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August 2004

Republicans favor high-tech immigrants

The party platform adopted a favorable stand towards high-tech immigrants at the GOP Convention . The party acknowledged that US has reaped enormous human capital in the genius and talent of immigrants. The party favors increase in H1-B visas, overhaul failed Labor Certification Program to end delays, and reorganize family unification preferences to give priority to spouses and children over extended family members.

National Sales Tax is a great Idea

Via Catallarchy, Neal Boortz writes in townhall about National Sales Tax as part of the Fair Tax Plan.

The plan replaces Federal Income tax, and payroll taxes with a nation wide tax on retail sales. The plan is very efficient (no tax returns to file), fair to everybody (it is not progressive) including poor as,

1. They get their entire paycheck.
2. Even with the sales tax, and considering the drop in prices, they’ll be paying essentially the same or less for everything they buy.
3. They get a check from the federal government every month to rebate any sales taxes they had to pay on life’s basic necessities.

I think it is a great idea for India to adopt. It will reduce black money in the system, reduce corruption and high-handedness of the tax officials and give tremendous boost to growth because of its non-progressive nature.

Electoral Reform policy of Liberal Party of India

The Swantantra Bharat Party's policy document on Electoral Reform, at, correctly points out that:
The need to spend enormous amounts as election expenses provides a major incentive for corruption amongst officials as well as politicians. Tightening the rules about collection of contributions or submission of accounts of expenditure is unlikely to bring about any improvement.

I agree completely.

Also, the document further says,

Governmental financing of election expenses will be worse than the disease itself.

Well said!

On compensation of Representatives SBP correctly recognizes that:

Compensation of Representatives: The current amount and methods of compensation to representatives ensures that only the corrupt enter the system.


However, in my view the document falls short of suggesting any drastic reforms in the system and method of compensation. It recommends increasing the amount of compensation. Only change in method, it suggests, is removing perks (such as free travel, etc.) and ensuring full asset disclosure.

The real problem seems to be that compensation is fixed. There is no incentive to produce better results other than getting reelected. One can always get elected (and reelected) by catering to special interest groups! In fact who else, but special interest groups, can finance the enormous amounts needed to finance the election expenses! Thus, the existing system and the proposed changes are both recipes for corruption.

One solution, is to introduce compensation which depends on performance and results. To ensure that representatives work keeping in mind long term perspective, the compensation has to be deferred and based on results measured years later.

But, how do we measure the results and performances of our representatives? The system of measurement should not give perverse incentive to inflate the results. Secondly, representatives should be able to see a clear link between their actions and probability of better results in the future. Public should be able to see the same link between the results and actions of the representatives, atleast in the hindsight! Otherwise, public will feel cheated! Thirdly, the system should allow them to raise finance for the election expenses and pay their contributors without granting special favors from Govt.

We can take advantage of the fact that Govt. anyway needs to measure various economic variables in order to collect taxes. For example, for income tax we need to measure incomes of individuals, corporations, families and so on. For collecting sales taxes, Govt. needs to collect information on retail sales. What if we define collection of such tax variables as our criteria for measuring performance of our representatives? We can then compensate our representatives as a fixed percentage of such economic variables as measured years afterward their actions.

Let's see if we met our criterias mentioned earlier.

First, does such a system provide incentive to politicians to inflate the results? The answer is no! We are measuring the results years later, when the representatives, whose compensation we are trying to determine, will not be in power. Hence, they will not have enough power to influence the measurement of results. Importantly, inflating results will cause higher taxes to be collected by Govt. and higher compensation to representatives, thus resulting in less incentives for private people. This will cause results in later year to go down. For example, increase in measured income base will cause more income tax collected and more compensation being paid. This should cause, income in later year to decrease. So, incentive to inflate results to increase current compensation will be balanced by incentive to increase compensation in later years. In other words, the proposed system provides incentive to our representatives to maximum their future income over a number of years and thus demand and get fair compensation.

Furthermore, representatives will have a strong incentive to maintain optimium compensation rates for them as well as optimium rates for taxes as there is a clear link between compensation, tax rates and the future results and thus their future compensation.

On second criteria, of clear link between actions and results, it is easy to see that opening up economy, removing the corruption, and maintaining law and order, ensuring security of the country, etc. will result in increase in the agregate variables such income base, sales base and so on. Because, unfree economy, corruption and lack of justice and security result in transfer of wealth from one set of people to another. This being a negative sum game, any aggegate economic measures should decline. Public can also see that actions of representatives, though painful at that time, in hindsight, produced better results.

On third criteria, of having corruption free election financing, our representatives can always raise finances and after getting elected can pay back their financers from their future compensation. There is no incentive here to give any special favors, as any special favors will cause agregate measures to decline in future and hence the compensation. It will be much easier if representatives simply pay their contributors (including themselves) from the compensation they will receive because of superior results. The financiers will be willing to handle the risk of their candidates not getting elected or of risk of unfavorable future results in same way any businessperson handles the any other risky investment. That is demanding premium on rate of return on successful investment.

Thus, the proposed system seems to be better than simply increasing the fixed amount of compensation and introducing more transparency. Whatever, form and method of compensation we decide will have a major impact on our long term future. Ensuring proper incentives for our representatives to look out for our long term just interests is critical. Otherwise, the existing system of corruption and injustice will continue to wreck havoc in our lifes. I welcome suggestions, comments and discussion so as to make the proposed system (or any other system) perfect and workable.

Everybody loses in restricting trade

It is an elementary economics that both buyers and sellers should benefit from an exchange. However, there is a small detail that many proponents of free trade miss! And that is, sellers have to make investment (capital, land and even labor) in order to produce and then sell something. Thus, they bear higher risk in a marketplace. If their products don't get sold, they are stuck with inventory and capital goods. The workers are stuck with investment in "wrong" skills.

Therefore, it is not surprising that sellers (as a role and not as particular individuals) will try to push whatever they have and limit competition.

Instead of repeating ad nauseum the cliche of free trade, we should expand the argument that any attempt by sellers to restrict competition will be met by other sellers doing the same. In that case, nobody will benefit because whatever money one earns by selling his/her goods and services in a unfree market can be used to buy only good and services whose quantity and quality is limited by unfree trade. Thus, there can't be any net advantage to gain by restricting the competition in market.

Only people who benefit from such a competitive politics of restricting the free trade are politicians and lobbyists.

Update: If you like this post, please vote for me (entry with 'Asish').

Healthcare insurance costs and mandates

NCPA has a study on how healthcare insurance costs are going up because of various state mandates:
States simply can?t keep their hands off health insurance. For 40 years they increasingly have tried to micromanage health coverage, and premiums have ballooned as a result, say the Council for Affordable Health Insurance?s (CAHI) Victoria Craig Bunce and J.P. Wiese.

Just consider the explosion of state mandates (a requirement that an insurance company or health plan cover (or offer coverage for) health care providers, benefits and patient populations that health coverage might not normally provide.

* In some markets, mandated benefits increase the cost of health coverage as much as 45 percent.
* In 1965, only seven benefits were mandated by the states; today, CAHI has identified 1,823 mandated benefits and providers nationwide.
* In January alone, CAHI followed the introduction of 295 new mandates in states.

Brad DeLong has a post analyzing Kerry's proposal on healthcare.

Negative externalities in employer paid health insurance

Arnold Kling has an excellent post on employer "paid" healthcare insurance. He compares the situation with the hypothetical example given by Alex on minimum standard for dwelling. In both cases, employers (or landlord) pass on the costs to the employees (or tenants). Thus, employers and landlors act as a intermeditiaries.

The situation of employer "paid" health insurance is more akin to landlord providing hot water to all his/her tenants with no individualized billing. That means, no matter how much hot water you consume, you always get the average bill (total hot water charges for all the apartments/number of apartments) or it gets included in the rent. This simply encourages indiscriminate usage and thus has tremendous negative externalities. The same thing applies to health insurance through employers. Since, each of the employee gets to pay the same premium (as a reduction in take-home salary) irrespective of risk he/she poses (because of age, medical history, habbits and so on) there is tendency to overuse the medical care facilities. This drives up costs for everybody.

While everybody talks about negative externalities inherent in some private activities (such as factory pollution) nobody brings up the negative externalities created by Govt. incentives (favorable tax treatment of employer "paid" healthcare insurance).