The Newsboy Problem

Back when I was in business school we were given The Newsboy Problem.

In a nutshell, the newsboy can buy papers for 33 cents and sell them for a dollar.  He averages selling 100 papers a day.  So how many papers should he buy?

Life is easy if every day he can sell exactly 100 papers, no more, no less.  But life is rarely easy.  1/3 of the time he sold exactly 100 papers.  1/3 of the time he sold 80 papers.  1/3 of the time he could have sold 120 papers.

If he is cautions and buys 80, he will never have any waste.  If he buys 100, he will sell them for a nice profit 2/3 of the time and occasionally lose some inventory.  If he buys 120, he will have maximum profit on the good days and maximum losses on the slow days.  What's a newsboy to do?

As a former newsboy and current State Rep, I'm again facing the same problem.  Our challenge in Ways and Means is to forecast Revenue for the next two fiscal years starting July 1, 2011.  Revenue comes from multiple sources and we have data going back 10 years.  But driving full speed ahead and just looking out the rear view mirror is not always safe.  So we also had three days of testimony from various experts to try to polish our crystal ball.

The dilemma for me is moral, not mathematical.  Do we vote the number that is most likely, 50/50 chance of up or down?  Do we take a cautious approach to make sure that we don't overspend during uncertain times?  Do we take an aggressive approach and say the recession is over and the economy will improve more than it did last year?

• 50/50 means a 50/50 chance of new tax increases after the budget is passed
• Cautions means cutting back important programs that nobody wants to cut
• Aggressive means risking more overspending, the problem we were elected to solve

The Committee took the 50/50 approach, with the understanding we will update the forecast each and every month.  More work for us, in addition to our normal activities of hearing and voting on proposed tax law changes.  But it's the right thing to do.

As for the newsboy, the long answer is at:

http://en.wikipedia.org/wiki/Newsvendor

The short answer is 107

The Golden Eggs

Remember Aesop's fable about the goose that laid the golden eggs?  The greedy owners killed the goose because they wanted all the gold that must have been inside.  But it was just an ordinary goose.  Then they had nothing.

I had an example of that last week in committee hearings.

One of our jobs in Ways and Means is to determine a realistic revenue projection for the two fiscal years beginning July 1, 2011.  So for the past week we heard testimony from all the agencies that contribute revenue to NH, and looked at their 10 year history.  Thursday we heard from the Lottery Commission, which has contributed over $260M in revenue in past years, but is down to under $240M this year.

One disturbing comment from the Commission was the "very unhappy players" who have just cashed out a jackpot at the lottery offices.  In the past, they would walk away with all smiles.  Now, in addition to Federal withholding (which everyone expects), an additional 10% is taken out by the State of NH on the new "Gamblings Winning" tax.  This 10% never comes back.  Unlike the Federal tax, it is not offsettable by gambling losses, and applies to everyone.  That includes NH residents who hit a jackpot in Connecticut, and Massachusetts residents who bought a NH lottery ticket over the border.  These winners felt like losers.

So now we hear stories of how border towns have had their lottery sales dry up, not to mention the associated sales of gas and convenience store items, and perhaps a short trip as a tourist into our fine state.  A tax that was supposed to raise an additional $4M has actually lost $2M.  And that's just on the lottery side.

Scratch tickets are the most popular lottery item, about 69% of the sales over the last 10 years.  NH has a decent payout on scratch tickets, ranging from 60% on the dollar tickets up to 74% on higher denominations.  Nice golden eggs for everyone.  But two years ago the Legislature imposed this new 10% tax, which is killing the goose.  Those irresponsible legislators were mostly voted out office, but their legacy remains.

My fellow members on Ways and Means were disappointed to hear all this, and one of our members has sponsored House Bill 157 to kill this tax effective July 1, 2011.  The bill has been assigned to our committee, and a public hearing will take place.

It can't happen too soon.

Guns 'N Roses

January 5 was the official start of the 2011-12 legislative session.  Nice flower display at the podium, followed by voting on House rules allowing guns in the Statehouse.

 

Got a call the other day from Nick Pappas of the Nashua Telegraph regarding my timely letter on the topic.  He decided to publish it:

 

Letter to the Editor, Nashua Telegraph, January 5, 2010

 

As a newly elected state representative, I’ve learned that House decorum requires gentlemen to wear jackets and ties.

 

After reading the Dec. 30 headline on Page 2 of The Telegraph, “NH GOP wants to allow guns in Statehouse,” I had images of us coming to work in Bat Masterson outfits with pearl-handled revolvers in our belts and perhaps a cane and derby hat.

But that is not the case. Although the 1889 state constitution fixed our annual paycheck at $100, our personal dress code evolved into modern fashions. Speaker William O’Brien’s proposal would allow all citizens, provided they had a police-issued concealed carry permit, to keep that right while at the Statehouse. No exposed guns.

The proposed rule seems perfectly reasonable to me.

Rep. Bill Ohm

Nashua

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