Farewell, Internet Privacy

Two days ago, President Trump signed a law that legalizes the practice of selling our internet web browsing histories without our consent. The law applies to internet service providers and not to cloud based services like Facebook.

Even if we use the ubiquitous “Clear Browsing History” command, the internet service providers can still sell our browsing information to any one. And they can keep the proceeds of their sales transactions for themselves.

Isn’t it strange that the national press has been obsessed with the effort to repeal the Affordable Care Act (ACA), and yet has virtually ignored the repeal of internet privacy provisions? Considering the fact that ACA repeal would have been phased in during an extended period of time, but internet privacy repeal is effectively immediately?

One could argue that the delivery system of health care services is far more visible to the general public than the delivery of internet services, and thus draws attention to itself more readily. But reasonably healthy people may rarely see their health care providers, whereas they check their mobile phones dozens (or even hundreds) of times per day.

It’s difficult to understand why the news industry has failed to focus its coverage on the legalization of sales of web browsing histories. Unless, of course, those very news organizations are considering the purchase of such data for their own marketing programs.

Brexit: A Generational Divide

You’ve undoubtedly already heard the hubbub about Great Britain’s shocking decision to leave the European Union. But did you notice the stunning generational divide that underlies the voting results?

An overwhelming three quarters of all voters aged 18 to 24 desired to remain in Europe. And a clear majority of voters aged 25 to 49 did so as well. But older voters favored the opposing position, with almost two thirds of senior citizens preferring to leave, and a clear majority of voters aged 50 to 64 also opting to depart.

Former United States Secretary of Defense Donald Rumsfeld once derisively referred to the established Western European nations as “Old Europe,” while praising the emerging nations of the East as “New Europe.” Apparently, the Brexit vote revealed a similar split between the citizens of “Old Britain” and “New Britain.”

Why does this cleavage matter? Because global history is full of ostensibly irreversible cultural attitudes that were washed aside by a deluge of generational change.

Consider the issue of gay marriage in the United States, for instance. In 1996, a Democratic President signed the Defense of Marriage Act (DOMA) into law. That act defined marriage as the union of a man and a woman, and explicitly gave every state the right to refuse to recognize gay marriages. And yet, for its time, it was considered a relatively moderate law because it implicitly permitted individual states to sanction such unions.

Just twenty years later, though, gay marriage was recognized by Supreme Court as a fundamental human right. Why the change? Younger generations, advancing into adulthood, overwhelmingly supported the progressive position.

Indeed, gay marriage proponents ultimately prevailed by convincing the younger generations of the wisdom of their position, and then by simply waiting for those generations to come of age. So what lesson may their experience convey to the disappointed young Britons who wish to remain in the European Union?

To put it simply: time is on your side. Be patient, and recognize that the inevitable generational tide is flowing in your direction.

Politics: From Eulogy To War

Imagine the unexpected death of the owner of a privately held company. His heirs take a moment to express their sorrow at his passing. And then, moments later, they turn on each other and initiate a vicious fight to take his place at the helm of the family firm.

That’s quite unseemly, eh? Any decent human being would expect the heirs to pause for a respectful mourning period before pivoting from eulogy to war. But America’s leading politicians are a unique breed. How long would they wait under such circumstances?

We now know the answer to that question. At 2:20 pm yesterday, CNN’s Breaking News Twitter account announced the death of U.S. Supreme Court Justice Antonin Scalia. And then what happened?

Republican Senator Ted Cruz tweeted a link to his Facebook eulogy at 2:18 pm, and followed with a tweeted call for the Republican Senate of the United States to deny Democratic President Barack Obama his constitutional right to propose a successor at 2:27 pm.

That’s not a typo. Senator Cruz actually scooped CNN’s Breaking News Twitter feed by two minutes when posting his eulogy. So how long did he then wait to launch into the rancorous political debate about Scalia’s successor?

9 minutes. Literally, 9 minutes, from 2:18 pm to 2:27 pm.

Senate Democratic minority leader Harry Reid was a bit slower to the punch. He tweeted a condolence message at 3:21 pm, and then waited a full minute to tweet his political support of President Obama’s right to name a successor at 3:22 pm.

Republican Senate Leader Mitch McConnell, often portrayed as a turtle by comics, was less hurried than either colleague. He tweeted a link to his official government eulogy statement at 3:41 pm. And then he pivoted to tweet his support of Cruz’s political sentiments at 4:35 pm.

Let’s calculate the mourning periods of these three politicians. How long did each pause before leaping into the vicious debate over Justice Scalia’s successor? Senator Cruz waited for 9 minutes. Senator Reid did so for 1 minute. And Senator McConnell for 54 minutes.

So whom do you most admire? Cruz for being first to the punch? Reid for being the quickest to pivot from condolences to political in-fighting? Or McConnell for managing to wait almost a full hour before tossing away his grief and engaging in political warfare?

It’s possible that most Americans are so disgusted by the penchant of their politicians to turn every possible event (even a man’s death) into a political Twitter war, they no longer care to ponder such questions.

But by becoming inured to the indecent squabbling of their political leaders, they perpetuate their behavior. And so each politician, like a jealous and ungrateful heir of a deceased business owner, will continue to bicker endlessly about any issue that can help him seize the mantle of power.

Via Twitter, of course.

American Politics: Who’s The Fiscal Conservative?

Sometimes, in American politics, it can be very disconcerting to notice the jarring differences between the “spin” of public relations and the reality of public policy. One such example emerged just last week, in an economic tussle that recently broke out on the border between New York City and New Jersey.

JP Morgan Chase, one of the “too big to fail” banks that received a $25 billion TARP program bailout from the federal government during the 2008/09 global crisis, earned over $21 billion of net income last year on total assets of over $2.5 trillion. Such immense wealth didn’t deter bank officials, though, from threatening to move 2,000 jobs from New York City across the river to northern New Jersey unless Bill de Blasio, the mayor of the Big Apple, granted them hundreds of millions of dollars in tax breaks.

At the same time, the bank offered New Jersey Governor Chris Christie the identical deal: 2,000 jobs in exchange for a massive amount of tax breaks. And then the institution played one politician off against the other, and waited to see whether either one would accept the offer.

The result? One politician refused to offer the tax breaks to JP Morgan Chase, retorting that the bank’s request was “excessive” and a “non-starter.” But the other politician offered close to $200 million in tax breaks, and ultimately won the jobs.

So which politician adhered to a fiscally conservative position and turned down the bank? Was it Mayor de Blasio, a liberal progressive Democrat? Or was it Governor Chris Christie, who is currently running for President as a conservative Republican?

If you listen to political spin, you’d undoubtedly guess that the Democrat offered the tax breaks and the Republican refused to do so. But if you made that guess, you’d be wrong.

In truth, the Christie administration has offered government fiscal support to many private corporations during his time in office. And some of his decisions, such as those to support a failing Atlantic City casino and a giant insolvent shopping mall development, have not turned out well.

In all fairness, though, other states in the New York metropolitan region have made similar mistakes. In Connecticut, for instance, massive fiscal benefits to global firms like the Swiss banking giant UBS and the pharmaceutical firm Pfizer have similarly failed to pan out.

In other words, this is not a partisan issue. It’s a concern that cuts across both political parties. And what lesson can we learn from this common experience?

Namely, it is not always wise for politicians to offer massive government tax breaks in exchange for short term employment promises by private organizations. And, perhaps more importantly, voters should never assume that government officials of either political party will necessarily act in a fiscally conservative manner when such promises are dangled before them.

Income Taxes On A Postcard?

Texas Senator Ted Cruz has now officially declared that he is seeking to become the Republican Party’s nominee for President of the United States in 2016. Welcome to the race, Ted!

Thus, what better time than now to review some of his positions? One of his most popular stances, for instance, is his demand that the United States government abolish the Internal Revenue Service (IRS).

It’s a line that always attracts a wide round of applause. But oddly enough, Senator Cruz also demands that the income tax code of the United States be simplified to a level where Americans can file their annual tax returns on small postcards.

So that raises a very simple question: if we were to abolish the IRS and require American citizens to file their tax returns on postcards …

… where would they mail their postcards?

Without the IRS to process them, the federal government would then need to create a new agency to collect the postcards and confirm that the “amounts due” in taxes were previously withheld from wages or remitted through estimated tax payments.

And what would we call that new agency? The most appropriate name would undoubtedly be “the Internal Revenue Service of the United States.”

In other words, in order to process the very activity that Senator Cruz proposes to establish, we would need to recreate the very agency that the Senator proposes to abolish.

And how does Senator Cruz explain that irony? He hasn’t yet done so, but his advisor Rick Tyler recently suggested that the “Treasury (Department) could … assume the responsibility of collecting postcard tax forms. There would be a … division inside Treasury” that would perform the functions that are currently performed by the IRS.

But do you know where, within the structure of the federal government of the United States, the IRS currently resides? Yep, the IRS is a Bureau within the Department of the Treasury.

So Senator Cruz and his advisor are proposing: (1) to abolish a Bureau of the Treasury, (2) to create a new document that would have been processed by that Bureau, and then (3) to establish a new Bureau, in the very spot of the abolished Bureau, to process that very document.

If you understand that logic, congratulations! You undoubtedly possess an aptitude for Presidential politics.

But if you don’t, you are not alone.

Doubling Down In Kansas

Are you familiar with the expression: if you find yourself in a hole, stop digging? The humorist Will Rogers popularized the witticism during the Great Depression, when he joked about government economic policies that appeared to be perversely designed to take bad situations and make them far worse.

Although Rogers hailed from Oklahoma, that advice could easily apply to the current state government of Kansas. Just last month, the fiscal engineers of the Sunflower State’s government budget made a decision that may come back to haunt them.

The tale of Kansas’ fiscal woes began two years ago, when newly elected Governor Sam Brownback’s massive tax reductions first took effect. He promised citizens that the tax cuts would serve as a “shot of adrenaline” that would jump-start the state’s economic prosperity.

But the growth spurt never emerged, and the tax reductions on existing income caused an immense government fiscal deficit. It also worsened the state’s unfunded pension liability, which soared to $9.8 billion.

Last month, in an attempt to reduce this $9.8 billion shortfall, the state decided to borrow $1.5 billion and contribute it to the pension plan. Budget Director Shawn Sullivan claimed that the transaction would prove to be beneficial because the fund’s “investment earnings would rise more than enough to offset annual bond payments.”

Huh? What did he mean by that? Well, Kansas officials are gambling that their investment acumen will generate sufficient total profits to pay off the bonds and still contribute significant surplus funds for the plan.

Is there anything wrong with such a gamble? In essence, the strategy is analogous to taking out a fixed mortgage on one’s house and investing the proceeds in the capital markets. On the one hand, there is always a chance that the capital markets will soar and generate huge profits. But on the other hand, there is also a chance that the markets will collapse, leaving the investor with no options for repaying the debt. And that scenario would result in a financial catastrophe.

Is it possible that Kansas’ investment strategists will actually make brilliant decisions that reduce the pension shortfall? Well, sure … that’s indeed possible. In fact, anything is possible. But if these investment strategists had made brilliant choices in the past, they probably would not have produced such a deep pension shortfall in the first place.

Nevertheless, the Kansan state government appears to have doubled down on its recent debt-plagued fiscal decisions by voluntarily plunging itself $1.5 billion deeper into debt. Few individuals — in fact, even few gamblers — are likely to bet on the state returning to fiscal health any time soon.

Fiscal Gimmickry: Pensions For Highways

For many years, the federal government of the United States has utilized accounting gimmicks to finance payments for obligations like pension plans and highway funds. But can you believe that the government is now creating a gimmick to sacrifice one of these obligations to pay for the other?

It’s true. Last month, the federal highway trust fund was running out of money. Because members of Congress could not agree on a responsible approach for raising new funds, many critical transportation infrastructure projects were about to grind to a halt.

So how did our elected leaders resolve the problem? They decided to weaken our nation’s private pension plans in order to generate additional government funds. By authorizing a practice known as “smoothing,” the government permitted private corporations to reduce their current funding payments into their own employee retirement benefit plans.

The reduction in pension expenditures during the current period is producing greater corporate taxable income. That, in turn, is increasing income tax payments to the government this period, which are being added to the highway fund.

Of course, this maneuver will result in greater pension payment obligations during future period(s). Interestingly, though, it would not have affected the tax liability of the corporations at all if the accrual method of accounting had been mandated under American laws of taxation.

Under this method, an expense is an expense whether or not it is paid. Prior to each payment, a liability (and its corresponding expense) must be recorded to reflect the unpaid obligation. The subsequent payment eliminates the liability; it does not affect the expense.

Although Generally Accepted Accounting Principles (GAAP) usually requires that the accrual method be used for corporate financial statement reporting purposes, American tax laws permit the use of the cash method to calculate taxable income and deductible expenditures.

In other words, had all corporate plan sponsors been required to follow the accrual method of financial statement reporting for taxation purposes, they would not have benefited from the government’s permission to delay pension payments. But because many of them use the cash method for taxation purposes, such benefits can be claimed by taxpaying organizations.

Thus, in the end, the federal government opted to take advantage of its own accounting gimmickry to generate highway funds by explicitly encouraging corporations to weaken their pension plans. Although America’s drivers are benefiting from this practice in the present, its employees and retirees will undoubtedly pay the price in the future.

Shell Games And Fiscal Policy

For the past several years, Democratic Governor Dan Malloy of Connecticut and Republican Governor Chris Christie of New Jersey have engaged in a public war of words over fiscal policy. Despite the economic similarity of their northeastern states, the two men have repeatedly clashed on television over their strategies for restoring fiscal discipline in government.

Malloy, following traditional Democratic doctrine, has chosen to maintain government spending in the face of economic malaise by raising taxes in order to eliminate budget shortfalls. Meanwhile, Christie, adhering to classic Republican policies, has slashed spending and reduced taxes in pursuit of the same goal.

So which strategy has proven itself to be the successful one? Regrettably, neither one has done so. During the past month, in fact, both Governors have acknowledged failure.

The first failure occurred in Connecticut, where Governor Malloy had been accused by his political foes of generating $500 million in excess cash by over-borrowing on debt. He had announced plans to spend the cash by mailing $55 checks to Connecticut households as election year tax refunds.

But then the anticipated $500 million budget surplus suddenly vanished with the collapse of overly optimistic economic assumptions. Because the excess cash was needed to finance normal government operations, the proposed tax refund vanished as well.

Meanwhile, in New Jersey, a similar collapse of overly optimistic economic assumptions forced Governor Christie to slash required payments to the state’s employee pension plans. To compensate for unexpectedly low tax revenues, the Governor decided to redirect the funds to finance normal government operations.

Ironically, Governor Christie himself initially agreed to authorize pension plan contributions at levels that would help the state “catch up” for many previous years of fully or partially cancelled payments. His predecessors had often balanced their budgets by redirecting pension funds to meet current needs.

But when Christie found himself in the same situation that had plagued his predecessors, he opted for the same choice that they had made: to shift budgeted pension funds into current year expenditures.

And so the “shell game” of government fiscal policy continues on both sides of the political aisle. Whenever debt generated funds or pension plan funds are shifted to finance current government operations, future budgets become more difficult to balance while the size and scope of government remains unaffected.

How would you modify the budgetary practices of our government officials to ensure the long term fiscal solvency of our states?

Pfizer’s Tax Inversion Strategy

How terribly dysfunctional is the corporate tax code of the United States? Last week, you could easily find an example of its deleterious nature on 42st Street in Manhattan, in the very heart of New York City.

That’s where the pharmaceutical giant Pfizer Inc. announced its pursuit of its British competitor Astra Zeneca. Although it cited several strategic and operational reasons for the proposed acquisition, it acknowledged that the transaction would yield attractive tax benefits as well.

As a firm that is headquartered in the United States, Pfizer is subject to a top income tax bracket of 35%. But as a firm that is headquartered in Britain, Astra Zeneca is only subject to a top bracket of 21%, a rate that will fall to 20% next year.

Because of these differential tax rates, Pfizer acknowledged that it would complete its acquisition transaction by merging its 42nd Street corporate headquarters office into Astra’s London location.

Such a transaction, known as a tax inversion, would not actually require Pfizer’s executive management team or other New York based Pfizer employees to move to London. Only the “official” corporate headquarters location would need to shift to Britain, and a few legal corporate meetings each year would need to be held there as well.

Pfizer, of course, has been headquartered in the Big Apple since it was founded in Williamsburg, Brooklyn in 1849. If its acquisition and headquarters relocation strategies are executed as planned, Pfizer would follow in the footsteps of insurance giant Aon, which was founded in the American Midwest in 1919 but which moved its headquarters address from Chicago to London two years ago.

How is the public interest of the United States served by regulations that slash the tax rates of iconic American firms that shift their corporate headquarters overseas while maintaining their U.S. operations?

New Jersey Bans Tesla!

Less than three months have passed since the infamous George Washington Bridge – Port Authority traffic scandal exploded across the headlines. Despite Governor Chris Christie’s attempts to move beyond the controversy, political and criminal investigations are imperiling his political future.

Wouldn’t it be reasonable, then, to expect the Governor to steer clear of any controversial transportation industry decisions? Instead, Christie’s administration leaped into a national debate last week by banning electric automobile pioneer Tesla from maintaining company stores in the Garden State.

Apparently, New Jersey requires automobile manufacturers to sell their products through independent dealership networks. Tesla, as a relatively young firm with no such network in place, has opted to distribute its electric automobiles through “Apple style” company owned retail stores instead. Many of these outlets are actually located in luxurious shopping malls!

Tesla founder Elon Musk, outraged by New Jersey’s ban, charged that Governor Christie “cut a backroom deal (with) the auto dealer lobby.” Then, referring to the GWB / PA scandal, he added “If you believe (him), Gov. Christie has a bridge closure he wants to sell you!”

The dealership lobby claims that restrictive sales laws are needed to prevent unfair competition and ensure consumer protection. It is difficult to imagine, though, why a Tesla company store would be any more threatening to the economy or to consumers than an Apple company store.

Interestingly, New Jersey has also banned self-service gasoline stations from its territory for the past 65 years. Claiming that such stations create safety hazards, the state requires that all filling stations offer full service gasoline pumps only.

So it appears that the Garden State has been promulgating unusual transportation policies for a very long time. But would the general public experience an economic and social benefit, or a commensurate risk, if the State continues to do so?

If you were Jessica Rich, the Director of the Bureau of Consumer Protection of the Federal Trade Commission, would you support New Jersey’s right to ban Tesla company stores? As well as all self-service gasoline stations?