politics

How often do we fall into treating the symptom, rather than the cause? Our politicians have certainly done so.

I’ve received 10 fund-raising calls this week for various candidates. “It takes about $100MM to run a campaign, these days.”

A very important message for our politicans: this $100MM campaign crap is going to drain likely half a BILLION dollars from U.S. citizens this year (assuming 2 candidates from each party @ 100MM). I can think of some excellent uses for that money, none of which involve giving candidates more money than God to play with. Not only does it assure that big donors will become ever-more-important (and thus ever-more-influential), but it means candidates must spend all their time fund-raising.

The solution is not to beg for money–I’ve had myself removed from every list after receiving roughly 10 calls from the Dems this week. The solution is to bring in real campaign finance reform, which our existing incumbents are in a fine position to do.

At this point, I’m torn as to what to do. Honestly, I’ve given all the money I care to already. Spending money this early in the game, despite the frantic attempts by the media and the politicians to convince me that it’s needed this early, isn’t going to do much for anyone.

Don’t fix the symptom, guys, fix the cause. Please.

We’re approaching our state primary for Governor here in Massachusetts. All the commercials I’ve seen simply tell how each candidate will cut taxes taxes taxes. “I’ll cut the gas tax.” “I’ll push to roll back the income tax.” “I’ll cut all taxes.”

I can’t help feeling rather discouraged by all the talk, mainly because it’s all such crap. Let’s think about the business equivalent. What would you think if someone came into your office wanting to be put in charge of an important project (say, running the entire state of Massachusetts) and this was their business plan:

1. I’m going to reject equity funding and fund with debt.

Would you put them in charge of anything? Of course not. Because frankly, deciding how to fund a project is something you decide after you decide what the projects will be, what the expected benefits will be, etc. In fact, it makes no sense to even think about financing before you know the ROI (in whatever currency is important to you) of the various projects. Some things have such a high return, you’re happy to finance them with high-interest-debt or with high taxes. Other things have a low return, and you only want to finance them if they’ll pay for themselves in 3 months.

Running a state is much more complex than running a business, and at some point we’ve been brainwashed to care about nothing but knee-jerk rejection of taxes.

Let’s see a return to sanity and recognize that taxes, like bonds and foreign borrowing, are nothing more than a funding choice. We will pay for the cost of government one way or another–borrowing eventually must be repaid (with interest!) from dollars raised through taxation. So the focus should be on what programs we want to use money for, and only then should we discuss where that money will come from.

It bodes ill that candidates from both parties today worry only about tax promises, and so much less about policy and governance.

Ever notice how people don’t change their minds? Even when confronted with compelling evidence against their position, they cling to their position and emotionally shred the evidence rather than face the notion that their beliefs are wrong. As one high-ranking political player told me, “the world is too complicated to worry about whether policies produce the desired effects. Politics is simply about seeing your beliefs put into law. Period.”

I found this a very depressing position. And no matter what his beliefs, I don’t want this man making decisions that affect my life. Unfortunately, he’s in a position to make many, many such decisions.

I’m committed to a process of inquiry, discussion, and (unscripted!) debate about our goals and about which policies will actually reach our goals. So rather than “Liberal” or “conservative,” I call myself a Political Functionalist. You can read my draft Political Functionalism Manifesto here.

(Comments and flames appreciated, though only if they are in the spirit of inquiry and discussion.)

On “The Daily Show” the other night, John Stewart hosted an oil industry expert talking a bit about current oil prices. She was a very happy woman, and her engaging, bubbly personality was just charming enough that she could repeatedly evade John’s questions without being too obvious. I thought I’d step in and answer her questions for her.

Why are gas prices so high?

John asked why gas is so expensive. She replied, “supply and demand. When demand goes up, prices go up.”

So far, so good. She’s quoting basic economics. John was ready for her: “Yes, but why do profits go up? If oil is more expensive, wouldn’t that offset the higher prices resulting in the same profits?”

Bubbly oil company rep: “Oh, but John, when demand goes up, prices go up.”

… and this exchange was repeated about four times.

Should gas prices go up while oil profits don’t?

At first glance, it seems like John’s logic is sound. Let’s say oil costs $1/gallon. Let’s assume it costs an oil company 50 cents to refine, transport, and sell the gasoline. They sell it at the pump for $2.00. Their profit:

If oil goes up 50 cents to $1.50/gallon, the oil companies should pass that cost through to the consumer, sell the gas at $2.50, producing:

Same profit. So if they’re enjoying record profits, they must be price-gouging, right? Wrong.

The problem is Wall Street or, more accurately, how we all treat money.

Oil companies just don’t pass costs through to consumers. We as investors and Wall Street don’t look at the actual dollar amount of profits. We care about profit as a percentage of sales. We don’t say “My investments made $3,000 for me last year,” we say “My investments made an 8% return last year.” That’s the profit margin. Profit margin is a company’s bottom line profits divided by top-line sales.

Let’s look at the above scenarios again, but this time we’ll look at profit margin, not profit dollars:

When oil prices go up, if oil companies simply passed through the cost without an additional markup, their profit margin would fall. In the world of investors who care about percentage profits, this is a strict No-No.

So when oil companies raise their prices to keep their profit margin constant, they have to raise their prices from $2.00/gallon to $2.67/gallon even though the oil price change was only 50 cents:

Instead of gas going up 50 cents when oil prices go up 50 cents, keeping profit margin constant means gas prices will raise 67 cents when oil prices go up 50 cents. That extra 17 cents flows straight to the bottom line. In dollar terms, profits formerly at $.50 are now at $.67.

(So that is a 34% increase in the actual dollar amount of profits! Even though the profit margin (percentage) stayed the same, the media will likely be reporting it as “a 34% increase in profits.” And it’s quite a large increase for the company doing nothing but marking up their product using a standard business markup practices.)

Now we can ask whether oil companies are using the tight supply to mark up their oil even more. If so, that’s where the unethical behavior and price gouging is coming in. But sadly for the rest of us, unless we want to let oil companies report lower percentage profits without penalty, every increase in oil prices will be offset by a much greater increase at the pump.

By the way, oil CEOs shouldn’t be paid for huge profits from supply price increases. That just rewards them for tightening supply and not investing in new energy sources!

Now that you know the rational side of the argument, visit my rants blog to learn why we’re getting exactly, precisely what we have said we wanted for the last thirty years.