target or Sears. The use tax is the same thing, except that you are required to pay it directly to the state when it's required to be paid. Instead of the retailer computing, collecting and paying it to the state, you do it. You usually pay the use tax when you buy something from out of state. At least, that's what the Times is saying people are required to do, but they don't.
The article points out that since about 1992, The Quill ruling from the U.S. Supreme Court has been a roadblock to the collection of sales or use taxes on Internet and out of state sales. Quill, Inc. is a corporation based in Delaware that was conducting interstate commerce with the people in the state of North Dakota. The state of North Dakota determined that Quill should have collected use taxes on the merchandise sold in that state. Quill refused, so the state of North Dakota sued.
In that case, the court rejected the notion that states could collect taxes on interstate commerce for a variety of reasons. Not just sales or use tax, they excluded *any* tax in their language. The decision runs through a number of issues relating to the due process and commerce clause of the Constitution. The ruling can be summarized as simply saying that Congress has exclusive power to regulate commerce among the states, and that no matter how the court thinks about it, they must defer to Congress.
I've seen discussion of state taxation of Internet sales since I've started using the Internet in 1994. Every few years or so since then, there has been grand talk of a unified tax code that all states can use to tax Internet sales. But it never happens. They need unification so that there can be no discrimination between in-state sales and interstate sales, as required by numerous court rulings and the Constitution. This is important because the framers of the Constitution recognized that if the states started charging tax on commerce between them, trade wars would emerge.
Even in the LA Times opinion piece, they discuss the California Board of Equalization. Why does the BOE even exist? The agency exists because the various counties within the state collect tax at different rates. They "equalize" the tax by collecting all of the sales tax due to the state from all of the counties and redistribute that tax among all the counties. Even the state of California has some concern for economic stability by regulating commerce among their counties. Apparently, some editors fail to see the need for equalization on a national level.
The Supreme Court also recognized that unless there was a physical nexus, and a minimal contact between the taxing state and the retail business, that the state couldn't impose a tax on commerce with another state. Just because the product is available through a mail order catalog, or a common carrier (the phone company or US Mail, and nowadays, the Internet), doesn't make it subject to a state's power of taxation. The reason for this is that taxation of this kind could become an undue burden on interstate commerce. This is also important in a recession, as we were in 1992. Take note that the lack of taxes on interstate commerce is what makes our economic system so strong as a union of states.
The Times article has noted a trend among the states, that several states are advancing their efforts to find some way to tax Internet sales. As if taxing more would fix their problem. The Times noted that Amazon has terminated affiliations with New York to remove their physical presence from that state so as to avoid in personam jurisdiction for sales tax liability. Overstock.com has terminated affiliations with 4 states, including California, to avoid being required to collect the sales/use tax, as well. They are terminating these affiliations even before a law is passed. This push for Internet tax legislation is disruptive to the economy and will only alienate the various state governments from their constituencies. And since only a few states at this time are bold enough to do it, a trade war among the states could ensue.
Some people have noticed that the State of California, like many other states, is in a constant battle regarding their budget, since there never seems to be enough money. Their budget dramas have been relatively constant since the late 70's, save for the rise in property tax revenue during the real estate bubble and the collapse of it. Notice that the bubble states were happy, sated and silent during the bubble. Now they want more money. I dare say that more money is not the solution to their problem. And imposing this tax, the use tax, in the manner that they seek to do, will only damage their economy further. They are again, attempting to circumvent the commerce clause of the US Constitution.
Even if all the states were to get their act together now, and come up with a uniform plan of taxation of interstate sales, I doubt very much that Congress would cede that jurisdiction to them anytime soon, if at all. This would create another level of bureaucracy, killing hundreds of trees in the process, and contribute to global warming.
This union of states has been together now for well over 200 years, and in all that time, the states could never cooperate enough, or have incentive enough, to put together a consistent plan of interstate taxation. If they haven't done it by now, I can't see it happening in the near future. I also find the timing of the LA Times article rather ironic. They are calling for more taxation a day before Independence Day, the American Revolution, with taxation without representation being one of the motives for declaring independence. As if we don't already have enough taxation.
Get over it, California, and any other state daring to traverse this path alone. Imposing taxes on Internet commerce may not be the answer, and could even become a problem. It's not going to happen in time to fix your budget, maybe not even in our lifetimes. So relax and find some other tax to collect.
Wednesday, June 03, 2009
About those patents...
I've been following the case of In Re: Bilski since it hit the headlines last October. What came out of that court last year was no less than astounding: business ideas cannot be patented unless they transform an article or are attached to a particular machine. Finally, we see a crack in the wall of entrenched interests against competition. Now that Bilski, et. al., have managed to get a willing ear from the Supreme Court next fall, the legal news and blogosphere is agog with all kinds of predictions.
What Bilski and his friends did was to patent nothing more than an idea. Not really an invention, just an idea about how to hedge risks in commodities trading related to weather. As Bilski describes it, they conceived of a series of mental steps used to mitigate risk in commodities trading in response to and in anticipation of changes in weather patterns. Such a series of steps could be implemented in software as a computer program. When his appeal was denied in the federal circuit court of appeals, patentees all over the country realized that tens of thousands of their patents and patent applications were at risk. This decision is said to threaten not just business method patents, but also software patents. Undeterred, Bilski has been granted certiorari in the US Supreme Court. But even in the Supreme Court, there are some rumblings that Bilski will be even less welcome there.
On the side of the patent holders, we see so much concern for all that investment and how a decision against Bilski could "stifle competition" and destroy the value of existing patent portfolios. But not a single tear is shed for the humble consumer, faced with an ever limited choice of products, manufacturers and vendors to choose from. Add to that the reduction of investment in research and development in the software industry, as found by James Bessen, et. al. Patents are monopoly power and can be used to wipe out any encroaching competition. As we have seen with Amazon's one-click patent, the fighting over intellectual property land grabs is reaching the heights of pettiness. All this for 20 years of royalties.
On the side of the rest of us, people who don't own any patents and have little power to sway the proceedings, other than to voice our concerns, we see people extolling the virtues of a freer market. Try the Free Software Foundation. Or Against Monopoly. To them, a market unconstrained by patent barriers, is a market free to innovate.
The book "Against Intellectual Monopoly", makes some very pointed observations about the relationship of patents to maturing industries. When an industry is young, innovation proceeds at an amazing pace, as innovators rush to get their products out in front as first movers. Young industries are also under the radar when it comes to regulation. Governments tend to move slowly to develop a regulatory regime in response to new technology.
But when an industry matures, the incumbents start to run out of ideas and think that somehow, they need more encouragement. I know, lets dangle patents in front of their noses! That should keep them moving. But the sad reality is that patents only hinder and stifle innovation, protecting the incumbents.
As someone who works with software, I have noticed another trend. You are all aware of the concept of the computer virus, or, in more general terms, "malware." Malware is what you get when you click on links from people you don't know. They could be in email or on a web page, it doesn't matter. It's out there. Subprime mortgages, health insurance, MLM, male enhancement advertisements, and the whimsical, the Nigerian treasure chest from a recently deceased leader. Malware is not just about advertising, it's also about stealing your personal information, taking down websites and storing child porn on your personal computer without your knowledge.
Now look at the malware industry. No court will protect them. They seek no copyright or patent protection. They are quite simply an unfettered market that has adapted to the conditions surrounding it. Since they are not busy applying for patents or copyrights, nor are they suing anyone to grind them into dust for want of a licensing fee or injunction, they are very busy innovating. Please note, I'm not saying they are right in what they are doing, I'm just making an observation.
Now look at the antivirus industry. They are collecting patents by the hundreds if not thousands. They are suing each other. They copyright their works. They seek government protection in what is supposed to be a free market. How are they succeeding? I wonder, if the product they offer is so superior, why would they need patent protection from competition?
Malware is a very profitable industry. Estimates of how many computers are infected, or get infected vary, and no precise number can be found. Reliable estimates hover around 15% of computers worldwide. But it is fair to say that the number is large enough to support an opposing antivirus software industry who's primary purpose is to protect the rest of us for a fee. Many pundits say that we are losing the war against malware. Why? It's hard for me to say without pointing the finger at the lust for monopoly power in patents and copyrights.
While these antivirus companies are "innovating", their lawyers are trying to make sure their products don't infringe on someone else's patent. Or they are trying to make sure their patent claims cover every other product that could compete with theirs. There are so many software and business method patents that we have what is known as a patent thicket. It is now widely acknowledged to be impossible to write software without infringing any patents.
There is also the issue of customer service. A company with a stack of patents doesn't have to worry about competition. They don't have to smile when they meet you. They don't have to be friendly when they greet you on the phone, either. A patent holder could be the sole supplier of the product you seek. Lucky you. Customer service? The estimated wait time for this call is 20 minutes, please hold and listen to some advertising.
Here are some things that have patents. You use them every day. All of them are software patents and all of them use math. You might have heard of the book, "Math You Can't Use." This case is just about that. The patenting of logical expressions.
MP3 music file format
MP4 a video file format
DVD encoding
encryption
one-click for amazon
certain features of the Microsoft Office Open XML file format (OOXML)
The FAT32 file system from Microsoft (using long file names to substitute 8.3 filenames)
This court case, In Re: Bilski, has the potential to clear the field and make way for real innovation. Hopefully, the court will see that the social surplus provided by software and business method patents is completely overwhelmed by the costs of these patents. What costs? Narrowing of and/or lack of consumer choice, reduced R&D investment, vendor arrogance and grandiosity, litigation, litigation contingency planning, trees, trees and more trees.
It is my hope that, over the next few years, the power of business method and software patents will be decimated so that all of us can innovate, copy ideas, improve on them and pass them on to the next generation or even the next person we share it with, without a single encumbrance.
What Bilski and his friends did was to patent nothing more than an idea. Not really an invention, just an idea about how to hedge risks in commodities trading related to weather. As Bilski describes it, they conceived of a series of mental steps used to mitigate risk in commodities trading in response to and in anticipation of changes in weather patterns. Such a series of steps could be implemented in software as a computer program. When his appeal was denied in the federal circuit court of appeals, patentees all over the country realized that tens of thousands of their patents and patent applications were at risk. This decision is said to threaten not just business method patents, but also software patents. Undeterred, Bilski has been granted certiorari in the US Supreme Court. But even in the Supreme Court, there are some rumblings that Bilski will be even less welcome there.
On the side of the patent holders, we see so much concern for all that investment and how a decision against Bilski could "stifle competition" and destroy the value of existing patent portfolios. But not a single tear is shed for the humble consumer, faced with an ever limited choice of products, manufacturers and vendors to choose from. Add to that the reduction of investment in research and development in the software industry, as found by James Bessen, et. al. Patents are monopoly power and can be used to wipe out any encroaching competition. As we have seen with Amazon's one-click patent, the fighting over intellectual property land grabs is reaching the heights of pettiness. All this for 20 years of royalties.
On the side of the rest of us, people who don't own any patents and have little power to sway the proceedings, other than to voice our concerns, we see people extolling the virtues of a freer market. Try the Free Software Foundation. Or Against Monopoly. To them, a market unconstrained by patent barriers, is a market free to innovate.
The book "Against Intellectual Monopoly", makes some very pointed observations about the relationship of patents to maturing industries. When an industry is young, innovation proceeds at an amazing pace, as innovators rush to get their products out in front as first movers. Young industries are also under the radar when it comes to regulation. Governments tend to move slowly to develop a regulatory regime in response to new technology.
But when an industry matures, the incumbents start to run out of ideas and think that somehow, they need more encouragement. I know, lets dangle patents in front of their noses! That should keep them moving. But the sad reality is that patents only hinder and stifle innovation, protecting the incumbents.
As someone who works with software, I have noticed another trend. You are all aware of the concept of the computer virus, or, in more general terms, "malware." Malware is what you get when you click on links from people you don't know. They could be in email or on a web page, it doesn't matter. It's out there. Subprime mortgages, health insurance, MLM, male enhancement advertisements, and the whimsical, the Nigerian treasure chest from a recently deceased leader. Malware is not just about advertising, it's also about stealing your personal information, taking down websites and storing child porn on your personal computer without your knowledge.
Now look at the malware industry. No court will protect them. They seek no copyright or patent protection. They are quite simply an unfettered market that has adapted to the conditions surrounding it. Since they are not busy applying for patents or copyrights, nor are they suing anyone to grind them into dust for want of a licensing fee or injunction, they are very busy innovating. Please note, I'm not saying they are right in what they are doing, I'm just making an observation.
Now look at the antivirus industry. They are collecting patents by the hundreds if not thousands. They are suing each other. They copyright their works. They seek government protection in what is supposed to be a free market. How are they succeeding? I wonder, if the product they offer is so superior, why would they need patent protection from competition?
Malware is a very profitable industry. Estimates of how many computers are infected, or get infected vary, and no precise number can be found. Reliable estimates hover around 15% of computers worldwide. But it is fair to say that the number is large enough to support an opposing antivirus software industry who's primary purpose is to protect the rest of us for a fee. Many pundits say that we are losing the war against malware. Why? It's hard for me to say without pointing the finger at the lust for monopoly power in patents and copyrights.
While these antivirus companies are "innovating", their lawyers are trying to make sure their products don't infringe on someone else's patent. Or they are trying to make sure their patent claims cover every other product that could compete with theirs. There are so many software and business method patents that we have what is known as a patent thicket. It is now widely acknowledged to be impossible to write software without infringing any patents.
There is also the issue of customer service. A company with a stack of patents doesn't have to worry about competition. They don't have to smile when they meet you. They don't have to be friendly when they greet you on the phone, either. A patent holder could be the sole supplier of the product you seek. Lucky you. Customer service? The estimated wait time for this call is 20 minutes, please hold and listen to some advertising.
Here are some things that have patents. You use them every day. All of them are software patents and all of them use math. You might have heard of the book, "Math You Can't Use." This case is just about that. The patenting of logical expressions.
MP3 music file format
MP4 a video file format
DVD encoding
encryption
one-click for amazon
certain features of the Microsoft Office Open XML file format (OOXML)
The FAT32 file system from Microsoft (using long file names to substitute 8.3 filenames)
This court case, In Re: Bilski, has the potential to clear the field and make way for real innovation. Hopefully, the court will see that the social surplus provided by software and business method patents is completely overwhelmed by the costs of these patents. What costs? Narrowing of and/or lack of consumer choice, reduced R&D investment, vendor arrogance and grandiosity, litigation, litigation contingency planning, trees, trees and more trees.
It is my hope that, over the next few years, the power of business method and software patents will be decimated so that all of us can innovate, copy ideas, improve on them and pass them on to the next generation or even the next person we share it with, without a single encumbrance.
Wednesday, February 04, 2009
Credit Bias
I'm in the market for a house. I'm resolved to not incur unsecured debt in any form, intent on saving money for the rainy day or the house that I want - or both. Is this the right way to go? Common sense would say "yes". But conventional wisdom says "no".
There is some anecdotal evidence to support this contention. I've heard a few stories that go something like this: I know this guy see, he pays cash for everything and has no debt. He works as an employee and he's saved up enough for a down payment on a house. But he doesn't have a credit history, so he couldn't qualify for a loan - any loan. He had otherwise sterling credentials, but since he never borrowed money, he was an unknown credit risk and didn't present the possibility for a profit for a lending institution. Can you say "FICO"?
So I've been talking to loan agents to see what I could qualify for in terms of a loan for a house. And what I've learned is that, essentially, unless we're willing to pay the banker interest, we cannot build a good credit score.
Never mind that I pay my bills on time. Never mind that I keep a prudent reserve. No, good behavior doesn't count unless it pays interest.
What were those economists and policy wonks saying again? "We need to get the banks to loan money again." Do you think if we had money in savings, that the banks would have money to loan?
There are huge systemic problems in our economy, and this is one of them: the need to use debt financing to generate profit. I used to work retail. How that happened when my trade is IT? I decided to do it just as an experiment to see if I could do sales. It was in an upscale home improvement store that was a subsidiary of a much larger corporation.
When I started there, I had to go through training. The training had a strong emphasis on the requirement to ask every single customer the following question: Would you like to put that on your (name of company here) credit card? And the follow up, "Oh, you don't have one? Would you like to open one? It will only take a few minutes."
The reason for this is that the company I worked for relied upon debt financing to make up for the low margins on the products they sold. The numbers were rather startling. For every $100 sold, they would earn $1-2 if paid in cash, $2-3 if paid by a third party credit card, and up to $8 by a company issued credit card.
The widespread use of credit cards has transformed capitalism in the US. Remember the traditional method of making a profit? (Maybe you don't because you can only read about it in history books.) You know, buy supply, or manufacture and deliver products efficiently at a cost below the sales price of your product? Instead, multinational corporations buy a huge amount of inventory to sell at a very low margin on their own lines of credit, usually in the form of commercial paper. Then they sell that inventory to their customers with a higher rate of finance. It seems that the art of selling a product for a profit is almost completely lost on the ability to use financing as a means of increasing or sustaining margins.
Or maybe that's a sign of globalization. If we can't compete domestically with imported goods, then it's a race to the bottom on price with debt maintenance payments creating the margins necessary to sustain the business.
Setting that aside, here's an interesting question: why isn't financial behavior, like paying the bills on time reported and/or given the same weight as making payments on a line of credit? Probably because the money isn't there, there's no incentive if you're not paying debt maintenance charges - you know, like interest. Which means that unless you get into debt, you can't get the credit rating needed to qualify for a home loan at a reasonable rate based on your perceived risk to the bank.
We've all heard about the meltdown and the Federal Government's effort to help out. Most of the help has strings attached. Some bank officials are worried that the compensation caps required by acceptance of this help would prevent banks from attracting real talent. With thinking like that, I'd hate to think of what real talent could do to the country.
I guess they're not that worried now. It seems that the major credit rating agencies want to be lenient on AIG. They're worried that if the rating cuts for AIG are too big, then AIG will have to put up a lot more collateral and pay a lot more in financing costs. It's nice to see how members of the financial industry can be so helpful to each other. What about the rest of us? When was the last time your health insurer gave you a break? Or your bank?
There is also the question of lobbying. The bank and finance committees in both houses took in well over $26 million in campaign finance contributions last year. Nice. So, really, what the banks want is firm control over the economy:
Basically, what we're looking at is the top of the kleptocracy created by the banks. They get to sit on their bum and collect principal with interest while the rest of us work for our money.
It's clear to me at this point that public policy must change with regard to standards used for assessing risk for secured loans, such as for a home. A person or company that seeks to borrow money for a secured loan is a far lower risk than for an unsecured loan. Yet, the measurements used to assess the risks rely almost completely on the record of payments for unsecured loans, usually credit cards. In other words, you have to start with unsecured credit first before you can qualify for the really big stuff like cars and houses, which are used as collateral in a loan.
This is so totally wrong. The weight of emphasis should be on payment of day to day bills, not payments on credit cards. We need to reverse the emphasis and place it on paying the bills on time and saving money as the basis for assessing the risk for secured debts like houses or cars.
This just in: Now Experian doesn't want you to get access to your credit score. It's bad enough that we have to pay for our own information (if we want it more than once a year), collected by agencies that will sell the same information to other companies. But it could get to the point where ordinary people cannot get access to their credit files. Gone is the time where you could dispute information on Experian's files because you can no longer see it. Seems like I should be paid everytime my information is disclosed to someone.
I want to leave you with one last thing. This is courtesy of NPR. Go to this page and you will see a chart. Here, we see the comparison of Debt vs GDP. There are only two years in the last century to date that debt was 100% of GDP: 2007 and 1929. Can you sense the sea change?
There is some anecdotal evidence to support this contention. I've heard a few stories that go something like this: I know this guy see, he pays cash for everything and has no debt. He works as an employee and he's saved up enough for a down payment on a house. But he doesn't have a credit history, so he couldn't qualify for a loan - any loan. He had otherwise sterling credentials, but since he never borrowed money, he was an unknown credit risk and didn't present the possibility for a profit for a lending institution. Can you say "FICO"?
So I've been talking to loan agents to see what I could qualify for in terms of a loan for a house. And what I've learned is that, essentially, unless we're willing to pay the banker interest, we cannot build a good credit score.
Never mind that I pay my bills on time. Never mind that I keep a prudent reserve. No, good behavior doesn't count unless it pays interest.
What were those economists and policy wonks saying again? "We need to get the banks to loan money again." Do you think if we had money in savings, that the banks would have money to loan?
There are huge systemic problems in our economy, and this is one of them: the need to use debt financing to generate profit. I used to work retail. How that happened when my trade is IT? I decided to do it just as an experiment to see if I could do sales. It was in an upscale home improvement store that was a subsidiary of a much larger corporation.
When I started there, I had to go through training. The training had a strong emphasis on the requirement to ask every single customer the following question: Would you like to put that on your
The reason for this is that the company I worked for relied upon debt financing to make up for the low margins on the products they sold. The numbers were rather startling. For every $100 sold, they would earn $1-2 if paid in cash, $2-3 if paid by a third party credit card, and up to $8 by a company issued credit card.
The widespread use of credit cards has transformed capitalism in the US. Remember the traditional method of making a profit? (Maybe you don't because you can only read about it in history books.) You know, buy supply, or manufacture and deliver products efficiently at a cost below the sales price of your product? Instead, multinational corporations buy a huge amount of inventory to sell at a very low margin on their own lines of credit, usually in the form of commercial paper. Then they sell that inventory to their customers with a higher rate of finance. It seems that the art of selling a product for a profit is almost completely lost on the ability to use financing as a means of increasing or sustaining margins.
Or maybe that's a sign of globalization. If we can't compete domestically with imported goods, then it's a race to the bottom on price with debt maintenance payments creating the margins necessary to sustain the business.
Setting that aside, here's an interesting question: why isn't financial behavior, like paying the bills on time reported and/or given the same weight as making payments on a line of credit? Probably because the money isn't there, there's no incentive if you're not paying debt maintenance charges - you know, like interest. Which means that unless you get into debt, you can't get the credit rating needed to qualify for a home loan at a reasonable rate based on your perceived risk to the bank.
We've all heard about the meltdown and the Federal Government's effort to help out. Most of the help has strings attached. Some bank officials are worried that the compensation caps required by acceptance of this help would prevent banks from attracting real talent. With thinking like that, I'd hate to think of what real talent could do to the country.
I guess they're not that worried now. It seems that the major credit rating agencies want to be lenient on AIG. They're worried that if the rating cuts for AIG are too big, then AIG will have to put up a lot more collateral and pay a lot more in financing costs. It's nice to see how members of the financial industry can be so helpful to each other. What about the rest of us? When was the last time your health insurer gave you a break? Or your bank?
There is also the question of lobbying. The bank and finance committees in both houses took in well over $26 million in campaign finance contributions last year. Nice. So, really, what the banks want is firm control over the economy:
You don't get a credit history unless you borrow money and pay interest. If banks make a mistake, taxpayers get to pay for or assume the risk for it, while executives get bonuses. Banks can use interest rates to manage the economy in their favor.
Basically, what we're looking at is the top of the kleptocracy created by the banks. They get to sit on their bum and collect principal with interest while the rest of us work for our money.
It's clear to me at this point that public policy must change with regard to standards used for assessing risk for secured loans, such as for a home. A person or company that seeks to borrow money for a secured loan is a far lower risk than for an unsecured loan. Yet, the measurements used to assess the risks rely almost completely on the record of payments for unsecured loans, usually credit cards. In other words, you have to start with unsecured credit first before you can qualify for the really big stuff like cars and houses, which are used as collateral in a loan.
This is so totally wrong. The weight of emphasis should be on payment of day to day bills, not payments on credit cards. We need to reverse the emphasis and place it on paying the bills on time and saving money as the basis for assessing the risk for secured debts like houses or cars.
This just in: Now Experian doesn't want you to get access to your credit score. It's bad enough that we have to pay for our own information (if we want it more than once a year), collected by agencies that will sell the same information to other companies. But it could get to the point where ordinary people cannot get access to their credit files. Gone is the time where you could dispute information on Experian's files because you can no longer see it. Seems like I should be paid everytime my information is disclosed to someone.
I want to leave you with one last thing. This is courtesy of NPR. Go to this page and you will see a chart. Here, we see the comparison of Debt vs GDP. There are only two years in the last century to date that debt was 100% of GDP: 2007 and 1929. Can you sense the sea change?
Monday, February 02, 2009
What does "stimulus" mean, anway?
So it has come down to this, a stimulus plan. Everyone is talking about it.
All this after an economic calamity that resulted in shriveled retirement accounts, deflated property values, and diminished expectations for employment. Estimates of losses in real estate and stocks amount to the trillions.
And there is plenty of news about how the financial industry, in recognition of their superior advice, talent and transparent management, gave themselves $18.4 billion in bonuses last year. There are some who are saying that the bonuses and compensation paid could not be justified by technology or experience. Who could've known? They're lucky they aren't in China - for they surely would be doing hard time in prison for their mistakes, instead of getting a handout.
More recently, we saw the story of Bernie Madoff, who ran the biggest Ponzi scheme in history. Harry Markopolos had been telling the Securities and Exchange Commission about Madoff for many years. But the SEC was unwilling to look at the scam and chose to remain willfully ignorant for as long as possible until it could not be ignored any more. That was when Madoff finally admitted to it in public. This is the free market at work. And for all you Southern California people, remember that former Senator Chris Cox, that great free market champion, failed to catch this on his watch. The free market will regulate itself, right?
I think it's also worth noting that during these hard times, CEO's aren't going to bed hungry. The vast majority in the financial industry aren't going to be out on the street anytime soon. They will try to find smaller firms to work for so that their bonuses don't make the news. And by the way, if you're looking for a good advisor that doesn't do Ponzi, check this out.
President Obama has made it clear that the middle class has been subject to plenty of abuse by the upper class. Those losses discussed above, were the most painful for the middle class. The middle class can't afford to lose half of their retirement account. For the upper class, they'll make it back in a few years. Even if they don't, they can probably take some time off to make a better plan while living in a house they still own.
The point of this post, is that for at least the last 8 years, the middle class has received a beating like none other since the great depression. And what the uppity class seems to have forgotten is that they really need the middle class. You see, when the upper class thinks of Mexico, they don't think of going there for vacation. No, they think of that great, captive employment market and yearn to bring it here. Just ask Gore Vidal.
The stimulus plans being discussed mean one thing, plain and simple: Ooops. We just beat the living daylights out of the middle class and we're so sorry. If we don't give them something to work for, they will stop working for what we are willing to pay them. We need to make sure they keep working until we can find a way to ship their jobs overseas.
Just how are we going to fix this? We can start by making the bailout plans god-awfully painful for executives who come to the government hat in hand after making really dumb mistakes. We can put an end to the conservative nanny state. This is the land where conservatives get their government intervention into the economy without the headlines the way progressives get it.
I used to consider myself a conservative, but I noticed over the years that I felt more and more uncomfortable with that association. At one point I was a libertarian, and I still hold some libertarian values (but I don't eat any books). The nanny state conservative is what the extreme "Right" has become: theologically dominant, morally "superior", belligerent, paranoid, and above all, self-righteous (just one ego fills a typical aircraft hangar when uncompressed). To the nanny-state conservative, economic policy is great if it drives income up and grants advantages to people who already have money and power. But somehow, it's really bad for the economy if the middle class gets to make more money.
Notice that the conservative Republicans are again pushing tax cuts. They're really, really worried that we're spending too much money on this stimulus plan. Gosh, we just spent $350 billion on banks who aren't even telling us how they spent their TARP money (though there is substantial evidence that domestic banks are buying other banks around the world rather than making loans at home). And we're getting ready to unload another $350 billion on them. Only this time around, we're going to make them accountable. Yeah, right. I didn't see anyone floating a tax cut to fix that problem. Notice that there was "bipartisan" support for that measure, too. And I didn't see any Democrats holding their breath in a pouting contest before that measure got passed.
I don't like the idea of spending, and I would prefer that we did nothing when it came to bailing out the banks. But if we have to choose between spending and tax cuts to save the economy, I'll take spending. Why? There is empirical evidence weighing against tax cuts. One really obvious clue is that tax cuts aren't going to do you any good if you're not making money. With many people out of work, and many more fearing for their jobs, people just aren't going to be making any discretionary spending decisions in favor of spending money. And let's not forget that we have eight long years of nothing but tax cuts for the benefit of the top 5% who saw their income grow at a much faster rate than the rest of us. Did they spend their money? If they did, would we be in a recession now?
For any of your doubters out there, here's an interesting quote to consider:
"As I've often said... this [increasing income inequality] is not the type of thing which a democratic society—a capitalist democratic society—can really accept without addressing." - Alan Greenspan, June 2005
...that subtle, yet discernable admission is from a fierce capitalist, a really big fan of Ayn Rand (see also, the libertarian link above), and an acknowledged expert on economic policy who was in charge of the Federal Reserve Bank for about 20 years.
So what is the return on investment when comparing a tax cut vs. spending? The simplest explanation put forth by Robert Reich, the former Labor Secretary in the Clinton Administration, is this: giving tax cuts to people who already have money doesn't make them spend more money. They've already spent the money they want to spend and so they only save more of it with tax cuts. On the other hand, giving money to people who have none guarantees they will spend it since they live paycheck to paycheck if they have one.
Here is one example of how a tax credit (which is a synonym for tax cut) didn't work. According to this article, between 1994 and 2004, the telecommunication companies, like AT&T, Verizon, and Comcast, were given an opportunity to improve their Internet access services with $200 billion in tax credits. What they did instead is cut costs, jobs, and increased prices for their services. So instead of remaining at No. 1 in the world for high-speed Internet access market penetration, we're No. 15 and falling. Oh, and they also gave the executives bonuses. Yeah, tax cuts are really great if you're making money.
By now, you may have noticed that I've been citing Dean Baker here and there. I like him because he's the only economist I've seen who is willing to go on camera and say what he really means. Dean points out another reason why spending is better than tax cuts. If the government doesn't spend the money, NO ONE ELSE WILL.
So let's look at the stimulus plan as a way to say "Sorry, my bad," all around, from those wonderful free-market conservatives. Who could blame them for having faith in the market.
And lets hope that the current administration is and continues to be mindful that we can make a meaningful change here for the better. Kudos to President Obama for making the effort to reach out to the other side. This is the first President I've ever seen that is actively seeking ideas from around the country instead of just inside the beltway. Perhaps the conservatives, noticing some of their ideas didn't work last time around, will wait their turn and give this new president a chance, too.
All this after an economic calamity that resulted in shriveled retirement accounts, deflated property values, and diminished expectations for employment. Estimates of losses in real estate and stocks amount to the trillions.
And there is plenty of news about how the financial industry, in recognition of their superior advice, talent and transparent management, gave themselves $18.4 billion in bonuses last year. There are some who are saying that the bonuses and compensation paid could not be justified by technology or experience. Who could've known? They're lucky they aren't in China - for they surely would be doing hard time in prison for their mistakes, instead of getting a handout.
More recently, we saw the story of Bernie Madoff, who ran the biggest Ponzi scheme in history. Harry Markopolos had been telling the Securities and Exchange Commission about Madoff for many years. But the SEC was unwilling to look at the scam and chose to remain willfully ignorant for as long as possible until it could not be ignored any more. That was when Madoff finally admitted to it in public. This is the free market at work. And for all you Southern California people, remember that former Senator Chris Cox, that great free market champion, failed to catch this on his watch. The free market will regulate itself, right?
I think it's also worth noting that during these hard times, CEO's aren't going to bed hungry. The vast majority in the financial industry aren't going to be out on the street anytime soon. They will try to find smaller firms to work for so that their bonuses don't make the news. And by the way, if you're looking for a good advisor that doesn't do Ponzi, check this out.
President Obama has made it clear that the middle class has been subject to plenty of abuse by the upper class. Those losses discussed above, were the most painful for the middle class. The middle class can't afford to lose half of their retirement account. For the upper class, they'll make it back in a few years. Even if they don't, they can probably take some time off to make a better plan while living in a house they still own.
The point of this post, is that for at least the last 8 years, the middle class has received a beating like none other since the great depression. And what the uppity class seems to have forgotten is that they really need the middle class. You see, when the upper class thinks of Mexico, they don't think of going there for vacation. No, they think of that great, captive employment market and yearn to bring it here. Just ask Gore Vidal.
The stimulus plans being discussed mean one thing, plain and simple: Ooops. We just beat the living daylights out of the middle class and we're so sorry. If we don't give them something to work for, they will stop working for what we are willing to pay them. We need to make sure they keep working until we can find a way to ship their jobs overseas.
Just how are we going to fix this? We can start by making the bailout plans god-awfully painful for executives who come to the government hat in hand after making really dumb mistakes. We can put an end to the conservative nanny state. This is the land where conservatives get their government intervention into the economy without the headlines the way progressives get it.
I used to consider myself a conservative, but I noticed over the years that I felt more and more uncomfortable with that association. At one point I was a libertarian, and I still hold some libertarian values (but I don't eat any books). The nanny state conservative is what the extreme "Right" has become: theologically dominant, morally "superior", belligerent, paranoid, and above all, self-righteous (just one ego fills a typical aircraft hangar when uncompressed). To the nanny-state conservative, economic policy is great if it drives income up and grants advantages to people who already have money and power. But somehow, it's really bad for the economy if the middle class gets to make more money.
Notice that the conservative Republicans are again pushing tax cuts. They're really, really worried that we're spending too much money on this stimulus plan. Gosh, we just spent $350 billion on banks who aren't even telling us how they spent their TARP money (though there is substantial evidence that domestic banks are buying other banks around the world rather than making loans at home). And we're getting ready to unload another $350 billion on them. Only this time around, we're going to make them accountable. Yeah, right. I didn't see anyone floating a tax cut to fix that problem. Notice that there was "bipartisan" support for that measure, too. And I didn't see any Democrats holding their breath in a pouting contest before that measure got passed.
I don't like the idea of spending, and I would prefer that we did nothing when it came to bailing out the banks. But if we have to choose between spending and tax cuts to save the economy, I'll take spending. Why? There is empirical evidence weighing against tax cuts. One really obvious clue is that tax cuts aren't going to do you any good if you're not making money. With many people out of work, and many more fearing for their jobs, people just aren't going to be making any discretionary spending decisions in favor of spending money. And let's not forget that we have eight long years of nothing but tax cuts for the benefit of the top 5% who saw their income grow at a much faster rate than the rest of us. Did they spend their money? If they did, would we be in a recession now?
For any of your doubters out there, here's an interesting quote to consider:
"As I've often said... this [increasing income inequality] is not the type of thing which a democratic society—a capitalist democratic society—can really accept without addressing." - Alan Greenspan, June 2005
...that subtle, yet discernable admission is from a fierce capitalist, a really big fan of Ayn Rand (see also, the libertarian link above), and an acknowledged expert on economic policy who was in charge of the Federal Reserve Bank for about 20 years.
So what is the return on investment when comparing a tax cut vs. spending? The simplest explanation put forth by Robert Reich, the former Labor Secretary in the Clinton Administration, is this: giving tax cuts to people who already have money doesn't make them spend more money. They've already spent the money they want to spend and so they only save more of it with tax cuts. On the other hand, giving money to people who have none guarantees they will spend it since they live paycheck to paycheck if they have one.
Here is one example of how a tax credit (which is a synonym for tax cut) didn't work. According to this article, between 1994 and 2004, the telecommunication companies, like AT&T, Verizon, and Comcast, were given an opportunity to improve their Internet access services with $200 billion in tax credits. What they did instead is cut costs, jobs, and increased prices for their services. So instead of remaining at No. 1 in the world for high-speed Internet access market penetration, we're No. 15 and falling. Oh, and they also gave the executives bonuses. Yeah, tax cuts are really great if you're making money.
By now, you may have noticed that I've been citing Dean Baker here and there. I like him because he's the only economist I've seen who is willing to go on camera and say what he really means. Dean points out another reason why spending is better than tax cuts. If the government doesn't spend the money, NO ONE ELSE WILL.
So let's look at the stimulus plan as a way to say "Sorry, my bad," all around, from those wonderful free-market conservatives. Who could blame them for having faith in the market.
And lets hope that the current administration is and continues to be mindful that we can make a meaningful change here for the better. Kudos to President Obama for making the effort to reach out to the other side. This is the first President I've ever seen that is actively seeking ideas from around the country instead of just inside the beltway. Perhaps the conservatives, noticing some of their ideas didn't work last time around, will wait their turn and give this new president a chance, too.
Wednesday, January 21, 2009
What a relief
For 8 long years, we have been politically constipated. I say that because I can remember how when GW Bush arrived to office, he was greeted by 10,000 protesters on the way to the White House. Both of his elections were tainted by cries of foul play, one went all the way to the supreme court for one election.
During the last election, we had none of that. Obama ran a straight campaign, taking all the lessons from history and putting together what was needed to win.
And now that he's in office, he's got a job to do. I watched him during the inauguration ceremony, and though I saw him smile, I also saw that he knows his job is cut out for him. I watched the justice stumble on the oath, and Obama stumbled too. But they regrouped and finished the oath, together. They may not agree on the issues, but they worked together to finish the ceremony.
The problems we face in this crisis are too big for one party, one faction, to solve. This requires all of us to cooperate and to work towards a greater goal than narrow interests would support.
Obama said more than once that open, spirited debate, with a mind towards the common good will be required for all so that economy recovers and that we can all prosper together. Such debate includes putting everything on the table for consideration, and avoiding the framing of such debate in a way that gives an advantage to one group or faction.
As Obama said, we must ask what is good for me and my children, going forward.
Amen
During the last election, we had none of that. Obama ran a straight campaign, taking all the lessons from history and putting together what was needed to win.
And now that he's in office, he's got a job to do. I watched him during the inauguration ceremony, and though I saw him smile, I also saw that he knows his job is cut out for him. I watched the justice stumble on the oath, and Obama stumbled too. But they regrouped and finished the oath, together. They may not agree on the issues, but they worked together to finish the ceremony.
The problems we face in this crisis are too big for one party, one faction, to solve. This requires all of us to cooperate and to work towards a greater goal than narrow interests would support.
Obama said more than once that open, spirited debate, with a mind towards the common good will be required for all so that economy recovers and that we can all prosper together. Such debate includes putting everything on the table for consideration, and avoiding the framing of such debate in a way that gives an advantage to one group or faction.
As Obama said, we must ask what is good for me and my children, going forward.
Amen
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