Fair Tax in Texas - Update 2

I sent two e-mails to State Rep. Larry Taylor's office regarding Rep. Phil King's sales tax proposal and received replies to both of them from Cari Chistman-Ott, his Chief of Staff. The first e-mail was voicing my support for the sales tax, and the second included my criticism of Dick Levine's position paper from CPPP.

Her e-mails are below:

Thank you for contacting Rep. Taylor regarding Rep. Phil King's consumption tax proposal. Rep. Taylor works closely with Rep. King on the Texas Conservative Coalition's Property Tax Task Force, in which they are both members. He believes Rep. King's proposal is a good starting point and looks forward to continue working with him on this proposal and others to relieve taxpayers from skyrocketing property taxes.

I have attached a copy of the TCC's statement on property tax reform for your review. Rep. Taylor will continue working with the task force throughout the interim to find a solution that will pass during the next legislative session in 2009.

Text of the attachment is here:

Texas Conservative Coalition: End the School Property Tax
State Representatives Wayne Christian (President),
Linda Harper-Brown (Vice-President),
and Ken Paxton (Secretary/Treasurer)
FOR IMMEDIATE RELEASE December 12, 2007
Contact: Brent Connett Phone: 512-474-1798

The property tax is the single worst tax ever devised.

Despite billions of dollars appropriated by the Legislature to cut Maintenance & Operations (M&O) tax rates, homeowners and businesses are facing rising tax bills due to local increases in appraisals, rates, and debt. It is apparent that the only way to provide relief from the M&O property tax is to eliminate it altogether.

Members of the Texas Conservative Coalition have shared a stark realization with Texans around the state at TCC town hall meetings: No one ever truly owns their home. Even after a mortgage is paid in full, the government continues to collect ‘rent’ in the form of the property tax. Should a homeowner fail to pay their property tax bill, the government can ‘evict’ the homeowner and seize the property.

This system of taxation is unjust and unacceptable.

Home ownership is the ultimate expression of property rights, but as long as property is taxed in perpetuity, home ownership is a dream that can never be fully realized. We have posed the question to our constituents and they agree with the fundamental idea of eliminating the M&O property tax as a means to restore their property rights.

If we succeed in putting together a plan to eliminate the M&O property tax, more low-income Texans will be able to attain the American dream of homeownership, middle-income Texans will be free of a constantly growing financial drain, and senior citizens on fixed incomes will be free to live in their homes. Furthermore, we aim to bolster Texas’ entrepreneurial spirit by eliminating a major and never-ending cost that all businesses face.

The state can meet its obligation to fund public schools without burdening home and business owners with unjust and constantly increasing property taxes.

P.O. Box 2659, Austin TX, 78768 􀃕 512-474-1798 􀃕 http://www.txcc.org/

***************

The second e-mail indicates that she forwarded my criticism below to Rep. Taylor.

Maybe he will read it, maybe not, but at least I got a response.

Mr. Shelley, Thank you. I will pass this along to Rep. Taylor…clc

Fair Tax in Texas - Update

Recently I have been defending Texas Rep. Phil King's sales tax idea on Paul Burka's Blog on Texas Monthly Magazine's website. Follow the link to see my comments. Mr. Burka linked to a position paper put out by Dick Lavine the Center for Public Policy Priorities.

Below is a critique I wrote to Dick Lavine and cc:'d to Rep. Phil King and my district's Rep. Larry Taylor. I thought the line in bold was the most damning.

Mr. Levine,

I have read your “REPLACING PROPERTY TAXES WITH SALES TAXES WOULD BE BAD FOR TEXAS BUSINESSES, FAMILIES, AND PUBLIC EDUCATION“ and I have a few problems with your analysis and wanted to point out some contradictions and oversights.

While you state the obvious that if prices go up, demand will fall for retail purchase, you ignore a number of other effects of the sales taxes replacing the property tax. You state:

“Thus, if the state raised the sales tax to eliminate property taxes, Texas businesses would have trouble selling their goods and services because we would have the highest sales tax in the country.”

You are completely ignoring the costs savings through property tax elimination for retail properties. While the sales tax would increase, the underlying cost of business would decrease because, as you said, the price of rent (in a competitive market) will fall when property taxes fall. You also ignore the wealth effect on the budgets of residential property tax payers who would have more money to spend once their property taxes fell. Even though internet purchases are growing, the vast majority of retail purchases are made by locals at local retail establishments, it would be terribly inconvenient for Texans to avoid Texas retail establishments for most purchases.

You also mention on page 4 that:

“Businesses also pass on their property taxes to families and individuals in the form of higher prices, lower wages, or lower profits.”

This statement, in defense of property taxes, is not included in your analysis of who would benefit form the tax cuts. You argue that the sales tax would hurt businesses and increase prices, so the sales tax is bad. Then when defending property taxes you admit that they lead to “higher prices, lower wages, or lower profits” and this is ok? This is a blatant contradiction.

“The sales tax, which is based on consumption, is extremely regressive, meaning it takes a much larger percentage of the income of a low- or moderate-income family than of a higher-income family.“

Therefore, the sales tax is regressive because it hurts the poor, yet you also say in the defense of property taxes:

"Homeowners write checks directly, but renters also pay property taxes, which are passed on to them by their landlords in the form of higher rents. "

The poor generally rent at much higher rates than those with higher incomes. Because they are renters the property taxes calculated into their rent does not have homestead exemptions available. Secondly, renters cannot deduct mortgage interest or property taxes from their federal income tax and these extra costs pass into their rent. Their rent would fall with a conversion to the sales tax.

Your analysis also ignores the rebate mechanism Rep. King mentions, in an allusion to the FairTax, which is available to everyone. This oversight means that the sales tax, under Phil King’s plan, may actually be progressive depending on the size of the rebate.

Finally, you state:

"Property taxes do not imperil home ownership. Generally, Texas families buy homes based upon their annual income, giving the tax a rough correlation to the ability to pay."

This is a terrible contradiction. First, you claim that lower prices will not lead to higher demand for home ownership, which is patently absurd and contradicts the most fundamental principles of economics, and claim that “families buy homes based upon their annual income”. Under a switch from property tax to sales tax, the incentives would change to encourage more consumption of housing, which would be taxed less, and away from retail purchases, which would be taxed more. This would increase the level of home ownership.

While you do fine with your number crunching your economics is superficial. While you may not like the sales tax bill by Rep. King prima facie, you do a disservice to the parties you want to help by piling up evidence against a bill without fleshing out all of the effects. In the end, your points may be valid, but the gaping holes I noticed negate your entire argument for me.

Sincerely,
Brian Shelley

P.S. I am sending copies of my rebuttals to Rep. Phil King and my representative Rep. Larry Taylor

Titanic vs. Iceberg, Live!

Social Security is a titanic government obligation and a touchy subject that many politicians shy away from, which is unfortunate. The reality is that the Social Security Board of Trustees believes that by 2017 we will be withdrawing more money from Social Security than we are collecting in taxes. The board also believes that Social Security will go bankrupt by 2041 because the so-called trust fund will run out of money. Of course, the trust fund is mostly imaginary because Congress long since spent it on other things, so this later date is somewhat meaningless. In 2017, we will have to cut benefits, cut other government programs or raise taxes. This massive iceberg is ten years out and it is not moving out of the way.

Who pays what and who gets what under Social Security?

The payroll tax is 12.4% of your first $97,500 of wages. You pay 6.2% and your employer pays 6.2%. Income above $97,500/yr is not subject to payroll taxes because people who make $97,500/yr and those who make $2 Billion/yr receive the same Social Security Benefit. Or put another way, your Social Security benefits top out when you make $97,500/yr in payroll income.

Your benefits are a proportion of the income you made during the years you paid into Social Security. Those with low incomes have their benefits subsidized and are generally a higher proportion of their working salary than benefits received by those with high incomes. These benefits are indexed to wage inflation, which means about a 4% increase in benefits each year.

How do we fix it?

In general, there are three major proposals to fix it:

1) Extend payroll taxes (which you see on your check as FICA) on wage income above $200,000 to keep benefits as high as they are now. Those making above $200,000/yr will not receive any more benefits with the new extra taxes. This amounts to a 12.4% tax hike on all payroll income above $200,000. This means that those who work for a living like doctors, lawyers, and athletes would get a tax hike. Those who have inherited money or are independently wealthy who receive their income from investments would not pay any extra tax.

My salary does not begin to approach this level, but I despise how this proposal treats high wage people like a piggy bank we can raid. Many people toss around the term Socialism far too much, but this is by definition Socialism. This is merely taking money from one person and handing it to another. We have many policies, like national defense, where the wealthy pay more taxes, but they still participate in the benefits. We have other policies that transfer funds from the wealthy to those in need. This is not one of those policies. It is not based on need, and is not based on community benefit. It is simply a plan put forward to get money for some by taking it from someone else. It is pure greed.

2) Increase the retirement age. At first glance, this seems like an equal way to reduce the benefits, but when digging a little deeper it is not quite as fair. Poor people tend not to live as long as wealthy people. The poor are more often employed in physically demanding jobs, have more health problems, or simply made bad decisions in their life that led to a shorter lifespan. Under this plan, those who live the shortest lives face the largest percentage cut to their benefits. To cut the largest percentage from the benefits of those who are poor and/or have medical problems, but have paid into the system their entire lives seems unfair.

3) Reduce the growth rate of benefits. First proposed under George W. Bush, and now supported by Fred Thompson, this plan cuts the growth in benefits for anyone under the age of 58. On a percentage basis, everyone who receives social security retirement benefits would have the exact same amount reduced from their benefits as everyone else. On a dollar basis, those who receive more social security benefits would have their benefits reduced the most.

Technically speaking, it would reduce the growth rate from the wage growth rate (normally 4%) to the inflation rate (normally 3%), effectively reducing the growth rate of social security benefits by 1% a year. Some believe that this will not cure the entire problem, but the sooner we act the less dramatic the changes will have to be in the future. We need to tap the rudder on this titanic program now so we don’t risk hitting the iceberg later.

Virtually every American is eligible to receive social security retirement benefits. America needs to cut benefits so that the system does not go broke. Every American eligible for benefits should have their benefits cut and the same proportion should apply to everyone. If the ship is sinking, we should not be throwing some people over board so we can save our luggage.

As always, tell me what you think.


Here are a couple quotes in response to Alex’s guest post last week:

Steve S. – “Accountability. What a novel idea! Why that's practically un-American…”

Craig W. – “I agree with [Alex] up to a point in his letter-to-the-editor…I believe the banks put these folks in this precarious position; knowing full well that they barely could make the introductory payment on their current income…I think it is mostly [the banks’] responsibility to work with the individuals to come out with a workable solution.”

Guest Blog - Mortgage Bail Out

A few weeks ago, I challenged you to write a letter-to-the-editor of sorts that I would print in this newsletter. Well, Alex G. took me up on it and I have included it below. These are his words, unedited.

Mortgage Bail Out

A lot has been said recently about the Federal Government's proposed "mortgage bail out". I have heard some pretty tough language at the people who can't pay their mortgages and are facing foreclosure in response to the proposed plan. It matters not if the people who will capitalize on this plan were "greedy" or "stupid". What they were (or were not) thinking when they signed those papers for their homes does not matter now.

What matters is if we are still a Nation that holds up the idea of accountability. When you make a mistake, whether you were greedy, stupid, or just plain old unlucky, there are consequences. We are moving further and further away from the idea that an individual is responsible for his or her own actions. Whenever something goes wrong the average American wants to blame someone/anyone but themselves. Your son is failing in school...it's the teachers fault. Your daughter fell off her bike..it's the manufacturer's fault. You hit the golf ball into the water. . .it's the club's fault.

You can't pay your mortgage . . .it's the bank's fault.

This is pervasive throughout our Republic. The most contentious issues of the day all deal with a lack of personal accountability (can anyone say Abortion?).

What's next? Maybe someday I can walk into a casino, lose all my money, and blame the casino for my losses and go cry to the government that "predatory" gambling practices were engaged, and I was duped into betting and losing.

Please. Stop crying for the homeowners about to be kicked out on the street. Let the big banks collapse under their own mistakes. This Republic is strong enough to withstand this bump in the economy, but what we can't withstand is a change in culture that allows people to run away from the consequences of their own decisions.

--Alex G.

Well said, but I think the real problem with American culture is ignorance of proper sentence structure Alex. Just kidding. Thanks for writing, and I invite everyone who is passionate about our society to put that passion on paper and work for change.

As always, tell me (us) what you think.

----

P.S. A person named Marsha left a note on the blog advertising a grassroots organization working for the FairTax. They have a humble website, but don't solicit donations. I think that their hearts are in the right place.

http://www.operationoffthefence.org/

The FairTax Comes to Texas

A few weeks ago, I wrote about the FairTax and had some criticisms, but overall I think it’s a pretty good, if not ideal, reform to the federal tax code. To review, the FairTax is a national sales taxes with a “prebate” (a rebate that happens at the beginning of the year) for all citizens so that the poor won’t face the same burden as those with more income.

Recently, a Texas State Representative named Phil King out of Weatherford has proposed a similar measure for the state of Texas. The Fair Tax is better suited for Texas because our tax code is already simple (compared to the Federal tax code) and the state already collects a large portion of its income from sales tax.

Texas has two major sources of income: Sales Tax and Property Tax. Rep. King is proposing that Texas eliminate much of the property taxes in favor of a higher sales tax. This is a good idea.

Why are sales taxes better than property taxes?

Through no fault of their own, someone can be taxed out of their home. In some areas property values have skyrocketed over the last few years, and people can no longer afford to live there because of the skyrocketing property taxes. How crushing would it be to retire to your dream house only to have to sell it because you could not afford the property taxes?

It also makes sense that a single and simple source of tax revenue reduces the size of government bureaucracy. Changing the sales tax rate should not require any additional staff to collect the income. Property taxes require appraisers to annually reevaluate every piece of property in the state.

Who does it help?

The first are those that are property rich and income poor. Generally, these are the elderly. Currently, the elderly can lock in the appraisal value of their homes, but still have to pay property taxes at whatever rate is being charged. This bill would eliminate a good chunk of their taxes. Poor elderly who survive on social security income would face higher sales taxes, but the prebate would reimburse them for a large portion of them. This would reduce the chance that they would be taxed out of their homes.

Another group to benefit is the poor who rent. While a homeowner in Texas can limit their property tax appraisal value by getting a homestead exemption, the owner of a rent house or apartment complex cannot. Assuming a competitive rental market, the price of rent includes the cost of property taxes. If property taxes drop, then rents drop, and poor people save money. The poor would also receive the prebate (like every citizen) that would offset the increase in sales taxes.

There are other winners, but I will limit the conversation to these two.

Who does it hurt?

The people who would be hurt the most are those that live in an inexpensive home but spend a large portion of their high income on retail services and merchandise. It would also hurt teenagers and other people who do not pay rent, but have an income.

I’m willing to accept the trade off.

I have written to my state representative (Larry Taylor) and told him that I support this bill and I hope that he will too. If you like this idea and live in Texas follow this link – and write your state Representative or Senator to express your support. For those that live outside of Texas you may want to pass it on to your representatives to suggest to them.

As always, let me know what you think.

Updates on School Choice

Over the last couple weeks I’ve gathered a few articles on school choice.

In an article by Vicki E. Murray, Ph.D., at HumanEvents.com -
“In their review of more than 200 scientific analyses of the effects of competition on traditional district public schools and students, researchers from Columbia University Teachers College conclude, “A sizable majority of these studies report beneficial effects of competition across all outcomes,” including improved public school student performance, higher graduation rates, greater public-school efficiency, smaller class sizes, better teacher salaries, and improved housing values. Not one of the analyses found that competition harms the performance of public-school students.”

No commentary necessary. It seems like there would be no debate, but apparently, Ivy League studies of 200 scientific analyses are not enough for everyone including these guys.

From an article by Jennifer Radcliffe in the Houston Chronicle -
Amigos por Vida is a charter school in Houston that leased and converted part of an apartment complex. It is a relatively small school and has situated itself where many of the kids can walk to school.

“Lauren Macedo…[a] seventh-grader walks just a few yards from her apartment to the state-sponsored charter school”
The proximity is ideal for the impoverished immigrant community: Kids have few excuses for missing class and, when they do, teachers are a short walk from their front doors.
…family members can easily get to campus for parenting workshops and teacher conferences.”

Another advantage of using charter schools is that they cannot issue bonds and increase property taxes to pay for facilities. They have to raise their own funds to build schools or to lease space.

“Unlike traditional public schools, charters can't ask voters to approve bonds for construction. Charters that attempt to own, rather than rent, face the challenge of raising funds and financing loans. In this case, Amigos Por Vida needs to persuade the community to chip in roughly $3 million, while financing the rest.”

If the school has to use funds to pay for rent and a public school does not, surely less money in the classroom means lower results, right? Wrong.

“The campus is starting to pile up accolades. In 2006, it received the Governor's Excellence Award for high scores on the Texas Assessment of Knowledge and Skills. In September, it received a U.S. Department of Education award for helping to close the achievement gap.”

But who wants to go to school in an old apartment complex?

“More than 250 students are on Amigos' waiting list.”

Also from the Houston Chronicle, an article by Lisa Gray -

She describes the experience of a boy named Deonté who was having many problems at his traditional public school. The KIPP Polaris Academy was recruiting middle school minority boys. The school wanted kids who had been in trouble at other schools, and kids with lousy grades and test scores. The principal, Shawn Hardnett, chose a Frederick Douglass quote as the school motto: "It is easier to build strong children than to repair broken men." What a refreshing perspective to see a school seeking out the worst kids and trying to reform them.
The end of the story, which I recommend everyone read the whole thing, was particularly poignant.

[The principal] summons Deonté to the center of the room. The boy squirms with pride, examining his certificate as the cafetorium echoes with applause.

Deonté swells as Hardnett pulls out his cell phone.

Cheryl Powell [his mother], at work, braces herself for a call from Deonté's school,then hears that her boy has won an award, that he's done something great. "You're sure?" she asks in tears. "My son?"

She gets her answer. On cue, every boy in the room shouts: "Deonté!"

As always, tell me what you think.

ABC's Chicken Little

The Sunday before Thanksgiving my youngest son decided that it was time to get up at 6 am, so this let me catch an interview by Bill Weir, one of the hosts of Good Morning America on ABC. Mr. Weir had been extolling the virtues and authority of a UN Global Warming report that said that global warming was growing worse than previously thought.

According to the Mr. Weir’s introduction his interviewee, Kentucky State Representative Gooch, was a global warming critic. The video can be seen here.

Here’s how the interview went down…

Bill Weir “Do you believe that global warming is not happening?”

Gooch – “…I believe that the climate is changing…We can certainly say that man does have an effect…so naturally we think we have an effect…we believe that we can do something about that…and we ought to be doing that…”

At this point it appears that Rep. Gooch is not a global warming critic. He believes in global warming and he believes that humans are one of the causes.

Bill Weir “Why do you call a hearing in front of your legislator…and bring people who believe it’s all a myth?”

Gooch – “That was just to get the debate going that not everyone is in agreement, that there is another side of the story.” Then on proposed legislation in Congress: “The chamber of commerce recently said that that would cost 3.4 million American jobs, and would cost 6 trillion dollars to our economy.” “What I want to make sure we do is that if we act we have the science right.”

Bill Weir goes on to accuse him, after the clip I linked stops, of voting for a bill that would let coal mines pour pollution into the rivers, and makes claims that he profited from this because his family has ties to the coal mining industry. By the way, Rep. Gooch is a Democrat.

The real kicker is at the end of the video clip, where Bill interrupts and says, “But according to all these scientists, the more hand wringing we do, the more we dither on this, the worse it’s going to get. And what if you’re wrong? What if this, in fact, is a global catastrophe? Isn’t there a moral imperative as a public servant to err on the side of planetary survival?”

What if he’s wrong? Wrong about what? Didn’t he just say that he believes in global warming and that humans are having an effect? Apparently, the moral imperative that Bill Weir is espousing is that Rep. Gooch should ignore other points of view and should ignore the economic consequences of his actions. Sorry, Herr Weir, but if my Congressman ever says that he has a moral duty to ignore the facts, other viewpoints, and economic consequences I’m going to punch him in the face.

It’s interviews like this that conjure up images of a powerful liberal media elite pushing their agenda on the American public. Don’t let them fool you. Bill Weir is no one special. Before joining GMA Weekend he was sportscaster for local TV in Green Bay and L.A. He’s ill informed, so he relies on his communication skills and comfort in front of the camera to bully people and make himself look like a good journalist.

Oddly enough, John Stossel, the anchor of ABC’s 20/20 interviewed one of the scientists on the UN panel Bill refers to just a couple of weeks ago. This scientist stated that he did not agree with the findings of the report, but the UN had put his name on it claiming, “We all agree”. He sued to get his name taken off the report and the UN finally relented. Apparently, of the thousands of names on the report only about 52 people were actually scientists.

Wait a minute, doesn’t John Stossel have a moral imperative to not report this? If all these scientists agree, shouldn’t he cover this up? Why did Bill Weir not walk down the hall at ABC News and inform John Stossel that he is endangering the planet, and the very future of humanity, by allowing competing opinions to be heard? "We are all going to die because you’re wasting precious time, John!"

When I was in college, I met people like Bill Weir. I got into probably no fewer than 1,000 political arguments in college so it was bound to happen. The best advice is to know your subject twice as well as them, and prepare for personal attacks. This sounds difficult, but most of these bullies will base their entire argument on a half dozen sound bytes from TV, and if you don’t back down when the insults start flying they’ll either get real quiet or fly off the handle and make complete fools of themselves. You start quoting statistics or Ivy League PhDs and these guys will pee their pants.

Like a good Boy Scout, be prepared.

Hope you had a Happy Thanksgiving!

Why School Vouchers?

This past week I debated for school vouchers on Tory Gattis’ blog. I won some points, but only changed one opponent's perspective a little, so I was inspired to think about it this week.

First, though, an excerpt from an article in the Economist on New York’s successful charter schools and expansion of a more market based system. It adds to my belief that market based education under charter schools and then vouchers is inevitable.

--Excellence is an independently run public school that has been allowed greater flexibility in its operations in return for greater accountability, though it cannot select its pupils, instead choosing them by lottery. If it fails, the principal (head teacher) will be held accountable, and the school could be closed. Three years old, Excellence is living up to its name: 92% of its third-grade scholars (eight-year-olds, the oldest boys it has, so far) scored “advanced” or “proficient” in New York state English language exams this year, compared to an average (for fourth-graders) across the state of 68% and only 62% in the Big Apple. They did even better in mathematics.

This is the sort of performance that the mayor, Michael Bloomberg, now wants to extend from New York's 60 charter schools to all of the city's schools. On November 5th, the mayor and his schools chancellor, Joel Klein, announced what is in effect the final piece in their grand plan to charterise the entire city school system.--

---
Proponents of vouchers do a good job of arguing why we need a change in our schools, but we have not painted a clear picture of what life will be like with vouchers and why this picture is better than the just using Charter schools.

The limit to Charter schools is the school district boundary. A charter school cannot take kids from other districts, nor can a child cross district lines to attend a charter school except in rare cases. While cities like New York have dozens of charter and magnet schools, other districts are too small to offer a wide array of school choice. There simply are not enough kids to justify a diverse offering. Different kids need different teaching styles. The more diverse the choice the more likely that parents will be able to find the niche that suits their child best.

This past year, a bill submitted in the Texas Legislature would have given state funded vouchers for kids with autism to attend public, charter, and private schools that specialize in the education of autistic children. Few districts have programs specifically for autism. Right now, these students are rarely afforded the opportunity to cross district lines because it is so expensive to help them. The result is that autistic children cannot receive the best treatment available. Unfortunately, the public school establishment venomously attacked this bill and it died after being passed in a Senate committee.

Another advantage is that vouchers can solve much of the debate on religion in schools by giving parents a choice. While the news cherry picks horror stories of propaganda in public schools, the result that I see more often is a dullness of consensus. The only acceptable values are those that do not offend anyone. Some see vouchers as a way for parents to isolate their child in environments that stifle free thought (church schools). I disagree, but even without allowing religious schools to receive voucher funds, a diverse array of private school environments will allow parents to find one that does not suppress their moral values and beliefs.

Because of the geographic monopoly that public schools hold, regulation makes sense to many as a way to protect their kids from the problems that are more common amongst the poor. They passed minimum lot size zoning to prevent low-income homes. They restricted the development of inexpensive apartments to keep out poor and transient residents. Both practices are now illegal. Parents in the suburbs are not horrible people for trying to keep violent kids out of their schools and away from their children, but the result is continued segregation on racial and class lines. Schools in poor neighborhoods are jammed with problem students because those who care about education, and can afford it, move away.

With vouchers, geography matters less. Where you live would not dictate the quality of school your child attends. If a private school has high standards of discipline and shares many of their values, parents do not have to live in a far-flung suburb to know that their child is safe. They can live somewhere more convenient to work and less affected by what someone is building across town. According to a 2005 poll done in Philadelphia, 59% said living near good schools was very important in deciding where to live, but only 30% said that living near people like themselves was important. This implies that schools may be a more powerful component of our self-imposed segregation than prejudice.

Public School offers too much of a one-size-fits-all education. Vouchers break down barriers between the diverse needs of the students and the ability of teachers to meet those needs. Vouchers are more effective than Charter Schools at meeting those needs by offering a more diverse approach to education. Public Schools cannot appease the values of an increasingly diverse society without suppressing some and limiting free speech. Vouchers allow private schools to offer a wide array of value systems from which parents can choose. The geographic monopoly of public schools reinforces racial and class segregation. Vouchers break down the barriers of education, break down the barriers to the free exchange of ideas, and break down the barriers of segregation.

As always, let me know what you think.

Let My People Go

My wife was a school teacher for 5 years and my mom has been one for over 30. Both have taught in schools where the vast majority of students were poor. On occasion I have had the privilege to meet the children of the sad stories they brought home. I remember the stained clothes of a young girl who smelled of urine because her parents didn’t have the common decency to buy a litter box or keep the cats outside. I remember the sullen dark eyes of little John whose mother would have him committed to a mental hospital during holiday breaks because she didn’t want to bother with him. I remember the feisty crooked smile of little Amy who hid under a bed with her brother as her father shot two people to death in the next room of their trailer. I remember reading their hopes and dreams written and posted on the bulletin board in my wife’s classroom.

On May 17, 1954 the Supreme Court struck down segregation in schools in a nine to nothing decision which stated that “separate educational facilities are inherently unequal.” Chief Justice Warren said:

“In these days, it is doubtful that any child may reasonably be expected to succeed in life if he is denied the opportunity of an education. Such an opportunity, where the state has undertaken to provide it, is a right which must be made available to all on equal terms.”

What breaks my heart is that 53 years later our schools are still separate and still unequal. The sad reality is that few of the hopes and dreams posted on those bulletin boards will ever come true because they face a grossly unequal education system. These children are bound by geography to attend schools overwhelmed by children with problems. With reasonable concern, more affluent areas make rules to keep their children safe from those problems. To break these bonds every child deserves the right to attend a school of their choice, whether it is the local public school or a private one. We can not place the burden of responsibility on the parents ability to afford a home in better school districts or travel long distances to take their children to better schools. School choice can and will repair the brokenness of inequality.

The unbridled creativity and compassion of our nation’s teachers can solve many of the problems those in poverty face. Their skill and determination should not be corralled by the bureaucracy and petty turf wars built into our current system. It is no wonder why so many teachers burn out so quickly. These teachers should be able to open schools in a competitive marketplace where good school programs succeed and bad programs fail.

As always, shrill voices rise to defend the status quo. They call this risky and they call it a threat to public schools. They ignore the fact that 7 different studies have shown that students that switch to private schools under voucher programs show improved test scores AND the test scores of the students who stay behind at the public schools also improve. Nobody is left behind. Competition forces everyone out of old habits to make needed changes ignored for years. History has shown that dumping billions upon billions of dollars into failed school systems hasn’t improved test scores at all. A mountain of evidence supporting school choice rises before them, but these patrons of the past defend the status quo.

They also ignore the fact that Milwaukee has had school vouchers for 17 years. They ignore that Cleveland and Washington D.C. have school vouchers, and when it came time to rebuild the tattered schools of New Orleans’, the choice was clear: Vouchers and School Choice. They ignore the fact that Sweden, Belgium, the Netherlands, and Ireland all have nationwide voucher and school choice programs. None have gone back to our old system. All of these countries not only outperform our students, they are getting further ahead every year. The only risk is to expect our children to compete in the future marketplace with a school system based in the past.

What is the status quo? I am embarrassed to say that our country is ranked 22nd in the industrialized world in education and we are falling further behind every year. We see drop out rates in many poor school districts surging past 50% and 60%. Can you look into the desperate eyes of our nation’s poor children and tell them that they don’t deserve the right to choose a better school? Can you continue to herd them into the same failing school year after year without remorse? I can not, and I will not stand idly by while injustice goes unanswered. To claim that shuffling them along the same failed pathway is fair and equal is absurd and offensive. Schools separated by geography are inherently unequal.

So I repeat the words of the Supreme Court that education “is a right which must be made available to all on equal terms.” Equal does not mean taking from some it means giving to all. Equal means that every parent and child has a choice and equal funding to attend the school that most meets their needs. Equal means that hopes and dreams are not a faded sheet of paper on a bulletin board soon to be thrown away. We must have equality, we must have vouchers, we must have school choice.

If You Only Knew the Power of the Free Market

I received this response from Joe M. of League City, Texas regarding last week’s post.

If the mega company (who is still making record profits) wants to, they can take the cheap way out. Does it really help the economy or do they keep the cash? Do they re-invest those savings in improving the current bad situation, increase benefits to employees, or anything that makes sense other than to pad the pockets of the wealthy .01% on the planet?

Ever since we were kids, we saw that some people had special privileges that we did not. There was the pretty cheerleader who never seemed to get in trouble for going off campus for lunch. There was the fast-talking jock that charmed homework answers from the bashful nerd. As adults, we see movie stars and athletes not going to jail or serving little time. We know that rich people have more clout and it bothers us. Sometimes the advantages are more than just a few perks, and we worry that a rich person or a big company with lots of connections will be able to destroy us financially because we do not have the money to fight back. It does happen in real life, not just in the movies.

Some see the government as the solution to this power, but government power is the vehicle the wealthy often use to expand their power. If the government passes a law that only affects a small group it’s very difficult to convince thousands of people to care enough to undo the law. You might wonder what power we have to protect ourselves if we don’t use the government. The answer is to use the power of the free market. The market grinds away at special privilege like a jackhammer.

I talk about it all the time, but what exactly is the Market? We are the Market. When I say I am looking for free-market solutions, it is the same as saying free-people solutions.

We usually think of voting as a card we fill out or an electronic pad we touch, but in the free market we are voting every second of the day. When we walk down the isles of a grocery store, we are voting on every product. You might see the price on black olives as being good, where I require payment to haul them to the dump. You vote to purchase them and I vote not to purchase them. If too many people vote not to purchase the olives, they will have to lower the price. We control the price not the grocery store. With a mere “Pshh, I’ll wait until the price comes down” we vote by the thousands. We are in charge, not them. If the government doesn’t interfere, the market has all the power, meaning that we have all the power.

The example of Cap-and-Trade from last week will help illustrate this power in the situation that Joe mentions. Let’s say that in 2009, Texas passes Cap-and-Trade for industries in Texas. Bob is majority owner of Texas Box, Incorporated. Bob’s engineer figures out the company can save millions by cutting pollution under the new cap-and-trade system and selling the credits. Texas Box Inc. makes record profits. Bob decides to keep all the new profit for himself and his shareholders, giving nothing to his employees. Many people think that Bob is selfish and nothing can be done without passing laws to make him give some away. Bob is friends with many Texas politicians so this is unlikely to happen.

Unfortunately for Bob, the ability to own a big office is insignificant next to the power of the free market. Stan is the majority owner of Louisiana Box, Inc. and has never tried to make boxes in Texas because the profit margins didn’t justify opening a new plant. However, his planning people show him news reports that Texas Box is making record profits. They do a little digging and figure out that Texas Box is selling pollution credits along with the boxes. Stan goes to his rich friends, borrows money to buy an old box plant in Texas, and fixes it up to sell boxes and pollution credits. To get new customers Stan undercuts Bob’s price. To keep his customers Bob cuts his prices too. Now Jim from New Mexico Box, Inc. joins the fun and undercuts them all. Stan and Bob lower their prices again to keep their customers. The prices fall until the profit margins are just about what they were before the cap-and-trade. The power of the market decides the price not Bob, not Stan, and not Jim.

While Bob, Stan, and Jim all made some sweet profits for a little while, eventually the market drives down the price because of competition. So in the end, who wins? We do. Our boxes are cheaper, and Stan and Jim hired more people to build boxes. While Bob might not want to be so generous, the free market takes his big profits away and gives it to us.

So the next time you walk through the store and choose not to buy something because the price is too high, remember that in a small way you are Stickin’ it to the Man.

As always, tell me what you think.

Letters to the Editor

Over the next few weeks, I want to challenge you to write a letter to the editor that I will include in this newsletter. It can be a few sentences or a couple paragraphs, but no more than 300 words. I want you to convince the readers of this newsletter about a topic that you feel passionately about. I also pledge to edit only misspellings, not whole sentences like the Chronicle. If I think something is inappropriate I will explain via e-mail. For those of you with co-workers who receive this newsletter you can request to be anonymous.

And You Can Quote Me On That

A few weeks ago, I added a list of suggestions for writing a Letter to the Editor, so this weekend I took the advice and wrote one to the Houston Chronicle. Lo and behold, they printed it on Tuesday. You can read it here.

They suggested a 250-word limit, so I limited my e-mail to around 160 words, but a few of my sentences were still removed by the editors. I am including those sentences in bold.

I have always thought that Mayor White had the right priorities. However, his sudden enlightenment on the need for emergency legislation to prevent the Ashby high-rise reveals that he is as much a sycophant to the wealthy as the worst hypocrites in office. The Chronicle has written dozens of articles detailing community groups trying to stop higher density development where city officials just shrugged and repeated, “They are within the law.” I guess things change when you can afford Rusty Hardin to represent you. White also supports the Metro plan to spend hundred of millions on new light rail lines hoping to bring density and urban living to Houston, but then sends a cold message of warning to the very developers who will build that density that they better not build anywhere near rich neighborhoods. I thought Democrats were against the undue influence of the rich and against urban sprawl. Maybe they are, but not the big one at city hall.

I felt like the sentences they removed made it more of an indictment on making exceptions for the rich than on the Mayor’s hypocrisy, but in the end, I think the point came across.


A Little on Cap-and-Trade

I’ve been a little confused recently why I’ve been hearing some conservatives talk negatively about Cap-and-Trade policies that help fight pollution. It is a significant improvement over current policy.

Historically, the government has simply passed laws that put a maximum, or cap, on the amount of pollution an industrial site can put into the air. The problem with this approach is that certain industries that we need, like iron ore smelting and oil refining, produce a lot of pollution. When the government simply caps pollution output it can cost these companies a fortune to be compliant because the laws of physics dictate that a whole lot of undesirable chemicals have to be released to produce their products.

The other downside is that any company that falls under the maximum already has no incentive to reduce their pollution other than personal ethics and public image. It is very possible that this company could reduce their pollution output rather inexpensively. The trade part of cap-and-trade allows these two companies to trade pollution cuts.

As an example, let us say that the pollution cap on Bad Chemical X is 100 units, and ABC Refinery Company produces 150 units. ABC Refinery Company calculates that it would cost $75 million dollars to reduce the pollution down to 100 units. Now XYZ Power Company is currently producing 95 units of Bad Chemical X, so it does not need to cut pollution under the law. However, XYZ Power Company investigates and finds that for only $35 million dollars they could reduce their output of Bad Chemical X by 50 units. Under Cap-and-Trade they can sell the reduction in pollution to ABC Refinery Company, who would likely pay some price less than $75 million dollars to spend less than doing it themselves. XYZ Power Company makes a profit by cutting their pollution and selling the reduction credit. ABC Refinery saves money by buying that reduction credit.

The same amount of pollution is cut, plus the economy only loses $35 million to added expenses instead of $75 million. Cap-and-Trade policies are better than simple maximums on the amount of pollution.

Why some conservatives have a negative reaction to cap-and-trade is probably because the system was first proposed on a large scale under the Kyoto Protocol. The Kyoto Protocol was bad because it exempted China and India from virtually any pollution standards and put the burden on the U.S. and Europe. However, we shouldn’t throw the baby out with the bath water. Cap-and-Trade solutions to pollution are a big improvement over any other pollution control mechanisms that I have seen.

As always, tell me what you think.

Doesn't Money Fix Everything?

Over the last few months, I have explained some problems with our current health care set up. My chief complaint about the plans that Hillary, Obama, and Edwards have put up is that they fail to address the bad incentives HMO and PPO style insurance creates. Even though I supported Bush’s veto of S-Chip, I knew that he and other free-market supporters would get bad press. When it boils down to a moral argument, it is hard to win against “Helping the Children” by complaining about cost over runs. Having said that, something remarkable struck me over the weekend that dramatically changed my thinking on Universal Health Care.

It Will NOT Work. We will be no healthier with Universal Health Care than without it. In fact, I think there are reasons to believe that our health will be worse under Universal Health Care.

The reason? Moral Hazard. Moral Hazard, is an insurance term, and happens when one party is insulated from risk and therefore behaves more risky than before they were insured. It can pop up in many forms. A person with a large life insurance policy might be more likely to commit suicide because family members won’t suffer financially. A company with fire insurance may choose to spend less time on fire prevention. Sometimes Moral Hazard is a conscious choice, but many times our behavior changes without even thinking about it. We feel safe, so we act a little more recklessly.

The following is from Tim Harford, a member of the Financial Times editorial board, in his column The Undercover Economist. This effect described by Mr. Harford is known as the “Peltzman Effect”. It is akin to Moral Hazard in the insurance world.

“The idea that seatbelts cause accidents is so ridiculous it could only have come from an economist. That economist is Sam Peltzman, who in 1975 published a paper demonstrating that drivers did indeed drive more dangerously after mandatory seatbelt laws were passed in the US. He argued that despite technological evidence showing that seatbelts save lives in a given accident, there was no evidence that the seatbelt laws had reduced driver fatalities. In other words, drivers take advantage of seatbelts to drive more dangerously rather than to live longer. More compellingly, Peltzman detected a rise in pedestrian and cyclist fatalities when seatbelt laws were passed.”

One might think it is a stretch to compare a seatbelt law with health care coverage. So let’s compare the outcome of a much larger government run insurance program. Welfare can be considered poverty insurance. It pays out money in the event that someone slips into poverty. I have argued before that Welfare distorted behaviors in many negative ways, but how well did it actually reduce poverty?

In 1959, the poverty rate in the U.S. was measured at around 23%. The “War on Poverty” passed under Lyndon Johnson in August of 1964, going into effect in 1965. In 1965, the poverty rate was about 16%, meaning that before welfare became a nationwide program the poverty rate had fallen by 7 percentage points in 6 years. While the poverty rate fell to an all time low of 11% in 1973, by 1983 the poverty rate increased up to 15%, wiping out previous gains. It dipped afterwards, but again rose to 15% in 1993.

If welfare had much of a positive benefit, it is hard to tell. Maybe it worked for a few years, but if it did work, shouldn’t the poverty rate start to climb in 1995 after Bill Clinton and the Republican Congress reformed welfare and the number of recipients declined by over 50%? In 1995, the poverty rate was about 14%, declining to around 11.5% in 2000. Today, it is at 12.6%. Poverty rates improved after we radically cut back Welfare benefits.

The answer is then clear. If the poverty rate failed to decline permanently after Welfare passed in 1965, and getting rid of the program led to lower poverty rates the program never worked. If the poverty rate was declining rapidly before Welfare was passed, and then came to a halt afterwards, the conclusion can be drawn that not only did it not work, it made things worse. The power of Moral Hazard outweighed the no-strings-attached checks we handed to the poor.

How does Moral Hazard affect health insurance? In three ways: First, as I’ve talked about before, we tend to use more health services than we need under an HMO or PPO style plan. Second, we have less personal incentive to shop for the least expensive doctor, hospital, medicine, or service provider because the insurance dramatically reduces our out of pocket costs. Third, those with generous insurance are likely to feel safer and act more reckless with their health.

Some may scoff at the third one, but let me relate a story to you of a gentleman I met a couple years ago. He was in his early 30’s, college educated, with a professional job (and generous health insurance). He happened to order a big chicken fried steak so we started talking about heartburn. He related to me that he was on name brand high blood pressure medicine, heartburn medicine, and cholesterol medicine. He said, “It’s great! Now I can eat whatever I want and not have to worry about it.” Do you really think he would have the same reckless attitude if he had to pay full price out of pocket for all of those medicines? Not a chance.

Universal Health Care, under the schemes that our Democratic candidates for President are proposing will not just cost too much, they will not improve our health. If mandatory seat belts don’t save lives, if Welfare didn’t cure poverty, universal health care will not make us healthier.

As always, let me know what you think.

Updates on Fair Tax, Immigration, and Health Care

Mea Culpas -

Occasionally I make a mistake or overlook something I’ve written about. Usually, it’s one of you that points it out to me via e-mail.

On Sept 13, I wrote about the Fair Tax in “A Tax Cure All?” :

“A glaring problem is crossing borders to buy big-ticket items in Canada and Mexico…to purchase a car, boat, jewelry...Only a fool would buy any big-ticket item inside the U.S.”

John C. and Ian wrote in to let me know that buying a car in Mexico would be easy to check once you filed the paperwork for registration and license plates here in the U.S. I do still think jewelry would be easy to avoid a national sales tax. It would be hard to prove where you bought it without a massive effort. But, I do feel pretty dumb not thinking that cars have to be registered, titled, and insured.

Also on the Fair Tax I described how the theoretical ABC Services Inc. would be hurt because they would have to pay taxes on all revenue and not just on their thin profit margins. Ian pointed out that if the income tax was replaced, the tax accounting costs and human resources costs for the company would fall substantially. If you don’t pay corporate taxes you don’t really need that extra accountant. If you don’t have to fill out a whole bunch of IRS forms for W2, Social Security, Medicare…you might not need that extra HR staff member. I don’t know if this completely makes up for the extra taxes that are calculated on all revenues, but it shrinks the margin and muddies my argument.

Last week, I wrote about using remittances and work visas as leverage for opening markets in Mexico and Central America. After getting no e-mails for a few days, I felt a little like Ben Stein up at the chalkboard talking about the Smoot-Hawley trade act, “Anyone, anyone?” However, Alex G. who does work for the U.S. State Department sent this lone reply:

“Well I think you are on the right track with *some* of your comments about leveraging the money transfer issue. Your end goal…I think is too small in scope.”

“Our issuance of visas has to be looked at globally, and used as a diplomatic tool with those countries for whom we have the greatest desire to strengthen relationships. If you increase the number of visas to Mexico, India, China and others are going to (rightfully) cry foul.”


Updates –

In an article printed today at CNN.com, a study reveals that even though basic dental coverage is guaranteed by Britain’s National Health Service many British residents have resorted to pulling their own teeth. They cannot find an available government subsidized dentist and cannot afford the more expensive private dentists.

“One respondent in Lancashire, northern England, claimed to have extracted 14 of their own teeth with a pair of pliers.”

Sounds like a great system! Let’s hear it for Government run health care and insurance! Woohoo!


Pass along –

If you are consistently annoyed by many of your local paper’s columnists, like I am, and would like to send a “Letter to the Editor” here are some of their helpful tips from a posting at eHow.com:

Step Five

State your opinion right off the bat in the first line: "I am writing to say ..."

Step Six
Clarify your context. For example, "In response to yesterday's headline, let me say ..." or "In printing John Smith's diatribe against big dogs, you've lost this small reader's subscription ..."

Step Seven
Trim your letter. Column inches are precious, and the newspaper will edit the letter if you don't.

Step Eight
Keep insults, name-calling and hearsay out of the contents if you want your letter published.

Step Nine
Proofread carefully, then hand your missive to someone else to proofread a second time.

What have you done for me lately?

A week ago Saturday I attended a speech by Laura Ingraham, a conservative radio host, at my father’s invitation. I enjoyed the event, but was surprised at the emotional intensity the crowd exhibited towards illegal immigration. I do not feel so passionately about the subject. Given that surprise, I gave the subject some thought and decided to talk about it this week.

I support immigration. It lowers prices for Americans and lifts immigrants out of grinding poverty in their home countries. If we only allowed in the educated and the well-to-do, I’m not sure my ancestors would have made it here. On the other hand, because we have opened our health care, welfare and school systems to illegal immigrants there is an imbalance in the benefits from our current situation.

Who is benefiting the most and paying the least? Illegals pay sales tax and property tax (indirectly through their rent). If they are using phony documents, they still have income tax withholding and Social Security and Medicare taxes. But, because they typically live in small and modest homes, have no health insurance, low and often unreported incomes, American citizens are carrying the bigger load, and not reaping the full benefit. While the anger is directed at illegals, they are not the ones contributing the least.

Those who are benefiting the most and contributing the least are foreign relatives of illegal immigrants and their governments. Illegal immigrants send back billions of dollars to family members in their native countries. The foreign relatives pay nothing in taxes to us.

According to the Federal Reserve, remittances to Mexico in 2006 totaled $23.1 Billion, having increased annually at a rate of 20% since 2000. This is 2.7% of the national economy, and in some Mexican states, such as Michoacan, these cash flows reach 16.1% of their entire state income. According to Inter-American Development Bank, remittances totaled $9.25B during 2006 to El Salvador, Honduras, and Guatemala, which are much smaller countries. In Nicaragua, remittances may be 29% of their entire economy.

Obviously, these areas are dependent on cash from their immigrant workers in the U.S. The knee jerk reaction would be to cut off the cash, but a little more thought reveals that this can be leverage for more valuable goals.

Mexico has been a major oil producer for many decades, but their output has fallen rapidly over the last 10-15 years. Baker and Associates, an Energy Policy consulting firm, discusses in Rethinking Oil Policy in Mexico a number of problems in Mexico’s energy sector. Pemex is a government run monopoly and provides big revenues for the government in Mexico. Their oil production is declining because a lack of reinvestment in oil field exploration, while the government siphons off revenues for budget purposes. Their refinery capacity is so small that even though they export billions of barrels of oil they import gasoline because they lack the technology to expand to meet demand. The same is true for their natural gas industry. The main cause is that American companies, with their newer technologies, are restricted from investing in Mexico’s energy industry.

A threat of crackdown on illegal immigration and remittances could convince Mexico to open its energy industry to American investment. This investment could mean thousands of engineering, construction, and contract employment for Americans to work on projects in Mexico. Expanding oil output in Mexico also secures a safer source of energy for the U.S. outside of the Middle East. Other Central American countries also have a number of restrictions on American investment in their countries and public policies that hinder internal economic growth. Stricter immigration enforcement would help convince these countries to make needed changes.

As countries comply, we would offer large numbers of temporary work visas for sale to their citizens. The greater the compliance, the greater the number of work visas. Part of the price of the work visa should go to a fund to give cash rewards to legal foreign workers who give information that leads to deportations. If we are not serious about stopping illegal immigration, this leverage will be seen as a bluff.

The true source of illegal immigration is poverty in Central America. While many of their economies are beginning to grow more quickly, their failure to adopt more open markets is preventing the kind of growth it takes to lift their citizens out of poverty and into the middle class. This leaves big incentives to come to the United States illegally. Can we really expect a rural farmer from Guatemala making $800 a year to lose interest in coming to U.S. where he can make over $20K a year?

While “Just build the wall!” gets a cheer from the crowd the long-term solution is signing these agreements between the United States, Mexico and the rest of Central America. The benefits from immigration should not be a one-way street. We have to demand that these countries open up their markets to our American companies and American workers. We have to push these countries to pass free market reforms to lift their citizens out of poverty and thus decrease the demand for immigration to the United States. Illegal immigration must be curtailed to give our government the leverage to convince these countries to make these changes.

As always, tell me what you think.

Tax Cuts are O-K-L-A-H-O-M-A

My brother, Mark Shelley, of Oklahoma City told me about a tax cut proposal in the Oklahoma state Senate and I thought it was a great idea. The bill will eliminate state income tax on overtime pay. A write up of the consideration is available at the Red Dirt Political Report.

“The proposal — Senate Bill 1132 — would exempt most overtime pay from state income taxes required by the federal Fair Labor Standards Act (FLSA). “ To show that I’m not just a partisan, State Senator Kenneth Corn, D-Poteau, and Rep. Bud Smithson, D-Salisaw sponsored the bill.

Who will it help?

Generally, those who are overtime eligible do not have high income jobs. Anything from a McDonalds fry cook to a “turn around” technician at an oil refinery. This tax cut would help the working middle class and working poor.

Why is it good?

Sometimes reforms designed to help the poor are just giveaways to anyone with a low income. This bill isn’t like that. This bill rewards WORKING people, and leaves out anyone who is living on the public dole. It rewards work, not just for having a pulse and a low income.

The other aspects of the bill are attractive to the economist in me. First, it will give an incentive for anyone who works an hourly job to work harder and more hours because the pay rate will be higher. While many low income working people already pay very little, if any, income tax, they still have to wait until tax return time to get their money back. Decreasing the withholding on overtime on their check will let them see more immediate returns for their work, giving yet another incentive for harder work.

The other reason why this is a good idea is political. In the press release from the Oklahoma Senate the two Democratic Senators are joined with AFL-CIO President Jim Curry. If the Unions are in support of a tax cut than how could some of the big government supporters on the left be against it. This is a great issue for small government supporters to push for both political and economic reasons.

Why Free Trade?

Currently in Congress, they are debating free trade bill agreements with Colombia, Peru, South Korea and Panama. I think that most Americans support free trade, but do not really understand why it is a good idea. It is hard to go through an economics education and not support free trade so this week I want to make it clearer why free trade agreements are good for you and good for America. To do this I will explain how the free market works fundamentally.

Imagine if you will, that you are stranded on a desert island with a complete stranger named Bob. Both of you need to survive. Bob makes a spear and heads out into the water to fish. It quickly becomes clear that Bob is not a very good swimmer and is rather uncoordinated. Bob is a terrible fisherman. You take your turn and quickly figure out that you are a better fisherman. You find coconut trees, but you can’t climb them to get the coconuts so you throw rocks. It takes a long time to dislodge them by throwing rocks. Bob has little problem getting to the top and tosses the coconuts down. You are a better fisherman and Bob is a better climber.

If you work on your own, you are likely to have fish to eat, but few coconuts. Bob is likely to have lots of coconuts, but few fish. So you trade. Now you both have a balanced diet. However, this is not the only benefit of trade. Instead of wasting your time throwing rocks at coconuts, you can spend all your time on fishing. Bob can spend all of his time on coconuts. Now, because of trade, both have more to eat than if you tried to do everything on your own. This is specialization of labor.

Now imagine again that there are two primitive villages. One town has rocky soil, but lots of good grass; the other has good soil, but has a weed that can make animals sick. If they don’t trade the rocky village will have to try to grow crops in rocky fields, and the good soil village tries to raise livestock that gets sick. When they trade, each village prospers because they can specialize in what they have a natural advantage just like the island example. The specialization of labor lets both towns excel because they only do what they do best.

However, the transition to trade has a few short-term losers and this is where the criticism comes. The rocky village has a few farmers who will lose business in the trade deal, and the good soil village has a few ranchers who suffer. Thankfully, this problem is not permanent. Human beings are smart enough to figure out how to make a living and the lost jobs are actually good for the village. Because the two towns can now produce more food with fewer workers, the displaced can do jobs that did not exist before because they had to concentrate only on food production. They can dig wells; build sturdier homes, and all sorts of technological progress. Free trade is why humans were able to develop civilizations. Without it, we would all still be hunting mammoths and picking berries.

Today, free trade works the same way. Some countries are poor so they are better at making labor-intensive products like clothing. However, these same countries often have unreliable infrastructure (water, electricity, education, etc…) and poorly developed legal institutions so they are not as good at making high tech products as we are here. Every country has some kind of activity in which they excel. This is called a comparative advantage. It is not that we can’t make the same products that they make; it is that they can make them cheaper.

This helps explain why free trade is good for America, but it doesn’t answer why free trade is good for you and me.

The main benefit that we receive is lower prices. Because there is more competition, free trade lowers prices. We import the products and services they can perform cheaper and we export the products and services we can perform cheaper. If these four trade bills were enacted and lower the overall price level by 1% that means you and I get a 1% raise.

You probably hear complaints about America’s trade deficit and that this is bad for the economy. According to freetrade.org:

An examination of annual changes in the current account balance compared to economic growth since 1980 shows that a "worsening" deficit is typically associated with faster economic growth, and an "improving" deficit with slower growth.

You have probably also heard that free trade encourages outsourcing of jobs to other countries. Even the AFL-CIO, who is very against free trade and outsourcing and is apt to exaggerate, believes that:

According to most estimates, American workers have lost hundreds of thousands of white-collar jobs to outsourcing over the past few years.

Since 2002, the U.S. has created almost 8 million jobs and the unemployment rate has fallen from 5.8 to 4.6 in 2006. It doesn’t look like it is hurting us that much.

So remember: Free trade strengthens the economy and lowers prices. New free trade agreements can cost people jobs temporarily, but this simply avails them for more productive tasks elsewhere.

As always, tell me what you think.

Updates on Education, Principles, and Health Care

Just a few updates to the posts I had over the last couple of months, but first, I read a quote recently that I thought was great.

Robert Murphy – PhD in Economics – “If the press ignored advances in other scientific fields as much as they do in economics, we'd see weathermen advising readers to offer sacrifices to the rain gods.”


On Education –

According to a study by the Independent Women’s Forum (8/13/2007)

“Overall, private-school teachers are nearly twice as satisfied as public-school teachers with their working conditions.”

“At 82 percent, overall satisfaction rates among charter-school teachers are twice as high as their private counterparts and more than three times as high as their district counterparts. Two-thirds of charter-school teachers report high levels of satisfaction with the influence they have over curricula, student discipline, and professional development, as well as school safety, collaboration with colleagues, and their schools' learning environments. On those same measures, slightly more than half of private-school teachers and slightly more than one-third of public-school teachers report high levels of satisfaction.”

On August 9th I wrote and predicted for teachers at independently run schools a whole four days before the study:

“Increased pay, improved discipline, and being in demand should help these teachers feel more respected.”


On Principles and Pachyderms -

Alan Greenspan has written a new book entitled "The Age of Turbulence: Adventures in a New World". In the book, he reveals that he is a libertarian Republican. Here are his thoughts on where the Republicans went wrong:

"They swapped principle for power. They ended up with neither. They deserved to lose."

Here are my thoughts on the same subject from July 19:

“The conservatives lost power because they became convinced that winning elections was all that mattered.”

“What they failed to do was establish a core set of principles so that America could accept the downsides because of the goodness of the purpose.”

Save the money and just read my newsletter and blog :)


On Health Care -

Apparently, John Stossel did a report this Friday on ABC’s 20/20 about private health insurance versus socialized medicine in Canada. I say apparently because I did not watch it and it was not made available in it’s entirety on the internet as far as I can tell. There are snippets on their website however. My father did watch it and related some of the stories of eye-popping wait times that occur under Canada’s government run health care plan that John Stossel used in his piece. Two of the stories were originally from the http://www.freemarketcure.com/ website that I mentioned back on July 26. They usually run a lot of repeat stories on 20/20 so I can hopefully catch it again sometime in the future.

I highly recommend keeping a nose out for stories by John Stossel. He is one of the few journalists who do actually keep up with Economic science.

A Tax Cure All?

During a Presidential debate, Gov. Huckabee referred to the “Fair Tax”, and I didn’t know what it was so I looked it up. I came across FairTax.org, which has done research for its plan to make the tax code more efficient and fair.

Generally, this approach is a consumption tax. The “fair tax” charges a sales tax of 23% on all final goods and services. Used items would have no sales tax. There would be no income tax or any other kind of federal tax. Each person would receive a “prebate” (an early rebate) each month so that all spending up to the poverty line would be tax-free. If the poverty line were set to $15K, the prebate checks would total $3,450 during the year.

Supporters claim the plan is more efficient than the current tax code, which I believe is true. Obviously, if the tax code shrank from over 9,000,000 words down to the 130 pages they suggest this would save a lot of money on tax compliance. The group also states that this plan could eliminate the IRS, and end Congress’ love affair with lobbyists. Unfortunately, the devil is in the details.

A glaring problem is crossing borders to buy big-ticket items in Canada and Mexico. I live several hours from Mexico, but if I were going to buy a $25K car that had a 23% tax on it ($5,750), I would definitely buy it in Mexico. People living further away from the border could still save thousands by flying there to purchase a car, boat, jewelry... Only a fool would buy any big-ticket item inside the U.S.

The phrase “final goods and services” may be short, but the definition of “services” could run as long as the current tax code. The definition of “services” is vague and left up to interpretation. A link to their definition is here.

Would a company that currently provides services now have to pay a 23% tax on all the services it performs? Let’s say ABC Services Inc. earns $10 million in revenue per year, and makes $1 million profit. Currently they would pay 35% tax on $1 million, which yields $350K in taxes. If they had to pay 23% tax on their services that would mean $2.3 million in taxes ($1.3 million more than their profits). This means a whopping 757% tax increase that would drive the company into bankruptcy. Maybe this type of “service” does not count as a taxable service, but that would be up to Congress and an army of helpful lobbyists to decide.

Because of the high tax rate, every industry would constantly be lobbying to remove all or part of their output from the definition of “Final Goods and Services”. The “FairTax” would not end the IRS nor would it end lobbying.

This is not to say that a simple tax code is not a noble cause. The Tax Foundation projects that tax compliance for 2007 in the United States will cost around $305 Billion. A study by them on a Flat Tax proposal by then Texas Congressman Dick Armey in 1996, predicted it would reduce tax compliance costs by 94%. Adding up all the government workers, private tax accountants, and the corporate attorneys who work to calculate and avoid taxation it adds up to hundreds of thousands of workers. All of these people could be doing much more productive things.

However, this presents the last and greatest problem with enacting a simplified tax system. The massive upheaval of changing the system would cause many problems. Those whose entire career depends on a complicated tax code do not want to see it go away overnight. If you were 50 years old and all you knew how to do was give advice on the tax code what other kind of job could you hold? Would people give to charity as much if they did not have that pull of a tax deduction? Our current tax code affects our behavior in many ways and completely dropping it might change it in ways that we do not like.

Even though I am a big fan of the Flat Tax, the move to a simplified tax system should be a gradual one. We should have a series of what I dub “Tax Switches”. Those in the highest income brackets who own most corporate stock indirectly pay corporate taxes, which is a 35% tax on profits made by corporations. This tax should be eliminated and switched to an increase in the marginal income tax rates.

If done right, the average person would be no better or worse, and it is one less tax to have to fool with. The countless hours companies spend coming up with ways to reduce taxes are less productive for society as a whole. By doing it slowly and in one sector of the tax code, mass layoffs are avoided.

This may be oversimplified and if someone sees some holes in my logic let me know. I am suggesting this general idea.

Over say ten to twenty years, other taxes would be eliminated in the movement towards a flat tax. Tax deductions would also be eliminated while lowering the marginal income tax rates across the board.

A radical switch in the tax structure sounds good, but it is not feasible when everyone starts to realize how much stress it will cause in the short run. It is also not enough to complain about the size of the tax code and hope Congress does the right thing. We need specific policies that will help us take steps towards a simplified tax code like a Tax Switch.

The Tyrant Next Door

“I’m all for capitalism, but not in my neighborhood!”

This has become the unspoken creed of many a do gooder. While most Americans support the free market at the state and national level, they don’t seem to be quite so keen on it at the local level.

In many suburban areas, deed restrictions have become a way of life. We want our neighborhoods to look nice and we want our neighbors to maintain their property about as well as we maintain our own. A couple of years ago I received a nice little letter explaining that if I left my empty trash can in the front yard again that I would receive a $75 fine. After the trash truck came by my visiting mother-in-law had placed it on the side of the house where I can’t see it when I pull my car into the garage. Oddly enough while I received a scolding for my trashcan, no rules exist to stop the new neighbor across the street from cutting down four 50-year old live oak trees.

Neighborhood enforcement boards have earned a bad reputation in recent years by letting a select few go on power trips. A man in my neighborhood was cited for parking a boat on the street for a mere 4 hours between midnight and 4 a.m. en route to a fishing tournament. You have to wonder what kind of psycho is goose-stepping around the neighborhood at the wee hours of night looking for infractions. It is annoying, but we were all given the rules when we moved into the neighborhood. Nobody forced us to buy a house there.

In some old neighborhoods, there are no deed restrictions. In Houston, there is no zoning either. For decades, this wasn't an issue. The residents just went about their lives and the neighborhoods maintained their modest appearance. However, over the last decade interest in living in the center of the city has grown dramatically. Old and small houses are being replaced by townhomes packed onto the old lots. The Not-In-My-Back-Yard (NIMBY) crowd now wants the city to allow new deed restrictions to prevent other property owners in their neighborhoods from building townhomes. Some have been successful, so more are trying. They want to keep their neighborhoods the way they have always been. Well, at least since the last time a developer came in and tore up an old family farm to build the neighborhood, and the time before that when the farmer tore up unspoiled wilderness.

In Bellaire, a close in suburb of Houston, they have had restrictions to prevent townhomes on the books for years. The unforeseen consequence was that old homes were still torn down and monster homes took their place. You cannot afford to tear down a house to build another one unless you have a lot of money. If you have a lot of money, you probably are not going to build a small house. Of course, the NIMBY crew doesn’t like these either because the new homes tower above their small homes. In Austin, they have now made restrictions to prevent townhomes and “McMansions”, effectively preventing redevelopment in large swaths of the city.

This means that there are fewer areas for redevelopment. This drives up the prices of available land and prevents those with modest means from moving into the city. This also gives a bigger incentive for developers to seek easier targets, like poor areas with little neighborhood organization. This has consequences as well. Low-income neighborhoods often have unbelievably cheap rents in old buildings that cannot be replicated by new construction.

What is the answer? More regulation and government programs of course. All across the U.S. government organizations are building or subsidizing “affordable housing”. In San Francisco, every new home is required to give money towards affordable housing, increasing the cost per home between $22K and $44K according to a recent article from reason.com. San Francisco is already one of the most expensive places to live in America and now they have added even more costs on top of that. However, another sticky problem arises when deciding where to build the affordable housing. The NIMBY crowd gets fired up again using our courts to make sure it’s not in their back yard.

Yet another consequence from preventing denser development is “Urban Sprawl”. Ironically, the same anti-development people are against urban sprawl. The opponents of urban sprawl believe that having cities more spread out leads to more pollution and loss of open space. What’s their answer to urban sprawl? That’s right. More regulation and government programs. Cities like Portland, Oregon have instituted growth boundaries around their cities, outside of which development is very restricted. These boundaries force density and limit the supply of land for development.

Economics 101, when you limit supply, what happens to price? It goes up. Is it any wonder why a house in Houston, which has no zoning and little land use regulation, costing $200K goes for $850K in San Francisco, which has stringent development restrictions? Not all forms of restrictions are bad, but the untended consequences of excessive regulation have driven the price of homes in some cities beyond what the average person can afford.

The fundamental problem is that we cannot regulate our way to paradise. Every regulation is going to have an unforeseen side effect, prompting the “need” for more regulation. Everyone has different preferences for how they would like to live and what they want their city to be like. When property rights are taken away our cities become dominated by those who yell the loudest or have the most money. Even though I may look like a curmudgeon from time to time, I feel safe in erring on the side of property rights.

HSAs - Your FAQs

I received quite a bit of feedback from last week’s post about HSAs. I also had my first person post on my blog – FreedomistheSolution.blogspot.com. In this post I have included a list of concerns by Craig Williams of Bartlesville, OK.

1) Who puts the money in the HSA? The employer more than likely if he is not providing traditional insurance and can now get a tax reduction for funding the HSA.

This is correct. Under my proposal HSA deposits would still be tax deductible so the employer would still have an incentive to fund them. Premiums would make up a much smaller amount of the costs so the employer does not need to control premiums costs as much by interfering. I still support an employer sponsored high deductible health care plans.

However, when you left that job you would be able to take all of your HSA funds with you. Let’s say you were able to save up $4,000 in your HSA during 8 years you worked for one firm, then they let you go. You could then buy a private $4,000 deductible plan, which should be fairly inexpensive, and you’ll be completely covered.

2) Who is affected the most by the one time funding? The catastrophic illness recipient. Their HSA money is quickly consumed and they are left with a huge deductible and co-pay.

I don't see the HSA as being a one time funding. I would support legislation that encourages monthly deposits (in place of monthly premiums).

This week, I e-mailed a gentleman who works as a Health Plan consultant for a national firm asking him to confirm some points of a presentation he gave while I worked at the same firm. If he ever e-mails me back then I will let you know if he confirmed what I recall from his presentation.

He said that he was working with a company that was considering dropping their HMO style insurance and asked for alternatives. What he was able to tell them was that the incentives under an HSA were so much better that the company could offer a health plan with a $1,000 deductible and deposit $1,000 in a corresponding HSA for no additional costs over their current HMO expenses. What that means is that the employee would not have any out of pocket medical expenses.

3) What happens to all the left over money? If they never use much of their HSA savings, who eventually gets that money? The government is the likely recipient as with the FSA left over funds today.

Let me first clarify first that left over FSA funds actually go to the employer, not to the government. Any money left over at the end of the year would roll over to the next. Younger people who don't spend much on health care would often be able to build up a significant account balance so that insurance becomes less and less necessary. I would also support allowing transfers into a retirement account once the balance reached a certain level (say $25,000). I would also support allowing people to make a full withdrawal at age 65.

4) A number of employers fully fund High Deductible insurance premiums already today. Many employees pay a premium to have the more traditional insurance above the portion their employer pays.

The existence of PPOs is not only a result of the tax incentives given to corporations. There is a market for PPOs outside of employer plans. If a person chooses to take on additional insurance, that is their choice. Let me be clear, I do not support banning HMOs and PPOs, only the tax incentives that encourage them.

5) High deductible insurance only helps the non-employer paid insurance workers by having cheaper premiums. They must still fund their own HSA out of pocket. They still run the risk of having a large debt if they have a catastrophic illness.

It is true that HSAs aren't the best plan for every person in every circumstance. I’ve read a good amount about the subject and brainstorm from time to time, but I haven’t figured out a perfect plan for every person. As soon as I figure out the perfect plan for health care please write your checks to “Friends of Brian Shelley for President”

6) Our Aetna PPO severely limits the price that a doctor, hospital, or lab can charge for services. Many times I have seen reductions of as much as 90%. Which means my employer as well as me saves money, because my company is self-insured and only uses Aetna to administer the policy.

I am not 100% familiar with how organizations administer group discounts, but I imagine that many doctors agree to them so that they get more patients. I don't see a logical reason why group discounts couldn't be coordinated through an employer after the switch to HSAs.

I probably haven’t answered every question or concern, so don’t shy away from putting in your two cents. Our health care system is very complex and coming up with a short and sweet answer is not very likely. I can see now why this why Bush had a hard time getting people excited about HSAs. The principles that I am trying to stick to are slowing the growth of health care costs and expanding individual control and freedom over personal health care protections.

More Health Care Solutions

Today, the vast majority of Americans with health insurance receive it through their employer. The employer typically pays a large portion and the employee pays the rest in premium. The reason why the employer offers health insurance is that premium payments are not taxed, meaning the company can offer a slightly more generous compensation package than with just salary alone. Most companies offer either HMO or PPO coverage.

An HMO requires you to be part of a network of medical providers, and typically requires a referral before seeing a specialist. Doctor visits cost the employee a co-pay (normally $5 to $20). Hospital visits also charge a co-pay ($100 is common). Beyond the co-pay, there is a very high dollar maximum for charges in a year. However, the company controls costs by limiting services available and often limits doctors on the care they can give you.

A PPO encourages you to be part of a network by offering discounts. A PPO does not typically require a referral before seeing a specialist. An employee must incur enough medical cost to meet the deductible (usually a few hundred dollars) before the insurance company begins to cover costs. After meeting the deductible, the insurance company will typically pay between 70 and 90% of the medical expenses, up to an annual maximum, after which they pay 100%.

Imagine if you will, that your local grocery store offered families a flat $100/week fee for groceries and then $5 per visit, and the family could pick whatever they wanted. What do you think would happen? People would take home more groceries than normal and they would choose the highest quality food in the store. I personally would die of a coronary after 50 straight days of eating my body weight in meat and Blue Bell ice cream. Few would exercise self-control about the kind of foods and the amount. Why get one Hershey’s bar when you could get three Godiva ones? Why not buy the free-range-slept-on-a-satin-pillow-with-daily-massage-and-yoga-classes eggs that cost $25 a dozen? The extra cost to the family to pick up a few more items would be zero, but it would still cost the grocer. The store would quickly go out of business.

This scenario is called “Income Smoothing” and it creates terrible incentives. Income smoothing is exchanging a random stream of expenses for a smooth and level one, which is exactly what an HMO does. An HMO does not actually meet the technical definition of insurance. Insurance is a financial arrangement to mitigate the risk of an unforeseen event, whereas an HMO covers all medical events expected and unexpected. There are a few special arrangements such as futures and swaptions in the financial world where income smoothing works, but it would not work well for our grocery store and it does not work well for health care.

Under an HMO, you pay a flat monthly fee and then just a few dollars for every doctor visit. There is an incentive to go to the doctor too much because your costs do not equal the actual costs. There are times when I could see myself spending $5 on a doctor visit and $5 on a prescription, because I can barely buy a bottle of Tylenol for that amount. There aren’t as many times when I would spend the real costs of $100 on a doctor visit and $150 on a prescription. A PPO is not as bad, but once the deductible is met and the policyholder only pays 10 or 20% of the actual costs, the incentives can be as bad as under an HMO. The added demand these health plans create increases the price of health care services nationwide.

Some may wonder just how big a problem these bad incentives really are. If the design of HMOs and PPOs caused every American to go to the doctor and get a prescription just one more time than needed each year (assuming an average doctor’s visit is $50 and a prescription is $50) this adds up to $30 Billion in wasted resources.

The general problem with the system of HMOs and PPOs is that they separate the costs from the consumer. The solution, as I have mentioned before, is Health Savings Accounts (HSAs). If you do not spend all the money in your account, you get to keep it. Every dollar of health care you use you have to pay for. Charges are not pooled with everyone else in the plan like an HMO or PPO. This incentive helps people control their use of medical services.

When the government started giving tax deductions for employer sponsored health plans, we lost control of our own medical care. We fear quitting a job we dislike because we are afraid of losing health care coverage. Some spend health care dollars irresponsibly because someone else is picking up the tab. To keep costs down, employers and insurance companies make many decisions for us and try all kinds of techniques to manipulate not just our decisions but also those of your doctor as well.

An HSA allows you to take your health care savings with you no matter what your employment situation. It corrects the bad incentives that have led to skyrocketing health care costs. It gives control of health care choices to doctors and patients, not employers and insurance companies.
Because of this, I support ending the tax deduction for companies offering health care plans like HMO and PPO plans and instead create a tax deduction for money placed in an HSA with a high deductible insurance plan. This would help fix the problems with the bad incentives caused by income smoothing. It frees us, and our doctors, from manipulation and interference by a cost-cutting bean counter sitting in a cubicle. It would also allow portability of insurance, and it gives you ownership of your health care funds.