Futures and Options

I know that I should not be amused by this, but the irony is just too rich for me to resist.  A new study by Kip Viscusi, an economist at Vanderbilt University shows that thin, healthy people cost insurance companies an average of $91,000 more than smokers from age 20 through death.  All that wonderful self-righteous backlash against smokers and it turns out that it’s the heath nuts who are a larger burden on society.  Even if this means my own insurance rates go up, I’m all but shaking with mirth over this discovery; I man not smoke, but darned if I don’t just love it when the morality squad has their beliefs challenged.

Right Wing Nuthouse makes a good, though slightly vitriolic, point about the allegations that are being thrown around regarding the Oakland, PA shooter’s motivations.

But beyond Willis’ usual hysteria and laughable hyperbole, there is this fantastical notion shared by many on the left that they have insight into people’s souls not granted to us mere mortals. Willis can make an extraordinarily bald faced statement that the reason the Pittsburgh killer acted was because he was influenced by right wing blather – without so much as “we think” this is so or “many believe” this is what he thought – because many liberals think themselves qualified psychiatrists or better yet, “diviners of their neighbor’s intent.” It is a heavy burden Oliver and other liberals carry, this almost psychic ability to peer into other men’s souls and glean motivations that we ordinary folk are not vouchsafed the ability to use.

Now, while I disagree with the broad brush being used here and the portrayal of liberals as a homogeneous group (even though I believe that it is being used for rhetorical purposes and not literal ones, I still dislike it), I wholeheartedly agree that there are at least a subset of people (on either side of the political continuum) who firmly believe in their ability to divine other people’s motivations.  Such beliefs are untenable.  Most of us barely understand our own motivations, much less the motivations of others, no matter how much we wish it were otherwise.

At most, we can say that Poplawski’s actions appear to have been partially influenced by a misunderstanding of the prevailing conservative view that greater restrictions on firearms are possible given the current administration.  Similarly, Charles Manson’s actions appear to have been partially influenced by a misunderstanding of the Beatles’ song “Helter Skelter”.  We don’t blame the Beatles for Manson’s actions because Manson was quite insane.  Likewise, Poplawski is clearly insane and it seems irrational to blame the actions of a lunatic on the empty rhetoric of a conservative fringe.

Of course, wherever there is an opportunity for political gain we can always be sure that someone will step in and attempt to exploit it, regardless of party affiliation.

Apparently I’m not the only one who thinks that the current mess was caused largely by excessive consumer debt.

This is an interesting article and I would encourage anyone with an interest in the root causes of our current economic situation to read it.  The author does an excellent job of comparing the current downturn to the 2000-2001 “dot-com crash” as well as to the Great Depression of the late 1930s.  The article concludes with the following:

What we’ve offered in our discussion of this crisis is the back story to Mr. Bernanke’s analysis of the Depression. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we’re witnessing the second great consumer debt crash, the end of a massive consumption binge.

This former Portfolio Analyst agrees.  As a country, we heaped debt upon people who were obviously unlikely to be able to repay that debt and now we all have to pay the piper.  The responsibility for the current crisis does not lie solely on the banks (though they do deserve blame for their failure to enforce anything resembling reasonable credit standards), but rather lies upon our own shoulders as well.  We borrowed, borrowed, and then borrowed some more, and in the process we created an economy whose growth was illusionary; fueled by credit instead of by real money.  As the country reached a point where credit began to max out, our economy faltered.  We should not have any trouble understanding why.

Yes, some things are large enough that they need to be bought on credit.  Home loans, educational loans, etc., these debts have tangible and intangible long-term gains and there can be wisdom in taking such debt, but for most of the pieces of everyday life a simple mantra rules:  Pay cash, or do without.

Today, the Iowa Supreme Court unanimously struck down the state’s statutory ban on same-sex marriages.
The decision is well-written, extremely thorough, and worth reading in full, if only for its excellent tour through modern equal protection doctrine. But it is wrong.

I do not wish here to address the policy merits of the same sex marriage debate (I do suspect that I, as more of a Burkean conservative, have different views than Zenmervolt, and I think this would be a worthwhile exchange at some point). I’d like to focus on what I view as the court’s flawed legal reasoning, which amounts to a judicial veto on a valid legislative act, rather than a legitimate exercise of judicial review grounded in constitutional law. I won’t address the standard of review question (rational basis, strict, or intermediate) that takes up a considerable chunk of the court’s opinion, because I don’t think it really matters in the end; the court would have invited itself to subjectively evaluate the wisdom of the law whether it felt compelled to describe the state’s interest in that law as “compelling” or merely “rational.”

Whatever the standard of review, the critical error of the court’s reasoning was its conclusion that homosexual couples are “similarly situated” to same-sex couples for purposes of the marriage law. Although this is traditionally treated as a threshold question in equal protection analysis, the court notes (correctly, I think) that it is really a different way of asking whether the state has a sufficient justification for discriminating between two groups defined by a certain characteristic, which is the meat of the inquiry in any equal protection claim. So what were the asserted state interests here? The state offered five, but I’ll focus on what I think is the most arguably compelling justification.

The state argued that limiting marriage to heterosexual couples promotes the optimal environment for raising children. There is broad room to disagree about this statement, and I am no expert, but there is a considerable (if not overwhelming) body of social science concluding that children do best when they are raised by both their biological father and mother. I gather that there is also considerable and growing evidence that children raised in stable homosexual relationships likewise do quite well. The court cites the latter findings approvingly but disregards the former as “largely unsupported by reliable scientific studies,” and so concludes that this particular justification for the law does not pass muster. The court in essence concluded that homosexual couples were, in fact, “similarly situated” to heterosexual couples when it came to raising children.  This is, as a matter of first impression, a defensible position, and I would not fault a legislative body for coming to such a conclusion.  But the question before the Iowa Supreme Court was not a matter of first impression, and the court was not a legislative body.  The court was reviewing the decision of the Iowa legislature, which had concluded (also defensibly, in my judgment) that homosexual couples were not, in fact, similarly situated to heterosexual couples when it came to raising children.  It is simply not the role of the court to re-weigh the competing evidence and policies and come to its own independent conclusion on the matter. That is squarely within the province of the legislature. The court’s opinion substitutes its own political judgment for that of the democratically elected representatives of the state of Iowa. This is, of course, not a new complaint about courts, but what continues to drive me nuts about this practice is the cloaking of such activism in the language of objective constitutional interpretation. The court is taking a subject of legitimate political debate off the democratic table by itself making an inherently political judgment. The result is that the citizens of Iowa, apart from the extreme long-term remedy of a constitutional amendment, now have no political voice in this extremely important and divisive issue.

One other note: the court’s opinion forecloses the possibility of the Iowa legislature offering civil unions as a possible way to remedy the equal protection violation here.  The court wrote that civil unions “would be equally suspect and difficult to square with the fundamental principles of equal protection embodied in our constitution.”  How the court can take such an important (and in my view, reasonable) option away from the legislature without having heard any argument on the subject is beyond me.

At a time when most people in America have had their annual raises withheld due to the economy, Congress is hashing out a version of the budget that tentatively includes a 2.9% pay increase for federal employees. While several watchdog groups are, quite naturally, against this proposed increase, at least one is defending it:

Max Stier, head of the Partnership for Public Service, said good pay helps the government recruit quality employees needed at a time of economic crisis.

“We’re asking more from our government than we have in a couple of generations,” said Stier, whose non-partisan group promotes effective government. “It would be penny-wise and pound-foolish to minimize pay to federal workers when we need so much from them.”

Ah.  So higher pay attracts higher-calibre workers.  I see.  Unless, of course, you work in the private sector, especially for a bank.  In that case, higher pay means you’re a greedy bastard.  But if you work for the government, it means you’re better at your job.  Nope, no hypocritical double standards here.

It seems that President Obama favors reducing the tax deduction for charitable donations.  I can understand the appeal of the superficial “fairness” that results from eliminating the greater deduction available to those with greater incomes, but it doesn’t take into account that those people also pay a higher percentage of their income in taxes.  Because they pay taxes at a higher percentage rate, they should get a higher deduction rate to offset their higher base rate and to provide a truly comparable benefit.  The inevitable result of this, however, will certainly be less charitable giving.

Now, to be sure, I agree, in theory, with the President’s comment that, “if it’s really a charitable contribution…that that shouldn’t be the determining factor as to whether you’re giving that $100 to the homeless shelter down the street.”  This is completely true as far as it goes.  But it doesn’t fully address reality.  The fact is that a decent number of “charitable contributions” are only undertaken to achieve a tax write-off.  In fact, that’s really the point behind the deduction for charitable giving; to coerce donations to organizations that help the community.  It is all well and good to want to believe that these donations are made out of the goodness of people’s hearts, but that isn’t fully realistic.  We can wish that it were, Heaven knows that I wish it were, but I seem to remember my grandmother telling me something about how, “wishing doesn’t make it so.”

So, the end result here will be a reduction in charitable giving.  That much seems unarguable.  That said, despite my pithy headline, I will reserve judgement on this idea.  Obama correctly states that the best thing he can do to help charities is to get the economy moving again, and if this reduction of the charitable giving deduction helps to prevent even greater budget deficits, then it may be a net good.  But I’m skeptical, and inclined to think that this won’t end as well as our President hopes.

“There Ain’t No Such Thing As A Free Lunch”

People who know me know that I’m not one to miss an opportunity to praise Robert Heinlein, but his recognition and popularization of this basic fact strikes me now as one of the more prescient aspects of his writing.

Our obsessive pursuit of a free lunch is, in my mind, the chief cause of the current problems with the world economy.  Yes, many are blaming simple greed, but there’s more to it than that.  Greed, simple avarice, while distasteful, is distinct from the more toxic desire for a “free lunch”.  Greed in and of itself is simply a desire for more.  Left un-checked greed alone can ruin a life, sure, but it’s possible to be greedy without the domino effect that we have observed in the past year.  It’s possible to be avaricious without desiring to acquire possessions undeservedly; greed can drive push a person to improve himself and to earn those things which are desired.  To be sure, such a life is ultimately unfulfilling and there is no final satisfaction in it, but it won’t necessarily drag everyone else down.

No, the disaster comes when greed is accompanied by sloth and we seek possessions the easy way.  When we believe that we can get something for nothing we delude ourselves.  Sometimes we merely postpone payment (with interest), sometimes we force that payment on others, and sometimes, worst of all, we do both.  It is convenient to blame banks and CEOs and “speculators” (a vague grouping at best), but the fact is that most of us bear at least some of the burden ourselves.  When I first started working, during the boom period of 2004/2005, I looked into  the possibility of buying a small house as opposed to renting.  Fresh out of college, $2,000 in the bank, two months of work experience in a “real” job.  The bank told me they could approve me for a $250,000 mortgage.  I told them they were insane and that I was looking for, at most, a 75,000 mortgage.

The result of my search was that I remained in an apartment; unlike the area in which I grew up it wasn’t possible to find solid $50,000 to $75,000 houses where I was working.  But that’s not the point.  The point here is that a lot of people believed their bank when they were told that things would be fine and that they could refinance later when the value of the house had gone up (because it was certain that house prices would continue to climb).  To be sure, banks should not have been willing to lend as much as they did; I am by no means absolving the banks which were out after their own free lunch.  However, I’m simply astounded that more people didn’t realize that they needed to reign in their spending and stop relying on credit.

We willingly buy into the idea that credit spending is acceptable and then are shocked when the bill comes due.  On Sunday, there was a story on the news about a man who had been making over $750,000 a year as a Hedge Fund manager who had lost his job and was now delivering pizzas for $7.50 an hour to make ends meet.  The news story took the populist slant and there was a sort of “wink wink, nudge nudge” implication that this was in some sense the deserved comeuppance for one of the “fat cats” who caused the current mess.  That angle didn’t work for me.  Instead, I came away wondering why no-one questioned how a man earning $750,000 a year lacked any significant savings.  I’m simply baffled by the apparent expectation that we’re all living paycheck to paycheck regardless of how much we make.  That a person who made $750,000 a year had no significant savings to fall back on is absolutely baffling to me.

When it all comes down to it, we have all made this bed and we all have to lie in it.  Maybe good will come out of this yet.  Maybe we’ll learn something and start saving again.  And maybe I’ll strike oil in my backyard.  But hey, I can still hope.

A couple of days ago I speculated that any retroactive tax would be an ex post facto law.  It turns out that the US Supreme Court may disagree with me.  In United States v. Carlton, the court decided that tax regulations can be retroactive provided that such regulations are used to “correct a ‘mistake’ in the original legislation that would have resulted in significant and anticipated revenue losses through ‘essentially sham transactions’.” The court supported a retroactive tax regulation on the basis that the regulation was, “neither illegitimate nor arbitrary”, and it, “acted promptly and established only a modest period of retroactivity.”

Whether the retroactive changes to “correct” the AIG bonuses are covered under this decision, however, is open to debate.

• Does US v. Carlton apply if the new tax regulations are correcting a “mistake” in something other than the tax code?
• Can bonus payments that were contractually-established well before AIG took any governmental money be considered in any way to be “essentially sham transactions”?
• Do these bonuses truly constitute a “significant and anticipated revenue loss” when the government did not have any anticipation of revenue from the bailout?

And that’s not even getting into the issue of whether the tax regulations would be a bill of attainder, though that too seems to be up for debate as I cannot find a court case that seems directly applicable.

Still, given the generalized death threats received by AIG, it’s entirely possible that any punitive legislation will remain unchallenged simply because the plaintiff in such a case would likely be risking his or her life.

I do have to wonder though, just how much it will cost the IRS to accommodate any new regulations.  It’s certainly less than the bonuses, but I have enough experience with implementing business processes and software to know that it’s going to be a few hundred thousand dollars by the time it’s all said and done.