Creditor of deadbeats = deadbeat debtor: Part 1, Bad debt and bad paper

March 5, 2015 | Economics, Eurozone, Finance, Global news, Government, Greece, Grexit, Recapitalization, Sovereign bankruptcy, Speculation, Taxation, Theory | No comments 90 views

By: David A. Smith

No sooner had I written People value a government they pay taxes for than confirmation of the thesis was forthcoming, in the form of facts, new to me (which is definitely my oversight), that make Greece’s prospects in the Eurozone even worse than I had previously thought.

www.richard-seaman.com

We’re readying the tax-evasion leaflets now, sir

Sources used in this post

The Wall Street Journal (February 25, 2015)

Economist (February 21, 2015; kelly green font)

Economist (February 16, 2015; brown font)

wsj_greece_02_graph_150227

Back Taxes: Greece lets almost as much tax revenue slip through as it secures

Greece Struggles to Get Citizens to Pay Their Taxes

Tax Collection Is a Top Priority of Reform Plan From Athens

To be more precise, Greece doesn’t get people to pay their taxes; barely half do. 

Athens—Of all the challenges Greece has faced in recent years, prodding its citizens to pay their taxes has been one of the most difficult.

At the end of 2014, Greeks owed their government about €76 billion ($86 billion) in unpaid taxes accrued over decades, though mostly since 2009.

The International Monetary Fund and Greece’s other creditors have argued for years that the country’s debt crisis could be largely resolved if the government just cracked down on tax evasion.

‘Cracked down on’ is not equal to ‘collect,’ as the IMF well knows.

lagarde_stark

It’s simple: just do one impossible thing and all will be well

In fact, there are six home truths, known both to Greece and to the troika, that make such a prescription a pipe dream.

opium_addict

Yeah, yeah, I’ll get up and start working …

As soon as I finish this pipe dream

1. “You [Greece] can’t pay bad debts with bad paper.”

Tax debts in Greece equal about 90% of annual tax revenue, the highest shortfall among industrialized nations, according to the Organization for Economic Cooperation and Development.

So out of whack is that ratio I can’t even find a point of comparison with any other country. 

The country’s previous government introduced a controversial new property tax, for example, that led to a sevenfold increase from 2009 levels in collection last year, to €3.5 billion.

In my book, property taxes are good taxes, because they are objectively measurable (based on property value), collectible (because property does not move so it can be legally and financially attached), and can be connected quite visibly to local services.  Of course, property tax collections, like so many forms of taxes, depend on the observant herd paying and the system breaks due to compliance-requirement overload when the observant herd stops paying because they believe the taxes are unfair.

But Syriza and other critics assailed the tax as unfair and many Greeks stopped paying it late last year, partly in anticipation that the new government would change it.

Hence the dangers of populist political vaporware: people act on your promise even before you are elected, and then when you are elected you are stuck having to keep your promises.

stuck_in_toilet

My plans are in the toilet now

Though Greece’s rich have often been singled out for not paying their due, the vast majority of tax evasion occurs at the lower end of the income scale, among small and medium-size enterprises, government officials say.

Probably tax evasion is equally distributed throughout the socioeconomic spectrum: the rich because they have the resources to be clever, the poor because they desperately need the money and figure the enforcers won’t chase small sums.

“Most small companies know they will never be audited so they don’t bother to pay taxes,” said a European official sent to help Athens overhaul its tax system. Many companies report they pay their workers the minimum wage, then supplement it under the table to avoid having to pay higher payroll taxes.

Of course – in the small horizon (that is, two-party subset of a multi-party bargain) both employer and employee do better if they agree to defraud the government, leading to the impeccable logic of Catch-22:

“But, Yossarian, suppose everyone felt that way.”

“Then I’d certainly be a damned fool to feel any other way, wouldn’t I?”

heller_yossarian_danby

“That’s some catch, that Catch-22.”  “The best there is.”

                    

2. “You can’t make people ‘buy’ a government they think gives them no value.”

Billions more in taxes are owed on never-reported revenue from Greece’s vast underground economy, which was estimated before the crisis to equal more than a quarter of the country’s gross domestic product.

When a government is rotten, or even when it is widely perceived to be rotten, compliance collapses, and when this happens, the government is increasingly unable to do anything about it because all information is unreliable.

Tax rates in Greece are broadly in line with those elsewhere in Europe. But Greeks have a widespread aversion to paying what they owe the state, an attitude often blamed on cultural and historical forces.

Yes, ‘cultural and historical forces’ are a much nicer pair to blame than either corrupt politicians/ rotten governments or crooked citizens.

During the country’s centuries-long occupation by the Ottomans, avoiding taxes was a sign of patriotism.

ottoman_tax_payment

A century from now, your great-grandchildren will use this humiliation as justification or their non-payment

When in doubt, blame people who haven’t been involved for over a hundred years; they’re not around to defend themselves.

Today, that distrust is focused on the government, which many Greeks see as corrupt, inefficient and unreliable.

aristides_hatzis

When taxes are theft, only fools pay taxes

“Greeks consider taxes as theft,” said Aristides Hatzis, an associate professor of law and economics at the University of Athens. “Normally taxes are considered the price you have to pay for a just state, but this is not accepted by the Greek mentality.”

If you have no just state, why pay for it?

Some also see grounds for cynicism in the case that opened Wednesday in Athens against former Finance Minister George Papaconstantinou. The 53-year-old faces charges that during his 2009-11 tenure, he illegally removed the names of three relatives from a list of suspected tax evaders. At the hearing Mr. Papaconstantinou denied the charges, for which he faces a life sentence if convicted.

papaconstantinou

You’re trying to jail me for helping out my relatives?

Naturally, if the chief tax man is himself accused of tax evasion, that’s very bad for taxpayer morale.

geithner_tax_evasion

Anyone’s software can make a mistake

Alleged corruption among politicians only strengthens Greeks’ conviction that evading taxes in their own everyday lives isn’t a serious crime, and little stigma is attached to getting caught, unlike in other European countries or even the U.S.

[One has to observer that bewildered-Englishman-aside ‘or even the US’ as if tax evasion was a national pastime. – Ed.]

The government’s tax-revenue shortfall in January alone was 23% below its €4.5 billion target for the month.

Last week, the government outlined plans to forgive up to 50% of individuals’ tax arrears, a sign it would make good on its campaign rhetoric.

Wow, that’s a good way to get people to pay their taxes, give them amnesty for half of what they previously didn’t pay.

jon_lovitz_yeah_yeah

Yeah, yeah … that’ll work

On the other hand, if I’m so smart, and have no better solutions of my own, why am I making fun of Syriza’s proposal?

gekko_drink

Because I can!

The fact is, Syriza is in a box the last side of which was of its own making.

Syriza would risk a popular uprising by the very people who put it into power if it were to back away from those policies and get tough on taxes, political analysts warn. Even within the government’s own ranks, officials say Syriza can’t risk tougher enforcement.


They’re right; Syriza can’t. 

curtis_lovell_in_a_box

I can’t see my way clear out of this

Syriza has already started to reverse some reforms, including privatisations and collective-bargaining rules, antagonising its creditors further.

3. “You can’t even buy your own paper at a discount.”

greek_yields

The market thinks the paper’s bad, but …

Ordinarily, the debt issued by a deadbeat debtor would fall in value, whereupon it would be resold in the secondary market by the original holders, who’ve lost confidence and just want out, to new investors like hedge funds.  As I wrote about Jefferson County, Alabama:

Many criticize hedge funds, but here they play a useful role of the kind that is often played by secondary-market buyers.

 

The funds include Brigade Capital Management LLC, Claren Road Asset Management LLC, Fundamental Advisors LP and Monarch Capital Master Partners LP, according to court records.

 

They bought their paper at discounts, and they bought it from people who really, really wanted to sell it.  In terms of resolution dynamics, both events are positives: creditors incapable of thinking unemotionally are removed from the equation because they sell for cash to eliminate their source of pain; and the incoming creditors are working from a lower baseline, so they’re often among the most ready to play Let’s Make a Deal.

The fall of non-performing paper to a market-clearing price is a healthy mechanism that moves toward eventual debt restructuring and emergence from insolvency.  But here it can’t happen, for two reasons.

[Continued tomorrow in Part 2.]

 

People value a government they pay taxes for: Part 2, The implications

March 4, 2015 | Economics, Government, Housing, Lucy Martin, Political theory, Real estate taxes, Speculation, Sub-Saharan Africa, Taxation, Uganda | No comments 248 views

[Continued from yesterday’s Part 1.]

By: David A. Smith

In yesterday’s Part 1, we explored a fascinating bit of doctoral research conducted by Lucy Martin designed to test whether people’s sense of unfairness, and willing to act on that unfairness, would change depending on whether the money in question had been received as a grant (from outsiders) or via a ‘tax’ (on one of the participants) – and she had gone to some trouble to set up the situation to be economically equivalent either way, the only difference being the story told about how the money wound up in the Leader’s hands.

museveni_after_obote

I ousted Milton Obote and brought democracy to Uganda:

Don’t I get any credit for that?

Sources used or referenced in this post

The Economist (February 7, 2015):

Taxation, loss aversion, and accountability: theory and experimental evidence for taxation’s effect on citizen behavior, Lucy Martin (September, 2014; caramel font)

Social norms and human cooperation, Ernst Fehr and Urs Fischbacher (2004)

A Theory of Fairness, Competition, and Cooperation), Ernst Fehr and Klaus M. Schmidt (1999).

To lend verisimilitude, she did the work in Uganda, a country whose budget depends in large measure on foreign donor aid, and conducted her experiment enough times, with enough different individual Ugandans, to generate a pile of responses that she considers statistically relevant.  (Graduate or doctoral students are constantly challenged by limited research budgets, so her decision was and is practical.) 

As loss-aversion theory predicts, embezzled tax provoked greater anger than stolen aid. Players in the tax game punished leaders when they received less than 460 shillings, on average, a figure 13% higher than the threshold for the aid group. For adult, wage-earning men (the group with most experience of paying taxes) the threshold was 30% higher. High taxes, it seems, make for high civic engagement.

She found what she expected to find, and that was highly relevant.

The results thus far demonstrate that taxation makes citizens more willing to punish leaders for non-accountable behavior.

Not only do people value what they pay for, when people pay for something, they are much less tolerant of waste, fraud, and abuse, to coin a phrase popular in Washington.

waste_fraud_abuse

Yeah, yeah, that’ll work

Having established a behavior, Ms. Martin then undertook a further analysis, one not mentioned in the Economist article, of parsing apart why Citizens punished Leaders, which I’ll summarize using both economics-speak and normal-person-speak:

1. Loss aversion.  “It was my money and I want it back.”

2. Fairness norms.  “If the situation were reversed I’d be nicer to you than you’re being to me now.”

Work from behavioral economics finds that individuals are more likely to punish behavior that deviates from what is perceived as fair (Fehr and Schmidt, 1999; A Theory of Fairness, Competition, and Cooperation). 

Behavioral norms are indeed powerful, but as Ms. Martin points out, it matters a lot to determine which force was operating in her Tax/ Grant game.

Differentiating between these two mechanisms has important policy implications:

The fairness norms mechanism suggests that public education might be able to create similar norms surrounding foreign aid or natural resource rents, potentially alleviating the “resource curse” and increasing the demand for accountability in affected countries.

If the loss aversion mechanism is correct, however, it suggests that education or sensitization campaigns are less likely to be successful, and that citizens must be given a stake in government budgets for accountability demands to increase.

Neatly expressed there is a dualism that arises so frequently with pro-poor interventions: Are rotten governments a consequence of inadequate cultural fairness norms, or because poor people haven’t paid for the rotten government?  Many are the colleagues I know who believe it’s simply a question of building up liberal-democracy (writ small), and if so people and societies will come swiftly to these beliefs and behaviors.

0071_i_pledge_south_africa

Sign at a South African city office.

I’m more cynical.  People are self-motivated, and the herd is observant, and if corruption isn’t punished, corruption spreads and it becomes the norm.  As I wrote over nine years ago:

people_value_only_what_they_pay_for

Education that bribery is wrong just embeds cynicism in citizens because they see foreigners preaching bribery is wrong and locals growing rich on bribery. 

molh_dont_give_a_bribe

Ministry of Lands and Housing: Nairobi, Kenya

Ms. Martin’s data found that loss aversion trumps fairness norms as the better explanation of behavior.

The loss aversion mechanism is indirectly supported by two aspects of the results of the games described above.  [To wit:]

Moving from the Grant to the Tax game does change expectations, leading to a strong effect – taxation has again shifted Citizens into the realm of losses, increasing punishment thresholds. The fairness norms mechanism cannot easily explain these differences.

In other words, if fairness norms applied, how the money wound up divided between Citizen and Leader should make no difference to the Leader’s decision or the Citizen’s judgment of that decision.  Yet both were influenced by the antecedent conditions.

And Ms. Martin came up with another nifty experiment (again, not referenced in the Economist’s piece, doubtless due to space considerations) aimed more specifically at the difference between loss-aversion (“It’s my money and I want value for it”) versus fairness norms (“We’re all in this together and I want my share”):

A second set of experiments tests the mechanism more directly. Following Fehr and Fischbacher

(2004), I use third-party punishment (3PP) games to differentiate between loss aversion and more generalized fairness norms.

Third Party Punishment – I must admit, I love the phrase.

disciplining_child

I’m taking 4 MU’s from you – and that’s for your own good

In these versions of the Tax and Grant games introduced above, respondents were randomly placed into groups of three—a Citizen, a Leader, and an Observer. In the 3PP Tax Game, the Observer and Citizen were each given wages of 10 MU. The enumerator then taxed the Citizen 5 MU, doubled it, and gave it to the Leader.

Observe that in this game, as in the other game, taxation is designed to be value-additive.  So we have the politician’s ideal vaporware: the trio is now better off than before the tax was assessed.

The Leader allocated this group fund between his own salary and the Citizen, and the Observer decided whether to pay 1 MU to reduce the Leader’s salary by 4 MU.

This time it’s not the Citizen who penalizes the Leader, it’s the Observer – and to penalize the Leader, the Observer must also penalize himself.  So one might expect the Osberver to be slower to penalize.

The Leader’s decision is the same, and the Observer is not directly affected by either taxation or the public good. The 3PP Grant game changes only the source of the funding; Table 4 shows the stages for the 3PP Tax and Grant games.

ugandan_tax_game_three_way_table_4

Leaders face the same potential penalty, but imposed not by the Citizen but by the Observer.

Though trivial, this game is a nifty illumination of human motivation, and the results give the lie to those who believe that human beings are entirely self-interested:

[In the 3PP game], officials who stole donor funds or central transfers were selected for punishment 42% and 45% of the time, respectively, while officials who stole citizens’ taxes were punished 62% of the time (p=.000).

Punishment was imposed 50% more often if the Leader’s source of money was tax, not grant.

In the behavioral experiments, citizens display a strong propensity to rate corruption involving tax funds as substantially worse than other types of corruption, and this affects their willingness to punish such transgressions.

Though on its face this finding is merely common sense, to have it confirmed with quantitative proper experiments is incredibly profound in its implications. 

zim_1_leaves_mfofu_primary

This is the minimum transportation acceptable

It suggests that overly generous donor flows don’t simply get siphoned out into bulletproof Mercedes, leopard-fur coats, and Swiss bank accounts, they also undermine the emergence of the strong electorate that donors want.

mobutu_leopard

When you’re president for life, you have to dress the part

The people who played the games also had good reasons for their decisions:

In a subset of the sessions, respondents were asked to explain their in-game decisions (N=100).  These data provide compelling evidence that the treatments activated the relevant expectations and norms surrounding political behavior.  

A number of respondents also specifically cited the tax as a reason for demanding high transfers from the leaders. For example, one respondent said that “As a citizen, since my money was taken as a tax, I want to earn more than the leader.” Another made a similar reply, explaining that “Because it’s tax money, [the leader] has to give back more.”

Taxes are sales of a product citizens are forced to buy (thank you, Obamacare) for the good of all and to avoid free-rider problems.  And when the extraction of tax is visible, people are more aware of it, so they demand greater accountability of those who use their taxes.  Ms. Martin’s work implies that taxes should be traceable, from taxpayer through government body and back to visible improvements – say, local taxes into streetlights or better police presence – as that traceability will result in greater voter expectations of service and quality.

museveni_sworn_in

I swear to uphold the Constitution, even if I have to change it to do so

Ms. Martin’s work also implies that making the taxation invisible (as in payroll deductions at source) actually reduces voter expectations of accountability.  For my part, when the FICA goes out of my pay check, I assume I will never see it again, as it’s going to pay the benefits to somebody who retired some time ago.

fica_boxes

Try not checking these and see what happens

Her work also reinforces the case for three levels of government – national, state/ province, and local – so that each level of government has discrete services that it is best poised to deliver. 

Day 2 - Paralympic Torch Relay

He makes all the decisions

Hence an overly large central government becomes remote and unaccountable, and its citizens become disengaged with that government and cynical about the possibility of anything constructive being done.

Barack Obama

I’m totally engaged

Votes are political equity, and people demand an equitable return on them.

throw_bums_out

People value a government they pay taxes for: Part 1, The experiment

March 3, 2015 | Economics, Government, Housing, Lucy Martin, Political theory, Real estate taxes, Speculation, Sub-Saharan Africa, Taxation, Uganda | No comments 140 views

By: David A. Smith

Given that People value only what they pay for is indeed a universal rule, it will have subcases – and one such subcase, striking in its own right and with major implications for the way donors deals with country governments, was highlighted in a recent article in The Economist (February 7, 2015):

UGANDA

Ugandan small farmer pay empoza: but what for?

No representation without taxation

A behavioral argument for higher taxes

Taxes are the fees a government earns for providing services that its citizens value.

Sources used or referenced in this post

The Economist (February 7, 2015):

Taxation, loss aversion, and accountability: theory and experimental evidence for taxation’s effect on citizen behavior, Lucy Martin (September, 2014; caramel font)

Social norms and human cooperation, Ernst Fehr and Urs Fischbacher (2004)

A Theory of Fairness, Competition, and Cooperation), Ernst Fehr and Klaus M. Schmidt (1999).

As we’ve seen in the context of real estate taxes, the connection is quite direct, and when citizens’ taxes go up they squawk, challenge the figures, and suddenly focus on the government budget; and they use, or threaten to use, their votes as political equity to replace the old scoundrels with new scoundrels.

dirty_rotten_scoundrels

We’re the new lot

How can poor countries get better governments? 

A recent paper (Taxation, loss aversion, and accountability: theory and experimental evidence for taxation’s effect on citizen behavior; quotes in caramel font) by Lucy Martin, [doctoral candidate in political science at] Yale University, suggests higher taxes could help.

lucy_martin_yale

Playing games with Ugandan shillings

Low taxes and high aid flows, Ms Martin thinks, are a recipe for disengaged citizens and therefore for less effective governments.

Unlike taxes, citizens don’t ‘pay for’ foreign aid or donor assistance; it just arrives, via some process invisible to and largely incomprehensible to ordinary citizens, and they quite rightly feel that their input makes no difference whatsoever in the amount of use of aid flows.  As I put the general principle back in December, 2005:

ugandan_market_01

See any government services here?

Paying for an object (be it product or service) is an action that requires a choice based on conscious decision.  You reach into your wallet and hand over money in exchange for something else.  Choice and decision mean you have formed an affirmative belief in the object’s value to you.

Our brains are complex organisms with multiple sub-systems; converting a desire into an action engages different parts of the brain.  Our attention, meanwhile, is a limited quantum, so it is allocated based on what we think they need to pay attention to.

seymour_hoffman_loman

Attention must be paid to such a person

Conversely, if you don’t pay for something — if I present it to you on a silver platter, who knows how much you value it?  Or whether you value it at all?

That concept, presented in the language of economics, underlies the intriguing experiments Ms. Martin did:

Her argument hinges on “loss aversion”, an economic proposition that the pain of a loss is greater than the pleasure afforded by an equal gain.

Anyone who roots for a sports team knows that ‘loss aversion’ is real; for that matter, anyone who plays poker or any other betting game knows the irrational power of getting back to even.

getting_back_to_even

So irrational you’ll buy my book!

Most people, the thinking goes, care more about losing what they have than about getting something extra.

In economics, which wants to be a hard science but is much more a social science, it is not enough to present statements to which most people would reply, That is indubitably so, Socrates.

plato_aristotle

It cannot be otherwise, can it?

Instead, there must be both theory (normally expressed as equations involving letters, superscripts and subscripts, and curving lines that intersect somewhere) and empirical evidence.

martin_economic_theory

From Ms. Martin’s paper, the theoretical lines

A similar rationale, Ms Martin argues, applies to aid and taxes. If aid money is siphoned off by corrupt politicians, people are miffed, but if they discover that their taxes have suffered the same fate, they are furious. In other words, taxpayers feel the loss of money they once had more acutely than that of funds they might have received.

Again, no man of sense could dispute this.

martin_economic_results

If you haven’t got regression analysis and least-squares, you’re not an economist

You would therefore expect that, even if their government budgets were a similar share of GDP,

a high-tax country to have more politically engaged citizens and thus better functioning institutions than one that depended on aid.

All this, as Ms. Martin knows both well and first-hand, is directly applicable to the challenges of improving society, economics, and governance in Sub-Saharan Africa, the continent most rapidly urbanizing and most in need of institution-building. 

[Among sub-Saharan African countries, AHI has worked or is currently working in Cameroon, Djibouti, Ethiopia, Kenya, Morocco, Nigeria, Senegal, South Africa, and Zimbabwe. – Ed.]

yoweri_museveni

Having been president for 29 years, I think I’ve got the bugs out of the system

Low-income African countries levy taxes worth about 17% of GDP each year, whereas the countries of the European Union take in nearly 40% on average.

Of course, it’s entirely possible that EU countries are over-taxed and over-welfared, but few would say that Africans are over-taxed; many would say they’re under-served by their governments.

In some cases, foreign aid makes up some of the difference: according to the IMF it constitutes about 10% of GDP in the Democratic Republic of Congo. In Liberia the figure is more like 15%.

I’d never seen the figures quantified that way before; it means that the country gets more revenue from appearing helpless to rich foreigners than it achieves from providing services that its citizens will pay taxes to support. 

In 2012 the whole continent received $51 billion in foreign handouts.

aid_for_africa

Does it do enough good?

So much for the macro; now for the micro.

Ms Martin tested her theory with an experiment in Uganda. In an “aid” game and a “tax” game, two players, a Leader and a Citizen, split 1,500 Ugandan shillings (about 54 cents).

ugandan_shillings_1000

As Ms. Martin puts it, “1,000 UGX is about US$0.40, a significant amount of money for respondents” (Page 14)

The experiments consisted of the “Tax” and “Grant” games, each played between one “Citizen” and one “Leader”.

All players were drawn from the same pool of lower-income Ugandans; the players were assigned roles randomly.

In both games, the Leader is given a “group fund” of 10 money units (MU) to divide between himself and the Citizen. 

(The decision to call the Leader’s 10 MU the “group fund” was made in order to eliminate the possibility that, in the Grant game, the Citizen would think that he had no right to the Leader’s money.)

akeezimbira

Ugandan savings co-operative: to build trust among the members

The Citizen can then pay to fine the Leader if she is dissatisfied with the allocation. The games differ in the source of the group fund.

In the Tax Game, the Citizen is given a “wage” of 10 MU. Half of that money is taken as a tax, doubled (to 10 MU), and given to the Leader. In the Grant Game, the Citizen receives wages of 5 MU, and 10 MU is given to the Leader as a non-earned group fund (similar to foreign aid or oil revenue). In both games, if the Citizen decides to punish the Leader, he pays 1 MU and 4 MU is removed from the Leader. For implementation purposes 1 MU was set at 100 Ugandan Shillings (UGX).

Thus the two games have the same economic distribution and the same judgment (Citizen punishes Leader, and in so doing hurts himself), but the antecedents differ for both the Leader’s sharing decision and the Citizen’s judgment of the Leader’s adjudication.

In both games, at the time the Leader makes his allocation decision the Citizen has 5 MU and the Leader has 10 MU; the decision trees are then identical.  The steps of each game are summarized in Table 1.

ugandan_tax_game_table_1

In this game, the Leader decides, and the Citizen can only punish both Leader and Citizen.

The decision tree and payoffs are the same in both games, and so the only difference between the Tax and Grant games is the framing effect created by having the group fund previously owned by the citizen. This implies that any differences in gameplay between the Tax and Grant games must therefore be due to some behavioral effect activated by taxing the Citizen.

Further, Ms. Martin put a nice sting in the punishment; nobody wins from it.

No one receives the money taken away in punishment, and as this is a single-shot interaction.

Eliminating repetitive playing takes us out of the Prisoner’s Dilemma realm of convergence toward civilized behavior among professional players (real estate brokers, or elected officials, or other experts).

As a result, the unique subgame-perfect Nash equilibrium of both games is for the Leader to offer 0 MU to the Citizen, who never punishes. Punishment is never economically rational, but rather a purely expressive action by the Citizen.

Punishment is not rational for the Citizen because to punish the Leader means hurting himself.  But people will do it anyway.  As the Economist abridged the decision question:

The leader then had to decide how much of that 1,000 shillings to allocate to the citizen, and the citizen whether to accept [Wrong word – acquiesce is more accurate – Ed.] that division. The disgruntled could punish a leader they considered unfair with a “fine” of 400 shillings, but exacting the punishment was not free: the citizen had to pay 100 shillings to do so.

Would people penalize themselves to punish their leaders?

museveni_campaigning

Why would anyone want to punish me?

[Continued tomorrow in Part 2.]

Month in review, January 2015: Part 2, Hello to the future

March 2, 2015 | Airbnb, Detroit, Golf, Green space, Month in review, Municipal bankruptcy, Pensions, Public employees, Speculation, Transportation, Urban issues, Urbanization, US News, Zoning | No comments 168 views

[Continued from Friday’s Part 1.]

By: David A. Smith

Although half of January’s post concerned themselves with the unhappy past, the other half looked at the emerging, even disrupted, future, starting with the visible-yet-covert dissolution of urban zoning by Airbnb and its local ‘hosts,’ who are multiplying invisibly, as revealed in Aiding and a-bedding? Part 1, A boon for tourists:

Elizabeth Driscoll: I have seen these flowers all over. They are growing like parasites on other plants. All of a sudden. Where are they coming from?

Nancy Bellicec: Outer space?

Invasion of the Body Snatchers

The fabric of our cities is under an existential threat by an invasion of apartment-snatchers that spreads invisibly, through the ether, infests individual properties and then infects their occupants.  And the authorities seem powerless to stop it.

karen_allen_body_snatchers

It started in San Francisco?

That, at any rate, is the conclusion one reaches about the invasion of Airbnb into cities around the world as it spread out from its San Francisco launching pad (landing pad?) to the globe’s hot spots, such as Paris, spotlighted in this God-ain’t-it-awful story from BBC News (December 26, 2014:

The Airbnb internet phenomenon is a boon for tourists, who find accommodation in popular destinations at a fraction of the cost of a hotel.

Airbnb and all the ‘sharing-economy’ models like it – Uber/ Lyft, Zipcar, and even the ubiquitous urban-bike rentals – are a new disruptive business model made possible by a disruptive technology (broadband wifi) and the resulting homegrown global network of connectivity. 

Sources used in this port

(and previous AHI posts on Airbnb and flat-renting)

Prohibition and the rent-easy (August 13, 2010)

Chez Reductio ad Gotham (August 5, 2013)

Outbreak of informality, Part 1, Part 2 (September 18, 2013)

We know where you live, Part 1, Part 2 (October 16-17, 2013)

The enemy of my enemy, Part 1, Part 2, Part 3 (November 18-20, 2013)

New York Post (October 16, 2014; brick-red font)

BBC News (December 26, 2014; black font)

Boston Herald (January 17, 2015; olive-green font)

All such disruptive innovations – whether sailing ships, railroads, automobiles, or the telegraph – both rapidly accelerate the flow of information and explode prior business or even social models that were built and sustained because until the new innovation they were the least-bad solution.

When the new thing arrives, after an initial observant-herd period of wariness, the market can take it up exponentially.

Part 2, No one is complying, Part 3, Being spied on, and Part 4, In an hour, you won’t want them to:

ibs_car_victim

You’re next!  You’re next!

Species (like Airbnb) can be domesticated (by cities) in mutualism arrangements (regulatory and tax structures) if they meet seven criteria:

1. Serves both the master and the animals.  Notwithstanding shortsighted or sectoral people who see only the invasive species, not its benefits, Short Stay Rentals improve cities because they boost the economy (bringing in tourists, jobs, and businesses) at the same time that they increase the effective utilization rate of the built residential environment.  Thus there’s a clear mutualist case for enabling SSRs so long as they are domesticated.  And for the companies like Airbnb, cities are prime territory – essential territory – where there’s a vast and reliable volume of newcomers seeking accommodation, and a large enough built environment of properties to provide continuing supply of flats to rent.

2. Cannot be picky eaters.  Airbnb tolerates a wide range of possible hosting sites and landlords.

3. Reach maturity quickly.  The web has enabled Airbnb, Uber, and Lyft, to get to critical mass within a city before elected officials can create to them.

“We should not deny thousands of New Yorkers the chance to share their homes, pay their bills and stay in the city they love,” Airbnb said in a statement.

4. Willing to breed in captivity.  The companies need to ‘take the bridle’ and accept the structure of regulation as a basis for further expansion within a city and to other cities.

5. Docile by nature.  Once the agreement is negotiated, then the companies need to live up to it. Uber’s CEO shows go-rogue tendencies, and might be fired.

6. Cannot have a strong tendency to panic and flee.  Once a company has dominant position and market capitalization, it will want to remain on good terms with its host city.

“We need to work together on some sensible rules that stop bad actors and protect regular people who simply want to share the home in which they live,” said Airbnb’s statement.

7. Conform to a social hierarchy.  The companies have a corporate structure, including CEO and board of directors, so there is a governance system already in place.

In the case of the Short Stay Rentals (invasive species) versus their cities’ zoning (host organism), mutualism must be the outcome, something along the following lines:

ibs_tong

She betta now.  Much betta now

mutualist_solution

Yet, even as there may be a mutualist endgame for the Short Stay Rentals, cities must beware: Invasive creatures come in many species.

kevin_mccarthy_invasion_body_snatchers

Is that iPad or iPod or just Pod?

Though a new year doesn’t mean a new spring – around here in Boston, it means the beginning of whomping snow fall –

shoveling_somerville

Shoveling in Somerville … I’ve been doing my share of that too

at least one is able to dream of spring, and I did in a stroll through the mental countryside in Golf and the romance of pre-urbanized society: Part 1, A good walk spoiled, Part 2, One vast golf course, Part 3, The infallible test, Part 4, Total consciousness, and Part 5, Play like a gentleman, and win:

Golf is a good walk spoiled.
Mark Twain

twain_golf_sportsmanship

When scanning Google Earth to research my lengthy posts of bucolic Belmont and meadowy Milton, I was struck how among the few landmarks readily identifiable from even very high altitudes were golf courses; though largely invisible from commuters’ streets, from above they stood out.  Examining those two towns for locations where affordable housing could be built, I thought, That’s a lot of undeveloped acreage. 

And while golf is a game, a golf course is a real estate investment, and that has always been both its blessing and its curse.

Though I’ve never played real golf – mini-golf doesn’t count, and even pitch-and-putt is only a fraction of the real thing – I’ve long found it soothing to watch, and golf courses are beautifully groomed places.

pitch_and_putt_ireland

Pitch-and-putt: All of golf’s emotions in a third the acreage

Spiritually, golf appeals to aspirational middle-class men because it romanticizes the pre-urban landscape and gives them a place to be men socializing among men – but those very attributes contain within golf the seeds of its eventual demise as societies urbanize further, putting urban space and leisure time under pressure that eventually makes the golf course no longer sustainable as a social model for leisure time or an economic model for urban leisure space.  

Golf romanticizes the pre-urban shaped and landscaped environment

From the time people first invented towns and cities, cultivated green space has always been a mark of culture. 

Kings had hunting preserves; or royal parks laid out for the stately perambulation of lords and ladies.

louis_14_versailles

Only royalty should be allowed to walk in nature … don’t you agree, court gardener?

With the earliest industrial revolution, large parkland estates were how the nouveau riche displayed their cultural achievements.

gainsborough_andrews_1749

Thomas Gainsborough, Mr. and Mrs. Andrews, 1749

Golf is part of that, for from its beginnings along the coast of St. Andrews, golf has celebrated the romantic outdoors:

The use of natural creeks and ponds is generally desirable when designing a golf course for their aesthetics and inherent difficulty, but such areas also typically include wetlands within the flood plain that are unsuitable for golfing.

Wetlands are likewise unsuitable for housing … unless drained or filled.

Month in Review, January, 2015: Part 1, Goodbye to the past

February 27, 2015 | Airbnb, Detroit, Golf, Green space, Month in review, Municipal bankruptcy, Pensions, Public employees, Speculation, Transportation, Urban issues, Urbanization, US News, Zoning | 1 comment 197 views

By: David A. Smith

A new year means a new beginning and new resolutions, and 2015’s first post completed the story of Detroit’s financial death-and-rebirth through bankruptcy, though to hear the New York Times tell it, Detroit’s recovery would be A fleeting miracle? Part 2, As long as the city recovers:

Public-employee pension funds are not supervised by any third-party regulator, which allows the fox (current elected officials) to guard the henhouse (give extra benefits to public employee union workers).  That will change:

fantastic_mr_fox

We’re the trustees … you can trust us

Judge Rhodes said on Friday that the state would have to serve a tougher pension watchdog role.

In fact, the city of Detroit will be on financial probation for three years (Detroit Free Press, December 10, 2014; red font):

Under the grand bargain that spared the Detroit Institute of Arts from liquidation and eased cuts to city pensioners, state lawmakers required a largely state-appointed Financial Review Commission to act as a fiscal watchdog over the city, with broad powers to reject contracts, spending, borrowing and labor agreements. [Detroit Mayor Jim] Duggan and City Council President Brenda Jones sit on the commission, along with Clinton and other Snyder appointees.

This is a critical reform – no longer will the city’s leadership be able to make backdoor deals to give away money the city does not really have.

Judge Rhodes said he found that settlement reasonable, but he made his misgivings clear.

“History will judge the correctness of this finding,” he said. Michigan must “assure that the municipalities in this state adequately fund their pension obligation. If the state fails, history will judge that this court’s approval of that settlement was a massive mistake.”


judge_rhodes_pointing

Don’t come back to my court again, okay?

Though Detroit was an extreme case, the Fall of the Roamin’ Empire as it were, hundreds or more US cities are in similar plights – grossly over-extended on obligations to public employees and public retirees who strategically outgeneraled elected officials over the course of decades, winning a war that few realized was even being contested.

greatest_trick_devil_pulled

The greatest trick the devil ever pulled

Was convincing the world pension fund doublethink didn’t exist

So devil’s-greatest-trick clever was the triumph that few knew it had even happened until we as a nation woke up hundreds of billions in debt to retirees, as I discovered when I went full recursive in a ten-part post, Doublethink pension funding: Part 1, “Nothing shocks me anymore”:

eric_blair_burma

He wears a mask, and his face grows to fit it.

Even to understand the word ‘doublethink’ involved the use of doublethink. 

George Orwell, 1984

When, a week ago, I blithely promised (in A fleeting miracle? Part 1 and Part 2) to dig more deeply into the machinations of Detroit’s pension funding schemes, which I realized would apply to hundreds of municipalities and states nationwide, like Pierre de Fermat and the Detroit trustees I had little idea what I was in for, nor how hard it would be. 

Unlike Detroit’s pension trustees, I chose not to pass the buck, and … proceeded to get lost in a funhouse maze of contradictions, finger-pointing, circulate arguments, actions at variance with statements, to the point where I was confronting myself coming back to places I hadn’t yet reached.

documents_maze

It’s all here in black and white documents

For several hours of reading this folderol I feared I might be losing either my way or my sanity, when I was rescued by the unlikely duo of George Orwell and Agatha Christie. 

doublethink_pension_funding

Two ideas are better than one, aren’t they?

agatha_christie_young

No, they are just red herrings

Suddenly realizing that pension funding was the modern-day demonstration of Orwell’s brilliant exposition, penned not as satire but as bitter perception, of the infinitely recursive concept of doublethink, for hours and hours I sliced up the source material (much of it listed below) into statements – clues.  With the clues thus clustered by topic area – the mess we’re in, the buildup of liabilities, obliviousness to the city’s financial health, deniability, buck-passing, and more – I recalled Christie’s tour de force Murder on the Orient Express the whodunit turns out to be [Spoiler alert from 1934! – Ed.] not which of the suspects is the only one guilty, but which of the suspects is the only one innocent:

I was particularly struck by the extraordinary difficulty of proving a case against any one person.

Agatha Christie, Murder on the Orient Express

suchet_poirot

It is easier to start with the premise that all are guilty and eliminate the innocent one by one

Even after entering the funhouse it took me words and words and words to orient myself and find my way through, as I eventually did in Part 2, “Somebody should be responsible for it”, Part 3, “It’s not like I was some kind of prophet”, Part 4, “A funded ratio of 40%”, Part 5, “In fact, shrinking 5% a year”, Part 6, “Effectively robbing the fund”:

hamlet_polonius_words

Words, words, words

Point 5. Everyone evaded responsibility

To know and not to know, to be conscious of complete truthfulness while telling carefully constructed lies.

George Orwell, 1984

Having freed themselves from the necessity of thinking about the city’s health, or of understanding where the money would or would not be coming from, the doublethinkers operated with non-accountability: decisions were made (passive voice), payments were sent (passive voice), and somehow no one ever decided to do it.

How much each person received is not known. But available records suggest that the trustees approving the payments did not discriminate –

The best doublethink models make everyone complicit, so no one can speak up.

– nearly everybody in the plan received them.

i_earned_it

Even if I didn’t actually earn it, if I shout that I earned it often enough, then you believe I earned it and I believe I earned it … and that means I did earn it, by shouting.

“It was like dandelions,” said Joseph Harris, who served as Detroit’s independent auditor general from 1995 to 2005.

Once before I wrote about Mr. Harris, appointed in 2012 as emergency fiscal manager for bankrupt for Benton Harbor, Michigan, until he was fired in January, 2013, evidently for doing too honest a job.

But here’s the thing: I don’t believe a mayor and city council can turn the city around [in the absence of a bankruptcy]. And the reason is because we have some contractual obligations that started 50 years ago that have continued to bind the city even more.

Under (former Detroit Mayor Kwame) Kilpatrick, (his chief of staff) Christine Beatty recommended, or should I say was involved in a 20 and out (retirement plan) for police. (The plan) for 20 and out and 25 out (was created) just so they could avoid making contributions to the pension plan for two years – not reduce the amount in total, but skip the payments for two years. The types of decisions, the types of contractual arrangements that the city has made have been not credible.

joe_harris_fiscal_accountability

Talking to citizens about fiscal accountability …

One of these days, thought Winston with sudden deep conviction, Syme will be vaporized. He is too intelligent. He sees too clearly and speaks too plainly. The Party does not like such people. One day he will disappear.  It is written in his face.

George Orwell, 1984

1984_syme

“Don’t you see that the whole aim of Newspeak is to narrow the range of thought?”

Part 7, “That might sound odd”, Part 8, “A battle over retiree votes”, Part 9, “The brains and the nuts and the bolts”, and Part 10, “One would think that alert trustees”:

An underfunded plan today – and make no mistake, virtually every public-employee pension fund in America is underfunded, some as much as 60% underfunded – has only three endgames:

1.  Insolvency and collapse, with plan dissolution and payouts at percentages of face.

2.  Continued underfunding and irresolution.

3.  Restoration of solvency through asset replenishment faster than liability accumulation, which can be done either (a) with radical surgery, as through electroshock recapitalization, or (b) over a forced-march of years or short decades of above-equilibrium contributions.

And really, Endgame 2 is no strategy at all, because as we’ve seen, a pension without a strategy becomes progressively more insolvent.  So, as Andy Dufresne put it in The Shawshank Redemption, “Either get busy living or get busy dying.”

andy_dufresne_red

Even if you have to crawl through a river of shit to come out clean the other side

Today, however, most doublethink pension funds are still busy dyin’. 

The widespread practice of lowballing pension contributions today so that people will pay more down the road comes from the actuarial standards of practice.

Lowballing contributions today is popular the way that overeating is popular, the way that credit-card spending and minimum-paying is popular, and like both it’s wholly unsound in the long run.

greatest_trick_poof

And like that – poof! – the money’s gone

Fortunately, most of these excesses are in the past, though their costs are still in the future, and as I showed in the other January posts, the future is looking up.

future_looking_up

Tomorrow’s half of this post will be more cheerful, I promise!

[Continued Monday in Part 2.]