Philip Greenspun’s Weblog

Politicians are debating an economic stimulus package for the U.S., with a figure of $150 billion being tossed around. Can this work?

Let’s consider the question from an employer’s point of view. A company needs to decide whether to invest in a new factory and whether or not that investment should be here in the U.S. In deciding whether to build a factory whose useful life might be 20 years, the company would look at long-term economic prospects, not short-term ones. In deciding whether to build the factory and create jobs here in the U.S., the company would look at tax rates, the education level of the workforce, and the costs of employing that workforce.

Based on tax rates, education, and costs, the U.S. is not looking competitive right now. Corporate tax rates are among the highest in the world. The quality of our high school graduates is stagnant or slipping while other countries have enjoyed big improvements. Our workforce is expensive to employ if only because employers are required to pay for health care costs that are now certainly the highest in the world.

Let’s consider the question from a consumer’s point of view. The average consumer has a crushing burden of debt and, unless he or she is one of the 40(?) percent of Americans who work directly or indirectly for local, state, or federal government, is concerned about being laid off. The consumer has been informed by the recently elected Democrats that new and higher taxes are forthcoming. The consumer thus reasonably expects his or her long-term spending ability to be lower than it is today. Anyone in that position would be reluctant to incur a long-term obligation, be it a car loan, a mortgage, a lease on an apartment. If the government sent a private sector employee a check, he or she would most likely use it to pay down some debt, not go on a spending spree.

Maybe the right answer is to send stimulus checks only to people with government jobs and/or think about actions that would give companies long-term confidence in the U.S. economy and consumers long-term confidence in their spending power.

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In the last couple of weeks, I have used priceline.com twice for hotel rooms. In big cities where higher-end hotels were asking $250-400 per night on their Web sites and through Expedia, I was able to get rooms for $125 per night. It seems that hotels are afraid of tarnishing their brand by offering deep discounts at the last minute, but they are happy to do it through Priceline where only the buyer knows that they sold off a room that otherwise would have gone vacant. In a growing economy there would be a serious risk of ending up with nowhere to sleep, but in our current depression there is virtually no chance of all of the hotels in a town selling out. Unless you need to stay in a specific hotel for an event, priceline.com a day or two before seems to be the way to go.

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One of the arguments in favor of spending $50 billion bailing out GM is that if the company reorganizes under Chapter 11 of the U.S. bankruptcy code (as suggested by this earlier posting), consumers won’t want to buy their cars due to uncertainty about the value of the warranty. Instead of throwing cash at the company, why not offer to back up the warranty with a federal guarantee for every car sold during GM’s Chapter 11 reorganization? New cars are extremely reliable and the true cost of the warranty is probably close to $500 (source). GM is currently delivering 170,000 cars per month. If GM imploded and nobody purchased any of its brands or the purchasers would not honor the old warranties, the Feds would be on the hook for something like $85 million for every month that GM was being reorganized. If the Chapter 11 reorganization lasted for 9 months, we’re talking about less than $1 billion of exposure or 1/50th of the cost of what Congress is currently contemplating.

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My friend Ray and I picked up a new helicopter at the Robinson factory in Los Angeles on Friday. We flew along Interstate 10 to New Orleans and then hooked a left up through Atlanta towards Washington, D.C. At all of the airports prior to D.C. we would borrow a car at the FBO and return it the next morning. At the Montgomery County Airpark in Gaithersburg, Maryland, we got our first rental of the trip. Enterprise was supposed to deliver a sedan, but instead showed up with a massive black GMC Yukon pavement-melting SUV. The monster truck had only about 3000 miles on the odometer and a plethora of switches and knobs, so I think that we can assume this represents General Motors’s finest engineering achievement.

The first thing that I noticed was the lack of GPS. What kind of car company crams together $40,000 of metal, leather, and plastic and leaves out a $5 GPS chip and $25 LCD screen that would save the owner from driving around at 8 mpg searching for an address?

The second thing I noticed was the waste of “screen real estate”. Right in front of the driver were an array of almost completely useless gauges:

• voltage (always at 14)
• coolant temperature
• oil pressure
• tachometer (with a V8 and automatic who cares?)
• speedometer (in Washington, D.C. traffic you’d be lucky to achieve 15 mph)

Why would any of this information be given such a valuable position in front of the driver’s eyes? As soon as LCD screens became daylight-readable and cheap, you’d have expected car companies to put the moving map in front of the driver. If the oil pressure plummeted, the speed was more than 15 percent over the limit for the currently traveled road (GPS databases seem to include speed limits for each road), or something else abnormal happened, you would expect some of the display to switch over to showing the now-critical information.

Instead of asking the taxpayers for $50 billion, G.M. could have used the moving map in front of the driver to earn significant revenue. The moving map could show nearly hotels, restaurants, and shops. G.M. could be collecting a commission any time that a driver chose to stop at an establishment that had been featured in the moving map.

What was Ray’s comment on these ideas? “I have a 1969 Jaguar in my garage. The gauges on this SUV present exactly the same information in exactly the same way.”

How about the rest of the car? The rear hatch kept popping slightly open while driving, generating some road noise and a warning message… underneath the tachometer in 1970s-style LED letters.

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G.M. is in trouble, according to the latest news. The company has some contracts and other obligations that it can’t afford. What can the government do to help?

Answer: The government has already done everything that it needs to in order to help G.M. The government established bankruptcy courts so that a company like G.M. can go through a Chapter 11 reorganization. During the Chapter 11 process, a judge has the power to adjust the company’s obligations so that they can be paid from the company’s likely future revenue. Chapter 11 was designed specifically so that employees can keep their jobs, albeit possibly at lower salaries, while shareholders and creditors suffer and/or are wiped out.

The stockholders, creditors, and employees of G.M. do not deserve to be spared the pain of the recession. The rest of America will be taking pay cuts, losing jobs, giving discounts to customers, etc. What is special about G.M. that they should be able to live as though 2008 never happened?

[Note that the current market capitalization of G.M. is only about $2.8 billion (compare to over $100 billion for Google). The shareholders have already lost almost 100 percent of their investment. The world won’t come to an end if these shareholders go from losing 95 percent to losing 100 percent. An evaporation of $2.8 billion will barely register compare to the losses that the S&P 500 holders suffer nearly every day.]

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In this December 12, 2007 posting, I predicted that Barack Obama would win the Election 2008 popular vote by 5 percent over “whoever is unfortunate enough to win the Republican nomination”.

http://www.cnn.com/ELECTION/2008/results/president/ shows that Barack Obama actually prevailed by 7 percent.

[Reference: In 2004, Bush won 50.7 percent to Kerry’s 48.3 (source). In 2000, Bush won 47.9 percent to Gore’s 48.4 percent (i.e., Bush would have lost if not for our electoral college system). In 1992, Clinton won 43 percent of the popular vote to King Bush I’s 37 percent. Clinton’s reelection in 1996 was 49/41.]

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I voted today in Cambridge. There was a choice among presidential candidates. You could vote for several competitors to John Kerry’s reelection bid for the U.S. Senate. All of the other candidates, ranging from Representative to the U.S. Congress down to dog catcher, were incumbent Democrats running unopposed. Cantabrigians had a fourth ballot question not available to most Massachusetts: “Shall the State Representative from this district be instructed to vote in favor of a nonbinding resolution calling on the federal government to support the right of all people, including non-Jewish Palestinian citizens of Israel, to live free from laws that give more rights to people of one religion than another.”

Asked about the experience later, I responded “You couldn’t vote against most of the Democrats, but you could vote against Israel.”

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… running political campaigns. This New York Times article implies that presidential candidates have collectively raised and spent over $2 billion for Election 2008. That will be an impressive contribution to our GDP statistic, but wouldn’t the country have been better off in the long run if we had invested the $2 billion in some new factories or clean energy powerplants?

Presumably the Chinese are not spending $2 billion deciding who will be their next dictator. Most Arab countries need not spend any money deciding who will be the next ruler, as the position is hereditary. The French have per-candidate spending limits of about 38 million euros (source), i.e., enough to buy six Diet Cokes at Charles de Gaulle airport.

When we factor in lost wages and productivity due to workers reading about the election instead of working, we may have to suspend elections for the next 10 years in order to avoid falling too far behind other nations (U.S. Congressional elections are especially wasteful as the incumbents are virtually untouchable).

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Massachusetts has a ballot question this election on whether or not to eliminate the state income tax. Opponents of the bill forecast death and destruction. Absent from the debate is the fact that our neighbors in New Hampshire seem to get adequate government services despite not having an income tax on wages (New Hampshire does tax interest and dividends) nor a sales tax.

Why do we need an income tax here when New Hampshire apparently doesn’t?

Let’s look at some recent news items…

• Massachusetts taxpayers are paying the salary of Dianne Wilkerson (wikipedia), whose track record during 15 years as a state senator includes (1) failing to file or pay federal income taxes, (2) being fined for ethics violations, (3) being fined for campaign finance violations, (4) being prosecuted for perjury, and (5) being videotaped taking bribes from the FBI.
• Massachusetts taxpayers are paying the salary of Salvatore F. DiMasi, speaker of the House, who is currently spending most of his time and effort stonewalling a conflict-of-interest investigation.
• Massachusetts taxpayers have been paying since 2003 to house Barack Obama’s Aunt Zeituni, an illegal immigrant from Kenya (Boston Herald story).

Vote No on Question 1, stay in Massachusetts, and ask your boss for a raise; our state government will be needing those income tax dollars…

[Facts and figures: The average American pays $4,283 per year in state and local taxes. The average Massachusetts resident pays $5,377. The average New Hampshire resident pays $3,642. Source: http://www.taxfoundation.org. The U.S. Census Bureau presents some data showing state taxes only for 2005. Interestingly, Massachusetts collects more per resident than New York, though perhaps that is only because New York funds more things at a local level.]

[Idea: Any tax that grows automatically with property values or incomes probably sets up a bad dynamic between taxpayer and government. The cost of delivering a product or service should normally be set by standard microeconomic supply and demand curves. The government runs schools, prisons, police and fire departments. If a Google or Microsoft is founded in the state and starts paying a lot of computer programmers higher salaries, should that drive up the cost of running the prisons? If there is a real estate bubble and all of the houses, at least on paper, are now worth 3X their former value, does that drive up the cost of running the local school? We have to assume that any revenue that gets into the hands of state bureaucrats will get spent (Alaska being the only current example of a state that returns some of its revenues to citizens). Why set up a system where there is no way for citizens to do better without fattening the state bureaucracy as well?]

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A Federal judge crushed New York City’s plan to force existing taxi operators to use higher efficiency vehicles (nytimes article). The city’s politicians seem helpless in the face of this decision, which says that only the Feds can regulate emissions or fuel consumption.

Is the city truly impotent? It is the city alone that decides how and to whom to issue taxicab medallions. The number has been fixed for decades while taxi fares have been allowed to rise, resulting in a trading value for the medallions of $600,000 (a return on this investment must be recovered from the hapless customers).

If the city wants to see hybrid or electric taxis on its roads, why doesn’t it issue new taxi medallions to drivers who promise, in exchange, to use high-efficiency vehicles? The fare on these new, presumably smaller, taxis would be set at 75 percent of the fare on the standard gas guzzling taxis. Consumers could choose the spacious gas guzzlers at a higher fare structure or a more cramped ride in a Prius at a lower fare. As most people are cost-conscious, eventually most of the taxi miles driven would be in Prius-style vehicles rather than the current V8 guzzlers.

How could the operator of a Prius survive on 25 percent less revenue per mile than the current operators? The Prius operator wouldn’t have to pay $600,000 for a medallion from an existing owner, but rather perhaps just a $1,000 per year inspection fee. The Prius operator would be paying less for fuel.

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