Sunday, January 30, 2011

Bundling versus Unbundling

I ran into a terrific example of the concept of economic bundling last week.

Every year I go on a ski trip, arranged by a ski club. When I started going on club trips (a long, loong time ago), the process was remarkably simple. You wrote the club a big check, and you were told when to show up at the airport. Once there, the trip leader handed you an airline ticket. You deposited a massive amount of gear at the gate (skiers travel with more equipment than your average Himalayan expedition), and got on the plane.

When the plane landed, you got on a bus that took you to the resort. After check in, you got your lift ticket for the week. Invariably, several dinners were included in the price of the trip, so you would get together with other members of the club and swap lies about how adventurous you had been.

The dominant feature of the pricing was that it was all inclusive. That is, you paid one fee, and everything was included. Put another way, all of the various services had been put together in one bundle by the club.

This year's trip provides quite a contrast with those earlier experiences.

First, I had to make my own airline reservation, separate from the payment for the club trip. I also had to pay an additional fee to cover the bus transfer from the airport to the resort. Several years ago, the lift ticket had been broken off from the rest of the trip package. You select the number of days you want to ski, and pay for those apart from the main trip fee.

When I bought my airline tickets, I thought I had a pretty good deal. That illusion stood until I got to the airport with all my luggage, and had to pay baggage fees, which were equal to 30% of the original ticket cost. Since the airlines no longer serve food on the flights, we bought something at the airport to eat on the plane. The trip price also included only one final dinner at the end of the week. There were other group activities planned, but they were pay as you go.
All of the discrete pieces of the original trip package had been separated, or unbundled, from each other.

The advantage of unbundled prices is the additional freedom and flexibility it offers the individual. When prices are bundled, you pay for everything, whether you use it or not. You don't like airline food? Tough, you still have to pay for it. Renting your equipment to ski? You don't get to use all of the baggage allowance built in to the ticket price. You like to rent a car and drive yourself to the resort? The other people who are riding the bus appreciate your subsidizing their ride. So unbundled prices give you a chance to save some money.

Bundling prices offer a couple of advantages, however. First of all, it is less complex, both for the buyer and the seller, and complexity costs money. If you use bundled prices, you only have to pay one time, and there is only one revenue collection point for the seller. In the context of my ski vacation example, bundling has another, even larger benefit. By grouping together a number of individuals, the club was able to get discounts by buying in bulk. A batch of wholesale purchases bundled together are going to be cheaper than the same set of purchases made at the retail level.

For my trip this year, I had more options, but the sum of my individual choices cost me more than what the old group price would have been. For once, I can actually put a price on freedom.

Wednesday, January 26, 2011

Tax Tales

If you ever want to know how loose the average American’s connection to the concept of honesty is, you just have to do taxes for a while. Most folks will say anything to get a bigger refund. What’s even more amazing is that they expect the person preparing their taxes to collude with them. Some examples:

“Off the record, I did air conditioning repair work last year. But I had to buy my tools all over again, because somebody stole them, so I didn’t hardly make enough money to talk about. We don’t have to report that, right?”
That would be a Schedule C business, and the excess of revenue over expenses has to be reported as income. And yes, you do have to report it, especially when you have just told the tax preparer that you have a side business.

Or another:

“I was separated from my husband in 2008 and 2009, so I filed as Head of Household. But my husband I got back together a few months ago.”
So you were married on December 31. You and your husband will have to file as Married, either Jointly or Separately. If you choose Married Filing Separately (MFS), you will lose the Earned Income Credit, along with most of the refund you got last year.
“We only got back together a few months ago, and he doesn’t want to file with me. Can’t we just forget I mentioned him?”
You can’t unring a bell. You can’t change your story after learning the tax consequences. The good news is that you get the share the joys of connubial bliss again.

Or this one, taken over the phone:

“I get $8000 a year in disability payments. Someone else claimed me on their tax return. How much of his refund belongs to me?”
If he provided more than 50% of your support, he can claim you as a dependent, in which case his refund belongs to him. If he did not provide half your support, and you knew he was going to claim you as a dependent, you have both committed tax fraud. What did you say your name was?
“*click*”

Monday, January 17, 2011

Martin Luther King Day

Watching the news this morning, there was a story about school districts that are not taking off Martin Luther King Day as a holiday this year. Because of unusually heavy snowfall's this year, these school districts are using MLK Day to makeup for snow days they have had to take.

Outraged over the lack of reverence shown to the memory of Dr. King and the civil rights struggle, it was reported that there were calls for parents to pull their children out of school for the day. These calls for a boycott were led by...wait for it...Al Sharpton and Jesse Jackson. There's a shock for you.

Somehow, I don't think that the legacy Dr. King wanted to leave was that it is okay to skip school. Much of the civil rights struggle was about gaining access to education. You know, the whole Brown v. Board of Education thing.

The Reverends Al and Jesse could have campaigned for special class sessions on civil rights on MLK Day for schools that were in session. Instead, they argued for a boycott of education. Maybe it is just me, but the priorities seem a little screwed up.

Thursday, January 13, 2011

Hit the Ground Running

I read an article on the Motley Fool website the other day that referred to the “Red Queen” economy. In Alice in Wonderland, the Red Queen is the one who says you have to run as fast as you can just to stay in place. If you want to get anywhere, you have to run faster than that.

In the Motley Fool article, the phrase “Red Queen economy” was used to describe deleveraging in the face of falling asset values. Normally, deleveraging, or paying down debt, increases your net worth, because you still own your assets, there is just less of a claim on them by the bank. If asset values are falling, however, you can pay down debt and still go under water, with your equity less than the remaining debt. You have to run as hard as you can just to stay in place.

I thought it was such a good metaphor that I’m going to try and use it in the area of work skills. When I started my career, back before globalization had taken hold, and at the start of the information technology revolution, it was possible to learn one set of skills, and use those skills for an entire career, oftentimes at the same company.

Early in my career, I met a man who was a draftsman. In his fifties, he had spent his entire adult life making drawings on a drafting board. When times were slow, he was laid off. When business picked up, he went back to his drafting board.

He had done basically the same job for the last thirty years. In the 20+ years since then, he would have had to reinvent his skill set twice to stay employed. First, he would have had to master computer aided drafting. A few years later, mastery of three dimensional modeling software. That's two reinventions of the job, for a field that had been the same for the previous fifty years.

In today’s economy, whole industries are created and wiped out in near record time. To stay ahead of this wave of creative destruction, you have to be upgrading your skills all the time. This requires a couple of judgment calls on the part of the skill seeker. First, you have to place a bet on what skills are going to be in demand. Second, you have to acquire those skills.

Formal education can only get you so far. You also need to find ways to sharpen and deepen new skills acquired in the classroom. To keep yourself employable, a necessary step is to pick up some experience, as well as education.

In the meantime, you have to continue performing in your current position. Run as fast as you can just to stay in place.

Like the survivors in the movie Zombieland, there are rules for surviving the Great Recession. Rule number 1: Cardio.

Tuesday, January 11, 2011

Sarah Palin and Gabrielle Giffords

Everyone has heard the classic definition of insanity: doing the same thing over and over again, and expecting different results. But sometimes insanity expresses itself by doing something wildly different than what has been before.

The mass shooting in Arizona is a case in point. Interviews with the shooter’s former college professors at Pima Community College have indicated pretty clearly that he was barking mad, but not violent. He was unstable, but there was no evidence of being a danger to self or others. The fact that he was obviously off his rocker was a necessary, but not sufficient prerequisite for what he did. That is to say, he had to be crazy to do what he did, but there are plenty of people who run the spectrum from mentally ill through to pure looney tunes, and most of them don’t bring a loaded Glock to a political meet and greet event.

So we are left with the question: what drove the shooter’s behavior? In these cases, the insanity of the action is defined by the fact that it defies rational analysis. We’re never going to know why he shot all those people, beyond the fact that he was crazy.

There has been considerable commentary expended on trying to connect this tragedy with Sarah Palin. On the web site of her political action committee, there was a graphic that showed a bulls eye over the Arizona congressional district of Gabrielle Giffords. It has been claimed that this somehow incites or condones violence.

This is absurd. I have seen the graphic in question. It is actually a map of the United States with all of the states outlined. There are cross hairs drawn on districts considered vulnerable, because they voted for McCain/Palin in 2008, but elected a Democrat to Congress. If it was a photo of specific congressmen taken through a rifle scope, the idea might have some traction, but it is a graphic of the entire country.

I would say trying to connect Sarah Palin to the shooting of Gabrielle Giffords was crazy but I don’t believe that it is. After all, the commentators airing this theory are, as far as I can tell, diametrically opposed to her on the political spectrum. Trying to discredit a political opponent’s rhetoric by tying her to a dangerous, violent lunatic’s attacks on innocent people? It doesn’t take much rational analysis to understand that course of action.

Wednesday, January 5, 2011

2011 Goal Setting

I let other people make New Year’s resolutions. I do goal setting. I had a lot of success with my goals for last year, hitting the mark on eight out of nine. My targets for the year ahead will be pretty similar to last year’s, with some tweaking around the edges. The objectives fall into three rough categories: personal finance, professional development, and private life.

Personal Finance
Save 20% from earned income. The heavy lifting on this goal is done by salary contribution to a 401K, with accompanying company match. That combination gets me to 15%, with the last 5% done the old fashioned way—not spending all of my take home pay.
End the year with less than $70K in debt. The deleveraging that started in 2010 will continue in 2011. Working against that is my plan to buy a new car before the end of the year. Since I pay off my current car loan in March, every month I defer that big ticket purchase allows me to build a bigger down payment on the new vehicle. Meanwhile, I will continue to make extra equity payments on my home mortgage. The goal of $70 K is actually $10 grand more than 2010’s goal, but I’ll be trading a fully depreciated asset for a new one.
Earn $2000 from outside sources. Last year the target was to earn $2 grand from tax prep with H & R Block. I was only able to get halfway there. If tax preparation isn’t enough this year, I will have to find some other kind of moonlighting gig to take up the slack. Needless to say, my day job comes first.

Professional Development
Take 9 credit hours of graduate accounting classes. With the classes already taken, accomplishing this goal will get me 2/3 of the way towards finishing the prerequisites for a Masters degree in accounting.
Build two new Access databases. One of the classes taken last year was a course in database programming. The student project is up and running, although it still needs some tweaking. The goal here is to deepen and extend that knowledge by building two new projects.

Private Life
Run 60K of road races. I’ve upped this from last year’s goal of 50K. At least one race will be at the longer 10K distance.
Entertain at home at least once a month. This encompasses everything from private dinner parties to blow out barbeques with thirty guests.
Read Proust’s “Remembrance of Things Past.” I’ve only got 3700 pages left to go. In addition to Proust, I’m going to continue with my Shakespeare reading group for at least another six plays.

I keep these goals written on a Post-It note on my desk, to keep them present for all year long. I’ll post on my progress around the mid year mark.