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October 23, 2006

I'm Siding With the AFSCME

… and against the Libertarians!

Ballot Measure 46 would amend the Oregon Constitution as follows:

Notwithstanding any other provision of this Constitution, the people through the initiative process, or the Legislative Assembly by a three-fourths vote of both Houses, may enact and amend laws to prohibit or limit contributions and expenditures, of any type or description, to influence the outcome of any election.

Why is a Constitutional amendment necessary to allow campaign finance restrictions? Because the Oregon Constitution provides a stunningly strong protection of free speech (Article I, Section 8):

No law shall be passed restraining the free expression of opinion, or restricting the right to speak, write, or print freely on any subject whatever; but every person shall be responsible for the abuse of this right.

Oregon courts have (correctly) interpreted this to protect political speech, including political contributions and expenditures. I'm proud to be a free speech absolutist and to decry government attempts to stifle it, such as the wicked McCain-Feingold legislation. Political speech is the type of speech most important to protect against government interference.

Imagine my surprise to learn that the Oregon AFSCME posted an argument against Measure 46 while the Libertarian Party Statement (p. 38 of my region's voters' pamphlet) urged a vote in favor. ("Party of Principle", my ass!)

My universe has gone topsy-turvy. See, elections are fun. :)

Measure 46 is on the ballot to make Measure 47 Constitutional. Measure 47 is a long, complex, and morally repugnant campaign finance restriction that I'll cheerfully also vote against.

Candidate Choices

Yeah, I vote. No, I don't want to hear any arguments about how I'm wasting my time. It's not that I disagree with those arguments, but that they miss the point. I vote because learning about the candidates and their platforms is an enjoyable exercise in comparative political philosophy.

And I like filling in those little ovals. The ballot instructions this year said to use pencil or blue ink pen… and I had to ransack my house to find an instrument to vote with. I discovered that I do not own any pencils and own only one blue pen. Plenty of black pens though, as Murphy would have it…

Representative in Congress, 1st District

Four candidates running, from each of the Constitution, Democrat, Libertarian, and Republican parties. I cannot stand the ultra-conservative Constitution party; their candidate is right off my list. In fact I won't mention them again. David Wu (D) is the incumbant and Oregon hasn't disintegrated under his watch, but his statement is a laundry list of pork promises and programs I oppose. Derrick Kitts (R) is running for Congress after having been a State Representative, and his statement is even worse than Wu's — it's totally vacuous! He doesn't provide a platform at all. No reason to vote for him except his smiling face and a few endorsements, which aren't reasons at all.

I have to vote against those guys, so I'll be making my ballot for Drake Davis (L).


In this race I also have a candidate from the Pacific Green party to ignore. The incumbant Ted Kulongoski (D) says he'll increase public school funding and provide public healthcare to over a hundred thousand people. I smell a tax increase. Thanks for cutting the 250,000 pages of regulations, but I can't vote for you. I'm actually torn between Richard Morley (L) and Ron Saxton (R) based on their statements, so I looked at each's website (Morley, Saxton) Saxton has provided much more in the way of specific information and proposals, and they're mostly reasonable, so I'm going to break party and vote for Ron Saxton (R). (And given that I'd be roughly equally satisfied with either, it makes more sense to support the major-party candidate.)

State Senator, 15th District

There are no minor party candidates in this race. I'm voting against John Napolitano (D) because he says he wants to "have the health care industry justify rate increases". No, I think the health care and insurance industries have been overrun by politicians far too much already. I'm marking my ballot Bruce Starr (R) whose primary attraction is that he's not John Napolitano.

State Representative, 30th District

It's been difficult to ignore this race (oh how I tried…) because although I avoid local media, they still get me with direct mail. I dislike both candidates. But I dislike David Edwards (D) more, because he would "[r]equire big insurance companies to get Insurance Commissioner approval before they raise our rates; also, expand the Oregon Prescription Drug Program to all Oregonians". In symbolic defense of the health insurance and pharmaceutical industries, I'm marking my ballot for Everett Curry (R) as the lesser of two evils.

The tendancy of Democrats to advocate public health care is very annoying. This more than anything else pushes me away from them. If they want to earn votes from the libertarian-leaning portion of the electorate, they need to stop being such overt socialists.

October 19, 2006

Oregon Measure 42

It's election time, and I would be negligent if I didn't have anything to say about the ballot measures. Let's start with Measure 42:

No insurance company, or agent acting on the part of an insurance company, which sells or markets medical, health, accident, automobile, fire, or liability insurance, or any combination of policies providing such coverage to consumers, shall quote, offer, or charge, either directly or indirectly, a rate or premium which is based solely or in part upon the credit score or credit worthiness of the insured or applicant for insurance.

As an advocate of freedom, including the freedom of contract, I am resolutely opposed to this measure. It is wrong for the government to intrude on a company's pricing policies; they simply have no right to do it.

The voter's pamphlet included five arguments in favor of the measure, four of which were from the author of the measure, Bill Sizemore. Let's start with the other one, from Loren Parks.

The only "argument" in this argument is an Argument from Personal Incredulity:

It makes no sense to claim that people are more likely to get in an accident because they have bad credit. I think most people know that instinctively. Insurance companies do it because it is easier. All they care about is maximizing premiums. They don't care where the money actually comes from or whether their rating system is fair or logical.

Strange… I have the opposite intuition. I would be surprised if there wasn't a correlation between credit score and insurance risk, because common factors influence both. A person whose is responsible with money is more likely to be responsible with their property and their health, which implies a lower insurance risk. And I believe this extends to things like automobile accident rates; people who have a greater degree of personal responsibility are more likely to avoid dangerous situations.

The most interesting argument for the measure is the third, with the heading "Credit Scoring is Anti-Free Market". I'll respond to it line-by-line.

My name is Bill Sizemore, and I wrote Measure 42. I am a normally a "free market" kind of guy. I do not believe in regulating business unnecessarily, because competition and free market principles tend to eliminate injustices and overpricing over time.

Beware anyone who says they are "normally" something good. They're admitting in that same breath that right now, they're something bad.

However, a hand full of very large companies have started a trend in the insurance industry that is anti-competition and anti free market. I will use this space to explain to my fellow free market conservatives why credit scoring is truly anti-competition.

Who is he addressing? I would argue that "free market conservatives" are mythical creatures, but for Bill claiming he is one. And if he's a free market conservative, I don't want to have anything to do with free market conservatives. They should be more honest, drop the "free market" act, and simply go by "conservatives". A true free market advocate advocates freedom in markets, not "competition". Worship not these false idols and so on and so forth.

First of all, when government requires that we buy a product, as is the case with insurance, it is no longer a free market product or voluntary transaction. When people are forced to buy a product or service, the market is automatically tilted in favor of the seller and reasonable controls must be installed to insure that consumers are not gouged.

This is true. And the best solution is for government to stop requiring us to buy such products. Otherwise, you'll get an object lesson in how one interference with the free market leads to additional interference. Always in the name of the public good, of course!

Also, credit scoring discourages price comparisons and shopping for lower rates. Under current law, insurance companies cannot use credit scoring to raise the rates of current customers for their existing policies. However, if a customer adds a new policy or switches companies, credit scoring can be used to impose higher rates. The result of this practice is to build a moat around the companies and keep existing customers from shopping for lower rates. This is clearly anti-competition.

Bill volunteers another example of how government has already interfered in this market. In addition to requiring people to buy insurance, it also places restrictions on the seller's freedom to set prices. And now he's proposing a third!

A skeptic like me would point out that the anti-competitive moats he's complaining about exist because of the restriction on the insurance companies' abilities to set prices. If they were free to raise the rates of current customers' existing policies, and actually did so, it would restore the customer's incentive to shop around.

Shopping for lower rates is the best way to insure competition, but credit scoring punishes customers for shopping around or switching companies.

Wrong. It's the law that punishes customers for shopping around or switching companies. But Bill Sizemore promises to fix the unintended, undesired consequences of the law with … another law! Which certainly won't have any unintended consequences. Certainly not like that previous law's. Absolutely, guaranteed. We definitely won't need any legal tweaks a few years from now.

If credit scoring was banned, as Measure 42 would do, not one insurance company would go out of business. The industry would simply be forced to use honest, meaningful grounds for establishing premiums, such as driving records and loss histories.

Insurance companies should be required to base rates on actions or events that genuinely are related to the risk the companies assume when insuring a customer. Credit scoring is simply not such a factor.

Credit scores are honest, meaningful grounds to factor into premiums. Measure 42 should be voted down.

October 11, 2006

A Stunning Contrast

October 9th was a day of unusual contrast for me, personally. It was both the date of North Korea's nuclear test and the date we reached an extremely important milestone in a project at work.

Early in the day (actually, still on Oct. 8th in my time zone) I learned about the North Korean test. I was not surprised that it happened but I was surprised they did it so quickly. I expected them to use the threat of a test as a stalling maneuver to slow down diplomatic action against them. As I write this, there's still no consensus on the device's yield, and it may have fizzled.

Regardless of the test's efficacy, the fact that it occurred is a reminder of how dangerous the world is. North Korea is a complete basket case, an economic disaster ruled by an insane tyrant who uses Stalinist methods to keep his starving population under control while focusing the country's few resources on military programs. Even without nukes, the army and artillery are a serious threat to South Korea.

China is North Korea's only, and infrequent, ally. They have the leverage to clean up this mess because they're North Korea's major donor nation. But China doesn't want to clean up this mess for diplomatic reasons — they want to reduce U.S. influence over the Korean peninsula and they can also use North Korea a bargaining chip over Taiwan. (And if the U.S. does anything unilaterally, it would provide a convenient excuse for China to complain.)

Bilateral talks won't work; I agree with Secretary Rice.

Sigh. Crazies with nukes, and some people want to try to turn the situation into a diplomatic advantage instead of doing something useful like cutting off aid or (better!) assassinating Kim Jong Il. Heck, I'd be happy if China killed him and then blamed the United States for it. Hint, hint.

The world is dangerous and unstable and frightening.

But we're getting amazing things done at work! I can't share the details, of course, but I can say general things about it. I've personally been working on this project for two and a half years, and on October 9th we reached one of the most significant (arguably the most significant) milestone in all that time.

The milestone is a demonstration that the tool works. Up until now it's all been scoping and architecture and design and implementation and you're probably thinking it's all pretty complicated stuff if it takes so long to come together. Yeah, that's an understatement.

A prediction was made a while ago about when we'd reach the milestone, and we beat it by three weeks. We ended up with fewer issues to work through than even I expected, and I was the optimist of the bunch. I don't think the success has fully sunken in yet. I've been convinced things would work for so long that success doesn't surprise me. :)

I'm living in a world where I see smart, dedicated people pursuing multi-year projects with job descriptions that didn't even exist fifteen years ago, creating mission-critical systems a full order of magnitude more complex than the previous generations, and achieving their milestones ahead of expectations. And there's another part of the world where politicians and diplomats are squabbling over the dangerous antics of the insane ruler of the armpit of the earth.

On the same day.

October 09, 2006

Unfair Competition #2

Last week I posed several scenarios of business competition and asked about them:

At what point do you decide that "unfair" competition ought to be prevented by government intervention? What form would the intervention take? What would happen to you, to your competitor, and to the customers?

Recall that you run a gasoline station with a small convenience store, and your competitor is a grocery store that also sells gasoline. Here's a quick list of the scenarios; refer to the earlier article for their full exposition:

  1. Competitor offers greater grocery selection.
  2. Competitor offers greater grocery selection and lower grocery prices.
  3. Competitor offers greater grocery selection and lower grocery prices and break-even gasoline prices.
  4. Competitor offers greater grocery selection and lower grocery prices and sells gasoline at a loss.
  5. Competitor is financed by an eccentric billionaire and sells all its products at a loss.
  6. Competitor is subsidized by a foreign government and sells all its products at a loss.

At the request of a reader we'll cover this extra scenario, too:

What if the grocery store was a nationwide chain that dropped its prices in new markets in order to drive out competition? Once the competition is gone, they raise their prices. The profits from the higher prices are used to offset the lower prices in other towns. The consumer benefits for a while until the competition closes. That benefit is reversed once the competition is driven out of town.

Few people would call scenario #1 unfair. This type of competition is normal … I'll even say inevitable. If this type of competition were unfair, so would be almost any other difference between competitors. If everyone had to sell the same products at the same prices there wouldn't be any meaningful competition at all. An economic theorist of the "pure and perfect competition" persuasion might find something to like about this but it's totally alien to real-world experience.

A great many people see unfairness in scenario #2. Think of the "big chain store" moving into town and taking the business away from the smaller "mom and pop" stores by virtue of its lower prices. It's such a prevalent view that it's been parodied.

The distinction of scenario #3 is that the competitor isn't even trying to be profitable in one of its product lines. The only way to successfully compete in this situation is to have lower costs in that area or to adopt the competitor's model of making money on other parts of the business. This form of competition can make it very difficult for others to remain in business selling a product at a price where no profit is made. This scenario was intended to suggest "predatory pricing".

Scenario #4 is merely a stronger version of #3. Because the gasoline is sold at a loss, the company must be internally subsidizing those sales, and many more people would consider this form of competition unfair. Assuming similar cost structures across the industry, it is impossible to remain in business without adopting this business model and the subsidy … and any "pure" retailer of the subsidized product (gasoline) will be unable to survive because they have no profit-making division from which to fund the subsidy. This extreme form of predatory pricing is typically called "dumping" and is condemned by groups such as the WTO.

Scenario #5 is designed to entirely sidestep the traditional arguments about "unfair" competition by turning the competitor into a charitable organization. Goodwill, for example, sells donated clothing by weight. Goodwill has no for-profit competitors in the used clothing market. This form of competition has been highly successful for Goodwill, and due to its nature as a charitable organization it is never criticized for its otherwise-scandalously-low product prices. Yet those low prices are a very effective barrier to entry against any would-be for-profit competitor. The twist here is that I asked you to imagine an eccentric billionaire subsidizing the business, when the reality is that the subsidy is provided by millions of ordinary individuals.

I presented scenario #6 last in order to shine light on a common hypocrisy. Protectionists very commonly argue that foreign subsidies are unfair to domestic businesses and should be neutralized with tariffs. But from the perspective of competitors and customers, there is no difference between low prices caused by charitable giving and low prices caused by foreign taxation and subsidy. The economic impact is rooted in the fact that the prices are low, not in the method by which they're sustained. If charitable giving is fair, why are foreign subsidies unfair? The economic effects of each are identical. (Remember, the subsidy is paid by some foreigner's taxes, and protectionsts don't care about foreigners anyway.)

Finally, let's consider the reader-suggested scenario. This is the textbook exposition of predatory pricing: A chain store subsidizing a new location in order to drive out competition before raising prices to earn higher than normal profits. A moment's reflection shows that this is economically similar to scenarios #5 and #6, with the important difference that in this case the subsidy is deliberately temporary. It's most similar to #6 because the non-local store locations can be mentally considered to be in a foreign country.

Now hang on while I pull a rabbit out of my hat.

If this form of competition is unfair, so must be charitable giving. The eccentric billionaire will eventually run out of money to give away, and customers will be faced with sharply higher prices. A scandal could cause donations to a charitable organization to dry up, and customers would be faced with sharply higher prices. The effects on competitors and consumers are the same when the subsidy ends, regardless of why the subsidy ends. The subsidy will have driven other competitors out of business and when the subsidy ends there will be only one seller left … who will stand to earn higher than normal profits. The only way to prevent these events from unfolding is to prevent charitable giving in the first place.

Furthermore, enacting tariffs to counter subsidies should be considered economically the same as a prohibition on charitable giving. If a foreign government wants to give our citizens cheaper products, who are we to complain? It's a gift. Yes, it's an unpredictable gift … it may affect any industry and may be revoked capriciously … but it's still a gift. Are we to forbid gifts merely because they aren't perpetual?

What this really comes down to is not a question of economics, but a question of psychology and ethics. People decide that certain forms of competition are fair or unfair not based upon economic effects but rather on what they perceive as the motives of those involved. Altruistic motives are permitted and selfish ones are forbidden.

Predatory pricing is okay if it's charitable. But it's not okay when done by foreigners, because they're trying to make us dependent. And it's not okay if someone's trying to make a profit from it.

I am abhorred by this popular understanding of what is fair and what is unfair. If the dividing line between legal action and illegal action is merely one of motive, the law becomes arbitrary and there is no justice. In civil law, where the legal standard is a preponderance of evidence, the prosecution and the defense are on even footing. Who do you suppose could make a more convincing argument about your true motive — an impartial prosecutor, servant of the public interest, or you … a suspected criminal who will obviously lie about your motive in order to avoid punishment?

Of course, the ethics is backwards, too.

I'll close with reader mail. Simon reminds us to consider the effects of subsidies and regulations designed to protect non-viable businesses:

Sure, if there was some kind of government intervention the gas station owner would probably be better off, but looking at the issue purely in terms of the gas station owner you lose sight of the bigger picture. The gas station customers end up paying artificially high prices to subsidise the gas station owner, they have less money to spend on other things, those things end up not being produced and people lose jobs. Not only that but peoples freedom has been impinged. Society is significantly worse off. In fact you could probably argue that not even the gas station owner is ultimately better off.

And Chris explains the new incentive created in the minds of the "protected":

I would build my business around obtaining the "fruits" of other peoples labor (the subsidy). This would mean my energy would go to navigating a bureaucracy NOT providing better prices AND/OR service to customers. Which answers your question about what happens to the consumers.

October 08, 2006

I don't do birthdays, but...

… in this case I'll make an exception.

Panic! You're 60!

My father

I hear this condition usually clears up by itself after about a year.

I also hear a good nurse can make the recovery much more pleasant.

October 01, 2006

Unfair Competition

I'd like to say a few words about "unfair" competition. This is actually not an article about antitrust law (surprise!) but instead about business practices that are quite ordinary.

Imagine you own a gas station. You're competing with all the other nearby gas stations, and because you're selling a commodity to a disloyal customer base who only cares about price, your prices are very close to your competitors'. Customers regularly accuse you of collusion and politicians keep threatening to investigate your industry. You wish people weren't so self-righteously ignorant but you have the grace and patience to endure the situation until the world realizes that studying economics is cool and sexy.

Let's further imagine that things have been fairly stable for a while and you're making a reasonable living from your half penny per gallon (or whatever) of profit. Once in a while a new gas station will open up or an existing one will close down, but there are no significant changes … until one day when a different sort of competitor opens up across the street from you.

This new competitor is a grocery store that also sells gasoline. You've known for a long time that people often want to pick up snacks when they buy gas, which is why you have a convenience store at your gas station. But you only have room to stock a few items and these sales don't account for a large percentage of your revenue.

You can't match the grocery store's offerings. It has much more space and many more products. They offer everything you do, and more. Given a choice between gasoline and a few snacks, or gasoline and a complete grocery store, your customers will choose the grocery store. As a result, your business is in trouble. Is this unfair?

The competing store operates its food business on a much larger scale. It enjoys economies of scale and is able to lower prices and still be profitable. Your costs are higher and you would not be profitable if you matched their prices. Now your customers get a greater selection and lower prices by switching to your competitor. Is this unfair?

Let's assume your competitor realizes that the gasoline business isn't very profitable by itself, but that lots of people who buy gasoline also buy a few groceries. They decide to lower their gasoline prices in order to draw more customers into their grocery store. Now they're only breaking even on gasoline, but more than making up for it through increased grocery purchases. You can't match their gasoline price reductions because you need to operate at a profit. Is this unfair?

And what if they sold gasoline at a loss, making them consistently the cheapest place to buy gasoline in town? They're subsidizing their gasoline business with their grocery business. If you met their price reductions you would be operating at a loss, and so would all the other regular gasoline stations in town. Is this unfair?

What if your competitor is financed by an eccentric billionaire who decides he'd like to give away all his wealth in the form of half-price food and gasoline? Your competitor lowers prices to such an extent that you cannot possibly be profitable. Is this unfair?

What if, instead of an eccentric billionaire, your competitor is a foreign company and receives large subsidies from a foreign government? Does this change anything in the analysis? Is this unfair?

At what point do you decide that "unfair" competition ought to be prevented by government intervention? What form would the intervention take? What would happen to you, to your competitor, and to the customers?

I'll revisit this topic in about a week. I'm inviting you to e-mail me if you have thoughts about this; I'll publish the most thought-provoking letters.

Net Worth Report - End of 09/06

September wasn't kind. I actually missed my target for this month, but by less than $300. This is primarily due to pull-back in my more volatile investments.

Net Worth Figures

Recall that I'm defining "Adjusted Net Worth" as net worth excluding the value of autos and unvested stock. The "Estimated Contribution" is how much money I believe I'll need to invest in order to meet the following month's ANW target. A declining EC indicates that I'm ahead of plan, and an increasing EC indicates that I need to save more in order to reach my long-term goal.

Goal-Tracking Figures
Adjusted Net Worth$437,900.27$440,172.41
Next Month's Target$440,460.25$442,746.41
Estimated Contribution$93.72$101.60

My credit card balances are 100% backed by time deposits and/or savings accounts earning interest at a higher rate than I'm being charged by the credit card companies. The monthly payment is estimated as 2% of the balance. (Most credit cards are now using a 2% minimum payment, and due to this it is important to have a strong cash flow and/or pay with funds from your credit card arbitrage savings account.)

I'll be paying off one of my credit cards this month because my 0% period is expiring. I owe about $14,500 on it. This will cut my credit card arbitrage approximately in half.

Credit Card Arbitrage Figures
Balances @ 0% APR$26,248.72$26,748.53
Monthly Payment$524.97$534.97

You can keep track of other personal finance bloggers at NetWorthIQ. I've updated my entry there.

Tiny Island