Taxes Are Awesome: Leviathan 2.0

I came across the line last night that “taxation is theft,” and I rolled my eyes, almost instinctually. It made me think of the overly reductive view I have of libertarian political philosophy. To me the libertarian is the two-year-old of political discourse: “Q: What is your view of the role of the state? A: NO! MINE!”. Again, overly reductive but instructive.

That got me thinking -- what is the role of taxation? I know I have been putting off mine for last year. Even though I am anticipating a refund, there is a time cost I’m not looking forward to spending. (As an aside, it was a genius who came up with automatic withholding. The perception is that you get money when you do your taxes. What a nudge!)

In a closed economy, with a commodity money and an unelected autocratic ruler, taxes could be seen as “theft” if all the taxes were was corn you owed to a landlord and you received nothing in return. But as long as you received something in return then its no longer theft but a quid pro quo. The cost of whatever it is you receive and if you wanted it my be at issue, but it is no theft if it is not just 100% expropriation. Even then you would still need some basic services and there are public goods that exist so that you would need to obtain those somehow because no man is an island. Then you’re paying fees to the service provider and taxation-as-theft to your autocratic ruler. It’s all rent in some form. I guess the chafing is that one feels much more coercive than the other. We can choose the service providers, but not the autocrat.

The problem is that we live in a world with a republican government at the federal level with fiat money and floating exchange rates. The simplest refutation to the idea that “taxation is theft” is to go look at a dollar bill. Right at top it says “Federal Reserve Note,” and right below that it says “The United States of America”. Nowhere do any of mine say “One Edgar Buck,” as much as I would like them to say “Edgar Buck” and be accepted at retailers of my choice, that is not the world I live in. Basically, no one can steal from you what never was yours in the first place. You are a temporary custodian of that dollar until you pass it along.

Instead there is a fiat currency with a slowly decreasing value. That because the monetary base is growing, and this is called inflation. Basically, inflation is the general rise of the price level. Stuff’s getting more expensive, but as the Federal reserve gets better data it is more controlled. The only time that should be a problem is if the cost of your labor is not increasing (Also if you have some sort of nominal fixed income). The Fed can influence the interest rate through policies of buying and selling bonds and other financial instruments. The basically have their hand on the tiller of how much a dollar is worth.

But what is a dollar worth? Is a million a lot of money? This is only realized through what a million can be exchanged for in the market. Will a million by a nice house or a hamburger? This is seeing money as a medium of exchange, where the worth of a dollar is realized in the terms of the goods and services that can be received for every dollar that you have. Inflation over the years makes each dollar able to buy a little less. It is hard to see the effects of low inflation on a day-to-day basis, but it can be exaggerated over a longer time period. I remember reading concern about fiat currency decreasing the value of the dollar 94% since the creation of the Federal Reserve a century ago. That would only be an issue if workers were receiving wages at a 1914 level. Low, persistent inflation is good, because that means contracts can be written taking it into account, and investments can be figured based on forward-looking projections on what inflation will be. It also has the effect of stimulating the economy because there is a disincentive to holding onto cash. In an economy where 70 of the GDP is consumer driven, that helps growth.

So if a dollar is a claim on resources that the government can make an infinite amount of, why does it have to take yours? Even a de minimis state needs institutions that protect property in some sort. I have argued elsewhere for much a larger state, but the same principles apply even if the state is just a police force and an army. In theory the state could monetize what it needed, printing the money for the paychecks to the policemen and the soldiers. The problem with that is that it makes fiscal policy (taxing and spending) into monetary policy (the amount of money out there).  As long as this happened at steady state, it would not be an issue. The problem is if there is variation in the spending needs of the state. If your country needs to go to war and it monetizing spending then suddenly there is a lot more money out there and the value of your money has gone down suddenly and without notice through a spike in inflation. Taxation is thus a social good because it makes inflation and the larger economy more manageable. Everyone chipping in protects the working and investing classes by stabilizing the economy and creating stable future expectations (though larger issues exists on who pays, for what, and how much?).  Taxation separates the fiscal and monetary realms and keeps inflation at bay by helping control the spikes in spending that would otherwise be monetized. The same argument can be said for government debt as well. As long as it is growing a consistent rate, the economy should be able to avoid shocks. An argument exists that it is the same as strict monetization of spending, but that is not true, Debt creates a liability, but it also creates an asset. It is, as I have seen it put, money that we owe to ourselves.

Chess and the Machine-Mediated Future of Work

I’ve been thinking about chess a lot lately. I blame a couple of authors – Tyler Cowen in “Average is Over,” and Jacob Morgan in “The Future of Work”. Both authors look to the future economy and what it will look like. Cowen’s seems more like a dystopia, but Morgan’s future has a smaller time line. For him the future of work will look like it does now, only more so. The real commonality is that they both really like Chess. Cowen uses it as a metaphor throughout his book, in that today’s chess matches mediated through computer help are tomorrow’s work situations. Morgan named his consulting firm after the game. I think it is a powerful metaphor for strategy, but a limiting one.

                I say that as someone who had chess thrust on me a lot when I was a kid. I was one of the smart kids, and in several environments, I was in a sort of “gifted” program it was anticipated that the smart kids would necessarily gravitate to the game. I was never particularly interested in it for whatever reason. That meant that I was beat by people who were more interested in that particular game. Here’s the thing, though. Researchers in artificial intelligence like chess because it is very bounded. There are only sixty-four squares, and there are sixteen pieces on each side. Each piece moved to set rules. There are, if I’m counting right, only twenty possible initial moves, and twenty possible second moves.  All the possible position and piece combinations can be mapped. It is a very large but finite number, but not so large if you have a perfect computer that can have all those possible positions in their memory that they can access. Each move is one more step along a decision tree that makes one side more or less likely to win. You could set a program up that maps out a route down the decision tree that makes the computer more likely to win in response to its opponents moves. You set two of these programs up against each other and you get white with a slight edge but the end would be mostly draw games?

                You know why I never really got into chess? Because chess is boring, and that scenario I drew out makes it even more so. Humans are not perfect computers. We play the game sub-optimally, where we often make choices that may make our opponent more likely to win. We operate with opening heuristics and planned end games that we try to get to because we know how they are supposed to go.  Strategy is interesting in the same way. If you are in either a cooperative or a zero-sum game, you have to anticipate your opponent’s moves in terms of all possibilities, not just the ones that may improve his lot. This is true for both bounded games like chess and for real life. As we move forward to Morgan or Cowen’s future, this is what I am afraid of – that mechanical mediation will make even the mindful jobs boring and that the workers of the machine will get more productive, but they will also become more machine-like. It would then be the owners of the machine who reap the benefits of that future, and the vast majority of the workers are just pawns on the board.

Somebody Ought To….

 I was reading something about the views of some tax payers on the right, who think the government is just an extractive institution. The problem is that the individual relationship with the state is a symbiotic relationship. It then becomes part of the environment so much that it is forgotten that it is even there. 

It starts from a state of nature, but in a large industrial society, there needs to be coordination of public goods. These are the things that everyone needs but few are willing to pay the upfront costs. It’s why transport was limited in the first 100 years of the country. 

The state helps coordinate transportation – somebody ought to help trade the interior, it was said. There was no private company willing to dig a big ditch. So the Governor of New York said, let’s do this. 

The same was with the railroads and helping utilities lay right-of-ways. 

So that’s fine. We have public goods. But how do you trade? You need to facilitate trade in some way. In a small community, you have your word and reputation. In a larger environment, you need something else. Somebody ought to arbitrate contracts and set the rules for the market place. So you have a government step in.

Now you have travel and commerce taken care of. How do you protect your property that you gained through that trade? Somebody ought to help out and protect private property. It’s too expensive to hire one guy for your own property.  Maybe you get together with some other local property to hire a guy to patrol everyone’s property. But who sets the limits on what that guy can do? You need a code of rules and regulations to say what he can or cannot do.

But why does that property need protection? Because for whatever reason there are people who covet what you own, much of these are losers on the transportation or the trade that was set up. What if instead of protecting your property, you made it so that you could help these people so that you did not be afraid for your property. What if you could do this at a lesser cost than it takes to protect your property and punish the trespassers?

Congratulations, you just built a functioning state. Now the real questions are about priorities and allocations of the funds you gained because the state set up the conditions for your prosperity. It is not that the state is being extractive, but about how much you are willing to share with the society that is only possible because of state coordination.

Economies of Scale Versus the Learning Curve

As Besank et al note, there is a difference between economies of scale and the learning curve (81). With the learning curve, a company can do something at a less expensive unit cost after time, where economies of scale are lower costs the more you do.

            These two concepts are independent of each other. Whether one is more important than the other seems to rely on the level of complexity within the task of a company. If something is simple, but takes a lot of capital to be done, economies of scale will take place. An example of a simple, capital-intensive business would be the operation of a strip mine. Once a business has the plot of land in which it wants to mine, all it needs is more equipment and relatively easily trained operators for that equipment. The more equipment, the more the company can carry out of the mine, and the cheaper each pound of rock is to take out.

            Conversely, throwing capital at different problems is not always the answer. Sometimes human capital is the most important element of a business. Often a service provider can be an example, but it exists in skilled manufacturing. For example, some of the most expensive watches in the world are still made by hand in Switzerland. These watches are miracles of the jeweler’s craft, even if the best made watch will never keep time as well as a twenty-dollar digital watch. The companies that make these watches position their wares as luxury goods, so that they are not in the same market as the cheap digital timepiece. They are made at a small scale for discerning buyers. Here is where the learning curve is important. Well-trained watchmakers will be able to make more watches faster and with higher accuracy. This allows a company that employs these artisans to have lower costs per unit. It also discourages new entrants to the market, keeping the retail value of the watches they sale inflated.

            With the two examples, it becomes possible to say that both the learning curve and economies of scare are important to the financial health of companies. The important difference is the human factor between which one will be more important.

          References

Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2013). Economics of Strategy (6th ed.). New York: Wiley.

Merger Happy: Lessons of ExxonMobil

            Standard Oil, Rockefeller’s oil conglomerate was broken up in 1911, into 34 separate companies (“About Us”). Two of those companies were the forerunners to the companies that came to be known as Exxon and Mobile. After almost a century apart, they joined back together on November 30, 1999 after over 18 months of talks (“About Us”). The merger did not happen in a vacuum. The head of the Bureau of competition at the Federal Trade Commission at the the time noted that there were several other contemporary mergers: “In recent months, we have seen the merger of BP and Amoco - which was the largest industrial merger in history until Exxon/Mobil was announced --and the combination of the refining and marketing businesses of Shell, Texaco and Star Enterprises to create the largest refining and marketing company in the United States” (“Remarks”).

Exxon was the larger of the companies in a merger worth $75.3 billion dollars, larger again by almost half of the merger between BP and Amoco (“12 Years Later”). Both companies had full control of their revenue streams, from extraction to refining to retail sales, though they often had partnerships. This merger of equals on a horizontal basis allowed them to create corporate synergies totaling up to $3.8 billion in pretax savings (“12 Years Later”)

The merger was not without its critics. Public Citizen, and advocacy group, put out a list of the things to worry about with the merger, including “If Exxon-Mobil were a nation it would have the 18th largest economy in the world larger than Denmark, Finland, Austria, and Greece,” and “Exxon-Mobil, with more than 50 refineries in a dozen countries, will be the most powerful oil refiner in the world. This position will allow Exxon-Mobil to shift production to the cheapest, most worker-unfriendly environment” (“10 Facts”).

The company countered that the market had changed. By their measure, the Standard Oil giant had over 80% of the market for oil, whereas a combination of Exxon and Mobile would only control 11% of the market (“Exxon, Mobile Divestures”).  In the end, the regulatory bodies were worried about monopoly conditions one the retail side, especially in the north east, where both companies had been originally based after the split up of Standard Oil. To get approval from the FTC, they had to sell 1800 gas stations to outside firms (“Deal Nears OK)”.

The result for consumers is hard to ferret out. The average gas price for consumers the month the merger was announced was $0.873 a gallon. A year later, it had risen to $1.124 nationwide (“U.S. Total Gasoline”). It is hard to tell how much of that increase was from the merger of the two companies and how much from other contemporary economic effects. Since gas prices eventually came back close to the pre-merge low before taking off based on large geopolitical issues, it looks as if there was little overall consumer effect in the long run. As for shareholders, it looks as if the merger was a wash. For the past fifteen years, the total return of the XOM stock has moved in tandem with an index of other oil company stocks, but has beat the S&P 500 over that time by 2.75% (Morningstar). If there had been true efficiencies to work out through scale, it would be expected that the value of the combined companies would surpass an index of comparable publically traded companies.  That there was little effect overall for consumers shows that the merger was not necessary, but it did not hurt them. Perhaps the FTC-mandated divesture was enough to make the long-run monopoly concerns not an issue. That there were not greater gains to scale in terms of returns in the equities market should show future managers that merging may bring headlines, but not necessarily growth.

References

Baer, William J.. (1999). Statement of the Federal Trade Commission. Federal Trade Commission. Retrieved from http://www.ftc.gov/sites/default/files/documents/public_statements/prepared-statement-federal-trade-commission-exxon/mobil-merger/exxonmobiltestimony.pdf

CNN Money (1999, November 23). Exxon-Mobil deal nears OK. CNN Money. Retrieved from http://money.cnn.com/1999/11/23/deals/exxon/

Corcoran, Gregory (2010, November 30). Exxon-Mobil 12 Years Later: Archetype of a Successful Deal. Wall Street Journal. Retrieved From http://blogs.wsj.com/deals/2010/11/30/exxon-mobil-12-years-later-archetype-of-a-successful-deal/

ExxonMobil. (2015). Our History. ExxonMobil.  Retrieved from http://corporate.exxonmobil.com/en/company/about-us/history/overview

Morningstar. (2015). Exxon Mobil Corporation XOM . Morningstar. Retrieved from http://performance.morningstar.com/stock/performance-return.action?t=XOM&region=usa&culture=en-US

Public Citizen. (2015). 10 Facts About the Exxon-Mobil Merger. Public Citizen. Retrieved From http://www.citizen.org/cmep/article_redirect.cfm?ID=6307

U. S. Enegry Information Administration. (2015, February 2). Petroleum & Other Liquids. UEIA. Retrieved from http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMA_EPM0_PTC_NUS_DPG&f=M

Wilke, J. and Liesman, S. (1999, January 20). Exxon, Mobil Divestitures Are Seen To Obtain U.S. Approval of Merger. Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB916791504585647500