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August 26, 2007

Cheap Warranty

Today I replaced the flapper valve in one of my toilets because it had been leaking. As I was shopping for the replacement, mindful of the bountiful cornucopia of competing products even for such a mundane item, I settled on the one whose package proudly boasted a five-year guarantee: "If it fails within five years of purchase, return to Lavelle. It will be replaced at no charge."

There are several amusing things to note about this warranty.

Flrstly, I don't think flapper valves fail very often. I expect most any flapper valve would have a good chance of lasting five years. The one I was replacing, for example, had endured six years of daily use.

Even if the valve does fail, in order to satisfy the terms of the warranty the customer would have to have retained the product packaging and receipt in order to make a proper warranty claim. No one is going to keep those things around, especially for several years. (In fact I had to fish the package out of the trash when I realized it would be fun to write about this!)

Finally, a warranty claim would probably take a couple weeks to process. Who would tolerate having a toilet disconnected for so long when the solution is a valve that costs less than $5? It's much less time and hassle to simply buy another one than to pursue the warranty. Plus, if the valve did fail quickly, you're unlikely to want to replace it with another one just like it, which you'd expect to also fail quickly.

I feel confident predicting that the total number of warranty claims the manufacturer will have to fulfill is exactly zero. The offer of warranty on an item like this is a pure marketing device, designed to make the product stand out from its competition while costing the manufacturer nothing at all.

Success! Man, I love capitalism.

August 23, 2007

Tax Case Update

My lengthy 2005 Oregon tax saga is over. I had my "day in court" — actually just a teleconference with a magistrate — and we all came to an agreement in about 15 minutes.

Shortly after I mailed my court filing (perfectly bad timing!) I got a letter from the DOR offering an explanation for what happened:

Your amended return and payment was received before your original return had completed processing. As a result, the payment made with your amended return was refunded to you when your original return was processed.

The DOR representative I spoke with in the teleconference had a different theory that sounds perhaps more plausible: When they received my payment, they didn't mark my account (for whatever reason) with a "hold for amended return" flag. Since they're very slow about processing amended returns, my account looked overpaid and they issued a prompt refund so that they wouldn't owe me interest on the "overpayment".

Whatever the source of the error, they agreed it was an error… and not something that happens frequently. The DOR's written response to my filing satisfied half of my demands right away, and they agreed to two others during the teleconference. I got everything I asked for except reimbursment of my filing costs, which they explained there's no provision in the law to allow.

When I filed my complaint, the penalties and interest totaled $10.04, and I will be recovering all of that. And it only cost me $26.10 to get it! :)

I'm happy to report that no one called my case frivolous or otherwise complained about the very small amount of money involved. Everyone was professional and respectful. Aside from the slowness of the system — it took two and a half months from the time I filed until I got my day in court — I come away with a positive impression of the manner in which my case was handled.

August 20, 2007

Fatness and Heart Disease

The least sugar-coated (that'll be funny in a moment) health news I've seen recently is the relationship between waist size and precursors of heart disease:

Several studies have shown waist size is clearly linked with heart attack, stroke and heart disease risk. U.S. government guidelines now say men should aim to have a waist 40 inches in circumference or less — 35 inches for a woman.

The Dallas researchers found no absolute cutoff. They simply found that the smaller a person's waist, the clearer his or her arteries were observed to be.

Reading the abstract, it's clear that the journalist got the story wrong. (Is anyone surprised by this anymore?) It's actually the waist-to-hip ratio, not waist circumference, that is best correlated.

Alas, not willing to shell out the $15 to read the full article, this is all I've got on the subject. Being fat is unhealthy, and journalists are sloppy. You didn't learn anything new; I know, I know… cut me some slack, it's been a busy week. :)

August 19, 2007

The Rate Cut That Already Happened

The recent liquidity problems of financial institutions have had the usual suspects clamoring for the Fed to cut interest rates. And on Friday they did, cutting the discount rate by 0.5% (from 6.25% to 5.75%). This has only temporarily silenced the calls for rate cuts — what people really want is a cut in the fed funds rate (not the discount rate), currently at 5.25%.

Ah, but they've already done that. Not officially, mind you — the target remains at 5.25% — but actual lending over the past several days has been at interest rates below the target rate.

Go, look. Search 07/01/2007 to 08/19/2007. Notice the "daily effective rate" and "standard deviation" — up until Aug. 9th, the daily rate had been comfortably within a few basis points of the target rate, and the standard deviations not more than 0.17. Since that date the daily rates have been under 5%, and standard deviations much higher.

They've already cut the fed funds rate. They just didn't tell anybody about it.

I wonder how long they'll hold the fed runds rate lower than their official target rate? Or will this silent rate cut become official with a reduction in the target rate?

August 14, 2007

Totally Unprofessional

My decorator and I are gathering bids for carpet installation. The contractor that visited us today was outrageously unprofessional.

He was supposed to arrive at 6:30pm. About ten minutes after that time, my decorator called to find out why the contractor was late. They were in downtown Portland and wanted to know whether we'd prefer to wait or to reschedule. I said I'd prefer to wait.

At this point, two things are wrong:

  1. He didn't proactively call to let us know he would be late for the appointment.
  2. He scheduled so poorly that he was in downtown Portland at a time when he was supposed to be way out here in Hillsboro.

We waited, and the contractor showed up about 45 minutes after the original appointment time. (A little Wii tennis entertained us in the meanwhile.) He measured, he talked, and he made what was actually a good bid. But he wanted a $50 deposit on the job.

I chimed in that we weren't ready to give him the job, as we were still gathering other bids. And then he said, to my complete astonishment, that he wouldn't even have come out if he knew we were getting other bids because he doesn't want to "take the job from someone else." (And confusingly, he added that he'd normally charge $75 to measure if he wasn't the only bidder. This made no sense after he said he wouldn't have come out if he knew it was for a competitive bid.)

What parallel dimension was this guy from?

He didn't ask us whether we were pursuing other bids, nor did he say it was a requirement of his that we weren't. And his excuse about not wanting to take the job from someone else really irritated me. Not only was he unwilling to engage in competition, but he had an explicitly zero-sum mentality about a job that doesn't "belong" to anybody anyway until after I accept a bid.

I came very close to uttering a curt "get out." Fortunately it didn't come to that. When it was clear we were surprised and offended by his requirement to be the only bidder, he withdrew his bid and left empty-handed. He did not seem visibly upset by this, making me wonder whether it happens to him often.

What a tremendous waste. The entire episode was unnecessary. If he had made his policy known up-front, we wouldn't have made an appointment. If he had come to the appointment as scheduled, it wouldn't have consumed an hour of everyone's time.

Oh well, at least it gave me something to write about. :)

August 12, 2007

Falling Gas Prices

Gasoline prices have dropped 17¢ in the past two weeks. That's a lot, and in a hurry.

Which is this evidence of?

  • Increasing supply and/or decreasing demand
  • The collapse of the gasoline cartel
  • A fake-out by the gasoline cartel to reduce political pressure

For extra credit:

  • Why did this happen last year, too?

Shame on the American Red Cross

Johnson & Johnson is suing the American Red Cross:

Mark Everson, American Red Cross president and chief executive, called the lawsuit "obscene" and said the first aid kits and other items promote its humanitarian aim of helping Americans prepare for a disaster. … "Our outside lawyers have looked at this and think we're on sound ground with what we're doing," Everson said. "We're helping Americans."

Johnson & Johnson, of course, is an evil corporation and charter member of Big Pharma — a profiteer on the sicknesses of children and the elderly. <hiss>

Oh, hang on, they're also enforcing their trademark:

In its lawsuit filed in U.S. District Court for the Southern District of New York, the maker of Band-Aids said it has for more than 100 years "owned exclusive trademark rights in the Red Cross Design for first aid and wound care products sold to the consuming public, including first aid kits."

J&J said American Red Cross founder Clara Barton in 1895 signed a deal with J&J agreeing and acknowledging the company's "exclusive use of a red cross as a trademark and otherwise for chemical, surgical, pharmaceutical goods of every description."

If this is accurate, the American Red Cross is obviously and wholly in the wrong and they deserve to have their ass handed to them (with a Band-Aid® on it).

The only thing that's "obscene" here is the spectacle of Mark Everson trying to claim that trademark violation is okay when it's for a good cause. I wonder if he's ever told his children (assuming he has any) that "the ends don't justify the means".

On the other hand, he used to run the IRS, so I suppose it was his job to steal from people for a good cause.

Global Credit Crunch

We're on the verge of a global credit crunch. Thank the Federal Reserve. George Reisman supplies the context; I'll supply the rage.

Central banks fill the role of "lender of last resort" to provide liquidity for the purpose of avoiding financial panics. They've certainly been doing a lot of that recently — the central banks of the United States, European Union, Japan, Australia, Hong Kong, and Canada all injected funds last week, a sum of at least US$280 billion. (These are temporary funds.)

I'd rather they hadn't. The world needs a good credit crunch.

Everyone's pointing fingers at U.S. subprime and Alt-A mortgages, for which default rates have been rising significantly. But they should be blaming the Federal Reserve. The Fed's very loose monetary policy of the past few years fueled the housing and mortgage bubble, just as it had earlier fueled the tech stock bubble. If they cut interest rates (as is now expected) in order to prop up the economy, they will merely be adding to the malinvestment bad by keeping bad ventures viable.

Monetary inflation does make the economy look good — spending, revenues, and profits rise. On paper. But the new money is spent wastefully, inefficiently, irrationally. By competing away the real resources from sounder business ventures, inflation harms the economy. When the waste of resources eventually turn the inflationary boom to bust, the instinct of central banks is — of course — to provide more money! By propping up the ventures that never should have been started, they continue to waste resources.

As long as central banks can create money out of thin air, they will prevent a genuine credit crunch that would liquidate the malinvestments and strengthen the real economy.

The Fed created this mess and the Fed will create another mess in trying to clean up this one. The Fed is not merely unnecessary, it is an active malignancy, and it should be abolished. (This legislation was introduced by Ron Paul, of course.)

August 10, 2007

Concurrency Exploits

As a rule I like to avoid going all computer-geek on my readers, but in this case I'll make an exception, for there's a wonderfully interesting short paper and presentation about how concurrency can be exploited to bypass security in system call wrappers.

That's right: Concurrency, security, and wrappers… oh, my! [It's like someone's trying to deliberately provoke Eric Q. - ed.]

(h/t Financial Cryptography blog)

August 09, 2007

Is That Surprising?

Once in a while an article comes along that makes me wonder whether anybody is paying attention. A friend forwarded me such an article, from Scientific American, describing how surprised we should be that eBay works:

To some economists, this is a borderline miracle, because it contradicts the concept of Homo economicus (economic man) as a rational, selfish person who single-mindedly strives for maximum profit. According to this notion, sellers should pocket buyers' payments and send nothing in return. For their part, buyers should not trust sellers — and the market should collapse. [source]

Sorry, no. Economists are not actually confused by the longevity of eBay. It does not rock the theoretical underpinnings of the science. It is perfectly ordinary — and is in no way a threat to the model of Homo economicus.

Economist Axel Ockenfels of the University of Cologne in Germany and his colleagues have spent the past several years figuring out why this does not happen.

Economists like to study markets. The data they gathered was new, but I assure you that the reasons explaining why eBay is not merely a cesspool of fraud have been long understood. eBay's solution, of course, is its feedback system — which effectively gives every buyer and seller a personal brand. Economists do understand the value of brands.

Because a bad reputation scares off future buyers, even strategic and rational sellers have an incentive to be trustworthy. [Emphasis added]

Wow, that's brazen! The reader is expected to believe that there's no rational reason to be trustworthy except for its effects on reputation — as if fairness is for suckers. I would ridicule that view as completely ridiculous (natch) but for how tragically common it is.

As I read the article I was struck repeatedly by the author's clear belief that rational, selfish behavior ought to lead to fraud and collapse in markets like eBay… and that these markets are saved only by the existence of other (presumably non-rational, non-selfish) factors — indeed, the article's lede declares "social concerns often trump selfishness in financial decision making."

I struggle to find a word to encapsulate how wrong that is. "Bullshit" seems too weak.

It isn't "social concerns" that keep, for example, the market for bread from collapsing when bakers selfishly save money by using tainted ingredients. Rather, the bakers understand that consistent quality is necessary in order to stay in business for the long term… and since they selfishly want to make money over the long term (and not merely for today), they'll use good ingredients. This is not new knowledge! Adam Smith explained over 200 years ago, "It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest."

Rational consideration of your potential actions includes projecting the consequences of those actions. A person who is pursuing their interests (viz., being selfish) will quite rationally consider the future. It's hard to achieve goals of any kind without doing so!

[I]nherent selfishness cannot explain behavior in other settings. Take a child who has been given a bag of jelly beans, which her left-out sibling is eyeing jealously. Many children would voluntarily share the candy just to be fair, even though that would mean fewer jelly beans for them.

Notice the assumed tension between fairness and self-interest, and the assumption that selfishness is bound to range-of-the-moment thinking. I would counter that the desire for fairness here is actually an excellent example of long-range self-interested thinking: You don't want your siblings to resent you because they'll have plenty of opportunities to get even. Or to state it positively, there are many benefits to a good relationship with your siblings — and they're more valuable than half a bag of jelly beans.

Economics has recognized for over 200 years that individuals' pursuits of self-interest do not conflict, but in fact harmonize, and especially so over the long term. This lesson has penetrated very shallowly into common understanding.

August 06, 2007

Charity or Theft

Consider two people, Alice and Bob, with similar incomes but different spending patterns. Let's assume Alice has a long commute to work and needs to spend $100/mo. on gasoline compared to Bob's $50/mo. For Bob, let's assume that he comes from a large family widely dispersed across the country, so to keep in touch with them he needs to spend $100/mo. on telephone services compared to Alice's $50/mo. Each person's combined spending for transportation and telecommunication is $150/mo.

Now let's consider socializing those two industries. The revenue side is simple: $150/mo. from each of Alice and Bob, or $300/mo. total. The distribution side is where things get interesting.

First imagine an egalitarian solution where both Alice and Bob get the same quantity of each good. If the government set its policy based on Alice's preferences, Alice would be happy but Bob would have too much gasoline and too little phone time. The opposite would happen if it used Bob's preferences. If the government tried to be "fair" by weighing everyone's preferences equally, it would supply $75/mo. worth of each good to both people — and neither would be happy! Alice wouldn't have enough gasoline and would have too much phone time, and Bob would have too much gasoline and too little phone time.

As long as people have different spending preferences, a purely egalitarian approach will not be satisfying.

Now let's imagine the government trying to adapt the quantity of goods according to individual preferences. Now we come up against the problem that peoples' desires are effectively infinite. Alice may wish to consume $100/mo. worth of telephone services, just like Bob, but also keep her job that requires her to consume $100/mo. worth of gasoline to commute. She wants to consume more than she contributed to the system.

The government only has $300/mo. to spend on Alice's and Bob's combined gasoline and communication. It can't fulfill Alice's wish (no matter how passionately argued) to have $100/mo. worth of gasoline and $100/mo. of telephone service while also providing Bob with $150/mo. worth of goods. It doesn't have $350 to spend, it only has $300. In order to give Alice more, the government must give Bob less.

This turns Alice and Bob into adversaries. Instead of having the right to spend what they've earned, now they are entitled to have whatever they need. And who's to say what they need? Not Alice or Bob: they can't be trusted to objectively assess each others' needs — they're adversaries in a zero-sum situation. The government will have to mediate. Politicians will decide what's a legitimate need and what's merely a desire that can be denied. Decisions about consumption cannot be left up to the consumers.

And people will take advantage of the politicians' rules. Chad is new to town. He makes the same money as Alice and Bob and contributes $150/mo. just like they do. But he understands that the government will take care of his needs, and this affects his decisions. He could live downtown near Bob… but he'd rather live way out in the exurbs, even farther away than Alice. Transportation to work is most assuredly a "need", so the government will pay $150/mo. for the gasoline he needs to commute. And at least a modest amount of telephone service (say $25/mo.) is certainly a "need", too. The government wouldn't let him go completely without it. Now Chad is enjoying the open spaces of the exurbs and receiving $175/mo. in benefits while paying only $150/mo. in taxes. Where did the extra $25/mo. come from? Why, from Bob, of course — surely he doesn't need to talk to his far-flung family so often. He can get by on only $75/mo. worth of telephone service. Isn't it more important that Chad be able to get to work? Won't everyone agree? Except Bob, of course — but he's a selfish bastard, only protesting because he's a net loser in the system. But that's a feature, not a bug: the system is supposed to distribute wealth towards the people who need it most! We've long since forgotten that Chad's large need is a result of a choice he made that was influenced by the incentives created by the government's system.

The situation of Chad is an unfortunate consequence of the real goal of the system: to help people like Dave, a poor man with a small income, who needed help even before the system was created. Dave wasn't responding to the system's perverse incentives. Dave isn't guilty of anything. He's the person we wanted to help — and now we can help him, albeit at Alice, Bob, and Chad's expense.

But what have we done in order to help Dave? We have turned Chad into a moocher while turning Alice, Bob, Chad, and Dave into adversaries. We have removed their ability to make their own consumption decisions, substituting instead the distant judgment of someone who has no direct knowledge of their lives. We have taken from three in order to give to one.

Was it worth it? What if, instead, those who were concerned with Dave gave him money voluntarily? Or gave it to a charity, which would in turn help Dave and others like him?

Then we would not turn Chad into a moocher — he would decide to live closer to the city, so that his income matched his expenditures. We would not turn Alice, Bob, Chad, and Dave into adversaries. Alice, Bob, and Chad would retain control over their consumption decisions. So would Dave, although the choices available to him may depend on the amount given to charity.

Would there be enough donations to help Dave? If the legislation to create the program had enough votes to pass, those concerned with Dave would seem to be in the majority. Would he get less help than under the government program? Perhaps, although this is uncertain. (We have to consider how much could be saved by not encouraging people like Chad to become moochers.)

The most significant difference is a moral one: Gifts to charity are voluntary. Taxes are forced. I recoil at forcing people to do things. If they won't do something voluntarily, it's because they have a reason not to! Overriding their judgment is a very serious matter. To do it is to assert that their judgment is wrong, that that their goals are inferior to yours, and that you have the right to assert your preferences over theirs.

If Ed wants to buy a dress for his girlfriend, I'm not going to force him to give that money to the homeless instead. I wish we would all grant each other the same respect.

Tiny Island