London is Greener

Financial Times' Weekend columnist and author of Undercover Economist, Tim Harford, confirms my earlier claim that urban planning with good transportation systems can provide better energy security, where security can also come in the form of being greener.

I wrote my note lamenting the lack of energy security and urban planning with adequte public transportation in California, one of the largest economies in the world and one of the poorest places when it comes to good public transportation, and yet one of the places that has the greatest ambition to have cities as green as its environ. The only trouble is that you cannot be green with so many cars and so many roads and so few efficient (and nonexistent) public transportation networks.

This is what Harford writes (FT, May 18, 2007):

The Office for National Statistics reports that Londoners produce much less household waste than anywhere else in the UK. From the same source I learn that London’s households are the most likely to have no cars, and the least likely to have two or more cars. Even before the congestion charge came into force few Londoners commuted by car.

London’s Mayor’s office informs me that London emits 40 per cent less carbon dioxide a person than the national average - which would be less than half the rate of ”carbon neutral” Ashton Hayes. All this from a city that is hugely dynamic, innovative and, frankly, disgustingly rich.

It is true that these figures do not include the environmental cost of producing products elsewhere and shipping them to London. That would be a more telling omission if the rest of the country was growing its food in the back garden, but the truth is that most UK citizens fill their houses with products produced elsewhere. They just have bigger houses to fill.

London, like other big, dense cities, is good for the planet. That fact seems to surprise people. After all, cities are polluted places.

...London’s environmental performance comes naturally. My in-laws live in the Lake District in a house that is twice as large as mine with half as many occupants; they drive into town to pick up the morning paper. We travel around by bicycle or walk pushing our kids in a baby buggy because a car is impractical. We are enormously greener than they, but not because we’re more virtuous nor because we’re poorer. We’d like a bigger house, but that costs too much in London. A fancy car would be a waste of money because we’d rarely use it. Economic necessity, rather than deeply held principles, compels us to be green.

The Labels, The Internet and The Musician

Internet, as a giant copy and distribution machine, may and should continue to afford artists with greater autonomy well into the future. Reports of musicians' success in using this copy-and-distribution tool continue to pour in. For example, Wall Street Journal's John Jurgensen writes about how musicians use the Internet to promote their work ("Singers Bypass Lables for Prime-Time Exposure," May 17, 2007, WSJ, B1). The report focuses on the case of singer and musician Ingrid Michaelson, "a 26-year-old Staten Island native who ... was discovered on MySpace by a management company that specializes in finding little-known acts and placing their works in soundtracks for TV shows, commercials, movies and videogames."

Many shows will only pay unsigned artists about $1,000 for the use of their music on TV, while artists on major labels might garner more than $30,000. Since she has been signed to Secret Road [Music Services, not a label], Ms. Michaelson has been paid up to $15,000 each time her music has been featured on a show or commercial, according to someone familiar with the deals. Secret Road says its cut of Ms. Michaelson's income is in keeping with industry standards of between 15% and 20%.

TV, of course, has become an increasingly powerful force for driving music sales. Apart from "American Idol" and "Saturday Night Live," possibly the most coveted TV slots for musicians are on "Grey's Anatomy," which has helped make songs like "How to Save a Life" by the Fray into top sellers on iTunes. A finale spot on "Grey's" is considered a particularly plum slot. Last year, the finale allowed Scottish band Snow Patrol to break through to a broad audience and played a role in making its featured song, "Chasing Cars," a hit.

Because Ms. Michaelson doesn't have a record-label contract, she stands to make substantially more from online sales of her music. For each 99-cent sale on iTunes, Ms. Michaelson grosses 63 cents, compared with perhaps 10 or 15 cents that typical major-label artists receives via their label. So far she has sold about 60,000 copies of her songs on iTunes and other digital stores. Ms. Michaelson is pouring most of her profits into pressing her own CDs and T-shirts, hiring a marketing company to produce promotional podcasts and setting up distribution for her CDS.

The fact that much good music today is discovered on the Internet before it ever makes it to the labels demonstrates that the labels need to reconsider their full "supply chain" and continue to review their policies and rules governing the protection and distribution of cultural content they come to license ("for a limited time").

On the same day as the report above, The Wall Street Journal also reported a significant move away from DRM which indicates the labels are recognizing the role of the Internet as a means to build networks of fans for artists through low-cost copy-and-distribution of content:

EMI Group PLC, the world's third-largest recorded-music company by sales (and the fourth-largest in the U.S. market) announced yesterday it would license its catalog to Amazon's DRM-free service. The three other major music companies haven't said publicly whether they expect to play ball with Amazon, but people close to all three companies said they don't expect to license content to Amazon in the near future. That means consumers shopping for downloads on Amazon will be able to buy tracks from EMI artists like Norah Jones and Coldplay, but are unlikely to be able to find music by most other major artists, including, for instance, each of the top-10 selling albums last week. Another complication: Apple's iTunes is moving toward offering music without copy protection, and also plans to release EMI's catalog in that format.

Much of the early use of DRM technologies has focused on limiting the power of digital copy and distribution of content.

Software and Transaction Cost Economics

It is good to see someone who has a relatively good understanding of Transaction Cost Economics write about the topic of open source software or software in general:

There was a time when a single determined individual could write the core of a single operating system for a primitive computer. But given the demands of computer applications and the capabilities of hardware technology at present, that is no longer conceivable. The task needs to be divided somehow. This immediately raises a ... core political economy question, about coordination of a division of labor within a centralized, hierarchical structure--that is, a firm. Within the firm an authority can make decisions about the division of labor and set up systems that transfer needed information back and forth between the individuals or teams that are working on particular chunks of the project. The boundaries of the firm are determined by make-or-buy decisions that follow from the logic of transaction cost economics. The system manages complexity through formal organization and explicit authority to make decisions within the firm as well as price coordination within markets between firms.

That's from Steven Weber's The Success of Open Source.

Security Consequences of Urban Planning

Modern urban planning in the U.S., as it has been conceived and implemented in the urban sprawl since WWII, poses serious security concerns that arise from its economic vulnerabilities. The vulnerabilities are both explicit, in terms of direct transaction costs such as transportation to work, and more implicit, in terms of aggregate and individual worker productivity. Thus, did The Economist ("In a Jam," May 5, 2007, p. 38) describe the situation in the area where I live:

[The] Bay Area is not set up like a European metropolis. Most suburbanites have quite a drive just to get to an underground station, and must then win a vicious struggle for parking to make it onto a train.

The description fits well with my family's experience here.

In major American cities, workers have to drive long distances (of the order of 80 - 200 km / day) from home to work and back, and a significant increase in gas prices, without a similar increase in better communications technologies (that allow people to reduce trips to work to compensate for other losses) or a similar increase in energy efficiency of automobiles (at the same unit price) can cause perturbations towards lower growth rates.

Lack of adequate and efficient public transportation is not limited to major cities. One in eight who live in the U.S. live in California, just as I do. The state by itself has consistently accounted for one of the top 10 largest GDPs in the world for multiple decades, and it drives the U.S. economy with its vast consumption, tax base, farming and real estate, not to mention high technology. And yet, there are no super fast trains connecting any of its major metropolitan areas together: Los Angeles, Orange County, San Francisco Bay Area, Sacramento Valley, etc.

The economic inflexibility of urban sprawl leads not only to higher overall transaction costs throughout the economy but also to instabilities in various sectors. For example, The Wall Street Journal recently reported that 51 leading retail store chains have reported a collective 2.3% decline in same-store sales. Michael Niemira, chief economist of the New York-based International Council of Shopping Centers says this is the weakest showing since he began tracking the closely watched industry measure of performance in 1970. People have blamed this on a soft housing market, bad wheather in March, a fast Easter or fuel prices. Fuel prices and a soft housing market seem to be the most likely explanations for why this drop has been as large as it has been. While the real estate industry benefits from generally cheap gas prices (which lead to better possibilities for greater urban sprawl) and may be willing to go to war for it (observe how the representatives of American economic power offered almost universal support, in 2002-2003, for aggression against and occupation of Iraq), the spending for war might come back to bite the real-estate and other industries in the form of rampant deficits and inflation, higher interest rates, higher fuel prices and general asset attrition. One would expect that the economic elites and political leaders of a super power to comprehend that peace, justice, stability and truly open commerce (of course, not in commerce of aggressive war machinary) remain the solid base and the best guarantors of mutual understanding and development, economic vitality and growth. However, "stability" is often confused with the extension of imperial rule. In the meantime, a rampant political jargon and an infected moral language equates mass aggression with liberation, injustice with natural rights, murder with "collatoral damange," etc. Such infection of moral language, publicly spread, will always fog people's minds and provide a kind of self-belief among the elites to perpetuate the rule of what becomes a militaristic economy unashamedly pursuing its ends until it exhausts all resources at its disposal (and reaches its own end) at a huge toll in human life and well-being.

Consumer (aka importer) of last resort

Lawrence Summers wonders whether the global economy can rely on the U.S. as the importer of last resort:

It is clear though that the global economy has been relying on the US as an importer of last resort; that the US economy has been relying on the consumer for its primary impetus; and that until now consumers have been encouraged to spend their incomes fully or more than fully by being able to access the wealth in their homes.

Summers notes that the U.S. imports 70% more than it exports.

But the growth syllogism is now in doubt. Recent developments in the subprime sector exacerbate housing’s brake on US economic growth. Foreclosures will bloat the supply overhang of houses. At the same time reductions in capital in the housing finance sector and more rigorous credit standards will reduce the demand for new homes.

Even as these developments reduce housing prices and the construction of new houses, housing finance problems are likely to magnify wealth effects on consumption as consumers face upward resets on their mortgage rates and are unable to refinance as they had planned, and as home equity, car and credit card lending conditions tighten.

If consumer spending declines and interest rates fall or appear likely to fall, there is the real possibility that the foreign lending to the US that has financed imports far in excess of exports will start to dry up, leading to a combination of higher long-term interest rates and a weaker dollar. This would tend to raise inflationary pressures, transmit US weakness to the rest of the world and could, by discouraging foreign demand for US assets, lead to further downward pressure on investment in plant, equipment and commercial real estate.

I wrote about asset attrition earlier, and this is another example of it.

The financial problems, which Summers relates to attrition in assets' financial value, and the real asset attrition, about which I wrote earlier, are related like the chicken and the egg!

Inflation, Interest Rates, Exchange Rates and Housing Prices

Financial Times' Chris Giles and Eoin Callan write about the recent rise is the pound due to UK interest rate expectations:

Richard Jeffrey, an economist at Ingenious Media, saw the trend towards rising prices as a return to normality after a period where Britain was more-or-less alone in experiencing sharply falling goods prices on the high street alongside normal levels of overall inflation.

Interest rate expectations jumped and a May rate rise is now considered a certainty. “People have to get used to higher interest rates than we have seen for much of this decade. I am not sure that house-buyers are taking that into account yet,” said Martin Weale of the British National Institute of Economics and Social Research.

Currency traders anticipate higher pound prices as inflation grows giving rise to an expectation for a rise in interest rates, which will draw currency exchanges into the pound.

Matters exacerbate when the U.S. economy slows down but the European economies don't. Inflation rate in the U.S. slows while it speeds in Europe. This forces interest rate expectations in opposing directions in Europe and in the U.S. causing the currency rate swing we have seen recently.

Alan Ruskin, a currency strategist at RBS, said: “What we are seeing is those investors chasing risk moving to higher yielding currencies. These numbers reinforce an existing trend.

“There had been persistent fears about inflation boxing in the Fed and making it difficult to respond to a slowdown in growth. Now the Fed is less boxed in.”

The Fed still views inflation as a slightly greater threat to the US economy than the uncertain outlook for growth but investors sold dollars on the basis that the inflation slowdown made the Fed more likely to keep interest rates on hold and could give the central bank slightly greater flexibility to consider easing monetary policy in future.

US government debt prices rallied as investors priced in a lower likelihood of US rate cuts, sending the yield on the benchmark 10-year note down to 4.71 per cent from 4.74 per cent.

London experienced the opposite trends in bond markets, again contrasting the current accelerating economic expansion in Europe with the slowing US economy.

Selling without an agent

Financial Times reports of websites that support people who want to sell their property without the involvement of an agent ("Websites log on to the power of private sales").

Large numbers of property sellers are abandoning the traditional services provided by estate agents and marketing their homes directly to house hunters via a growing number of private websites.

Examples are periodproperty.co.uk and barnsetc.com, and "Flatshare has launched a portal dedicated exclusively to direct property sales, propertiesdirect.com, which has private property listings from a range of websites." The report notes that

Some of the biggest names for private property sales include House Web, House Ladder, The Little House Company and ClickSell and new providers are entering the market all the time.

While the market is crowded, these sites have about a 100 fold less listings and they have trouble placing ads to draw customers.

These “buy from owner” sites have been banned from advertising on propertyfinder.com, one of the main property portals, as it claimed their presence was damaging advertising revenue from estate agents. Rightmove.co.uk also only accepts listings from estate agents.

The Tax System in America

David Cay Johnston has an ineresting book on the tax system in America.

How to Recognize Funds for Tax Efficiency

Jaclyn Badal of The Wall Street Journal has a story on recognizing mutual funds for tax efficiencies. She concludes her story in this way:

Good indicators of a tax-efficient fund strategy are low annual turnover -- below about 30% -- and a potential capital-gains exposure, or the percent of a fund's assets that represent gains, of less than 25%. Both figures can be found for free at Morningstar.com.

Note that some funds' after-tax returns may be attractive partly because they have used losses harvested during the bear market of 2000-2002. Funds have up to eight years to use past losses to reduce capital gains. Morningstar factors relevant past losses into its calculation of capital-gains exposure.

Reading on Annuities

The Wall Street Journal has published a list of readings on annuities. The comments in the list are by Dr. Moshe A. Milevsky, a finance professor at York University in Toronto:

"Getting Started in Annuities," By Gordon K. Williamson
If you're a beginner, a good (if somewhat dated) introductory book on the different types of annuities. For those who are hesitant to purchase anything with the word "dummy" in the title.

• "The Annuity Handbook," By Darlene K. Chandler
"The Variable Annuity Handbook," By Gary H. Snouffer
Both published by National Underwriter Co. Good sources of information, specifically on variable annuities, with detailed explanation of products and terminology written by sunny and optimistic industry insiders.

• "Investing with Variable Annuities," By John P. Huggard
Focused specifically on the tax aspects of buying variable annuities versus mutual funds, this book—written by a practicing attorney—provides a long list of debatable reasons for saving and investing only in variable annuities.

• "Equity-Indexed Annuities: The Smart Consumer's Guide," By Jay Adkisson
A brief (92 pages) introduction to this important subcategory of fixed annuities, in which the author tries to bring clarity to the genre and echo his warnings to the novice.

• "Guaranteed Income for Life: How Variable Annuities can Cut Your Taxes, Pay You Every Year of Your Life, and Bring You Financial Peace of Mind," By Michael F. Lane
A dated but still readable book that explains with personal case studies and examples how variable annuities can be used to create a sustainable, predictable and tax-efficient retirement income.

• "The Handbook of Variable Income Annuities," By Jeffrey K. Dellinger
An encyclopedia of detail on the actuarial and insurance minutiae of variable income annuities, from reserving requirements to asset-allocation dynamics.

• "Retirement Income Redesigned: Master Plans for Distribution," Edited by Harold Evensky and Deena B. Katz
A collection of independent articles by well-known authors and practitioners in the field, many of which provide the intellectual foundation on how to integrate and use - or ways to avoid - annuity income at retirement.

• Securities and Exchange Commission, sec.gov/investor/pubs/varannty.htm
Important consumer information on what to look out for when buying variable annuities.

• National Association of Variable Annuities, navanet.org,
retireonyourterms.com
These industry sites provide educational material.

• Insurance Information Institute, iii.org/individuals/annuities
Information on all aspects of the insurance industry, including annuities.

• ImmediateAnnuities.com, immediateannuities.com
A source of product and industry information for individuals considering purchasing income annuities. A simple calculator allows the user to estimate income he or she may receive from such a product.

• Annuity Nexus, annuitynexus.com
Tracks the trends and statistics for the fixed annuity market and offers various educational articles about the product.

• Advantage Compendium, indexannuity.org
Offers educational and sales-trend information, as well as an overview of currently offered rates for index annuities.

• National Association for Fixed Annuities, nafa.us
An industry site that offers educational resources for agents as well as customers.

English and Business

English may be the language of business today but many know that there are no guarantees it will remain the language of business tomorrow. In fact, more business was conducted among nations (per capita) prior to World War I, when there was no uniform business language, than around the late 1990s, at the height of the .com boom and when English was the lingua franca of business. (See Robert Barro's Getting It Right: Markets and Choices in a Free Society.)

Taxes and War

Note: A friend just forwarded this message.

Hang Up on War: Get a Tax Refund

By Amy Goodman, King Features Syndicate.

Posted April 5, 2007.

If you are upset that Congress won't defund the war in Iraq, there's something you can do: Take the IRS up on its offer for a war tax refund.

If you are upset that Congress won't defund the war in Iraq, there's something you can do: Stop paying a tax. Legally.

The Internal Revenue Service is giving a rebate this year on a telephone war tax. This is one of those line items at the bottom of your phone bill. The tax was instituted in 1898 to help the United States pay for the Spanish-American War. Individuals and businesses have one chance to obtain a refund on this telephone war tax, by asking for it in their 2006 income tax returns.

Remarkably, the Internal Revenue Service has made it easy to request the refund, yet IRS Commissioner Mark Everson says that many taxpayers are overlooking it. Obtaining the refund is easy. But first, a little history.

The Spanish-American War lasted from April to August of 1898 and was predicated on a U.S. government demand that Spain abandon its colony in Cuba, which the U.S. subsequently occupied. By the end of 1898, the United States had also taken over the Philippines, Guam and Puerto Rico.

The war was also used as an official pretext to take over Hawaii. The Senate debated over the annexation in secret, some arguing for total annexation, others for just Pearl Harbor. Sen. Richard Pettigrew of South Dakota derided the annexation plan as money "thrown away in the interest of a few sugar planters and adventurers in Hawaii." Military bases and raw materials -- sound familiar?

The telephone tax was instituted as part of the War Revenue Bill, which expanded the government's ability to collect taxes, ostensibly to pay for the war. As with the myriad controversial "pork" items added to the recent Iraq war funding authorization, the 1898 bill was the subject of scores of amendments that benefited big business. These included tax breaks for powerful industries like the insurance companies and tobacco dealers.

The telephone tax of 1 cent per call targeted the wealthy, who were generally the only ones who had telephone access in 1898. After the war, the tax was eventually raised to 3 percent. Since the Vietnam War, it has been the target of war tax resisters, people who refuse to pay taxes because they do not want to fund war.

Tax resistance has a long history. Henry David Thoreau promoted it in his essay "Civil Disobedience" to fight slavery: "If a thousand men were not to pay their tax bills this year, that would not be a violent and bloody measure, as it would be to pay them, and enable the State to commit violence and shed innocent blood."

The IRS has vigorously targeted full-fledged tax resisters -- ranging from those refusing to pay the Pentagon's percentage of their taxes, to those who outright refuse to pay anything to the government -- making an example of them by garnishing wages, sending them to prison for tax evasion and confiscating their homes.

Tax resisters figured out that they could protest the telephone tax simply by writing their checks to the phone company, withholding the amount of the tax. The IRS deemed the collection of the tax too expensive, relative to the small amount of the tax itself.

According to the National War Tax Resistance Coordinating Committee, early collection efforts by the IRS included the auctioning of Jim Glock's bicycle for $22 in 1973 and of George and Lillian Willoughby's VW Bug in 1971 for $123 (in 2004, Lillian, at 89, with the support of her husband, George, 94, was jailed for protesting the Iraq war).

Court losses convinced the IRS to dump the telephone war tax in 2006 and to offer the retroactive rebate for phone taxes paid between March 1, 2003, and July 31, 2006. Typical refunds will be between $30 and $60. Ironically, while the IRS has dropped the tax on long-distance and "bundled" services, like high-speed Internet, the tax remains for older, standard local phone services and rental of equipment that enables the disabled to use phones.

Thus, this tax on the rich is now a tax on the poor. Congressman John Lewis, D-Ga., has submitted a bill to permanently wipe this remnant clean. Two-thirds of the bill's co-sponsors are anti-tax Republicans, so Democrats might be leery about passing it.

The website, www.refundsforgood.org, lists step-by-step instructions on how to recoup the telephone tax rebate, and recommends donating it to charity.

While Congress and President Bush trade barbs over war funding, with a simple check mark on your tax return you can help to defund the war. Claim your telephone tax rebate. Let the Pentagon hold a bake sale.

Amy Goodman is the host of the nationally syndicated radio news program, Democracy Now!