Taxassination

Posted on by David Wright

In my emerging view, Americans have a high standard of living because things are cheap here. Putting sin goods (alcohol and tobacco) and rent to one side, NYC is cheaper than Toronto, London, Sydney and Hong Kong.

Economists, bless them, would destroy this.

You see, taxes are distorting. And any increase in a particular tax is more distorting than the last. Since taxes are necessary, how does one minimize the distortion?

Keep the rates low but have lots of taxes is the answer. Low rate, broad base.

Now, I’m not sure why things are cheap here, but let’s say I’m convinced it’s due to low consumption taxes (fuel, VAT, etc). Add in high income taxes and the quick answer for most efficient tax at this margin is: ‘on stuff we buy’

The prospect of this worries me a bit:

There’s an amazing swarm of low-paid workers who get paid in cash and can live cheaply (in apartments with a dozen other people, probably). These workers supply inexpensive services to everyone here: delivery, shoe-shines, restaurant service. Luxuries for the well off, to be sure. Is that so bad?

The services in New York are incredibly diverse. And I worry that a consumption tax will destroy this part of the economy. In econ-speak, I’d say that economists are horribly underestimating the deadweight loss.

I’d also say that this underground economy breathes life into a city that, in my opinion, is shockingly controlled and regulated.

Perhaps taxes must be raised, as they all say. If so, I’ll get fewer shoe shines and no more deliveries. Goodness knows what happens to those who once supplied those services. As I said: deadweight loss.

Maybe the kind of low-level service economy I’m witnessing here is a relic. If so, I’m thrilled to have seen it.

As we move toward a mild socialism (I don’t mean that in the pejorative), this kind of fly-by-night service economy will be crushed.

Villains of Insurance

Posted on by David Wright

So the folks down under are in a spot of bother and insurers are starting to pay up.

I’ve never been one to shy away from a bit of armchair theorizing in this space, but there’s sausage being made here, folks, so it’s worth zooming in to see if all’s working as I’d expect.

Clearly a disaster? check

Insurers paying? check

Reinsurers paying? check

And the regular folk? What do they think about all this?

I’m sent to this article, which makes a few points:

1. Insurable loss is smaller than ‘economic loss’

2. Governments shouldn’t buy insurance because they should be able to “manage the risk within their own budget”

3. Insurers have been struggling to make their margins recently

4. Insurers should have ‘costed in’ this disaster (unless less than “1-in-100” year event)

5. Poorer people live in flood zones and will opt out of higher premiums

6. The government should pay for insurance because the government zoned these places in the first instance

A few doozies in there. Less charitable bloggers would revel in the logical inconsistencies (#3 vs #4) and sloppy thinking (#6) here.

Instead, I shall mock caricatures of the sides of this debate.

Press Release: BIG GREEDY COMPANIES SCREW EVERYONE OVER

Subconscious Thoughts: I pay premium and don’t read/understand my policy. I am crap at evaluating tail risk so I never actually thought I’d have to suffer the consequences of living in a flood zone. I’m also crap at comparing large magnitudes so I don’t understand why a company with ‘billions of dollars’ can’t pay $400,000 to 2 or 3 million people to rebuild their lives, stay solvent and renew my policy without a fuss.

When I do submit my claim I think I might try to squeeze out a few extra bucks and get ahead on the deal; after all, you’ve got ‘billions of dollars’ and I ‘work hard every day’. And, regardless of how my choices have affected this outcome, I’m firmly invested in the ‘victim’ mindset here because I know people are nicer to victims. Politicians especially like to appear magnanimous to us victims. Watch your ass!

Press Release: GREEDY ILLITERATES SHOULDN’T LIVE IN FLOOD ZONES

Subconscious Thoughts: This business was horribly underpriced and I’m on the edge of a knife, here. If only those muppets at XYZ company hadn’t gone after our customers we wouldn’t have had to cut our rates by 30% to keep them.

The last few times, I was able to earn my way out after jacking up rates, but if I get downgraded, I’m belly-up. Maybe I should forego that expensive backup reinsurance cover and bet the house on no more disasters this year. What month is it again?

Maybe there are some loopholes in my policies. If I can string out the payments for a while I’ll be able to earn my way through. I hope someone else gets downgraded and pulls out; that way, rates will really skyrocket and we’ll make a killing. The problem is, as soon as some competition shows up I’d rather take the pipe than actually innovate a bit and make money the hard way.

Making Waves

Posted on by David Wright

I like having pet ‘theories’ that I find useful for thinking about the world but are exaggerations or ‘caricatures’, as I typically call them. Reading Arnold Kling and Robin Hanson freed me from the need to feel like people should ‘kinda agree with me all around‘ about things.

Here comes another one: “people and politics never matter”

Barry Cunliffe’s Europe Between the Oceans discusses Fernand Braudel‘s division of history into three concepts of time:

(oh, yes, I’m using the french!)

1. l’histoire evenmentielle (“events insitgated by individuals”);

2. conjontures (“collective forces, impersonal and restricted in time to no more than a century”); and,

3. the longue duree (“geographical time”).

Ok, some examples to help explain.

Scott Sumner’s had what I’m sure he would say was a provocative idea:

I seem to be the only person in the world who thinks Al Gore would have led us into Iraq.

I’d rephrase what Scott’s saying as: everyone thinks that the invasion of Iraq was a #1 event (attributable to GWB or Rumsfeld or something), but it was really a #2 event (driven by the will of the people in reaction to 9/11).

Controversial example, to be sure. But it helps illustrate the point that humans have a deep need to attribute actions and consequences to individuals. We aren’t built to think on a societal scale, we’re built to think in terms of tribal units, a mental model that evolved waaaay before societies were of any size.

Now, my caricature of this idea is that NO heroic historical figure is relevant for understanding any historical process: Plato, Aristotle, Alexander the Great, Jesus, Charlemagne, Copernicus, Martin Luther, Newton, Geroge Washington, Napoleon, Abe Lincoln, Darwin, Einstein, Hitler, Stalin, Martin Luther King Jr, Jackie Robinson, Ronald Regan, Bill Clinton, George W Bush, Sarah Palin or Joe the Plumber.

All extraordinary individuals, to be sure. But I’d say that all of their acts (good or bad) were fundamentally products of their culture. The WHO affects the WHEN (barely), but not the WHY.

The next lesson I take from this is that we attribute #3 effects to #2. Geography builds societies, not culture.

Why did Western Europe develop faster than North America, Africa or Australia? Geography. Why did the Middle East develop first and not Europe? Geography. Why was the Industrial Revolution in England? Geography.

GG&S was the first exposure I had to this idea and it blew me away. Cunliffe’s book is very much in this tradition.

When I hear some grand even attributed to a person, I think about the culture. When I hear something attributed to culture, I think about the geography.

Why Does Berkshire Hathaway Hold Any Debt At All?

Posted on by David Wright

You could be forgiven for not noticing with pages of self congratulatory pagentry like this:

Unquestionably, some people have become very rich through the use of borrowed money. However, that’s also been a way to get very poor…

But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade – and some relearned in 2008 – any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces  zeroes, even when it is employed by very smart people…

On the facing page you can read a letter sent in 1939 by Ernest to his youngest son, my Uncle Fred. Similar letters went to his other four children. I still have the letter sent to my Aunt Alice, which I found – along with $1,000 of cash – when, as executor of her estate, I opened her safe deposit box in 1970. Ernest never went to business school – he never in fact finished high school – but he understood the importance of liquidity as a condition for assured survival. At Berkshire, we have taken his $1,000 solution a bit further and have pledged that we will hold at least $10 billion of cash…

Flip over a few pages. Now, what do you see on the balance sheet?

Cash and cash equivalents:

(2010) $ 34,767

(2009) $ 28,223

yep, that looks right. But wait a sec, what’s THIS?!

Notes payable and other borrowings:

(2010) 14,477

(2009) 13,769

Growing every year. Why oh why?

Here’s David Merkel:

What I am saying is that once the discipline against debt is breached, it becomes easy to justify more debt.  I think we are seeing that now, and Buffett is compromising his principles.

Hey, Greenberg eschewed debt for two decades, and then piled it on for two decades.  Is Buffett doing the same thing?  Personally, I think he is, though I don’t think he has thought it through.  Warren, if you are reading me, pull back on the debt.  It killed Hank.

Where’s the Romance?!

Posted on by David Wright

A dose of reality is always nice, but yikes:

It’s hard to capture the linked-to post in an excerpt, and even harder to gut-check yourself through sentences like this (particularly in the context of insight like this):

I don’t care who you are or how strong your ego is, you will have these moments — perhaps a continuous stream of moments — when you can’t take it anymore.

You see, I’m a mild idealist with a deep-seated desire to BUILD SOMETHING. A common sentiment among self-regarding 30-ish professionals with lots of ego and few prospects at the next margin of success.

The thought that taking the plunge into the entrepreneurial deep end is terrifying, risky and impoverishing isn’t pleasant. Most of the time these thoughts are easily swatted away by some ego-insulating doublethink (either: oh, but that wouldn’t happen to ME; or, yeah, but I can handle that shee-it – bring it on!).

But let’s not kid ourselves. What sacrifices is one really willing to make?

Probably fewer than we’d think.

Inmates Run the Asylum

Posted on by David Wright

Just finished Russ’ podcast with Daron Acemoglu on inequality and the financial crisis. There’s a lot of interesting stuff here.

The genesis of the podcast is a book by Ragu Rajan that I haven’t read. The ideas (as discussed in the podcast) are familiar, though: measured inequality goes up, everyone freaks out, politicians figure subsidizing housing is a good response, a housing bubble emerges and every special interest under the sun (the poor, Wall Street, Real Estate, etc) makes a killing.

Acemoglu has a great stat about how politicians’ voting records correlate most highly with the surveyed priorities of the top third of the income distribution, somewhat well with the middle third and not at all with the bottom third. Lots of interpretations here:

My caricature of Bryan Caplan would say that the top third are the informed voters and the rest don’t matter because their desires are nonsensical and they don’t vote anyway.

Super lefties immediately go for the corruption angle.

Who knows.

Tyler Cowen’s awesome essay on financial regulation and inequality screams for a mention here. It taught me that bailouts are impossible to a avoid, really.

The only people who know enough to figure out how to engineer a non-bailout system or command enough authority to convince the polity that bailouts aren’t necessary are in the system!

Depressing stuff.

Douchebag Alert!

Posted on by David Wright

Man do I hate this post. Let me count the ways:

Basic Math:

I’d say I correctly broke down how a dollar  of insurance premium gets distributed, but I made two errors. I stand by the main cost being claims and brokerage. I glossed over the breakdown of the rest, though. There’s profits (5%), Reinsurance (5-10%) and internal expenses (5-15%).

Different Reality:

The internal expense portion is massively dominated by one function: regulation. In the US, there are fifty regulators a nationwide carrier needs to cozy up to. FIFTY. Insurers are NOT just pools of capital. They are money + regulation passing machines. That function is pretty resilient to ‘streamlining’.

No Balls:

So why did I decide that the smallest share of premium is the one to automate? The fat is in the brokerage because they have the power over the business.

Facile Business Fantasy (I really hate this part):

‘Silicon Valley’? WTF are they going to do for you? Social networking or cloud computing? You going to improve our process by outsourcing it? The key problem here is that if someone else has an idea that’s great for insurers, they should just start an insurance company. All you’d bring to the table is regulatory expertise and work flow systems. Not very impressive is it?

All the money is in the distribution network. Forget insurance. Find a way to take out the broker and let the insurers play with the regulators.

This is why I was worried about writing more. I start slinging stuff out the door and only later realize it’s shit.

Destroying Jobs [not the guy!]

Posted on by David Wright

I’m obsessed with this idea that I work in a commodity business. That statement breezes through quite a lot of legitimate criticism, but I don’t care. I’m convinced.

And since I am in a commodity business, success at the margin requires developing a more efficient system for delivering that commodity. Exogenous price fluctuations are irrelevant.

Money tells us that sales are the second most important part of an insurance policy after claims. Brokers take a cut of between 10% and 20% of the premium.

Until the singularity comes along, our ability to extract the cost of salesmen from the system will be extremely limited, so that’s fixed.

Claims, the point of all this, are the biggest part, and cost about 60-70% of the premium, but they’re exogenous (commodity!), so forget them.

That leaves something between 10%-30% for corporate expenses, profits and other things under control.

Labour and capital. Salaries and systems and overhead. Capital + scale is no new idea. But applying capital to new areas is ripe for innovation.

Now, here’s my philosophy: new ideas do not exist. Certainly not in my head and almost certainly not in my business.

I take a cue from Fabrice Zinga. This guy made a fortune exporting the ebay model to non-US countries. I think that’s a bit of a naked wholesale swipe of a business model, but it worked.

I’m not quite so bold, but my plan is to spend as much time learning about innovation in OTHER businesses, particularly recent innovation, and figuring out if it will work in mine. I’d guess the implementation delay of a solid idea from Silicon Valley to insurance is about a year.

-=-=-

Edit: and google is telling me that this post has gotten a pile of traffic, no doubt because of the word “jobs” in the title. I bet that the only better traffic bait would be the name of a certain former Alaska governor.

*shudder*

People of the world: I regretted writing this stupid post!

HR is a Low Priority

Posted on by David Wright

One frustration about working for a small company is the hiring ‘Strategy’.* The process (for general entry-level spots) goes something like this:

1. Realize you should have hired someone 6 months ago

2. Hire the next person you meet that seems suitable

3. Be annoyed 5 years later when you feel like there’s always a shortage of ‘skill’ positions.

4. Hit the sale rack for discarded talent.

The answer to this problem: choose carefully and train. Easy enough to understand.

Recently, I’ve been given the go-ahead to hire an intern. I’ll show ’em how it’s done!

(sigh)

Haven’t much to show for myself. Here’s why I think this is:

1. This process is effing TIME CONSUMING. College career services offices are painfully bureaucratic and only want to talk to a company that hires dozens of MBAs (ka-ching!), not one that might hire an undergrad intern per year. Maybe.

2. Learning is hard! Bumbling through the process with bureaucrats then try and sort out which students are duds? No fun. I remember, from ages past, the ratio of decent-to-disastrous candidates as something like 1-5 or 1-10, and that was from a heavily pre-selected University program.

3. Meeting people is hard. And chumming around with a gang of youths too nervous to flash me a glimpse of their real selves so I can probably reject them outright? Wearying.

4. And all for what? Short term pain, medium term breakeven (probably), long term massive gains. MY discount rate is prohibitive?! My bosses’ discount rates are astronomical by comparison.

Luckily I’m happy to tie myself to the mast with blog posts like this. Need some motivation!

* For small companies in my business, ‘strategy’ is something to do when idleness if forced upon you, the rest of the time, you’re broking/pitching/selling.

The Systems in Your Life

Posted on by David Wright

For some reason I have an enormous affinity for the word ‘system’.

I like to caricature the world as being broken into system-based activities and status-based activities. The former being the entire world economy before, say, 1900, and the latter being 99% of the economy in, say, 100 years.

But this isn’t about economics, this is about Colin Marshall’s post that resonated with me.

…if you want to make a life of some craft, it makes sense to institute a system, a schedule — no matter how basic — as soon as possible.

The point, as I see it, is that you are never going to get good at something unless you do A LOT of it. Very Gladwellian, of course, but I like reminding myself of this. As such, I think Colin’s a bit harsh on this point:

I respect most the work of creators who, broadly speaking, do what they want to do — especially when they don’t want to do it.

Now, Colin might not agree here, but I’d say that he’s got his correlation/causation mixed up. Systematized creators tend to have better work, so he likes them better.

Anyway, all this to say that I do this blog to practice my writing and work out ideas that pop into my head. But if I really wanted to get good at this, I’d have to crank out material on a schedule.

Am I up to it? (A very Colin Marshallesque question!)