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April 29, 2005

A Contradiction of Integrity

I had a great telephone conversation tonight. You know the sort, talking with your best friend for several hours and hearing about fun stuff. I was thinking of going to sleep afterward (it's been a long, busy week at the office) but she told me I should do some blogging first, so here I am. :)

Ethics was the major topic of the night (she's in a philosophy class) and I have something worth saying to a larger audience. Contradictions in logic are universally condemned, and rightly so. But contradictions in ethics are often not even noticed. This is a tragedy.

Many people have observed that, for example, people who say we have a serious moral obligation to help the less-well-off seldom help as much as they could. There is no parade of rich altruists selling their estates in order to send money to the desperately poor in developing countries. They "feel" the pain but don't follow through with money. This is a clear manifestation of a phenomenon that is, unfortunately, extremely common.

The basic problem is that people are not very disciplined about ethics. If a person claims to believe they have a serious obligation to help others, and admits to not following through, they'll report a feeling of guilt. An economist might retort that their stated preference is not the same as their revealed preference. But this is really a philosophical matter, not an economic one. Why do people put up with this semipermanent state of guilt?

Integrity is a virtue, and guilt is the penalty for breaking it. It is a form of contradiction for one's beliefs and one's actions to be incongruent. Either one's beliefs are wrong, or one's actions are wrong, or possibly both. In logic, the discovery of this contradiction would prompt a search for the error. In ethics, for most people, guilt does not create this response. It creates a desire to avoid the matter rather than to resolve it.

Yet there is an error here.

People are hesitant to reexamine their beliefs because they simply don't know how. Most people acquire their ethics implicitly from their environment and do not have strong ethical reasoning skills. And people are hesitant to change their actions both because it would be to admit an error, and because they actually don't want to change. ("Sell my house and give away the money to some poor people I've never met? That would be so uncomfortable for me!")

The root of the trouble is that they hold conflicting ethical principles. "From each according to his ability, to each according to his need" conflicts with "I've earned what I've got, so I can keep it." Resolving the conflicts between explicit ethical principles controlling statements and implicit ethical principles controlling actions is important. It is the ethical equivalent of seeking to understand the error that lead to a contradiction in logic.

It ought to be done. And I think it would be, if people took integrity more seriously. Your thoughts and your actions should be congruent. Guilt is the emotional warning that something is wrong — don't try to bury it because it's unpleasant.

If you buried your hunger because it was unpleasant, you would starve to death. By burying guilt, you're doing a different sort of harm. You're letting yourself continue to operate with an ethical system that you know is wrong. In any particular instance, there's no way to tell if you'll be guided by the correct or the incorrect principle. Or perhaps both of your principles are wrong, so anything you do is harmful.

Fix your ethical machinery. Think about it.

April 27, 2005

Study Economics Before Writing About It

I realize I've missed most of the brouhaha about recent changes in bankruptcy law. I wasn't very interested in the subject and didn't follow it. So I don't have anything to say about the legislation that was recently passed and sent to the President's desk.

Today I stumbled across an article written at least a week ago (why oh why doesn't everyone date their articles?) judging from an editor's comment. It was easy to tell the author had an agenda, which I'm fine with, but it was also easy to tell the author wasn't studied in economics. That, I'm not fine with.

If you're making an economic argument, you should know what you're talking about. The portion I thought was over the line was on the article's second page:

Proponents of the bill, including its sponsor, have argued that it will relieve honest Americans from having to pay the "bankruptcy tax."

"In their view, the cost of credit card defaults is passed along to the rest of those who use credit cards, in the form of higher interest rates," the professors explain. But this so-called tax just does not exist, say the educators: "The average interest rate charged on consumer credit cards has declined considerably over the last dozen years," they point out. "More importantly, between 1992 and 1995, the spread between the credit card interest rate and the risk-free six-month Treasury bill declined significantly and remained basically constant through 2001. At the same time, the profitability of credit-card-issuing banks remains at near-record levels."

Poof. There goes the whole rationale for passing the bill in the first place, and with it the illusion that credit card companies suffer losses when consumers with financial hardships file for bankruptcy under Chapter 7. The credit card companies aren't really losing money; they're just not making as much as they could if everybody had the wherewithal to pay their bills.

The article didn't state whether the "group of 92 professors at prestigious universities" were economics professors. I find it hard to believe that any were. (A more charitable, and possibly more correct, interpretation is that the professors were just noting the facts and the journalist was putting words in their mouth by writing "does not exist, say the educators" before their quote. Alas, I can't check her sources, because she didn't provide a link or citation.)

The reasoning of the bill proponents was correct: Defaults cause higher interest rates. The facts (assuming that they're true) that credit card rates have declined and profitability has held up are not inconsistent with the argument that defaults cause higher interest rates.

A more precise statement of what was called the "bankruptcy tax" is that defaults cause interest rates to be higher than they otherwise would have been. An economist looking at the theory and the facts would quickly and easily say that credit card interest rates would be even lower than they are today if there were fewer defaults.

No doubt this journalist sees herself as a consumer advocate. This is a good example of a person advocating something, out of ignorance, that will frustrate their goals. If concern for the poor is paramount, and the poor have credit card debt, then lower interest rates are an extremely powerful way to help them. (After all, a far larger number of poor people pay credit card interest than will file for bankruptcy.)

The ultimate example of people advocating something that will achieve the opposite of their goals is, of course, those few honest believers in socialism.

April 25, 2005

Narrowing the Auto Search

I've been reading and talking to friends as I narrow my search for a new car. The least helpful suggestion so far was to buy a golf cart and stick a pirate flag on it.

I've got a better idea of what I want, now:

  • My base price range is $25,000-$30,000. After getting carried away with optional equipment, my absolute price ceiling is $35,000.
  • I want a boring 4-door sedan with a comfortable back seat for hauling around friends (and some day, I hope, children).
  • Safety is a priority. I want all-wheel anti-lock disc brakes and driver, passenger, and side airbags. I've never been in a car accident, but I've almost been in several. If I'm finally caught off-guard, I intend to survive.
  • Another safety feature I require is OnStar (or a similar competing service) because it can alert emergency services even if I'm incapacitated in an accident.
  • I'm a twenty-something American male, so I want something decently sporty. At least 200hp and 200ft-lb, and it needs to feel good during the test drive. Unfortunately, I can't quantify "feel good" so it won't help me narrow the field before test drives.
  • Heated seats. Even though it never gets all that cold in Oregon, I've fallen in love with butt warmers during my trips back to Iowa.
  • The car must be quiet. The main road to Portland from here, Hwy 26, is an extremely loud road. I want to be able to carry on a conversation without shouting, or listen to music without cranking it up. (Yeah I'll probably crank it up anyway, but I want to know I don't have to.)

These features would be very nice to have, but not deal-breakers:

Things I'm not interested in:

  • Great gas mileage. I only drive ~3200mi/yr, so I don't care.
  • Dashboard navigation system.
  • Sunroof/moonroof.
  • Towing.

I hope these things narrow the field substantially. Now I'll go wading through the options…

April 24, 2005

Springtime in Oregon

I rushed out to take this picture Friday evening.

Where's my leprechaun?

Springtime rainbow in Oregon

Arrr, I'll be goin' thataway to dig up some buried treasure. I love goooold!

(I just hope it's not buried under a big "W".)

One Piece

I Japan. I Cartoon Network.

I saw the premier of One Piece today. I had never heard of it before, but it's all about pirates! It's been a huge success in Japan, and has run for many years. It's like they made a cartoon just for me, but kept it a secret.

Arrr! I wanna be the pirate king, too!

April 23, 2005

Banks Giving Away Money

Something strange is afoot in the banking industry. They're giving away money. This isn't normal, but I think I see what's happening. They're giving away money because they're running out of cash.

"What's that? They're giving away what they need?" Yes. Recently, two banks have sent me letters bribing me to entrust them with my money.

My bank wants me to make a deposit into my savings account. They said they'll give me $30 if I deposit at least $4000, or $15 if I deposit at least $2000. But I have to leave the deposit there for at least six months.

Earlier, I got a letter from a different bank (who I have no association with) offering me $75 if I'll open a checking account with them and keep it for at least 8 weeks.

What's going on? Why do they need deposits so badly that they'll pay for them?

I think there are basically three things combining to put pressure on the banks. (1) The federal funds rate has been rising steadily since mid-2004, making it more expensive for banks to get money from the Fed. (2) The banks are hurling money into the housing bubble, which continues to grow. (3) Finally, banks' required reserves have been increasing, limiting their ability to make loans. (The increasing reserves are partly a reflection of the loans already made.)

Look at the squeeze. The mortgage market is soaking up loans while the Fed is increasing its rates and reserve requirements are going up. To keep loaning into the housing market, they need cash. Since the Fed took its ball and went home, the cheapest source of cash is depositors like you and me. If we open accounts and make deposits, they'll have more cash to loan out. The mortgage business is profitable enough that they'll pay us to part with our money.

As long as they're giving me money, I'll play along. But I think this is a bad omen for the banks.

April 18, 2005

Auto Shopping

I've finally begun automobile shopping in earnest. What ended the procrastination? A deadline. If I haven't purchased a new car by June, I'll have to renew my current auto insurance. That might not sound like a very meaningful deadline, but please don't talk me out of it. I've been saying I wanted to buy a new car for over a year, and it's time to actually do it.

This will be my first experience buying a new car. The one I drive now (and have driven since I was in college) was bought used. I've spent a lot of time this weekend reading about car buying, but not much time comparing specific vehicles. I'm not sure what I want yet.

I want a sedan. (The body style is one of the few easy decisions.) I want it to be an above-average vehicle, but nothing excessive. I simply don't need it — last year I only put 3200 miles on my current vehicle. A fancy car wouldn't be worth the money. You get rich by saving, not splurging.

Unless fancy cars really are babe magnets. Seriously, I don't know, but if you do you should tell me. It may be shameful to admit, but that factor could influence my decision. (Nonsense; it's not shameful to admit, honesty is never shameful. Having the inclination in the first place can be shameful, but in that case I can feel it even without telling anyone…)

The median price of a new car is $25,500, or at least it was in 2002. That page also used the same figure as the average price, so this data is both old and innumerate. But it's close enough for my purposes. I'll set my base price range at $25,000-$30,000 and do a sedan search at Yahoo! Autos. After adding options, this search should put me comfortably in above-average range.

Thirty-three models. Sigh. This might take a while.

Great CotC This Week

This week's Carnival of the Capitalists is unusually good.

My favorites:

  • Government-Sponsored Enron: The Fannie Mae accounting scandal is about 20 times as large as Enron's, but is curiously receiving much less media attention and no one has been indicted. Hmmm, why is this?
  • "Technology comes in two types: clone-able and magic: The latter is easier to make a profit with.
  • A great advertising idea if we de-socialized our healthcare: "At the Smith health center, if you wait more than ten minutes after your scheduled appointment time, your visit is free."
  • Drug development and market failure… or not.
  • Fascinating federal government revenue and expenditure numbers. Guess where the problem is?

Additionally, and totally unconnected to anything I've ever written about, this blog has a great banner. A cute girl motioning as if to hand you a drink, or deliver a toast? That's plain great. It's a total non-sequitur (the blog author is a guy) but who cares? Not me! Now I need to find a bunch of gorgeous women to pose for photographs. …but if I had that, I might reduce my blogging a bit.

April 17, 2005

Bloggers, Journalists, and the First Amendment

"Bloggers. Showing up at the national political conventions, even at the White House press room. But are bloggers journalists? And do they deserve the same First Amendment protections?"

That's the lede I heard flipping through channels. It got my attention. But — Arrr!! — it looks like this will be the very last story on the program (Fox Report). While waiting for the real story, I couldn't help but think of the response of Charles Babbage (19th-century inventor of mechanical computers):

On two occasions, I have been asked [by members of Parliament], "Pray, Mr. Babbage, if you put into the machine wrong figures, will the right answers come out?" I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.

The issue, you see, is that the First Amendment doesn't grant any special protections to journalists. It applies to all citizens equally. It prevents Congress from "abridging the freedom of speech, or of the press" — but these are the same thing. Even if they weren't, my computer is a press, affording me both the freedoms of speech and of the press.

I am not able rightly to apprehend the kind of confusion of ideas that could lead a "Real Journalist" to think he and his press should have legal privileges that I and my press should not.

… it wasn't quite the last story on the program. And it was pretty dumb. The MSM's constant complaining that blogs don't have oversight and accountability is wearing pretty thin given how many times blogs have exposed bias and errors in MSM reporting.

Oddly, at the end, the program did admit the First Amendment applies to bloggers too. Doesn't this make the whole story pointless? Why even air it?

Arr! I'd post this, but my host is having some technical difficulties. Sigh. Eventually, it'll get through…

April 16, 2005

The Estate Tax and Capital Decumulation

Shocking! Outrageous!

Matt Yglesias writes about the estate tax. I don't read him often, and this sort of article is why. (Also, Paris Hilton is mentioned.) I hoped that someone in his comments would have something substantive to add, but I gave up halfway through. There is a very straightforward, easy to understand reason why the estate tax is a bad tax. I'll go so far as to argue that it is the worst possible kind of tax and ought to be completely and permanently abolished.

First, let's see what I'm up against. After stating his preference for inheritance tax instead of estate tax (I see no substantive difference), he says:

Speaking of which, fuck the small businessman. This is exactly the problem posed by obsessive focus on Paris Hilton. I might be an earnest, hardworking dude who works in the store. And somebody might die and give the store to me. The store may be worth millions and millions of dollars. If so, I ought to pay tax on it. Why? Because I've just inherited millions and millions of dollars, that's why. That I'm earnest and hardworking, and that my riches came in the form of a valuable store rather than a heaping plate of gold matters not a whit. What about those sad folks forced to sell the family business? Don't cry for them. Here you are, you inherit a store worth $X. You owe $Y in taxes, with Y being less than X. So you are "forced" to sell the store, and accept "only" $X-Y as your inheritance. Note that X is a figure in the millions, and Y a small proportion of X. This is a very good problem to have, abstracting away from the fact that someone you love has probably died and this is probably a bigger concern of yours that the tax bill. This is, in other words, a non-problem. The government ought, perhaps, to facilitate some kind of lending arrangement so that people who prefer to keep the store and pay the tax down over time out of operating revenues can do so.

What kind of thought process creates this sort of drivel? Megan McArdle had it right in her brief post (h/t) saying "Matthew Yglesias ably demonstrates why middle America hates blue state folks like us." But she also didn't say what was wrong with it. And after reading about a third of her comments, none of them had hit upon it either.

Perhaps, then, what I'm about to say is a uniquely Austrian perspective. (Megan's audience tends Chicago school. Matt's is &hellip not economic.)

The estate tax is a bad tax because it forces capital decumulation. It does this very purely. Unlike income or sales taxes, the estate tax's effect on capital doesn't occur at the margin, with dollars that aren't yet or are only barely invested. The estate tax gouges deep into existing capital. Even a small percentage of a business with several million dollars in assets is a very large tax and can easily require the sale of the business, or the acquisition of a large debt to avoid sale.

No matter how financed, the tax is a large chunk of money headed to the government all at once. Large chunks of money do not come from current wages or profits. They come from savings accumulated over time — i.e., capital.

(Are property taxes similar in this respect? Yes, somewhat. They are not as bad because they are much smaller and are regular, so the funds required to pay them will not become invested in long-term projects to begin with. The accumulation and then decumulation of capital is more wasteful than simply not making long-term investment in the first place. Property taxes can also be somewhat justified as a form of usage fee for government defense services. But don't get me started on public schools.)

To make the capital decumulation point clear, I must stress that there is a decumulation of capital even if the business is not liquidated. The funds that enabled the business to stay whole came from a partial liquidation of some other business. Large chunks of money are productively invested (are capital), and are not found lying around idly.

The capital markets play an important role in minimizing the amount of real capital decumulation, but they would have to be perfectly efficient in order to make the estate tax's effect on capital similar to the income tax's effect on capital. (This impossible state of affairs would be represented by financing the estate tax by selling shares of the affected business only to people purchasing them out of current income.)

Capital decumulation as the explicit policy of the government is a dagger at the heart of the economy. Capital is a major factor raising the productivity of labor (the other is specialization) and this higher productivity is what makes us all wealthy. The estate tax forces capital decumulation, lowering the productivity of labor, and reducing our wealth compared to what it would be without an estate tax.

That is why the estate tax is bad. It makes us all poorer. Briefly adopting Matt's tone: government financing be damned.

I was about to mention how wonderful it feels to write a post purely about economics, rather than about politics or …taxes. Oops. This whole thing is about taxes. But at least it's from an economic angle, rather than the personal finance angle. So it didn't feel like I was writing about taxes. :)

April 15, 2005

Rangel-ing over Money

Shocking! Outrageous!

The Club for Growth's Social Security Choice blog commented on a press release from Representative Charles Rangel (D-NY). Rangel, in turn, was commenting on President Bush's statement that the Social Security trust fund is "just IOUs that I saw firsthand."

Rangel invoked the "full faith and credit" clause to imply Bush was wrong about calling them "just IOUs" and the blog criticized this reasoning, correctly, because intragovernmental debts and assets exactly cancel to zero. That's fine so far as it goes, but I had a very different reaction to part of Rangel's statement:

If the "full faith and credit" of the United States means "just IOUs" then our entire financial system will come tumbling down. By the President's logic, every dollar in your wallet is just fancy paper backed by the "full faith and credit" of the United States. If President Bush thinks we might default on obligations to Social Security recipients, then is any commitment the U.S. Treasury makes truly secure?

Every dollar in your wallet is just fancy paper backed by the "full faith and credit" of the United States. Read them! Right at the top they all say "FEDERAL RESERVE NOTE", and a note is a debt instrument. It is a claim to some asset. What asset? Another federal reserve note. It really is just fancy paper backed by nothing but the "full faith and credit" of the United States.

It didn't used to be this way. Paper money used to be very, very different. Look at a $100 1922 gold certificate (bottom of that page). The text is dramatically different. It reads "this certifies that there have been deposited in the Treasury of the United States, one hundred dollars in gold coin repayable to the bearer on demand". And a "dollar" was defined as a specific quantity of gold.

The dollar in your wallet used to be fancy paper that you could redeem for gold coin, and gold coin was real money — not a debt instrument. Today, the dollar in your wallet is just fancy paper that can only be redeemed for similar fancy paper.

The dollar is just fancy paper. The Social Security trust fund is worth even less. (At least with enough dollars, you can buy some gold!)

Rep. Rangel might be right about the entire financial system tumbling down. Austrian economists have given ample warning about the dangers of a fiat monetary system.

April 13, 2005

Tax System Favors Dividends over Capital Gains

With tax day (April 15th) looming, I have an excuse to talk about taxes a little more. I've learned a lot about taxes this year, unfortunately, because my tax preparer screwed up my taxes. (They fixed it professionally, so I'm not going to give them bad publicity over it.) One of the things I realized is that the tax system creates a small incentive for dividends instead of capital gains.

It's also an excuse for me to use Don Lloyd's Transparent Envelope Company as a didactic example again, which is always fun.

Imagine a company with $100 in cash assets, and nothing else. The company doesn't do anything. No storefront, no products, no revenues, no expenses. It's just a holding company. Its $100 in assets are stored in a transparent envelope. This company has issued 100 shares of stock, and because the company is so transparent (pun intended) and easy to understand, the shares are obviously valued at $1 each.

Magically, the company earns a $5 profit. The source of the profit is irrelevant here. Ignore the fact that my description of the company makes profits impossible. Trust me, it's magic.

The company's assets are now $105. If it retains those profits, its stock price will rise to $1.05 — a 5¢ capital gain. If instead it pays a $5 dividend (5¢ to each share), the stock price will remain $1.

As an investor, do I have any preference? I'm seeking the highest yield. Who do I believe will make the greatest return from that $5 — the company, or myself investing it somewhere else? My belief establishes my preference. If I believe I'll earn more, I want the dividend. If I believe the company will, I prefer it retain the earnings.

Taxes make this complicated. In the case of the Transparent Envelope Company, it's easy to see that both dividends and capital gains are double-taxed — first as profit to the company, and later as income to me. Dividends are taxed immediately, but capital gains are only taxed when they're realized, so the tax system raises the relative yield for retained earnings due to their (partially) untaxed compounding. This incentive favoring capital gains is fairly obvious, but isn't the one I wanted to talk about.

There's a different incentive, and it favors dividends.

It exists, ironically, because capital gains are taxed. Because gains are taxed, losses are tax-deductible. But the tax rates for dividends and deducted losses are unequal!

Let's modify the earlier example to add a magical asset loss of $1. (Let's say a horrible industrial accident smudged the transparent envelope, and it cost $1 to replace.) If the company paid the $5 dividend, its assets are now $99. If the company retained the earnings, its assets are now $104.

What happens if I liquidate my position in the Transparent Envelope Company?

In the dividend case, each share netted me a 5¢ dividend (taxed at 15%) and a 99¢ sale representing a 1¢ capital loss (deductible at, say, 25%.) Total value of $1.04/share, and a net tax of 5¢×15% - 1¢×25% = 0.5¢/share.

In the retained earnings case, my total value is again $1.04/share, but each share had a 4¢ capital gain. If it was long-term (15%), my net tax is 0.6¢/share. If it was short-term (25%), my net tax is 1¢/share.

Interesting, isn't it?

Despite the title of this article, I don't know whether the compounding incentive or the loss-deductibility incentive is larger when you're unsure which direction the stock price is headed. But if you do have an idea which way the stock price is headed, these incentives are present: if you believe the stock price will rise, you'll want capital gains so you can take advantage of untaxed compounding. If you believe the stock price will fall, you'll want dividends so you can take advantage of capital loss deductibility.

Why would I ever invest in a company when I believe its stock price will fall? If it's deliberately decumulating capital by paying dividends in excess of profits, it may make sense. The share price will fall, but the dividend will protect your total return. And you get this nifty tax benefit.

If the Transparent Envelope Company had no profits but simply started paying a $5 dividend, it would eventually liquidate itself. Each share would pay out $1 in total dividends (+15¢ tax) but also have a capital loss of $1 (-25¢ tax), for a total after-tax result of $1.10.

Once more, with feeling: Interesting, isn't it?

April 12, 2005

Oooh, an Award!

I'm the first recipient of a random award from Caliban — sweet!:

I hereby nominate Cap'n Arbyte for the 'John Stossel Award for Extensive And Categorical Mockery of Dirty Scams'.

Then&hellip you like me, you really really…… <cough> Sorry.

Flattery will get you everywhere. Unless you're peddling a pyramid scam; I can spot those.

More seriously, he's one of those rare bloggers who also wants to opt out of Social Security, and less seriously, he finds great headlines for me to forward to my co-workers for our Bad Joke of The Week. Read his blog.

April 11, 2005

Into the ACN Pyramid Scam

A friend of mine called me a few days ago, asking me to attend a meeting to hear about ACN. ACN is a reseller of telecommunication and utility services. They use multi-level marketing (aka a pyramid scheme) to recruit customers and agents, which they call Independent Representatives.

I decided immediately to attend the meeting. This would be fun. I enjoy asking tough questions, and I might be able to rescue my friend from the system.

I knew it was a pyramid scam even from the brief description my friend gave me, but when I read the fine print, I discovered some very interesting things that make the system even worse than I had anticipated. I prepared a list of tough questions, went to the meeting, and acted dumb and gullible as long as possible. It got interesting when I stopped playing dumb.

(Unfortunately this meant keeping my friend in the dark. I didn't volunteer my thoughts until during the meeting.)

The person running the teleconference, Angela, was unable to answer all of my questions and eventually conferenced in one of the big guns — Regional Vice President Judd Mintz, who is a very smooth talker.

ACN's program is described on three pages at its website: the Policies and Procedures, the Independent Representative Agreement, and the Compensation Plan (PDF). As I read them before the meeting, I took notes about the passages that sent off warning signals. The suspicious sections, my questions, and their responses are all given below. This does not follow the meeting chronologically, but it's easier to follow when arranged by topic.

P&P §I(F), Unauthorized Contact
Under no circumstances, is an Independent Representative permitted to directly contact any carrier/supplier/service provider(s) with whom ACN contracts, unless it is in specific relation to a personal account they may currently have with said provider.

Translation: You may not compete with ACN. We don't want you to contact the suppliers directly, because we don't want you reselling any services outside ACN's umbrella.

P&P §II(C), Cold Marketing in Customer Acquisition and Recruiting
ACN strictly prohibits Independent Representatives from engaging in any "cold marketing" techniques for purposes of customer acquisition at any time. Cold marketing is defined as any promotional activity that is geared toward random individuals who have no personal, business, social or acquaintance relationship(s) with the promoter. Examples of cold marketing include, but are not limited to, mass advertising, purchased leads, trade show participation, door-to-door selling, telemarketing, pamphlet distribution, auto dialer usage, etc. ACN also strictly prohibits the purchase or sale of customers at any time.

The prohibition on cold marketing limits your ability to advertise. You can only make customers from people you already know. The purpose of this prohibition is to force you into the pyramid model of recruiting more agents for ACN to get bonuses, rather than simply earning commissions from your customers' use of ACN's resold services.

The company line on why cold marketing is forbidden is that they're "building a team of people" — and they tell you to acquire customers by telling them that you're "asking for a huge favor." A favor? No way. If the terms of service are competitive, people will sign up — and if they're not, they won't. It should be a business transaction. It's morally repugnant to couch it in the terms of a favor, asked to friends and family, playing on their sympathies to help you out. The irony is that throughout the meeting I was several times told that ACN operates with high ethical standards, and that "the company is very very high integrity."

Furthermore, ACN allows, yet highly discourages cold marketing techniques for purposes of recruiting other Independent Representatives…

Tellingly, ACN does allow "cold marketing" techniques for recruiting more agents. Which side of their business is advantaged in this arrangement — getting customers, or getting agents?

P&P §II(J), Fundraising
ACN strongly discourages marketing the ACN opportunity to non-profit organizations as a method of fundraising as these programs seldom work well within ACN's proven sales model.

This is odd. If ACN is such a good opportunity to make money, why discourage non-profit organizations from getting in on it? Easy. Because they're an organization, and they'll raise a stink when they end up losing money on the ACN program. "Charity loses money in pyramid scam" would be quite a headline, wouldn't it? Individual people will be unhappy when they lose money, but they won't be able to attract much embarrassing attention.

P&P §VI(B), Representation
Independent Representatives shall make no claim or inference to prospective Independent Representatives as to the anticipated or actual income an Independent Representative might earn. ACN makes no guarantees of income, nor assurances of any profits or success.

This policy was blatantly broken during the meeting. Both Angela and Judd volunteered some information about how much they were personally earning, without even being asked for that information.

When I noted this to Judd, he explained the purpose of the policy (forbidding direct enticement) rather than explaining how he hadn't violated it. Nice switch — but I didn't fall for it. You tell people how much you make because it will entice them into joining by making them believe they can make that much money, too.

Each Independent Representative understands that no Attorney General of any state, territory or other regulatory authorities ever reviews, endorses or otherwise approves any product membership or compensation program of any marketing company. As such, each Independent Representative shall make no such claim to a prospective ACN Independent Representative.

I didn't understand why this language would be included in the P&Ps, but I thought it was odd. I learned why it was present during the meeting. ACN has three (former?) state Attorneys General serving as legal counsel to the company, and this fact was hyped up when I asked questions about ACN's legality. (More on that, later.)

The dishonesty in this instance was blatant. Judd talked about the Attorneys General specifically to allay my concerns about ACN's legality, but the P&Ps specifically prohibit this. True, the Attorneys General are not acting in their official government role as they serve as ACN legal counsel, so qua Attorneys General they do not approve ACN's program, but that is certainly the impression he tried to give. Of course the program is legal, we've got Attorneys General looking at it!

P&P §VII(A), Annual Renewal Fee
A renewal fee is charged beginning one year after the Independent Representative's start date. The fee is charged to cover the support costs for a period of one year.

The annual renewal fee is $149. It was recently raised from $99. This information is not available on the ACN website; I had to ask what the fee was. An honest company would make that fee's amount known up-front.

I also asked if there were other fees, such as monthly fees or fees for using the website. Angela said yes, but that they were <$10/mo. According to a competitor, they're $5.99/mo. Again, an honest company would make the existence and amount of these fees known up-front.

P&P §VIII(C), Customer Acquisition Bonuses (CABs)
Customer Acquisition Bonuses are paid to Independent Representatives at the level of Executive Team Trainer or higher…

You don't get bonuses until you've risen within the organization. I had a few questions about this, like how long does it take the average new IR to reach the ETT level? Angela said "I don't know what the average would be." I asked what percentage of IRs who join ever reach the ETT level? "I do not know."

Maybe she really doesn't know. She's only an ETT herself, after all. Alas, when I asked these questions Judd hadn't been conferenced in yet, but I suspect he wouldn't have been able, or willing, to give me an answer, either. I suspect the answer is "much less than 50%."

Interestingly, I have to give ACN credit for structuring the incentive correctly in this case. Bonuses are only awarded when new agents become successful, rather than when they join. This is surely a deliberate structural decision to attempt to look less like a classic pyramid scheme.

P&P §VIII(D), Commissions
An administration fee will be deducted from each CAB and commission payment to cover processing costs relating to the issuance of the payment and the statement. A payment will not be issued until the total amount (less the administration fee) is greater than $10.

The administration fee is $1. I had to ask. Again, an honest company would list the fee amounts in their materials.

P&P §VIII(F), Adjustments for Bad Debt
ACN reserves the right to adjust commission payments for bad debt. The bad debt deducted may be based on the overall bad debt average and/or specific deductions on an account by account basis or a combination thereof.

I told Judd I didn't understand this section and hoped he could explain it to me. He couldn't. It sounds like ACN can make a blanket reduction in all commissions to offset lost revenue from non-paying customers. So I'll be penalized for someone else's nonpaying customers.

If a representative is found to be targeting customers whose service was previously canceled by another carrier for nonpayment, or targeting those customers who knowingly have credit problems, that Independent Representative's status may be suspended and/or terminated. In addition, the Independent Representative may be held liable for any unpaid debts.

How am I supposed to know the creditworthiness of my customers? Or, if I do, what if my friends and family — the only people I can market to, because "cold marketing" is forbidden — mostly have credit problems?

Judd didn't have a good answer for this. He said that ACN would take customers with poor credit on a preauthorized payment basis, but didn't address my concern about what to do if I had mostly poor-credit friends who were likely to be nonpayers.

He did confirm that my commission will be reduced if my customers are non-paying. Since my commission would be 1%, if even 1% of my customers didn't pay their bills, my commission would be totally wiped out! This doesn't sound like a very reliable source of income, does it?

The Compensation Plan (PDF) is also very interesting. Your commission on personal customers is 1%, unless you have an implausibly high billing volume ($2000 or more per month.)

In the introductory presentation, Angela said that the nationwide average telephone bill is $49. Let's use round numbers and call it $50.

If I want to earn enough to offset the annual ($149), monthly ($5.99), and administrative ($1) fees, that takes $149 + 12×$5.99 + 12×$1 = $232.88/yr. At 1% commission, my customers' total billing would have to be $23,288, or $1940.67/mo. That's 39 customers each at $50/mo. Angela only has 27! And remember, any one of them not paying their bill will wipe out my commission!

Clearly you're not going to make money with ACN by signing up customers. The only way to do it is to bring in new agents, in order to earn bonuses and your cut of their commissions. But if you're going to go that route, you have to spend at least $499 to buy your way in, making it that much harder to break even.

(Incidentally, Angela feigned disappointment that the $499 wasn't higher, to keep out people who weren't really serious about ACN.)

Ironically, ACN's strongest product feature — free long distance calling between ACN customers — will reduce phone bills and therefore reduce my commissions. If ACN becomes fabulously successful and sweeps the market, revenue from long distance will dry up. When I mentioned this, Judd quickly started talking about local telephone service being much higher revenue than long distance anyway. Fine, but ACN doesn't offer local service in my area. (I checked before the meeting, of course.)

The commission structure is designed, unsurprisingly, to enrich the company founders. It's not just you who gets a commission, so does the person who recruited you, and the person who recruited them, etc. That's the pyramidal nature of the system. The commissions are 0.25% for these "downline" customers until you reach 6 or 7 levels deep into the pyramid, where the commissions are 1% and 7% respectively.

The 7% commission is your reward for building a gigantic pyramid. No, let me clarify — it's the reward for the people who cooked up the system, because you'll never get there. The introductory presentation used example calculations that included customers 7 levels deep from you, which is totally unrealistic. But it's those high commissions that they use to sell the system, even though almost no-one will ever earn them.

Total commissions on a "leaf" customer at level 7 are 10.25%. With a cut this large, it's questionable whether ACN will buckle under competition. If the spread between wholesale and retail rates drops to less than 10.25%, ACN will lose money — and this is a structural vulnerability built into ACN's compensation program. ACN is a middleman, and is vulnerable to any competing middleman who's willing to take less than 10.25%. In their promotional material they're quick to talk about how fast their revenues are rising, but the company is privately held and information about ACN's profits is unavailable. I wonder how profitable it is, considering ACN recently sold its mobile services in Finland and sold its US energy operations.

When I asked about these (of course they didn't volunteer those facts), Judd said the energy sale was "to create more buying power" but wasn't specific about how that worked. The Finland sale was ACN "merging to have a bigger network." He said "you'll have to trust me on that one, I'm a Regional Vice President so I … know what's going on." Right. I wonder if these sales were really because ACN needed some cash, or was avoiding legal problems.

The Independent Representative Agreement contained a few puzzles, too. For a company with three Attorneys General as legal counsel, its documents should be clearer.

The IRA preamble talks about a "Sales Kit, which is sold at ACN's cost." But what's this?:

IRA §5 (about refunds)
Upon request or written notice of termination of this Agreement pursuant to the procedures set forth by Paragraph 4 within one (1) year from the date of purchase, ACN shall repurchase the Marketing Kit, provided that, the Marketing Kit is returned to ACN in a useable and resalable condition. The repurchase price shall be at a price of not less than 90% of ACN's cost to provide the Marketing kit to the Independent Representative.

Is the Sales Kit the same as the Marketing Kit? I don't know. If they're the same, the refund will protect you. If they're not, it doesn't!

IRA § 22 (about arbitration)
The arbitration panel shall consist of 1 arbitrator.

This contradicts the P&Ps, which in §III(B) says there will be "a panel of three arbitrators, each side choosing one and then the two choosing the third." But the preamble to the P&Ps says the IRA prevails in the case of a conflict.

Come on, guys, get some proofreaders. You shouldn't have contradictions in your documents. Very unprofessional.

Speaking of unprofessional things, Judd's attitude toward some of my questions was highly unprofessional and frankly offensive. He claimed it was okay not to understand how the details of ACN's program work, but offered himself as proof that they're okay and I shouldn't worry about it. He boasted that he didn't even read or understand the whole contract before he signed, and that it's normal to learn the details later.

Obviously, "Regional Vice President" is just a title. No business acumen required.

The clincher? Just 2½ weeks ago, on March 23rd, an Australian federal court found ACN in violation of §65AAC of the Trade Practices Act of 1974:

… it is my view that the scheme is a 'pyramid selling scheme'. In my view ACN has breached §65AAC of the Act in participating in that scheme and in inducing and attempting to induce persons to take part in the scheme.

Judd was familiar with this, of course, and blamed it on Independent Representatives violating the Procedures. You can read the judgment for yourself to decide whether that is a credible explanation.

A press release from the Australian Competition and Consumer Commission said:

Justice Selway found that ACN participated in, promoted and induced or attempted to induce persons to take part in a pyramid scheme in contravention of section 65AAC of the Act and that Mr Paech, an ACN director, was knowingly concerned in and aided and abetted those contraventions.

According to the judgment, an ACN employee — not a mere rogue IR — was involved. This completely undermines Judd's explanation, because the Court found a company director had responsibility.

UPDATE 2006-02-27 06:52:10 UTC: The websites linked below no longer contain the material I intended to link to. The first was taken down as the result of legal action by ACN in Feb. 2006, and the second disappeared for unknown reasons not long after I originally published my article. See this for more information.

In researching ACN, the most valuable link I found was this website, which was itself recently the target of legal attack from ACN for alleged copyright violation.

(Dear ACN Lawyers, you know full well that my quotations fall within fair use guidelines. Don't bother — you'll lose and you know it.)

I also discovered, after the meeting, that there is a blog dedicated to discussion of the ACN pyramid scheme. Go there if you're interested in more. They have comments, including some from ACN Independent Representatives.

April 08, 2005

Good for Napster

Dave sent me this link about the possibility of a law forcing Apple to make iTunes media compatible with Microsoft media players. He suggested it as an item for my Shocking! Outrageous! file. But I've already written one of those today, so instead I'll look at the silver lining.

William Pence, the Napster CTO, said this during a Congressional committee hearing:

"Napster believes that allowing the iPod to work with multiple service offerings would benefit consumers. Nevertheless, I do not see government intervention as the solution, as it would stifle competition and innovation that will benefit consumers and copyright owners at a very early stage of the market's development," he told the subcommittee. "It does not seem prudent for government to pick a winner in the continuing… marketplace battle between Apple's FairPlay DRM and its competitors."

Thank you, and good for you! It's refreshing to hear a business leader stand on principle.

Hissing and displeasure at the circumstances, of course.

Oregon Senate Bill 845

Shocking! Outrageous!

A hideous Oregon bill, S845 (easier to read in PDF), has been brought to my attention. (Thanks, Paul!)

Section 3 of this bill states that a gift card with no transactions for three years will be "presumed abandoned." Section 4 forbids expiration dates and fees (dormancy, inactivity, maintenance, or service) on gift cards.


In Oregon, abandoned or unclaimed property is held in trust for residents to claim. Interest on the property is allocated to the state Common School Fund.

"This bill protects consumers in Oregon, keeps the dollars in our state, and helps schools by adding to the Common School Fund," said Senate Majority Leader Kate Brown, who testified Monday before the Senate Revenue Committee in support of the bill. [source]

Expiration dates and fees are precisely the mechanism businesses use to ensure gift cards do not persist forever and become a looming liability, never knowing if they've been lost or destroyed or simply saved to redeem later. Fees eventually reduce the balance of unused cards to $0, eliminating any uncertainty for the businesses that issued them.

By prohibiting expiration and fees — a clear violation of the freedom to contract — and declaring unused cards abandoned property, the Legislature is cashing in on gift cards to earn interest on property it has no right to use.

You can hear the whining already: "It's for the children!" The widespread popular support for public schools makes it a favorite way for legislatures to boost revenue. Property rights notwithstanding.

A surely unintended, but harmful, effect of this bill is that the gift card balances will never go to $0 because expiration and fees are prohibited. Gift cards would have an unbounded lifespan, making it impossible for a business to know the real magnitude of its outstanding liabilities. This is a blow against the ability of businesses to manage their risk. Gift card expiration dates and fees serve a valuable purpose, and it's a shame that this has been overlooked. (Yes, I know that's a charitable interpretation, but I'm a nice guy.)

This is a bad bill.

It's also a bill that the State Senate is currently working on. It's not too late to kill it…

You may have noticed I haven't complained specifically about Section 3. I'm not opposed to the idea of unclaimed or abandoned property as such, and I do think it proper for government to define rules for dealing with it. There are circumstances where it makes a great deal of sense. For example, a few years ago I purchased some gold coins from the State of Texas in an unclaimed property auction. My understanding is that they were found in a deceased man's safe deposit box, but he had no next-of-kin and no will.

I also got a really good price, barely over spot.

Some pirate I would be if I didn't have golden buried treasure, right? Arrr!

UPDATE 2005-04-08 20:09:53 UTC: I'm told my explanation of the gold coins is supposed to read that I got them "from a dead man's chest." Right. Arrr!!!

April 06, 2005

The Observer on Kofi Annan

I nodded in agreement throughout this Observer article arguing Kofi Annan should leave right up until the last paragraph.

After detailing UN outrages, including a first-hand account, comes this important paragraph (emphasis added):

The second searing irony for me is that the American neoconservative right has occupied the moral high ground in critique of Annan, outflanking the left, which sits on indefensible territory in his support. But if prevention of genocide and protection of the vulnerable are not core priorities on the left, then what is? If anyone's values have been betrayed, it is those of us on the left who believe most deeply in the organisation's ideals. I am mystified by the reluctance of the left both in the US and the UK (the Guardian's coverage, for example) to criticise Annan's leadership. The bodies burn today in Darfur — and the women are raped -- amid the sound of silence from Annan. How many genocides, the prevention of which is the UN's very raison d'Ítre, will we endure before the left is moved to criticise Annan? Shouldn't we be hearing the left screaming bloody murder about the UN's failure to protect vulnerable Africans? Has it lost its compass so badly that it purports to excuse the rape of Congolese women by UN peacekeepers under Annan's watch? Is stealing money intended for widows and orphans in Iraq merely a forgivable bureaucratic snafu?

The author is a self-identified member of "the left", so I'm gratified to see criticism of Kofi Annan and the United Nations from the left. It's ironic, however, that the theme of the article is criticism of the left.

I have to disagree with the last paragraph, though:

Annan is not personally corrupt or incompetent. But the UN cannot have failed more catastrophically when the stakes have been highest. If he does not lose his job for that, then for what? And if not now, when?

Kofi Annan is personally corrupt and incompetent.

(h/t Instapundit)

What is "Rock the Vote", Anyway?

Rock the Vote is supposed to be a "non-profit, non-partisan organization … [that] mobilizes young people to create positive social and political change" — and, importantly, "The goal of Rock the Vote's media campaigns and street team activities is to increase youth voter turnout."

I didn't pay any attention to RTV during the last election cycle. Maybe I should have. I swallowed their PR and assumed they were just encouraging people to vote but not pushing an ideology.

I was wrong.

The Rock the Vote Blog is absolutely pushing an agenda. Many of its recent articles have attacked Social Security Reform. (And have done so sophomorically, such as titling one article "All the cool kids oppose privatization".) Not this one, and I have it on good authority that I'm cool, so nyah-nyah.

The comments have been very hostile. If RTV is reaching the young audience it's intending to, I'm heartened to see that so many young people see through the Social Security system's veneer and recognize it as a screw-the-young system.

If the blog wasn't enough to convince you RTV is pushing an agenda, check out their clothing line. It would be funny if it&hellip no, it is funny.

Sometimes I fantasize about running for Congress simply so I could get a column in the Oregon Voter's Pamphlet to write an anti-Social Security screed. That would be my entire campaign, just the Voter's Pamphlet. I know I'm thoroughly unelectable, but I'd be very interested to see how many votes I could get.

That would be my way of conducting the poll that the polling organizations aren't interested in doing.

The required paperwork is all online. And curiously, it appears from SEL110 that a minor-party candidate (helloooo, LP, have I mentioned I find you slightly less nauseating than all the other political parties lately?) doesn't have to collect signatures. And no mention of any fees. It can't possibly be that easy, can it?

Hmmm. I'm not by nature an impulsive person, but should I be worried by the fact that I've spent even this long contemplating it?

April 04, 2005

Motherhood and Taxes

Josh writes in response to this article:

I think most people do recognize that theft is wrong when performed by large groups or majorities. This is clearly shown by the public's overwhelmingly negative reaction to the recent corporate scandals — theft of property — and by the (mostly recent) rejection of segregation — theft of liberty or civil rights. I don't think it's so much that people don't see government taxation as theft, but see it as beyond the consideration of theft because they see government as something wholly different than simply a large organization or majority. I think people see value in being taxed, and that's why they comply with taxation.

That's true; in some circumstances people have recognized large-scale theft. I think Josh has it exactly right that people "see government as something wholly different than simply a large organization."

… Government is fundamentally different than any other organization because it is the only entity allowed to use force. Government is defined by force.

This does make government special. But not unique. Individuals still retain the right of self-defense, and private security companies and guards are widespread. These examples of non-government force are also legitimate — and, unlike government, operate without theft.

Some forceful government action is legitimate. Some forceful private action is legitimate. Some forceful government action is illegitimate, and some forceful private action is illegitimate. Private theft is always illegitimate. Why isn't this also true for government theft?

I know that you don't buy into the 'social contract' theory, but I think it has some merit if you view society as competing but cooperative individuals. Individuals cannot cooperate unless there are rules defined under which they can conduct business and an authority defined to enforce the rules. I know that you agree that this authority is government's proper role, to define and defend rights. I'm sure that you must also agree that goverment needs funding to perform these functions.


Though social contract adherents are wrong in seeing the social contract as a source of morality, I do believe that it is a useful abstraction for examining the relationship of government to individuals. That 'contract', in my mind, grants government the authority to tax as the 'ante' to participate in the society defined by the government. Government should rightfully have the authority to tax you because it must have money to be effective in performing the tasks assigned to it by its nature. If you have no taxes, then you can't possibly have effective government for there will be no ability to fund enforcement.

I am very sympathetic to this argument. It is, fundamentally, why I accept subpoena power. And it's also why a total end to forced taxation is among the last, not first, changes I would like to see in the government.

I've seen arguments in support for voluntary taxation, but (in my laymen's understanding of economics) I don't think it could possibly yield enough income to support the budget that even a Rand-approved government would require. The simplest example I can think of is the extraordinary amount of money required for foreign defense against first the communist bloc and now terrorism.

I don't know how much revenue would be raised by voluntary means, either. I wouldn't get rid of forced taxation until it was clear that voluntary sources would be sufficient. And, of course, the transition from forced to voluntary sources would be gradual.

The military certainly is expensive. There's a useful summary table (S-10) in the 2006 federal budget that shows 2004 military spending as $436 billion of total federal outlays of $2,292 billion, or 19%. (As a percentage of total government spending, including state and local spending, it is less.) But national defense is a purpose I'm happy to contribute to, even as I might quibble about the sums involved.

It's things like Social Security, Medicare, and Medicaid — together more than twice as expensive as the military! — that I complain about and regard as pure theft. These programs do not serve the purpose of protecting individual rights, so they are illegitimate government action. Government should not do these things even if funded voluntarily; those who favor these things should set up private organizations to pursue them. (More about this in a forthcoming post.)

I am willing to temporarily endure a system of forcible taxation in order to fund the essential activities of government. I will not consider it proper or desirable, and I condemn government involvement in non-essential (non-rights-protecting) activities.

I still see no principled way to defend forcible taxation. My question about what distinguishes government from a gang cornering me in an alley still stands. What is incorrect in the analogy: Social Security is the product of a gang of the elderly, and as illegitimate as such a literal gang's demands would be?

  • Joanna: So you're going to make a lot of money, right?
  • Peter: Yeah.
  • Joanna: It's not yours?
  • Peter: Uh, well, it becomes ours.
  • Joanna: How is that not stealing?

Social Security doesn't protect individual rights, so I don't think of it like subpoena power or national defense. It's stealing. And that's wrong, just like Mom said.

Tiny Island