Secure Credit Card Signatures

I found this hilarious account of this fellow named John Hargrave at Zug (via Coyoteblog). This site specializes in pranks. In this prank, John forges various signatures on credit card receipts to see if the clerks notice. They never do. The point is that the signature doesn’t offer any protection because the vendor will get his money whether the card is used fairly or fraudulently.

Last month, I suggested (in Secure Credit Cards) that we should replace the signature on the credit card with a 12-digit one-time-use activation number. Zug’s prank illustrates why we need to go to the numerical signature.

Address Web Page

Recently, my family moved from a house at the edge of Fairfax County to a more central location. One of the drawbacks of moving is that there are always dozens of people and organizations that need the new address and telephone numbers. You can never remember all of them. Even if you tell a company that you have moved, they might have your address in multiple locations. This happened to my wife’s W-2 form; her firm knows my wife address but the W-2 went to the wrong address. Luckily, the Post Office still forwards our mail.

To me, this seems like a completely unnecessary problem in the age of the Internet. Instead of giving a physical address and phone number, why not give a virtual address and phone number. In the C programming language, it would be a pointer to the address and phone number. The information would be kept in a database which you could access using a password and change the information at any time. Others that you want to give this information to would be given a read-only password and web address that contains this information. Firms and government agencies would run a program that weekly updates everybody’s contact information automatically.

Who would create this web page? I think it might have to be the Federal Government. They have the single biggest archive of contact information so they would have the greatest benefit from having such a service. Also, I don’t see a profit opportunity here. A free web page with contact information might be profitable if a lot of people went to that site and read the advertisements in the way that Yahoo and Google operate. But for this site to be useful, a computer program would take the information off of the site remotely, so no one would actually see the web page. Therefore, this web site would be a pure public good, which explains why it doesn’t already exist.

The other possibility is to charge a small fee for use. This would cover the cost of creating the database and creating the mechanism that extracts the data and puts it into your database automatically. Yahoo and Google would be able to do this, and several other companies as well. However, it might be difficult to get companies or individuals to pay since everyone would know most people would not want to use this service until it is well established and it won’t be well established until most people start using it. That’s why any such company would try to sell the idea to the Federal Government first.

Linked to Chocolate and Gold Coins

I’ve started a “Linked to C&GC” section on my blog to show you those blogs have linked to me. Part of the motivation is show appreciation to those who have help direct traffic to my website but it is also to encourage others to link to me (knowing that they will get linked to in return).

The first blog I would like to mention is the very interesting “Sometimes its Peaceful” blog by Gill in England. Her “Blog of the Day” post highlights some very interesting blogs that she has managed to find. I was “Blog of the Day” here.

Andrew Hughes has a blog called “Anyletter”. He blogrolls me, and he linked to me in this post. His blog turned very personal (and interesting) recently.

Another blog that blogrolls me is “Jwaala” by a student in India who nom de blog is Jwaala. His blog is devoted mostly to India politics so I don’t follow it regularly.

Brian Gongol linked to my “Lottery Technology” post. That gave perhaps my best ever post a little more life. His site has a good collection of news links to offbeat stories.

Coyoteblog also linked to my “Lottery Technology” post because it part of the Carnival of Capitalists. His site usually has some very well-written articles about a variety of topics including his experiences as a small business owner.

Long ago, Jenny at Hot Topic Blogs - Obesity linked to my “Free Food, Why Do Americans love it?” post. Her links to any obesity-related news items.

Of course I cannot forget to mention Amit Varma. He linked to me at his flagship blog India Uncut; this gave me lots of exposure to people in India. He also linked to me repeatedly at his other blog Middle Stage. Both of these blogs are excellent but India Uncut is really in the top echelon of blogs.

So to everyone who has linked to me: Thank you.

Consumption Tax

It’s tax time and time to revisit an old idea: the consumption tax. A lot of economists have advocated a shift from an income tax to a consumption tax. Here is Arnold Kling’s essay on this subject. Taxing investment income lowers the amount of investment and lowers the growth rate of the economy. However, a sales tax, which is a consumption tax, is essentially a flat tax and most people would be unfair to poor. Is it possible to create a progressive consumption tax? Yes it is, and it would not be hard to do at all. But first, let’s look at the problem caused by the current ad hoc ways Congress has created to encourage investment.

Currently, there are several mechanisms in place for people to invest and not pay taxes on the interest on those investments. For example, there are IRAs and 401k plans for retirement, college savings accounts for a child’s college plan, and flexible spending accounts for medical expenditures. However, the big problem with these kinds of accounts is that they prohibit an efficient flow of money from one form of investment to another. The flexible spending account is the worst of these: if you don’t use the money in a calendar year, you lose it. My proposal is to treat all flows of money into investment as equal and non-taxable until these investments are cashed in. Flows of money between investments would not be prevented or discouraged in any way.

The simplest way of explaining this idea is to assume that most people have a checking account and a money market account. Any flows of money into the checking account would be considered consumption (in the near term) and would be taxable even if they came from investments. Any flows from the checking account into the money market account would be fully deductible. Any expenditure from the money market account on investments would not be counted since this would be an exchange from one form of investment to another. Using your money market account to pay your credit card bill though would mean you would have to pay tax on that transaction, so you would probably first transfer money to your checking account and then write a check for the credit card bill, but you wouldn't have to.

There two big issues that I can anticipate with this new type of tax. First issue is how to treat the taxation of investments made prior to the enactment of the consumption tax. The second issue is how to treat home mortgage interest deduction.

Since investments were made out of after-tax income up until the passage of the new consumption tax, then it would be unfair to tax investment again once the investor decides to cash in on that investment. One simple way of transitioning to the tax is to do an accounting of each person’s net worth exclusive of special tax-free funds. This money would be divided by 10 and be deducted from consumption for 10 years, (10 years is arbitrary but you don’t want to have negative consumption in any year and you don’t want the transition to stretch out forever). So if your net worth is $100,000, then you get to subtract $10,000 from your consumption income for the next 10 years, even if you don’t cash in any of your investments in that period. Of course, you will have to pay tax on all of your investments as consumption when you cash them in some day.

Home mortgage interest deduction would not make any economic sense in this framework, but interest deduction would be very hard to repeal. The logic of interest deductibility probably started with the observation that if you borrow money to make investments and then pay tax on the interest on those investments, then logically you should be able to deduce the interest you paid on the original loan. However, if we are not taxing interest income, we won’t allow interest deductibility either.

If we think of a home purchase as an investment, then both the interest and the principal associated with a home purchase would be fully deductible if they are paid out of checking. However, if you are going to be living in your own home, which presumably you will be, you will have to include an imputed rental value of that home as part of your consumption. This calculation would not be too complicated ― your county could probably estimate it fairly well ― but it would almost completely wipe out the home mortgage interest deduction. In fact, people that own their own home free and clear would have to pay an additional imputed rental value tax that they currently do not pay. I suspect that this might be a sticky issue.

Real Estate Bubble

My wife was listening on the radio to a person who claimed that the current increase in real estate prices was just a bubble that was about to burst. His reasoning was a little suspicious though. He said that only 3 percent of the land was being used for housing and this left 97 percent of the land relatively inexpensive.

Looking at a map of the United States, one could easily see that most of it is relatively empty and the land is probably dirt-cheap. But that commute from Wyoming into the District would be a killer.

The Mayor of River City

Imagine for a moment that you are a resident of a small town called River City. River City is a sleepy little village whose glory days were long in the past and not in the present or near future. But the new mayor has plans to change all of that. He rounds up the locals who would be willing to listen him – five or six of you, and gives this impassioned speech:

My fellow resident of River City: I had the most remarkable dream last night. I dreamt that the Lord came to me and said “Mochaccinos, Caramel Machiatos, Pumpkin Spiced Lattes… they could all be right here in River City."

You know what River City needs? Moonbuck’s coffee! Imagine what a difference it will make if Moonbuck’s brings their wonderful brew to our charming - if underappreciated - little town. Moonbuck’s is everywhere today, even on Moon, why shouldn’t they come here? And when they come, they will bring customers to business district. These customers will come for coffee but leave buying a book from Sam’s Bookstore, a hat from Hilda’s Hats, and maybe even some vinyl flooring from Ned’s Floors.

Oh, I know what you’re thinking, “Why would Moonbuck’s come here when they could go to Garden City down the road? Yes, Garden City with their fancy new homes, their Jaguars, and their BMWs will surely beat out Garden City.” “Not so,” I say. Why? Because, look around you - this is God’s Country! And we can convince the good people of Moonbuck’s that this is God’s Country by chipping in to buy them a nice new place for their coffee house. That would only be neighborly for such a nice new neighbor. And those people in Garden City might as well put a few miles on their fancy new cars driving right here to River City.

You might find the good mayor persuasive. After all, it’s hard to argue with a man who talks to God about Mochaccinos. And a nice hot Moonbuck’s coffee sure seems tempting.

But your libertarian side objects to the notion of subsidizing Moonbuck’s. Why shouldn’t they buy their own shop? And then you answer your own question: because they will buy it in Garden City. Maybe it’s bad to subsidize Moonbuck’s, but it’s bad mostly for Garden City, and you don’t really care.

Beggar thy neighbor

All across the nation, in small towns and in big cities, scenes much like the one in fictitious River City are playing out for real with real businesses and billions of dollars. Mayors and city council try to promote business by cutting generous deals with prized corporations. Instead of expecting these companies to pay into the public pot, they are being paid subsidies out of the public pot.

In the above example, Moonbuck’s was a passive player. But with so much money available for the asking, many companies are demanding deals. It isn’t just sports franchises, but also automakers and chip makers and other big business that are shopping their deals around forcing communities to play a negative-sum game for their business.

Here is an old Inc. article (from 1996) that does an excellent job of explaining the problems with subsidies. The problem hasn’t changed since 1996; if anything it’s worse now. The article mentions a paper by Federal Reserve Bank of Minnesota senior officials Melvin Burstein and Arthur Rolnick that strongly urged that the Federal Government should ban state and local government subsidies to private firms. I actually took a class with Art Rolnick years ago.

If these actions were obviously bad for the cities involved, one could say, “The people get the government they deserve.” But often this public sector entrepreneurial activity benefits their city at the expense of whatever city would have been the first choice city. Cities are locked in a prisoner’s dilemma: if everyone says no to subsidies then every community would benefit, but each community would benefit more if it cheats and the others don’t.

A classic example of the River City scene played out a few month ago in Washington D.C. Washington D.C. got a new baseball team, but they had to promise nearly a half a billion dollars in subsidies to Major League Baseball. Here is an old article from last November that explains the deal Washington D.C. made with Major League Baseball. Washington D.C. is not wealthy, and could ill afford to pay money for such a luxury. But the big loser was Northern Virginia. In a free market, the baseball team would have probably come to Fairfax County, the wealthiest county per capita in America with more than one million residents. Fairfax County has twice the annual income as the District, and the District is only 35 miles away from Baltimore, the nearest baseball city. These two reasons would have been big factors in deciding where to put the franchise. But Fairfax County refused to play ball with Major League Baseball.

When mayors dip into the public pot to subsidize private, for-profit, corporations, they are violating free trade within the nation. I agree with Burstein and Rolnick that it should be against the law: public money should be used for public goods. However, who would pass a law against a mayor? His own city would never do it. His state might not either since they might not mind if their biggest city’s mayor beggars the cities of other states. The Federal government has little jurisdiction over mayors. However, Article I section 8 of the U.S. Constitution gives Congress the right to regulate commerce between states, and that might be the legal foundation for allowing Congress to declare such beggar thy neighbor actions illegal. I think this is an action that is long overdue.

Sure, I’ll take my little boy to see the Nationals in the District. We can travel the 15 miles to the District; we can just ride the Metro train. And we will get to see a part of the District we’ve never seen before, (I’m not that thrilled). And I doubt my son will care too much if he cheers the “Washington Nationals” instead of the “Fairfax County Slugs.” But sometimes I think, “Maybe baseball might have been just two miles from my home.” That would have been wonderful.

Indian Call Center Employees Get an Earfull

Trin! Trin! The phone rings, and Stephanie (an alias used by the call center employee taking the call) has 20 seconds to get ready with her headphones and chant her opening script.

"Thank you for choosing *** (the name of the company). My name is Stephanie. How may I help you?"

Guess what she hears in response? "Oh my God! My call has been routed to India. Hey poor girl, do you understand English?"

Stephanie replies, " Yes ma'am, I understand English, how may I help you?"

To this, she gets a rejoinder: "I can't access my Internet. Do you know what 'access' means? I am sure you don't! 'Access' means to approach, to enter or exit something. Like access to the Internet. Did you get that?"

Exasperated Stephanie still maintains her cordiality and says: "Yes ma'am, I understand and I am here to help you out with this."

To which she gets the answer: "You Indians are so cheap. You people are taking away our jobs. You work for less money. How much do you get? 10 dollars per day? Just tell them to pay you as much they pay to somebody working in the US and see how all outsourcing will end."

Unfortunately, the caller's problem was very unusual and Stephanie had to consult someone. She politely asked the caller to hold on until she could fetch some help from her supervisor.

The caller was in a bad mood and started all over again. She said, "Oh! I had forgotten that you are an Indian. You guys are not only cheap but also dumb. Go seek help. Go learn something. What can I do, my call has been connected to an Indian. I cannot degrade myself anymore. I will call again and pray that I get a sophisticated American call center executive online next time."

With these lines the caller hung up.

This account comes from a rediff article written by Anubhav Arora and Vivek Kaul. Read the whole article.

Abuse of this sort is unacceptable. Unfortunately, many workers in Indian call centers are reporting similar abuse. Here is a recent Washington Post (free registration required) article by Rama Lakshmi (link via Sepia Mutiny) that gives another account of an Indian call center employee, Rohail Manzoor (who is shown standing in front of a rather impressive building):

" 'You Indians suck!' an American screamed on the phone," recalled a soft-spoken Manzoor, 25. "He was using a lot of four-letter words, too. He called me names left, right and center."

Call center executives and industry experts say abusive hate calls are commonplace, as resentment swells over the loss of American jobs to India. According to a survey in November 2004 by an Indian information technology magazine called Dataquest, about 25 percent of call center agents identified such calls as the main reason for workplace stress. The survey said the calls often were "psychologically disturbing" for workers.

"When some callers are unhappy with the service, their frustration often turns racist," said Amit Narula, 25, a call center agent. "They would say, 'This is why you should not handle our work. Indians are not good enough.' "

As a result, the call center workers are feeling stressed. Manzoor said he developed high blood pressure and chest pain in November, and quit his job. But in two months, he was back in another call center processing credit card applications for an American company.

Americans should realize that outsourcing such jobs is inevitable and actually very beneficial to Americans. Indian call centers do not take away American jobs, they provide us with a service we could not have otherwise. Without the opportunity to use the inexpensive labor from India, we would either have to rely on written instructions exclusively or we would have to talk to the computer voice activated system. I really hate talking to the computer voice activated system. Computers voice activated systems are so frustrating: if you punch one number incorrectly, you have to start all over again.

Perhaps this is the way these call centers can deal with the obnoxious Americans (who I would hope are a small minority). They could say, “Would you like to talk to our service center in America?” If the caller says “Yes”, he or she would be routed to America — to a computer voice activated system. After 15 minutes of going in circles, the caller will be glad to talk to a human being.

There is a humorous side to the Washington Post article. One of the call center workers, Ankur Jaiswal, 22, pretends to be American, (which is standard practice and maybe a mistake). He says that some suspicious Americans will start quizzing him.

Let’s see, how might that quiz go:

“I want to talk to an American!”

“I am from America, ma’am.”

“Oh, yeah? Then tell me who was the first President of the United States?”

“George Washington, ma’am.”

“Who wrote the Declaration of Independence?”

“Thomas Jefferson, ma’am.”

“Who’s buried in Grant’s Tomb?”

“Ulysses S. Grant, ma’am.”

“You knew all that? You big phony, I knew you weren’t American!”

However, there is no need for an American to quiz the Indian call center employee. If the American shouts abuse at the call center employ and he or she is still polite, the American knows that the employee is not another American. This is incredible thing about this verbal abuse: the caller is acting like she wants to protect the job of some person she has never met, but she is treating another human being that she is talking to like a dog.

The sad thing about the abuse that Americans are giving these Indian call center workers is that these jobs are a way for Indians to enjoy the economic freedom and independence that Americans take for granted. Here is the summary quote from the Washington Post (free registration required)article by Rama Lakshmi (link via Sepia Mutiny):

"I would be mad too if somebody took away my job," said Vidya Ramathas, 24, who works in a Bangalore call center servicing an American Internet company. "I love my job. It has brought me freedom. I moved out of my parents' home. I don't ask them for money anymore. I do what I want to. I don't ask for their permission."

Ramathas, whose uses "Amanda" as her phone name, added: "In that sense, I am like an American."

He Only Drinks American Beer

I was standing in the checkout line in my local supermarket when the old man behind me began quizzing me.

“What kind of beer is this?” he inquired. Before I could answer, he positioned the box so he could read the label.

“Bass Ale? Where does that come from?”

“England,” I responded.

“England? What does it taste like?”

“It tastes like…beer.” I admit that wasn’t very helpful. I admit I wasn’t really trying to be helpful.

“I only drink American beer,” he announced.

“When I was in Germany, I tasted the German beer and it was pretty good. If I lived over there I suppose that I would drink it,” he said.

“I think it tastes the same over here,” I said to him.

He stared at me as if I were some kind of idiot.

Why Not Two CIAs?

Sometimes I get an idea that I think is very good, and a day later I no longer think its so good. Here is an example of post and a quick revision. Other times, I have an idea that I think is good at the time but later I think maybe that its better than that. An example might be my idea for a new kind of exercise bike. I love that idea; I would buy a bike like that. Another example might be my analogy that I made in a post two days ago about choosing your own budget. I tepidly liked the idea but I thought that it would not help make government more efficient because we don’t get to choose a better government technology:

However, the main issue I have with this proposal is that it would not address the fundamental problem with government spending: we don’t have a plan B. In the free market, if I don’t like the information the Washington Post provides, I can always buy the New York Times. However, if I don’t like the information the CIA provides (and who does?), then I cannot opt to spend my taxes on CIA2. We can hope the government reforms CIA1, but CIA1 is the only choice we have, except for not having a CIA altogether. Free markets duplicate organizations so that if one becomes dysfunctional, we can shift to a more efficient version. We never get that choice with the government. So while I kind of like the idea of having some choice about how my tax dollar should be spent, unless I actually get some choices, all I have is Hobson’s choice.

In the quote, I made the analogy between being able to choose between two different newspapers for our news and choosing between two different CIAs for our intelligence information. When you think about it, these are very analogous organizations. The ideal CIA would be like a great newspaper that just published its information with a secret or top-secret classification. The problem with the CIA is that a lot of the information it sends out is wrong. If the New York Times regularly prints garbage information, other newspapers will instantly show the world that the New York Times is wrong, and no one besides the New York Times suffers from the error. Unfortunately, we only find out that the CIA was wrong after we bomb the Chinese Embassy in the former Yugoslavia or after we invade Iraq and find no WMD’s.

So here is the obvious question: "Why not have two CIA's?" If we had a CIA1 and a CIA2 we would have two chances of getting those pieces of information right. News is too important a commodity to rely on only one newspaper and intelligence for the leading superpower is too important a commodity to rely on only one source as well.

However, there is a more important reason why two bureaucracies are better than one. With two bureaucracies, we have two chances of having at least one functional bureaucracy. Some bureaucracies degenerate into dysfunction. Reforming them is nearly impossible unless you are willing to fire almost everyone.

Bureaucracies tend to reinforce a particular groupthink. People who don’t exhibit that groupthink aren’t recruited into the bureaucracy or get discouraged within that bureaucracy and leave. It happens in the corporate world as well, but there the disgruntled employees can form their own firms and prove the old groupthink wrong. In government, there is only one groupthink per “industry” so the technology never improves.

We might be able to use the idea of “dueling bureaucracies” in other government agencies besides the CIA. However, an idea like this would need a proper trial. The CIA gives that opportunity for experiment. There is no better time to start the experiment than right now.

Back to homepage.

Also, check out my "Chocolate Shop," my favorite posts.

Chocolate Shop

• The Exercise Bike


• He Only Drinks American Beer


• Lottery Technology


• Free Food: Why Do Americans Love It?


• Too Much Ravioli


• Optimal Exorcisms


• Thanks, Amit

Strange Taxes and Rent-Seeking in India

Amit Varma, that most excellent blogger from India, found an interesting commentary from the India Express about rent-seeking by industrialists in India. Gautam Chikermane writes of these rent-seekers:

Death is the only way — this thinking, this attitude, this whole approach has to die. Come budget time and for decades now, we have been seeing one private interest group after another approach the finance ministry with its list of demands — demands that help that industry become more profitable, either at the cost of another industry or consumers. For decades, the finance ministry has been accepting, rejecting, modifying these demands.

A little later on in the article, you get an idea why industrialists in India are such avid rent-seekers. The government chooses to raise revenue from a rather bizarre collection of commodities. He gives the examples of naptha imports for the petrochemical industry and synthetic fibers imports for the textile industry. In general, the article gives the impression that India tries to raise a sizable amount of revenue on intermediate goods, and specifically imported intermediate goods. The motive for rent seeking in such an environment is very strong.


Mr. Chikermane recognizes that rent-seeking behavior is damaging, but he blames the industrialists for being greedy and the government for listening to them:

[W]here does “national interest” fit into an argument that demands lowering of duties? What do any number of “lakh workers” have to do with a sector being freed from price control? Why lean on consumers when it is clear that either way they will lose (an adverse price impact will be a pass-through and a favourable one pocketed)? And while the organised industry seeks concessions, individuals are unable to look beyond deductions, exemptions, [and] rebates.

What Mr. Chikermane fails to understand is that a poor choice of things to tax can lead to serious problems in the economy. Most, perhaps all, economists would agree that taxing intermediate goods is a very poor choice of things to tax. You raise very little revenue but you put an industry in turmoil. In the worst case, you merely put the firms out of business and raise no revenue at all.

Faced with devastating taxes of this sort, renk-seeking becomes a very profitable enterprise. The talent of the industrial class is spent in persuading the finance minister instead of improving technology and doing business. Also, these taxes produce rent-seekers in pairs: one who is hurt by the tax and one who is protected by it. These antagonists fight a classic zero-sum game in their attempts to persuade the finance minister.

Why would India choose such inefficient taxes as these arbitrary taxes on particular intermediate goods? Mr. Chikermane indicates part of the motive. Raising the taxes paid directly on individuals would be unpopular with consumers. If all taxes are equal, let the industrialists pay them, and then the consumers won’t have to bother with them. The problem is, not all taxes are created equal. Taxing intermediate goods creates an enormous excess burden on society, and contributes to poverty.

Mr. Chikermane ends his article with an appeal to the government:

Exactly thirteen years ago, in February 1992, Manmohan Singh presented a budget that unleashed the creative energies of Indian business. P. Chidambaram can take this one step further by changing the theme of Budget 2005 to “wealth creation for the individual” and unleashing that far greater, far widespread, far reaching potential.

I would agree with that sentiment and would hope the current Prime Minister Manmohan Singh would be wise enough to see the destructiveness of these intermediate goods taxes. He should shift the taxes off of industry and onto consumers. It might not be popular with consumers, but just imagine what India could do if its industry were to be unleashed!

Here is another article via Amit Varma that suggests India should scrap the current taxes system and got to a Value Added Tax (VAT) which is essential a national sales tax.

Here is a link to a blog (MadMad) via Amit Varma that rails against possibly the stupidest tax I’ve every heard. Imagine a tax of 20 cents on withdrawals of cash of $200 but no tax on withdrawals of $100. How much tax do you raise? You inconvenience a lot of people though. Apparently there is such a tax in India.