Graph of Long Term Unemployment

Okay, this scares me. here's a graph from an article in the New York Times last week concerning long term unemployment:

The number of long term unemployed is spiking about three times higher than it has been for the last thirty years. It is much higher than the recession of early eighties, and that one was rough. As a percentage of the workforce, it works out to be about 2.5%.

The economy is beginning to show signs of improvement, but not quickly enough for these folks. Many of them are subsisting on unemployment benefits, and those benefits are starting to run out.

The old saying is that necessity is the mother of invention. A lot of people are going to have to be very creative to eke out a living for the next few years.

The CARD Act or Building a House of Cards

The Credit CARD Act went into effect this week, changing the rules for banks and other credit card issuers. One of the changes is that they will now have to put a statement on the front of your monthly bill, telling you how long it will take you to pay off your outstanding balance if you make only the minimum payment. I imagine that some people will get a notice that reads something like this:

“Your estimated life expectancy is 24 years and 7 months from your statement date. Four months later will be your last payment on the outstanding balance.”

Seriously, one of the major provisions of the legislation is that it prohibits the practice of universal default. Under the old rules, if you made a late payment on one bill, your credit card could raise your interest rate on the existing balance you had with them.

Universal default is one of those things that really hack people off. “I’ve never made a late payment to you guys,” the cardholder would cry out. “Why are you raising my interest rate?”

“Simple,” the bank would respond. “A) If you skipped a payment on one bill, we could be next. That puts you into the riskier class of customers who get charged higher interest rates. B) Because we can.”

I’ve never quite figured out the logic behind universal default. Oh, I get that once you start delaying payments, you are a riskier customer. The thing is, it looks to me like raising rates on an existing customer sets up a feedback loop. If you’re strapped for money, cranking up the interest you’re paying makes you more likely to default, not less. “Every month I pay, but my balance keeps getting bigger. Fine, I’ll just stop paying altogether. You want to hurt my credit rating, go ahead.”

I assume that the credit card companies have run the statistical models that tell them that even if they push some customers into default, the higher interest charges on the remaining customers more than make up for it. Or maybe their experience is that once the average customer misses a payment on any card, they only make a couple more payments on the other cards before they file bankruptcy, no matter what the interest rate is. In that case, you better make your money while you can.

Regardless, universal default is now banned. The credit card companies cannot raise your rate on existing balances just because you are late on another card. What they can do, however, is drop your credit limit with no prior notice.

To me, this looks like a fight over allocating risk management duties, between the guy who borrows the money, and the guy who loans it.

In the history of credit, there have been swings over time in terms of who bears the risk of default. For example, in the eighteenth and early nineteenth century, default risk was more evenly spread between borrower and creditor. Sure, if you stopped paying on your debts, your creditors had to write off the loss. But they in turn could stick you in debtor’s prison. That seems like a pretty fair tradeoff to me.

With the advent of modern credit cards, more of the default risk was shifted over to the creditor. All that backs up a credit card is your promise to pay it off. If you are an honest man, your word is your bond. When I meet one of those guys, I’ll let you know. Seriously, I don’t know too many people who would forego using a credit card to get something they wanted, just because they might have trouble paying off the debt. After all, what’s the worst that could happen? Your credit rating might get dinged. Most people will enjoy the good stuff now, and worry about that tomorrow.

With all of the risk on the part of the creditor, credit standards were naturally higher. It used to be much more difficult to get a credit card. As the pool of available credit expanded to include riskier borrowers, the banks undertook tactics designed to shift some of the default risk back onto borrowers. Tactics like universal default.

Now that Congress has pushed the pendulum back in the other direction, look for credit standards to tighten up again. Also, some of the benefits given to good credit risks, like rewards points and no annual fee accounts are probably going to fall by the wayside.

For our society as a whole that’s probably a good thing. Learning to live within your means isn’t a bad idea. In the meantime, I’m going to keep paying off my cards in full every month.

Two Views of Dysfunction

I ran across the Werking Gerl blog the other day. It's like staring at the scene of an accident. You know you shouldn't look, but you just can't pull your eyes away. The blogger is a free lance writer based in Brooklyn. Starting last November she lost her regular job, and decided that the solution to her problems was to rely on the New York City public assistance system (AKA welfare). Unsurprisingly, the city's bureaucrats have not leapt to provide the woman with the assistance to which she believes she is entitled.

If you start at the beginning, and read forward in time, it is like watching a descent into madness. Her tone gets increasingly strident with every encounter. One of the things that interests me is that even when she was gainfully employed, she was already drawing food stamps. That tells me that from the very beginning, the blogger has been drawing more off the system than she has been paying in taxes.

Of course, it is her right to draw food stamps, and it is also her right to have her rent paid by the city. Once you've grasped that basic concept, her outrage becomes much more explicable.

Then there's Filthy Richmond. Now this is just hilarious. This blogger puts the fun in disfunction. As a matter of fact, I think I did this girl's taxes.

Adventures in Tax Preparation, Part II

At my day job, people know I do taxes for H & R Block. The number one tax question they ask me? “How does that other guy we work with get such big tax refunds? He said he got over $7000, and he makes less than I do, even with my side job.”

The short answer to this question is that the other guy has kids, but it is actually a little more complicated than that. To try and explain it, I run out some numbers for people.

Let’s assume that the other guy (we’ll call him TOG for short) is married, with two small children. We will further assume that Mr. and Mrs. Tog have a combined income of $26,000 between them. We’ll enter that $26K onto the front page of their Form 1040. So far, so good.

Now we’ll turn the Form 1040 over to page two, which is where all the real action is. First, the Tog’s will probably take the married filing jointly standard deduction of $11,400. Then the two adults and two children generate four personal exemptions of $3650, or a total of $14,600. You subtract the standard deduction and personal exemptions from their gross income to arrive at the Tog’s taxable income, which is $0. The Tog’s do not owe any Federal income tax.

So now, let’s start calculating the size of their refund. Right off the top, they get back any withholding taken from paychecks throughout the year. For the purposes of this illustration, we will use a figure of $1700. It could be more, could be less, depending what they set up with their employer. Whatever they withheld, they’re getting 100% of it back. Remember, they owe no taxes.

Next, we add in to their refund the Making Work Pay credit. This was part of the Obama stimulus package for 2009 and 2010. The Tog’s are married, so even if only one held a job, they still get $800.

Now we’re to the part where the children really come into play. If they actually owed taxes, they would be eligible for the Child Tax Credit of $1000 per child, which would wipe out the first $2000 of taxes owed. Since the Tog’s don’t owe any taxes, they don’t get the Child Tax Credit. Instead, they get the refundable Additional Child Tax Credit of $2000.

But, as the infomercials say, wait, there’s more! The Togs are a low income couple, qualifying for the Earned Income Credit. The EIC is a phase-in, phase-out credit, increasing to a plateau as you earn more income, than gradually reducing to zero as you earn a higher income. At $26,000 of earned income (note, the EIC works on earned income, not taxable income) you get about $3000. Fully refundable, of course.

That just about does it. Let’s tote up the board, shall we?
Withholding: $1700
Making Work Pay Credit: $ 800
Add’l Child Tax Credit: $2000
Earned Income Credit: $3000
Total: $7500

See, it wasn’t that hard to figure out how the Tog’s got such a big refund after all. Processing the paperwork is a different matter, of course which is why there is a market for paid tax preparers.

The thing that jumps out at you is how much of that money wasn’t the Tog’s in the first place. Even with no withholding, they would have received $5800 from the Federal government, a 22% boost in their income. These are straight transfer payments, going from people who actually pay taxes into the pockets of people who do not. Classic redistribution of wealth.

There are those of us who are concerned that the US is going to turn into a socialist state. But from the point of view of someone who prepares taxes, it has already happened.

Adventures in Tax Preparation

Whoever came up with the name homo sapiens, “thinking man,” for our species clearly never worked as a tax preparer. Actual conversation:

Tax preparer: “How do you want to receive your refund? We can do direct deposit into your checking account, or at a higher charge we can cut you a check.”
Client: “I want a check.”
TP: “Are you sure? You told me you wanted to keep your fees as low as possible. We charge you $20 for a check. Direct deposit is free.”
C: “I’ve always gotten a check.”
TP: “Let’s work through this. If we cut you a check, you have to come back to this office to pick it up. You’ll then drive over to your bank to deposit the check. With direct deposit, the money is placed directly into your account. And we’re going to charge you $20 for putting you through the extra effort.”
C: “Okay. But I still want to get a check.”

At times like this I wonder how we ever managed to become the dominant life form on the planet.

What is interesting about this situation is that tax preparation firms are sometimes attacked for having “predatory pricing.” Like charging $20 to cut a refund check for a customer. But in the face of less expensive alternatives, some clients are going to choose what they are most comfortable with, even if it costs them extra.

One of the characteristics of living in a free society is the number of choices you have. Intrinsic to that is the right to make bad choices.

The Two-tier Economy

A sales rep I do business with called me the other day. He asked the standard icebreaker question for these kinds of calls: “How’s business going for you guys?”

I told him that things weren’t too bad. Our order book was pretty solid, and after the restructuring we did last year, it looked like we would be in the black, even at the lower recession level of business we were seeing. I felt like our business was as secure as any could be in these days of whirlwind change.

I expressed some sympathy for the salesman. With commission based income, he was probably hurting more than I. He assured me that he wasn’t doing too badly. His sales lines were diversified, and while some sectors were hurting, other sectors had picked up the slack.

Although the recession may have ended, things certainly have not returned to the pre-recession level. Good times are a long way away. Yet, here we were, both of us fairly comfortable and secure in our employment.

I think what has happened in the last six months is that the existential threat has gone away. Last year at this time, the people I talked to in business were all worried, wondering if the next round of cutbacks was going to hit them. We acted as if the sword of Damocles was hanging over our head.

Now that the decline has stopped, and things have improved (if only marginally), I don’t feel that immediate threat any more. We may not have enough work to need new workers, but there is plenty of work for those of who are left.

In the news, they call it a jobless recovery. I call it the two-tier economy.

In the top tier are the 90% of us who still have jobs. Bonuses, commissions, and overtime have been reduced, but we’re still standing. People in this tier are going to the movies, going out to eat, shopping in the stores. Life is back to normal, although maybe with a little less reliance on credit and a bit more saving.

Then there are the other 10%. These are the people who worked for businesses that failed, or plants that closed, or were laid off in cutbacks. For these folks, no possible reduction in lifestyle is going to be enough, because they no longer have an income. If the job situation doesn’t turn around, over time the people in the lower tier are going to lose everything. As their unemployment benefits run out, these people are going to start getting desperate. Assuming they’re not already desperate.

I don’t know what the solution is to the predicament of the people in the lower tier. I do know that I’m going to do what it takes to stay in the much larger top tier.