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June 19, 2007

The Damage of the Estate Tax

I recently learned that Sweden has abolished its estate (inheritance and gift) taxes.

That's an economically wise move. It's a little-understood fact, but an estate tax is among the worst possible kinds of tax. Allow me to explain why.

The wealth comprising a large estate, and particularly the wealth comprising a great fortune, is almost entirely in the form of invested capital. Its physical form is that of office buildings, industrial machinery, specialized equipment, inventories, in-progress research, and the like. The invested funds are fairly liquid — stock can be sold for cash — but ordinary transactions in the capital markets don't affect the physical capital itself, only its ownership.

Vast quantities of capital are essential to the high and rising productivity that creates the vast array of consumer goods that we all enjoy, and at prices we can afford. It is important to everyone's well-being that the physical capital invested in the economy's productive capacity stay invested in that way, for the buildings and machinery etc. that make up that capital serve the customer's needs. For example, an airline's fleet of aircraft is of little direct use to the company's major shareholders, who would probably prefer to fly in their private jets anyway. Those aircraft are instead used by ordinary travelers like you and me.

The lavish personal consumption of rich people is seldom paid for by drawing down their assets — it's usually paid for out of current income. (If you believe the bromide that "the rich get richer," this should be an intuitive point.) The transactions of the rich are generally to change the distribution of their investments, not to liquidate them.

The reason the estate tax is economically bad is that it causes invested capital to be liquidated. The government does not reinvest the proceeds, it spends them. This is capital decumulation — the destruction of capital. Of course it need not literally take the form of asset destruction such as selling a railroad engine for scrap. The economic effect is the same even if the physical result is merely to decrease the rate of accumulation of new capital.

By impairing the rate of capital accumulation, or by causing actual capital decumulation, the estate tax reduces the productive capacity of the economy. The economy's physical capital was accumulated by people who consumed less than they produced, who used the resulting savings to invest in equipment that was of little direct use to them, and built great enterprises that serve the needs of a great many customers. And then when they die the government smashes the work of their lifetimes. (Or, more accurately but less rhetorically, the government reduces the funds available to be invested in new capital, making it harder to build new great enterprises.)

Too few people understand how they benefit from the fortunes owned by others. It is especially tragic that even many of the wealthy don't understand it. It is far better economically — and for you and me as individuals living in the economy — for a spoiled heir to gradually fritter away some portion of their inheritance over their lifespan than for the government to seize and immediately liquidate it.

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Comparative Driving

I was recently talking to a friend from college about car stuff and learned that they've been keeping a lot of data about their gasoline purchases. Perhaps unsurprisingly, I keep a lot of data too. And what do you do when you stumble upon two commensurate data sets? You chart them, of course! Everybody loves charts. :)

The strange thing about our driving habits is that we don't, much. Since I bought my new car in late 2005 I've averaged driving only 7.9 miles per day (2900 mi/yr), and that includes an 800-mile driving trip around Washington I took last year. My friend has averaged 18.6 miles per day (6780 mi/yr). The USDOE tells kids that the average American vehicle is driven 12,000 mi/yr.

Daily Driving Miles

My driving is dominated by very short trips, the worst kind of driving for fuel efficiency. But as I knew when I was researching vehicles to buy, this wasn't at all important to me because of how little driving I do — less than a quarter of what most people drive.

Low Fuel Efficiency

My car's window sticker says it's rated for 19mpg city and 27mpg highway. During my trip around Washington — the obvious spike on the graph — I averaged 25.7mpg, quite reasonable given that I was usually going faster than 55mph and was often in hilly areas. Other than that trip I've been fairly steady around 15mpg which doesn't disappoint me given the kind of "extreme city" driving that I do.

My very recent increase in driving (and in fuel efficiency) is due to several trips into Portland, which should be amusing to someone when they read this.

I can also compare Oregon and Iowa prices over the past two years:

Oregon and Iowa Retail Gasoline Prices

And finally, just to make everyone jealous, here's a chart showing how long a full tank of gasoline lasts us:

Time Between Fills

I've had to omit some data points from that chart due to not always filling the tank completely full, or not waiting until the tank is almost empty before buying more gas. But yes, I really do buy gasoline less than once a month.

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June 18, 2007

Gasoline Imports

There's an interesting point in this news story from a week ago (yeah, it's taken me a week to write about it…) that average gasoline prices have fallen 7¢/gallon in the prior three weeks:

Most of that 7-cents-relief came from lower prices charged for gas produced in refineries outside the United States

Color me unsurprised. With domestic refineries still having trouble ("operating at 89.6 percent capacity, down about 6 points from normal") the gasoline demand is being met by imports.

I detect a whiff of I told you so in the air.

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June 12, 2007

Poverty in Africa

There's been a swell of interest lately in the blogosphere about a 2005 interview with Kenyan economics expert James Shikwati. I didn't see that interview when it was new, and it is very interesting, so I'll try not to hurt myself while jumping onto the bandwagon.

In the interview Shikwati argues that international aid to Africa has "been damaging our continent for the past 40 years. If the industrial nations really want to help the Africans, they should finally terminate this awful aid. The countries that have collected the most development aid are also the ones that are in the worst shape. Despite the billions that have poured in to Africa, the continent remains poor."

He does a good job explaining the second-order effects, the unintended consequences, of that aid. But it pains me to read economic arguments that are only half right because they don't address the fundamental issues. It is true, as he argues, that food aid puts local farmers out of work and that clothing aid puts local textile workers out of work. But that's only half of the story, of half of the story!

Let's focus on food aid. The belief that food aid is a net detriment to a country is a fallacy. It rests on thinking that a person whose job is destroyed will not be able to find another job — that there's only a certain amount of work available, and that unemployment is a result of too many people competing for too little work. But that simply isn't true. Human desires are limitless. Unemployment is caused by macroeconomic (usually monetary) factors, not in any sense due to a lack of available work. (It can also be caused by political policy.)

It is true that inconsistent food aid makes business planning more difficult. But it isn't right to say that food aid is harmful overall. It isn't! The people who cannot work as farmers due to the aid are available to do other work. The economy gets the food and this other work. It's an obvious net benefit.

The other half-story in the interview lies in Shikwati's explanations of how aid benefits corrupt politicians. Again, he's right about that effect. But the larger implication — that Africa would become more successful if foreign aid were ended — is wrong.

Aid is a scapegoat. It's not true that aid is keeping Africa poor. It's a mistake to think of it in that way in the first place. Poverty is the natural and default condition of humankind; it's wealth, not poverty, that needs to be explained! It is more accurate to say that Africa is "not growing rich" than to say it is "being kept poor."

In a word, wealth is created by capitalism. To become wealthy Africa needs secure property rights, enforcement of contracts, stable currencies, freedom to compete, freedom to profit from success… the whole panoply of policies that describe a capitalist society. Instead, it has leaders like Robert Mugabe who pursue the opposite of all the above, to predictable effect.

Cutting off aid will not by itself get rid of Mugabe or foment political improvement. Aid is not holding Africa back. Rejection of capitalism is.

A capitalist Africa with foreign aid would be richer than a capitalist Africa without foreign aid. An anticapitalist Africa is doomed to be impoverished no matter the level of foreign aid.

The institutional improvements needed to make Africa more successful are largely orthogonal to the issue of aid. Cutting off aid could weaken some of the corrupt politicians who are part of the problem, but as experience with Cuba has shown, isolating a bad leader doesn't necessarily get rid of him or improve his policies.

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June 11, 2007

Domestic Project

I've lived in my home for almost six years now, and in all that time I've done almost no decorating. The place feels empty and almost uninhabited — all the walls are still white, and I have lots of unused space.

This is about to change. I've hired an interior decorator to make the place more comfortable. I had my initial consultation on Sunday and surprised myself by finding a lot of things that I specifically did and didn't like among the examples. I didn't expect to have so many opinions about a subject that I know so little about — the examples were very helpful!

We're starting with the living room. I don't have guests over very often, but might be able to change that once I have a space I'd be proud (instead of embarrassed) to invite people into.

I have very few utilitarian requirements for that space. It has a large West-facing window so I need to be able to draw curtains to block the sun. The room is otherwise poorly-lit and needs proper lighting. It also needs to hold an modern entertainment center — I'm finally going to update my circa 2000 equipment and join the hallowed ranks of HDTV owners. Beyond these requirements, everything will be up to aesthetics. (I'm not attached to any of the existing furniture.)

I left apartment living behind many years ago, and I'm glad that I'm finally going to have a house that looks like a home, instead of looking like a big and mostly empty apartment.

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June 06, 2007

BPA Residential Exchange Credit

I got a letter today, as probably did many of my local readers, from PGE explaining that the BPA residential exchange credit is being suspended and that "residential customers will see their [electricity] bills increase an average of 13 - 14 percent."

Firstly, I'm upset that they wasted a whole bunch of money by making a special mailing instead of including this information with my next bill.

Secondly, the mailing doesn't tell me anything useful about the reasons why the credit is being suspended. It tells me that it's due to a ruling by the 9th U.S. Circuit Court of Appeals and then tells me that "… electric utilities are uniting to fight for our customers' rights to their fair share of BPA benefits."

Hang on. Do I have such rights? Isn't that, just perhaps, exactly the matter the Court ruled on? I like to be an informed consumer and I would have appreciated hearing where I could find information on the merits of the case, not merely on its fallout. After searching for a while I found a news article with (a very few) more details:

The settlement underlying the current crisis began in 2000, when the agency agreed to give the investor-owned utilities a combination of power and financial payments valued at about $140 million annually between 2002 and 2006.

The benefit ended up far higher than $140 million, because the Western energy crisis forced the BPA to repurchase power it had agreed to provide utilities - but at much higher prices.

The public utilities sued in 2001, complaining that the settlements were illegal. [source]

I don't know exactly what this program is about. There's too much advocacy and too little explanation in the sources I've found. But it smells a lot like a subsidy designed to let private utilities buy BPA electricity at cost instead of at market rates:

Through the residential exchange, BPA distributes financial benefits of the Federal Columbia River Power System to ratepayers served by investor-owned utilities. The benefits BPA provides are passed on in the form of lower rates to the investor-owned utilities residential and small-farm customers. [source]

(If you have links that describe the residential exchange in more detail, please post them in the comments.)

The problem in my eyes is not that my electric bill is going up. The problem is that I've been getting subsidized electricity in the first place. When you subsidize something, you encourage its wasteful and uneconomic use. I don't want to encourage wasteful and uneconomic use of anything. There should be no subsidies.

The original news article states:

Ratepayer advocates and investor-owned utilities in Oregon already have called on the congressional delegation to get involved. They say Congress should consider reopening, and potentially fixing, the Northwest Power Act.

But any congressional action raises the possibility of forcing Bonneville to sell its federal power at market rates.

What, pray tell, would be so bad about BPA selling its power at market rates? In fact, why not wholly privatize BPA by selling its assets to investors?

4 Comments (closed)

June 03, 2007

Heh

Excellent satire.

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June 01, 2007

Net Worth Report - End of 05/07

I had good intentions this month. I was going to seriously review my asset allocation, make about $25,000 in new investments because I'm too cash-heavy, and also start tracking the performance of the individual components of my portfolio.

Instead, I found other important things to spend my time on.

So I have no changes in methodology to report, and the only notable transactions I made were to sell all but one lot of my ESPP shares and invest most of that money elsewhere. I'm essentially flat on the month with no interesting changes.

Net Worth Figures
Category04/0705/07
Total$573,112.57$578,384.94
Short-term$33,128.20$36,726.84
Medium-term$146,348.77$143,147.61
Retirement$201,416.30$206,736.67
Property$192,219.30$191,773.82

Goal-Tracking Figures
Item04/0705/07
Adjusted Net Worth$521,009.44$525,828.38
Next Month's Target$523,425.96$528,228.88
Estimated Contribution-$468.97-$516.79

Credit Card Arbitrage Figures
Item04/0705/07
Balances @ 0% APR$19,455.94$19,417.64
Monthly Payment$389.12$388.35

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

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Tiny Island