Wednesday, December 12, 2012

Michigan and Right to Work

Michigan recently voted in legislation to become a Right to Work state. This is considered to be a major blow to the unions in the state. What Right to Work (RTW) means is that you can no longer have a closed shop.


A closed shop is an employer where all employees are required to pay dues to the union, usually through payroll deduction. Employees in Michigan will now have the option of opting out of those dues. Proponents of the legislation claim that it will strengthen unions, because the unions will have to prove their value to the members to get dues. This is disingenuous at best.

Opponents of the legislation claim that this is designed to hamstring unions, because the beneficiaries of unions can get a free ride. Once enough free riders weaken the unions, they will fall apart. Then managers can then proceed to oppressing the workers. Almost equally poppycock. It would take an unusually strong willed person to withstand the constant campaign of harassment and ostracism their coworkers will bring to bear, solely to avoid paying union dues. That’s if there is already a strong union in place.

If there is not already a union in place, however, it is much harder to make a case for unionization in a RTW environment. And that is the real overt goal of the legislation. Michigan suffers from one of the highest unemployment rates in the nation, hovering at a little over 9%. It will require investment by businesses to bring that number down.

All of the states compete for business investment, in a way that they do not f or people to relocate. The country is awash in labor. What is in short supply is capital. And nobody is going to build a new factory in a high union environment. It is hard to compete with nonunion states like Tennessee and North Carolina if you have a long history of union work rules and closed shops. That is why the center of gravity of the auto industry has shifted south from the Midwest in the last 20 years. According to economic development professionals, many companies will not even consider a non-RTW state for new factories.

The hope is that with a more business friendly legal environment, Michigan will have an easier time attracting companies seeking to locate new facilities. That’s the business case.

On the political side, labor unions are considered an arm of the Democratic Party. Labor unions supply a lot of the cash and most of the foot soldiers for the Democratic machine.

Improving their chances of getting new business investment, and weakening the political machine of their opponents. I guess for the Republicans, that would be considered a win-win.

Wednesday, December 5, 2012

Special Dividends

I received a notice from my stockbroker this week.  One of the companies in my portfolio has announced a special dividend of $1 per share, payable on December 28.

My first thought was "Woo-hoo!  Found money.  Christmas came early this year, baby."  Then I started to think about the implications of a special cash dividend.

When I read the company announcement in full, one thing I noticed was the timing.  They specifically wanted to do the payout before the end of 2012.  This is because tax rates on dividends are going to go up next year.  Even if the fiscal cliff is avoided by Congress and the President, a special surcharge on high income households will raise the rate from 15% to 18.5%.  If the Bush era tax cuts all sunset, and we revert to the tax rates in place 12 years ago, then dividends go back to being taxed as ordinary income.  For a taxpayer in the 25% bracket, that becomes the rate for dividend taxation.  So if you're going to pay dividends, this is the year to do it.

But a large special dividend tells you something else about the company.  It means they are sitting on a large stockpile of cash, and they do not have a better use for it then returning the profits to the shareholders.  Looking around, the management of the company does not see a lot of opportunities for profitable growth right now.  If they did, they would be  putting the extra cash to work.

I like cash flow as much as the next guy, but in the long run, growing the company is what the stockholders are paying management to do.  So this could be a warning sign that this company's best days are behind it.

Still, I won't lie to you, I do relish the idea of getting a big check in the mail.

Tuesday, November 20, 2012

After the Fall


In the aftermath of the election, there is a lot of soul searching going on among the ranks of the Republican Party.  I am particularly amused by the advice on how to revitalize the Republicans being offered by pundits who would never in a million years be caught dead actually voting for them.  “If the Republicans want to become viable again, they have to embrace the Democratic Party platform.”

Most of the analysis has focused on identity politics.  The Republicans appealed to older, married whites, who are a shrinking share of the population.  The Democrats appealed to single women, African-Americans, Asians, and especially Hispanics, who are a growing share of the population.  So the standard advice is that the Republicans will have to give amnesty to illegal immigrants.  The dilemma for the Republicans is that is they help expand the Hispanic population, and Hispanics tend to vote Democratic, they are hastening their own demise.

I have also noticed that exactly no one has suggested that the Republicans try and expand their appeal to African-Americans.  I think the assumption is that African-Americans will vote as such a monolithic bloc for the Democrats that any efforts to court that demographic are wasted.  If this is true, it would explain why neither party is doing anything on those lines.  Why would the Democrats waste political capital on people who are going to vote for them no matter what?

Personally, I would like to see a shift away from identity politics, and back into the arena of governing philosophy.  The Republicans are the party of smaller government, the party that celebrates self-reliance.  The Democrats are the party of bigger government, the party that celebrates compassion.  Those are pretty clear fault lines.  Properly articulated, I think thet Republicans can make a pretty good case that the government powerful enough to give you everything you want is powerful enough to take everything you have.

Wednesday, November 7, 2012

Hurricane andy, Part II

Recovery from Hurricane Sandy continues to move along.  The last time I looked, power was back on in all of Manhattan, the subways were running again, and utility crews were making inroads on the power loss problems in New Jersey.  Election coverage has completely pushed everything else off the news for the last two cycles.  Still, it looks like gasoline supplies in the Northeast are recovering.  Gas lines are down, although that may be more a factor  of rationing than  expanded supply.

One of the sidebars in the coverage of the storm and the damage it caused has been the climate change motif.  This part of the story is that the storm was exacerbated by man-made greenhouse gas emissions. If we want to avoid more super storms in the future, we have to dramatically reduce the amount of greenhouse gas we put out as a society.

This may very well be true.  Certainly  levels of greenhouse gases in the atmosphere have increased in the last century.  But the people calling for reductions in greenhouse gas emissions are not being honest about the implications of their crusade.

Our society is based on the ready availability of energy, both in the form of electrical power, and as liquid fuels for transportation.  To make major cuts in greenhouse gases, we are going to have to restrict access to both of those.  The idea that we can cut energy usage in half,  simply by replacing all of the light bulbs with compact fluorescents is laughable.  The concept that the government can simply wave the regulatory wand an cars will get double the current gas milage is equally ludicrous.

To really reduce per capita greenhouse gas emissions, half the electrical generating capacity in this country will have to be taken off line.  That is about the amount of capacity powered by coal burning power plants.  Also, we will all have to cut back to just a couple of gallons of gas per week apiece.

If you're paying attention, you'll realize that the kind of restriction of energy use I'm talking about is what New York and New Jersey have been dealing with for the last week.  If tempers were getting short from a temporary loss of power, imagine what will happen to the government that attempts to apply energy rationing to the citizens.

The symptom is the cure.

Saturday, November 3, 2012

Hurricane Sandy

I've been following Hurricane Sandy and its aftermath for the last five days.  Staten Island and portions of the Jersey shore seem to be particularly hard hit.  Rebuilding those areas will take somewhere between months and years.  Flooding seems to be the worst type of disaster in terms of property damage.  Not only will a mass of moving water pull a house off its foundations and reduce it to matchsticks, but the flood waters will also deposit huge amounts of sand and muck.  That all needs to be cleared away, along with the rubble, before rebuilding can even begin.

Manhattan's problems seem relatively minor by comparison.  Pump the water out of the tunnels and subways,   dry out, repair or replace electrical systems, and turn the grid back on.  Unsurprisingly, Manhattan is coming back to normal far faster then some of the outlying areas.

People were patient about the situation for about one day after the storm.  Now the griping has started, and is increasing in volume.  I would hope I have the patience to endure a week without power, but you never know how you'll react until you've been tested.  Here in Tornado Alley, I get annoyed if the power goes off for more than a couple of hours, so I don't know if I would have the equanimity to sit tight for a week with no lights, refrigeration, running water, or flush toilets.

What amazes me is that Andrew Cuomo, the Governor of New York, sent a threatening letter to the utility companies.  He threatened them if they don't get the lights on fast enough to suit him.

What a ridiculous thing to do!  Everything from compassion, to professional ethos, to sound business reasons is pushing the utilities to do the best job they can.  Instead of offering help, the governor threatens to pull their operating permits.  He turned a technical problem into political grandstanding.


Tuesday, October 23, 2012

Caffeine Overdose?

A story making the rounds of the media this week concerns a 14 year old girl who died from cardiac arrhythmia recently. The girl had an underlying cardiac condition, mitral valve prolapse, which contributed to her death. Her death certificate stated that the cause of death was due to caffeine toxicity. She consumed two 24-ounce Monster energy drinks on the day before her death. Predictably, the maker of Monster energy drinks is now being sued by the girl’s family.


How much caffeine is too much?

According to the Mayo clinic, Monster drinks contain 10 mg of caffeine per ounce. This is a little over three times what Coca-Cola contains. A 12-ounce can of Coke has 35 mg of caffeine total. By drinking two 24-ounce cans of Monster, the girl imbibed 480 mg of caffeine. Four cans of Coke would have given her 140 mg of caffeine.

Now let’s compare that to coffee. Brewed coffee contains between 95 and 200 mg of caffeine per 8-ounce cup. McDonalds is on the low end of the range, Starbucks is on the high end. If we choose the average, 24 ounces of coffee would give you a caffeine dose of 450 mg, comparable to what the girl got from twice as much Monster drink.

We are left with the proposition that the equivalent of three cups of strong coffee induced caffeine toxicity in a fourteen year old. This seems a bit of a stretch for anyone except a trial lawyer to claim.

As a result of the widespread media attention, the shares of Monster’s parent company dropped 10% this week.

Saturday, October 20, 2012

What I Want for Christmas


Remember the “You can hear a pin drop” commercials?

When Sprint was installing their fiber optic network in the ‘90’s, the company ran a series of ads where engineers in one city would drop a pin on a table, and another engineer in a different city would exclaim “Really?  That was a pin?”  The point was how Sprint’s network gave unusual clarity of sound.  That was back when everybody used landlines.

Nowadays an increasing number of people do not have landlines, only cell phones.  Now, instead of commenting on how clearly you can hear what is happening on the other end of the line, a phone conversation is more likely to have shouted comments like “What?  Can you say that again?  Wait a second, you’re breaking up.”

I blame a lot of that on the device design.  The old desk phones were designed for clarity of transmission and durability.  You could drop them on the floor (repeatedly) and the sound quality was still good.  The design of a cell phone is optimized for size and weight.  The antenna, microphone, and speaker are all miniaturized.  Sound quality is a secondary consideration.

Still, even though the sound quality is not good, the number of households with cell phones only is increasing.  At some point in the future the phone companies will begin to drop landline service as unprofitably to maintain.

I have an idea of how to combine the quality of a landline with the convenience of a cell phone.  What I envision is a docking station for your phone that will have three functions: a) recharge the cell, b) give the cell better reception through a larger antenna, and c) have a handset with a better speaker and microphone.  This is not much different than my current cordless phones, which is what gave me the idea.

Developing this device should not be much of an extension on current Bluetooth technology.  On the other hand, I don’t know anything about Bluetooth technology, or phone technology in general, which is why I’m not trying to find investors to develop this on my own.

So I’m just throwing the idea out there, and maybe in a year or two I’ll find one of these gizmos under my tree at Christmas.

iPhone compatible, please.

Friday, October 12, 2012

New England Compunding Center

A tragedy is a story where no one wins.


We have a tragedy unfolding with the current fungal meningitis outbreak. So far fourteen people have died as a result of contaminated steroid injections, and over a hundred have contracted the disease. This is clearly a tragedy for them.

The source of the meningitis has been traced back to New England Compounding Center, a pharmacy in Massachusetts that specialized in compounding. Compounding medications is the process of either mixing together multiple drugs, or changing the form of a drug. For example, if you crush a pill into a powder, then dissolve the powder in a liquid to make a syrup, that is compounding. In the case of NECC, they were taking a powdered medicine and converting it into an injectible liquid.

The meningitis outbreak is a tragedy for the owners and employees of New England Compounding Center as well. It is not a big company, and they just announced a recall of all of their products back to the beginning of the year. It is a pretty safe bet that they have ceased operations, and a pretty safe bet that they will not be restarting. Everybody who works there has just lost their job, and the owners have lost their investment in the company. Worse yet, they can all look forward to being called into depositions for years to come.

Now, the people at NECC certainly didn’t intend to start a meningitis outbreak. But due to somebody’s mistake, they could lose everything they have. All of them, including the ones who were off sick that day. I call that a tragedy for them as well.

The doctors and clinics that purchased from NECC are going to get sucked into this mess as well. After the owners of NECC are crushed by the litigation machine that is just starting to warm up, the doctors and hospitals who purchased the steroids are the nearest deep pocket around. They get to look forward to spending years fighting claims on their assets, over half of which will go to the attorneys.

The attorneys are the only ones who will profit from this situation.

I started out saying that a tragedy is a story where no one wins. I might have to refine that definition.

Wednesday, September 26, 2012

NFL Referees

Talent really does matter. That is the lesson of the replacement referees in the NFL.


Now, I don’t normally watch any football, and I’ve heard of this controversy, so I assume everyone else has too. The NFL is in a labor dispute with its referee’s union. The two sides are apparently far, far apart, because the NFL locked out the refs before the preseason started, months ago. To replace the regular refs, the NFL is using replacements from college and arena football.

There is a hierarchy to officiating. You start with grade school games, move on to high school, and then on to college games. In college, there is a whole sub hierarchy, based on the size of the school. Division I schools are the largest, and from what I can gather, most of the officials that referee those games are not crossing the picket line. So the NFL has gone down to the ranks of the referees for Division III colleges to get enough referees for their games.

The result, at least in terms of play, has been a disaster. The replacement refs are not catching or calling cheap shots by one player against another. Without penalties to restrain the players, the level of brutality has been increasing every week. They are also making bad calls on plays. This reached a peak in one of last week’s games, where what the refs called a game winning touchdown was clearly, upon reviewing the instant replay, actually an interception. Even after review, it was still called a touchdown.

The consensus is that the replacement refs lack both the experience and innate ability to referee games played at the level of skill, speed, and intensity of the pros.

The push of modern technology has been to reduce the skill content of work. Think of the cashier in a grocery store. She used to have to be really, really quick at hitting the keys on a cash register. Anybody can be trained to key in prices, but some people had faster hands than others. Being a fast and accurate checkout cashier was a skill, albeit a minor one. Two people doing the same job would be differentiated, not just by training and experience, but by talent.

Now, with bar code scanners, the accuracy is all in the computer. The cashiers are reduced to material handlers. The edge that talent can give you is vastly reduced. That is just one example, but the application of technology to simplify work is well documented. It even has a lot to do with the decline of the middle class. If anybody can do the job, then wage rates decline to the lowest common denominator.

My model for job training is that about 80% of any job can be reduced down to between 50 and 100 subroutines. The goal of training is to teach you those subroutines, and give you the chance to practice them in controlled conditions. After that, you need experience in a job to tell you which subroutine to apply in any situation. That covers about 15%. The last five percent of job performance is attributable to talent. Talent is what separates the high performers from the everyday performers.

What is clear from watching the replacement refs give out bad calls, or not call players for breaking the rules, is that the replacements probably aren’t even seeing the events on the field as they unfold. Watching the game on TV, with multiple viewing angles, replays, and slow motion, things seem very clear. For the refs on the field, there is a single viewpoint, there are a lot of bodies in motion, and they are moving very fast.

The replacements know how to do the job. They have years of experience at multiple levels of play. Yet they are still woefully inadequate. The difference can be attributed to the talent. When you’re playing for the pros, talent matters for everybody on the field, whether they’re Lions, Tigers, or ...  zebras.

Tuesday, September 11, 2012

Airports

I fly regularly occasionally for both business and pleasure, and I usually end up going through Atlanta. There’s an old joke that runs “If you live in the South, when you die you may go to Heaven, or you may go to Hell. But first you have to change planes in Atlanta.”


On my most recent trip I had a layover of several hours. This was okay by me, as I like airports. Looking out the windows to watch planes come and go, the complex choreography of flight operations is entertainment to me. Rows of planes lined up at the gates or on the runways, each one costing tens of millions of dollars. The range and power of the information technology: tracking hundreds of flights and millions of passengers, and updating critical information automatically on the monitors throughout the terminal.  Then there is the people watching, which is a sport unto itself.

Airports have a density of commerce, capital, and people that is only rivaled by the skyscrapers of Manhattan or Chicago.

But on my last trip through, I noticed how little value added activity is being conducted. Obviously, the place is a beehive of activity. Outside the terminal, workers swarm around the jets, fueling them, fixing them, even a few loading and unloading baggage (most people carry on their luggage these days). Inside the terminal, it seems less organized, with passengers trying not to run into each other as they rush from gate to gate. Although, even inside the terminal there is structure, as people line up to get food, or to board planes. It may just be my imagination, but the line for Starbucks is calmer than the scrum to get on some of the flights.

The thing is, all this activity, this hurried coming and going, but very little new wealth is being created. A lot of wealth is being redistributed. Money flows from the passengers to the airlines and businesses at the airport. Those businesses then pay their employees and suppliers. Money is moving. The most visible symbol of the wealth redistribution is when one of those big jets takes off. Tens of millions of dollars worth of equipment, headed for someplace else.  But redistribution is not the same as creation.

The reality is that wealth is being destroyed at airports. An enormous amount of food and fuel goes to feed the metabolisms of people and the giant machines that serve them. Machinery and buildings depreciate. In many ways the ability to easily and relatively cheaply deliver people across vast distances, even across continents is one of the high points of our technological culture.

But the wealth that enables this process has to be generated elsewhere.

Tuesday, August 28, 2012

Apple vs. Samsung

In 1985, Microsoft launched their Windows operating system.  Windows was a huge increase in ease of use over the earlier versions of Microsoft's operating system, known as DOS.  The new operating system went a long way toward erasing Apple Computer's lead in easy to use computer software.

Apple sued Microsoft for patent infringement on their software.  Even though the actual computer code of the two systems was very different, Apple's claim was that Microsoft had pirated the "look and feel" of Apple's software.  The judge hearing the case disagreed, in what was a landmark case for its day.

Fast forward to this week.  In another patent infringement case, Apple sued Samsung over several of the features of smartphone technology.  The most important patent allegedly infringed was one on "pinch to zoom" technology.  This is the feature of a smartphone or tablet computer where you put two fingers on the screen and spread them to zoom into and expand an image, or close them together to shrink the image.

This time, the jury ruled in Apple's favor.  The ability to control an image on a computer screen that way is such an innovation that Apple has an exclusive right to that feature, regardless of the technical details of how it is done.  The jury found that Samsung had cost Apple a billion dollars by violating the patent.  And because the jury found that it was a willful violation (i.e. Samsung's execs knew what they were doing) the judge in the case has the option to assign treble damages.  That means Samsung would have to write a check for up to $3 billion.

The real impact of this case is that if Samsung or any other cell phone or tablet amker wants to use the patented features, they have to get Apple's permission.  Apple can either charge hefty licensing fees, making the other companies' phones more expensive than the iPhone, or just flat deny the rights to other companies.

The impact of this case is to make everybody's cell phones and tablet computers more expensive from here out, including Apple's.  After all, why drop the cost of your product when you have a monopoly?

Wednesday, August 15, 2012

Voter ID

The Commonwealth of Pennsylvania recently passed a voter ID law. Passed on party lines (Republicans for, Democrats against) it headed for state court, as these things tend to do. The basis of the law is the position that before you vote, you should have to prove your identity by showing a photo ID.


Those in favor of the law argue that it will prevent fraudulent votes being cast. There is no evidence that there is an epidemic of voter impersonation going on, but that is the fear cited in justifying the new requirement.

Those opposed to the law argue that it will disenfranchise numerous legitimate voters, who are too poor, infirm, or disabled to acquire photo IDs. The ACLU and other voting rights groups suing to have an injunction blocking the law brought a number of witnesses to testify that they would be unable to comply. Interestingly, they could manage the logistics of making a court appearance and testifying, but would be unable to manage the logistics of getting to a DMV office to procure a state photo ID. Still, when you ask someone to lie to you, don’t be surprised when that is what they do.

Since you cannot cash a check or buy a drink without ID, it does not seem an unreasonable burden to ask for proof of ID when casting a vote. And this is pretty much what the judge found, when he ruled that the new law could go into effect. Neither side proved their case, and the legislature passed it, so it goes into effect.

Two thoughts on this issue:

First, I’m not sure that it’s a good thing for the Democrats to be taking their side of the debate. At least, not from a branding perspective. “Join the Democrats! You too can be a member of the party for people who are too feeble to get a driver’s license.”

On a more serious note, the Democrats are in favor of allowing voter registration to take place when you get a driver’s license. Republicans are in favor of retaining the current dual system of keeping voter registration separate from the DMV. They oppose so called motor-voter legislation.

Using driver’s licenses as a form of ID required to vote erodes the Republican rationale, at least from my way of thinking. After all, if getting a driver’s license is a prerequisite for voting, why not allow the registration to take place at the same location. It seems to me the Democrats should embrace the need for photo ID, and then turn that against thte Republicans.

If it were up to me, I’d restrict the franchise to tax payers. By tax payers I mean people who belong to households that actually pay in federal income tax. Otherwise, what’s to stop people from voting themselves benefits out of the public treasury, and thereby bankrupting the nation.

Oh, wait. We’re pretty close to that now, aren’t we?

Thursday, August 9, 2012

The Deleveraging of America

US households are continuing to reduce their debt burden. According to the Federal Reserve, the amount of money dedicated to paying off debt has shrunk from 14% of disposable income in 2007 to a current level of 11%


There are three ways to ease the cash flow burden associated with debt.

First, you can do it the old fashioned way: whittle it away a little each month. Then once you have eliminated some debts, don’t turn around and add on more. If you get the car paid off, drive it for another six months and accumulate a bigger down payment on your next vehicle. If you pay off a credit card, cut it up and close the account. Avoid taking out a home equity loan to pay for a vacation.

Second, you can take advantage of lower interest rates. If you refinance existing debt at a lower interest rate, either the term of the loan gets shorter or the monthly payments go down. Or both, depending on what the spread is between the old interest rate and the new refinance rate.

The third way you can reduce your debt and ease up your cash flow is by surrendering assets pledged as collateral in discharge of your debt. That’s just a fancy way of saying you get foreclosed on by the bank. In the last five years there has been a mountain of debt erased by this method.

However they are doing it, a reduction in household debt is good economic news. With more disposable income in their pockets, consumers will have more cash to spend. Deleveraging has the potential to help drive the economy forward.

Of course, with the paltry retirement savings of most Americans, the best use of increased cash would be to divert the extra money into long term savings.

Thursday, August 2, 2012

Chick-Fil-A

The CEO and member of the founding family of Chick-Fil-A gives an interview to a Baptist religious newspaper, in which he declares his opposition to changing the traditional definition of marriage to encompass same sex couples. This is not new or surprising, given that CFA closes on Sundays because of management’s belief that the employees should be in church.


The story is picked up by national media. Then things get interesting.

Within 24 hours, headlines like “Head of Chick-Fil-A Takes Antigay Stance” appear. This is a case of the mainstream media deciding “If yer not fur us, yer agin us.” You can be opposed to redefining a social institution that has persisted for thousands of years without caring one way or the other about individuals’ sexual orientation. Tolerance does not necessarily require approval.

Then the mayors got into the act. The mayors of both Boston and Chicago publicly stated that they would oppose the opening of any Chick-Fil-A stores in their cities, solely based on the political opinions of the owners. These guys espouse a belief in diversity, as long as it doesn’t include anybody who disagrees with their opinions.

Now, I can pretty much guarantee that both cities have permanent trade representatives in Beijing, and that both mayors have participated in trade missions to China. Part of their job is to encourage investment in their respective cities.

So they would welcome investment from an authoritarian regime that suppresses dissenting views, but they are discouraging investment from an American company whose owners disagree with them?

Birds of a feather flock together, I guess.

Monday, July 23, 2012

Taxes, Transfers, and Progressivity

This showed up on Harvard economics professor Greg Mankiw’s blog. He took data from the non-partisan Congressional Budget Office that showed incomes, Federal taxes, and state and Federal transfer payments for different income segments of the population. Transfer payments are cash outlays from the government that benefit an individual. Social security checks are transfer payments. So are Earned Income Credits, food stamps, and Medicaid payments. The most recent data provided was for 2009.


Since transfer payments are like a negative tax, what Mankiw did was combined tax payments and transfer payments, divided by market incomes from earnings and savings. These are the results he got:

Bottom quintile: -301 percent

Second quintile: -42%

Third quintile: -5%

Fourth quintile: 10%

Top quintile: 22%

Top 1%: 28%

This means that for households in the lowest 20% of income, they receive $3 in federal money for every dollar that they earn. For people in the top 1%, for every $1 they make, 28 cents ends up back in the hands of the Feds.

Two points on this spring to mind.

First, notice that the middle 20%, the third quintile, has a negative percentage. That means the middle is drawing more from the government than they are paying in. Not by much, but the majority of households are benefiting from government largesse. We have reached a tipping point.

Secondly, this speaks to the level of progressivity in the tax system. Much of the policy debate coming out of the Obama administration concerns raising taxes on the top earners, making them pay their “fair share.” When 60% are taking out more than they put in, I don’t see how you can make a claim that the wealthy have a duty to put in a higher percentage of their income.

Friday, July 20, 2012

Yahoo's New CEO

Yahoo has a new CEO coming on board. Marisa Mayer, currently a senior executive at Google, has been picked as the fifth CEO of the troubled Internet portal company in five years. Almost simultaneous with the announcement of her selection, word came out that she was pregnant. The prospective CEO has declared her intention to be in the office right up until her due date, and continue working remotely during the few weeks she will be off after her delivery.


Reaction to Ms Mayer news has been mixed. Some commentators are jubilant over the prospect that such a high profile executive will show that women can fill the highest positions and still have children. Others have expressed concern the Ms. Mayer will raise the expectation that every woman should take minimal leave, and come right back to work. Still others have raised the point that her resources dwarf those of the average working woman, making any comparison moot. As a wealthy woman (employee #20 at Google), she can not only afford a live-in nanny, she could bring in her own wet nurse if she so chose.

Now, maybe she can skip right over the normal fuss and bother associated with bringing a new human into the world. She might be just that good. Yahoo’s Board of Directors clearly thought so. But one of the things I’ve observed about having children, particularly for the first time, is that it is an unpredictable process. Maybe she’ll be able to do a videoconference in the delivery room, and send emails between pushes. Maybe there will be no postpartum depression, and the child will be perfectly healthy. And maybe not.

Yahoo is a company in crisis. They are losing market share in the Internet search market, their stock price is in the tank, and they’ve had five years of failed strategic shifts and management turnover. A corporate turnaround like Yahoo’s is one of the riskiest business propositions around, and now the Board of Directors have added a whole new level of risk to the equation.

Any candidate could have health problems arise after being hired. Nothing is certain in this world. But pregnancy is known to be a significant risk, and the Board appears to have ignored it, based on the statements of a woman who doesn’t know what she is talking about, because she has never gone through childbirth before.

Based on her track record, I sure wouldn’t bet against Ms. Mayer. But I wouldn’t bet on her either. Yahoo looks like a really dicey proposition to me. I am going to hold off on buying Yahoo stock.

Yeah, like I’ve got money lying around to buy stock with.

Thursday, July 12, 2012

There Oughta Be A Law

One of the myriad of ways in which people can be divided into two groups is that some people hear the phrase “there ought to be a law” with regard to a situation, and think “yes, there really should be a law.” Then they begin to think about how that law should be structured. Other people hear “there ought to be a law,” and consider it with an ironic appreciation.
These tendencies cut across the political spectrum. Consider the ill starred Defense of Valor Act, passed by the Republican-led Congress. This law would have made it a crime to claim that you had received military honors and medals which you had, in fact, not received. Congress, in its wisdom, had decided to outlaw braggadocio, a characteristic of human nature that has been with us from time immemorial. Thankfully, the Supreme Court struck down the Act as a violation of free speech rights. Guys trying to chat up girls in bars all over this country breathed a sigh of relief at this sign that the Supreme Court remains a bulwark of their liberties.
Then there is Obamacare, legislation that is a darling of the Democrats. Someone cried out that there ought to be a law requiring everyone to buy health insurance. Others took up the rallying cry, and lo, 2000 pages of densely worded legalese was transformed into the law of the land. The Supremes, in their wisdom, pretty much let that one stand.
Lately, it seems to me as if the number of people who believe that there ought to be a law in all seriousness is on the increase, while the numbers of those who think there are enough ordinances on the books is waning. Personally, I come down on the side that hears the phrase “there ought to be a law” as a comment on the need for patience when dealing with the foibles of society, and a wistful desire for honesty and tolerance in others dealings with us.
Except for the clown who cut me off in traffic the other day. There really ought to be a law against that sort of thing.

Wednesday, June 13, 2012

All the News is Bad

The economic news has been pretty bad so far this month. The jobs report that came out a couple of weeks ago showed only anemic job growth. Enough people came back into the workforce that even though jobs were added, the overall unemployment rate remained at 8.2%. On slate.com, blogger Matt Ygliasias called it “The Jobs Report of Doom.”


There is a steady drumbeat of bad news coming out of Europe these days. Greece’s exit from the Euro zone appears to be almost a foregone conclusion. Now Spain’s banks need a bailout, and even the Spanish government is having trouble borrowing money.

Finally, this week the Federal Reserve came out with a report that showed median household wealth dropped like a stone in the recession. In 2007, the median level of household wealth was $126,400. Half the households had more wealth, half had less. In 2010, that figure had dropped 39%, to $77,300. This is about where that number was in 1992.

This is one report where I would like to dig into the data a little more. Most of the loss in wealth came about from the collapse of the housing bubble. I have to wonder if there has been growth in households with negative net worth. If you have an underwater mortgage and little in the way of other savings, you will have a negative net worth. Your debts exceed the value of your assets.

Similarly, the explosion in student loans over the last few years has created a number of negative net worth households. If you graduate from college with $30,000 in student loans, even if you get a job, you are starting out with negative net worth.

If the number of households with negative net worth have increased significantly, that could explain why the drop off in median net worth has been so sharp.

Friday, June 1, 2012

The Facebook IPO Debacle

It has been interesting to watch the Facebook IPO debacle. The privately held company sold about 10% of the shares to the public at a price of around $38 a share. The total deal valued the company at about $100 billion on the day of the IPO.


Since then, the price of a share has slumped pretty dramatically. In the week since the IPO, the value of the shares have plunged 25% from the opening day high. The individual investors who fought for the chance to buy some of the allocated shares now look like chumps.

This was predictable, and there were plenty of warning signs.

Generally speaking, there are two reasons why you sell a piece of a company:

• You need the money to expand the company. This expansion will make the remaining shares in your possession more valuable.

• You are cashing out, in whole or in part.

Let’s look at using the money to expand the company first.

To illustrate, let us suppose that you have invented a new product, say a holographic projector for use with home computers. You have built your prototype, taken it to venture capitalists. They like the prototype, and funded the development of the final production ready design. Now you want to go into production. You have to build a factory, acquire raw materials, and build up an inventory of finished projectors. You also have to mount a mass media campaign to introduce your product to the public.

All this takes a lot more money than what the venture capitalists are willing to put up. So you sell shares to the public to raise the necessary funds to expand into full production. In full operation, your remaining slice of the company becomes worth more than what it was before you sold part of it. That is how a traditional IPO functions.

Then there is how Facebook did it.

For Facebook, the venture capitalists and other early stage investors have fully funded the company’s very fast growth to date. Indeed, much of the company’s growth to date has been paid for out of continuing operations. The early investors do not need any additional capital to expand the business, and that is not how they were going to use the money from the IPO. Instead, they are paying themselves back for all the money invested on the front end.

When it became clear that there was going to be tremendous demand for Facebook shares, the offering price was increased. Tellingly, the number of shares tendered also was increased. Now you have to ask yourself: Why would someone sell their piece of a business if they thought it was going to increase in value? The answer is they wouldn’t. But you would sell more shares if you thought the price being taken was more than the business would be worth in the future.

For the early investors, the IPO was the best of both worlds: they got the money back that they put into Facebook on the front end, and they still own lots of shares. Any future recovery in the stock price lifts the value of their residual positions. In the meantime, the investors who bought shares in the IPO have taken a 25% hit to their wallets.

One classic investing tip is to invest in what you know. With hundreds of millions of users, lots of people know and love to use Facebook. But it is important to remember that just because you know and love something, that doesn’t make it a good investment.

I sure didn’t think so. That’s why I didn’t buy any stock in the IPO.

Sunday, May 20, 2012

Greece: Is Default Imminent?


On Monday the banks will open again in Greece.  By the end of the week we could see the end of the experiment in European unity called the Euro, the common currency.

In recent elections, Greek voters repudiated the conservative political parties that had agreed to cut government spending in exchange for continued loans from the European Central Bank.  By European Central Bank, we really mean the Germans, since they are putting up most of the funding.

The ECB agreed to a complex deal that included holders of Greek government debt taking a fifty percent reduction in the face value of Greek bonds, and the Greek government agreeing to cuts that would reduce their deficit to around 3% of government spending.  In exchange, the ECB would loan Greece more money so that Greece could continue making interest payments on bond they had already issued.

The political parties that gained the most in the election have declared their intention to renegotiate the deal.  Their position is that pushing Greece into a depression so that German bondholders can continue to get interest payments is not a good deal for Greece.  The new guys position is essentially this: “If you don’t continue to loan us money, we’ll default, and then your banks will get 0% of their money instead of 50% of their money.  And your interest payments? You won’t get any of that either.”

The German position is pretty simple: “If we don’t loan you more money, your government defaults, you won’t be able to pay salaries or pensions, and you’ll have to pull out of the Euro zone and issue your own currency.  Who wants drachmas?  Nobody wants drachmas.  And even with your worthless currency, you still haven’t solved the problem that your government spends more than it takes in.”

The problem with what is essentially a high stakes game of chicken between the left wing Greek political parties and the ECB is that they are out of time.  The Greeks could not agree to form a ruling party after the elections, so now they are going to have another election on June 17.  After that election a clear winner may emerge, which can then form a government.  But the Greek government will require more bailout funds before then.

Meanwhile, Greek citizens are pulling their Euros out of banks, and either stuffing their mattresses or putting the money into non-Greek banks to hold.  This is a process that has been ongoing.  Last month Greeks pulled about 5 billion Euros out of Greek banks.  Last week they took 750 million Euros out of their banks on Monday alone.  If the pace of withdrawals accelerates, by the end of next week the Greek banking system could collapse, requiring a messy, unplanned exit of Greece from the Euro zone.

If the problems were limited to Greece, it probably wouldn’t be so bad over on this side of the Atlantic.  Our banks don’t hold a lot of Greek government debt, and we don’t do a ton of trade with Greece either.  What is keeping policy makers up at night is that nobody thinks the problem can be restricted to just Greece.  Portugal, Spain, and Italy are the next potential dominos to fall.  Italy alone is the eighth largest economy in the world.  If the southern periphery of the Eurozone falls apart, it will have major implications for the world economy as a whole.

That’s the problem with playing chicken.  Sometimes neither guy swerves out of the way in time.

Thursday, May 10, 2012

Austerity vs. Growth

Two European nations have recently had elections: France and Greece. In both cases the electoral shift raises the level of uncertainty in financial markets.


At the polls this last week, both France and Greece threw out center right parties and replaced them with more left wing political coalitions. This is widely regarded as a reaction to the austerity policies being pushed by the current administrations. The incoming administrations will press an agenda more focused on growing the economy of their respective nations.

Why would you want to live a life of austerity when you could be growing your economy? That seems like kind of a no brainer. The answer lies in the disparate economic policies behind the buzzwords “austerity” and “growth.”

Austerity is a program of cutbacks in government spending, attempting to balance the budget, and maybe reduce government debt. Some of the cutbacks are immediate, in the form of pay cuts and layoffs of government employees. Some of the cutbacks are long term, such as raising the retirement age. The idea is to live within your means, and so reduce the risk that you will have to default on the money you have borrowed.

Growth policies mean spend money that you don’t have. Increase government deficit spending to employ more people. Those people will spend their government supplied income, leading to an expansion of the economy. As the economy expands, taxes go up along with the expansion. Classic Keynesian economics.

Of course, governments have run large deficits for years, in good times and bad. That is why they are starting to have problems borrowing money.

My thought is that it is better to cut spending now, while you still can borrow money, than to default, and then have to cut spending anyway. But if I was having to cut my standard of living, or lost my paycheck and had no other options, I might see things differently.

Thursday, May 3, 2012

Spirit Airlines Baggage Fees

Spirit Airlines just announced that they are increasing the fee to check a bag up to $100.  This new fee increase is for carry on bags that are paid for at the boarding gate.  If you check in online, and pay for your carry on in advance, the fee is much lower.

Baggage fees are a terrific example of unbundling services.  Bundling is the practice of combining multiple services within a single price.  The airlines used to bundle a host of services together in their ticket price.  Once you bought your ticket, you got to fly, your bags got to fly, your carry on got to fly, they fed you, and you got the in flight movie.  The logic behind bundling is that most passengers use and appreciate the extra services, and it is more convenient.  Paying multiple fees feels like getting nibbled to death by ducks.

The downside of bundling is that if you don't want the extra services, well, that's tough, because you still pay the same price.  Not bringing any luggage?  Still the same price.  Airline food gives you indigestion?  You're still paying for it.  In a sense, bundling means that some passengers are subsidizing services for the other passengers.

So now the airlines are unbundling their services.  When you buy a ticket, that gets you from point A to point B.  You want to get luggage from point A to point B, that will be charged separately.  You want a headset?  Pony up two bucks, big spender.

For the light packer, unbundling baggage fees from ticket prices keeps ticket prices low.  The people who can't bear to be parted from their anvil collection, on the other hand, are paying the full price of flying their stuff all around the country.  Unbundling can lead to higher efficiency, as people pay for only the services they deem essential.  This is not a bad thing.

The downside is that unbundling increases the complexity of the transaction.  On Spirit Airlines baggage fee schedule, there are at least fourteen different ways of paying for a single bag brought onto a flight, which range from $18 to $100.  Trying to get the best deal can require a lot of thought, planning, and effort.

Like I said, it can be like getting nibbled to death by ducks.

Thursday, April 26, 2012

Health Care: Right or Resource

“Healthcare is a right, not a business.”


This is a statement I have heard or read repeatedly during the entire debate over Obamacare during the last couple of years. It was the underlying assumption behind the administration’s arguments during the recent Supreme Court case. In talking about the individual mandate, the Solicitor General basic argument was: we have to get healthy people to pony up the money to pay for the sick people. Those sick people are going to need healthcare, and somebody’s got to pay for it.

I think that to argue that healthcare is a right is profoundly incorrect. In my view, healthcare is a resource. Like all resources, it is scarcer than the demand, and must be allocated in some fashion. Advocates of the private sector will argue that price is the appropriate mechanism to allocate healthcare. If you can’t afford the care you need, that’s just too bad. Advocates of a single payer system, such as Britain’s, ration care by use of waiting lists, or by refusal to provide certain procedures or pharmaceuticals. If you die before you can get treatment, that’s just too bad.

There has been a profound shift in the notion of what constitutes a “right” in the last couple of decades. Traditionally, having a right was intended as a limit on government. Freedom of speech means you cannot be arrested for calling for the overthrow of the government. Separation of church and state prohibits the government from using your tax dollars to prop up a religion that you don’t agree with. Rights are concerned with what the government can’t do.

The new version of rights, particularly in the economic sphere, posits responsibilities that government must do. For example, some have proposed a right to housing. And not just housing, but decent housing, whatever that means. This right absolves the individual of responsibility for providing their own housing. If we sign on to this new right, then it is the government’s problem to provide me with lodging. After all, I have a right to it.

The newer view of rights, instead of limiting government power, entails an expansion of government activity and control.

I come down on the other side of the question. In my view, the individual has no more a right to healthcare, than they have a right to health itself.

Wednesday, April 18, 2012

The GSA Parties Down!

The scandal concerning the Government Services Administration (GSA) has been getting a lot of airplay recently. In GSA district 9, they had a conference to reward a number of employees for…well, for something. Maybe they were exemplary employees selected from the rank and file. Maybe they were the senior managers, taking advantage of a boondoggle. Anyway, the conference, hosted in Las Vegas, was apparently pretty over the top. They spent about $822,000 for a conference with only a couple of hundred attendees

The GSA’s own internal auditor raised the issue in a report. Then it hit the media. Once the story broke, it picked up steam all on its own. The head of the GSA has now resigned. Congress is investigating. The head of district 9 pleaded the 5th when called in front of a congressional committee. Politicians of both parties are hyperventilating, declaring that they are “shocked, shocked to discover gambling is going on in this establishment.” Oh, sorry, wrong movie.

The politicians are appalled over this waste of government money. The government? Wasting money? How can you tell?

The people who worked at the hotels where the conference attendees stayed don’t think it was a waste of money. The entertainers hired don’t think it was a waste of money. They entertained the hell out of those bureaucrats!

The people whose businesses were supported by the GSA’s largesse don’t think it is a waste of money. They probably think that continuing to support a war in Afghanistan and bribing the Pakistanis to allow supply convoys through their territory is a waste of money. They might think that extending Federal unemployment payments to people who aren’t working is not as good a use of the government money as paying people to actually do a job. Maybe they think that having Medicare pay for medical services for people who die shortly thereafter is a waste of money. But I really doubt whether the folks who provided goods and services for the GSA’s conference thought that they were a waste of money.

Seriously, the government takes in wealth through taxation, and then redistributes that wealth. Some wealth is spread around employees of the government, and most is redistributed among the populace.

In holding this conference, the GSA was redistributing wealth. You could make an argument that they were doing their job.

Sunday, April 8, 2012

Off Topic POst: Treyvon Martin

I have been fascinated by the continuing coverage of the Trayvon Martin case down in Sanford Florida. A lot of people, including most of the main stream media, appear to want George Zimmerman's head on a pike. One of the most bizarre features of the news coverage was ABC's report showing the surveilance video of George Zimmerman entering the police station. "Look at the grainy footage of George Zimmerman, shot from a high angle that doesn't show any detail. We can't see any blood on his face. That disproves Zimmerman's story."

When you read the actual police report from the responding officers, you note that they say Zimmerman had a bloody nose, and that he received attention from the paramedics on the scene after Trayvon Martin was pronounced dead. Why not ask the paramedic if Zimmerman had a bloody nose? I would guess that is what the State's Attorney investigating this case is doing. If you are in the media, why put out statements that can be easily proved as false and inflammatory?

Then there are the cries for help. Forensic experts have analyzed the calls for help heard on a witness' 911 call, and have concluded that there is only a 48% chance the voice on the tape is Zimmerman. They cannot prove the voice is Trayvon Martin's, because they do not have a sample of his voice for comparison. So Martin never left a voice mail on his girlfriend's phone? He didn't record a voice mail greeting on his own phone? Really?

I have a particularly hard time accepting the racist executioner scenario in this case. This is the version of events that has Zimmerman confront Martin. Some kind of verbal and/or physical altercation occurs. Then, Zimmerman pulls his gun, and while Trayvon Martin pleads for help, shoots him in the chest. This just doesn't make any sense to me. Zimmerman knows the cops are going to arrive on the scene any moment, because he called the cops. Once he has the drop on Martin, why pull the trigger?

Then having shot a man in cold blood, the racist executioner scenario requires Zimmerman to make up a cover story in the two or three minutes before the cops show up. The scenario also requires almost complete collusion by the police. Now, if it was a white police officer who shot a black teenager, I could believe that the police would close ranks. But the responding officers didn't know Zimmerman from Adam.

One of the interesting aspects of this case is the lack of faith in the police from both sides. Treyvon Martin was on the phone with his girlfriend when he told her he was being followed by a suspicious looking man. She tells him to run. Why didn't she tell him to call 911? Why didn't Treyvon Martin think of that? Apparently it never occurred to him to call the police in a threatening situation.

Zimmerman has a different lack of faith in the police. When requested by the 911 operator not to follow Martin, his comment was "These assholes, they always get away." The motivation of the 911 operator is easy enough: her training is that if the caller pursues the person they are calling about, the odds of a physical confrontation escalate enormously. This is exactly what did happen. Zimmerman's motivation for disregarding this advice (as far as I know, 911 operators do not have the authority to "order" anyone to do squat) was his belief that the person he suspected would disappear by the time the police showed up. The police would then drive around, come back, and tell him that they hadn't found anyone. The neighborhood where Zimmerman lived was subject to a number of break ins during the last year. This has not been a widely covered story, but I'll bet that none of them have been solved. No arrests made.

We may never know all of the details about what happened that night. But I have a hard time seeing a criminal case against George Zimmerman for killing Trayvon Martin making it past a jury of Zimmerman's peers. Now, a Justice Department case against Zimmerman for violating Martin's civil rights? I think a conviction will be pushed through on that side.

Of course, at that point it is not a criminal matter any more. That is more of a political trial.

Tuesday, March 27, 2012

Adventures in Taxland: Filing Status

This tax season, I have had a number of clients who are married couples inquire about filing separate returns. Sometimes they say they know another couple who did that and got a better refund. I always give these clients the same advice.

As a married couple, you have two options for filing: Married Filing Jointly (MFJ), and Married Filing Singly (MFS). Under the joint status, you pool both incomes, combine your two personal exemptions with those of any dependents you have, and either itemize deductions or take the standard deduction of $11,600

Using the MFS status, each spouse files a separate return, with their incomes separate, and one personal exemption. The spouses can divvy up the dependents however they want. The standard deduction for each spouse is $5800, exactly half of what it is for MFJ. The tax tables for MFS are exactly half of what they are for MFJ. Unless you have an unusual situation with deductions, there are no tax benefits to MFS.

There are disadvantages to MFS. You lose access to the Earned Income Credit, the Dependent Care Credit, the Lifetime Learning Credit, and you double your tax preparation costs. If there are no tax benefits, and potentially significant disadvantages, you shouldn’t do it. I always counsel my clients to bite the bullet and file jointly.

Of course, what the client are really asking is whether they should split their filing status into Single and Head of Household.

Let’s say that the husband earns $30,000, and the wife earns $15,000, with her claiming their one child. As a Single filer, he gets a standard deduction of $5800, the same as he gets for MFS. But if she claims to be unmarried, as the Head of Household, she gets a standard deduction of $8500. So they have already reduced their tax burden.

But wait, there’s more! As a married couple with combined income of $45,000 and one child, your earned income credit (EIC) is $0. But as Head of Household with one child and $15,000, the EIC is $3094. Add $3094 to your refund and, ding-ding-ding, you’ve got a lot more money for changing your status. And all you have to do is lie on your tax return.

The technical term for that, of course, is tax fraud. If I knowingly put down the wrong status for a married client, I have committed a crime. So I play dumb and only offer the clients the legal options, although I know what they want to here.

Besides, if I have to pay my share of taxes, why shouldn’t they?

Monday, March 19, 2012

Pink Slime: Fact or Fiction?

What’s in a name? As Juliet famously remarked, “a rose by any other name would smell as sweet.”

Well, apparently if you call it “pink slime” it would smell a lot worse. I’ve been following the story of Lean Finely Textured Beef (LFTB) in the news for the last couple of weeks. LFTB is a filler found in ground beef. In their never ending quest to use everything on the cow but the moo, meat processing plants take the trimming off larger cuts of meat. These trimmings are a mix of protein and fat, looking kind of like bacon. The trimmings are heated to liquefy the fat, and then centrifuged to spin off the liquid fat, leaving the protein bits behind. The processed beef bits are then blended into ground beef to reduce the overall fat content of the finished product.

One of the big gross out factors in the popular imagination is the treatment of the beef after the fat is extracted. The trimmings used have a high probability of bacterial contamination. To kill the e coli, the meat is treated with ammonium hydroxide gas. “Ewww,” go the cries of outrage. “I don’t want my kids eating ammonia laced food.”

Personally, I can’t understand the outrage. I couldn’t find any information on how long this product has been used as an extender for ground beef. However, based on my recollection of college dining hall food, I would guess that this product has been in the food chain for decades. My rule of thumb for food safety is that if millions of people have been eating something for decades with no none ill effects, it is safe for consumption. As a matter of fact, I’ve been to Europe, and I’ve encountered some cheeses that pass that test, yet I would have sworn they were unfit to feed to dogs.

In this case, labeling this processed beef as “pink slime,” combined with a social media campaign to raise the level of outrage, has forced the bureaucrats who run the country’s food regulation system to back down and allow schools to specify ground beef without the additive for school lunches. Perception has become reality.

My prediction: ground beef is about to take a quick jump up in price. Dog food, on the other hand, is about to get a little cheaper. After all, the meat has to go somewhere.

Thursday, March 1, 2012

Adventures in Taxland: RAL's

Next year RAL’s will be a thing of the past. I will not be sorry to see them go.

RAL stands for Refund Anticipation Loan. This was a product that tax preparation services offered to clients who were getting a refund from the IRS. It was basically a short term loan given in anticipation that you would be receiving a refund in a couple of weeks. You sign over your refund to a bank, along with some fees and interest, and the bank gives you a (very) short term loan. Because the fees are amortized over a very short time period, these loans have a very high effective interest rate. Consumer advocates hate’em. But consumer advocates appear to hate all bank fees and interest. I’m sure that they all take Ben Franklin’s advice, and neither a lender or a borrower be.

No cash trades hands on the front end, because the bank takes its fees and interest when the refund comes in, before forwarding the balance on to the client. So this type of bank product has a certain appeal to some kind of people. Mostly people who are broke. Especially people who are broke, and are getting a big slug of the government’s cash. After all, it’s not their money that is paying the bank fee, it’s the government’s money.

The tricky thing about giving out a loan secured by your tax refund is that you don’t always get the full refund. If you owe the IRS money from previous years, or back child support, the IRS takes that out of your potential refund. In those cases, it turns out the bank has made an unsecured loan to someone whose minutes on their burner cell phone are about to run out. Good luck setting up a payment schedule, Mr. Banker man!

The average Refund Anticipation Loan (RAL) was about $3000. The fee was about $30. So if 1% of these loans went south, it turns into a money losing proposition for the bank. In the past, the IRS attached a flag to the taxpayer’s computer file called a debt indicator. When you electronically filed the return, the bank would see the debt indicator, and decline to make the loan. So the risks were manageable for the bank.

Last year the IRS stopped putting the debt indicator on the files, causing the banks’ risks to skyrocket. All but one bank responded to the changed situation by dropping the RAL product line. That bank had a contract with a tax preparation service that competes with the one I work for, and they have announced that they will exit the RAL business when their contract ends this year.

So the RAL is dead, which brings me back to my starting point. Although no one would accuse me of being a consumer advocate, I didn’t like the idea of the RAL. Who couldn’t wait three weeks to get their refund? More to the point, processing the paperwork was time consuming, and I wasn’t compensated for it. IRS regulations prevented paid preparers from getting a commission on RAL’s, because it was a conflict of interest.

And, in the last two years, it turns out that almost nobody really did need the money three weeks sooner. Clients ask if they can get their money sooner, and when told we don’t offer that product anymore, the response is always “Oh. Okay.” We were offering RAL’s because the other guy was offering RAL’s, not because our clients needed the product.

But some clients really wanted the product. They went into it with their eyes open. This is the way the conversation would go:
Me: “Now you understand, if you are willing to wait just a couple of week, it will save you $30, plus the interest charges, right.”
Client: “Yeah. I still want to get the money sooner.”
Me: “Okay, it’s your choice. Please sign here.”

My clients may be better off without the ability to make that choice. But isn’t having choices, for good or ill, part of the nature of liberty?

Wednesday, February 22, 2012

What Economists Do

I found this on Greg Mankiw's blog and thought it was funny.





Thursday, February 16, 2012

Adventures in Tax Land II

Actual conversation from the tax desk:
“I need a big refund this year. I really need money. What can you do?”

“Well, I see you only have a little bit of income on your W-2, and you didn’t have them take any withholding out of your check. Your income is actually below the Federal filing limit, so the good news is that you don’t owe any taxes. But since you didn’t pay anything in, you aren’t going to get a refund.”

“I got almost $1000 last year, and I need money even more now. That’s why I came to you. Why can’t you get me a refund?”

“Looking at last year’s return, I see you had unemployment compensation all the previous year, and the state withheld taxes. That’s what you got back. Did the unemployment run out last year?”

“Yeah. That’s why I need a refund. I have a friend who came here, and she got a big refund. Why can’t you do that for me?”

“Since you don’t have children, you have to pay more in withholding than you owe in taxes to get a refund.”

“So you’re saying I’m not going to get a check?”

The sense of entitlement is astonishing.

Tuesday, February 7, 2012

Making Ends Meet Via the IRS

People are always getting confused when I tell them that a lot of my tax preparation clients aren’t taxpayers. Instead, I classify them as taxfilers. The distinction comes from the reality that about 47% of American households do not pay income tax. Not only do they not pay into the Federal government, but they actually draw money out of the IRS. These are households that don’t pay taxes, but they sure do file, because otherwise you miss out on all that free government money.

The amount of money is significant, particularly when considered as a percentage of annual income. If you have two children, and earn $12,000 in wage income (pretty close to a full time job at minimum wage), the Federal government will give you $7000, or just over a third of your annual income.

Then you plug in the value of food stamps. The formulas are a little complicated, but in our example the annual benefit is around $5500 for a three person family, and $7000 for a family of four.

Using the family of four gives us earned income of $12,000, and total income of $26,000. So if you ever wonder how people make ends meet on a minimum wage job, the answer is that the 53% of us who pay taxes are picking up the slack.

Monday, February 6, 2012

GE's Superbowl Ads

Like a lot of other Americans, I watched the Superbowl last night. And like a lot of other Americans, I paid as much attention to the advertising as to the game.

Some of the ads were terrific, like the Doritos ads. I would rate some as a swing and a miss, like the Audi commercial featuring the vampires. Sure it was a cute concept, but if I'm going to spend over $35,000 buying an expensive imported sedan, I sure want more features than LED headlights. Sadly, no other selling point of the car was mentioned.

But the ads that had me scratching my head were the spots from General Electric. One was an ad featuring employees at a Schnectedy turbine factory talking about how they love their jobs. What was really weird about this ad is that 2/3's of the way through it morphs into a Budweiser ad.

The other GE ad was similar, featuring interior shots and voiceovers from employees of Appliance Park, where they build appliances. Mind you, this ad wasn't pushing GE appliances, it was pushing GE factories.

The two commercials totaled a minute and a half of running time, which means somebody at GE headquarters greenlighted spending $10.5 million of the shareholder's money on this boondoggle. I find this decision absolutely inexplicable. If you're selling beer, it makes a lot of sense to try and reach 100,000 million Americans at the same time. If you're selling power generation turbines, there has got to be a more cost efffective way to reach the 50 or 60 people who will be making that purchase this year than advertising on the Superbowl.

But really, these ads weren't even selling GE's products. They were selling the concept of General Electric itself. This kind of corporate image advertising belongs on the Sunday morning news shows, or maybe CNBC. But the Superbowl? I just don't get it.

For God's sake, next time but a dog into the commercial, okay.

Friday, February 3, 2012

What % Are You?

Here is a wonderful toy from the New York Times website. It is an interactive tool that tells you how high (or low) on the income distribution your household income places you. What I particularly like is that you can drill down geographically. So first, you get national ratings. Then you can go down to the state level, and even into local income distribution.

I'm doing better than I would have thought from the state of my bank account.

Tuesday, January 31, 2012

Adventures in Taxland, Part I

As a sideline, I do taxes for other people. It is hard to make much money, since it is only a part time seasonal gig, but I enjoy the work, and the stories are terrific. I plan to share some of those stories on this blog (with identities suitably masked), and this is the first from this season.

Since I started with my current company, I have always heard bad things said about our largest competitor. There are a number of players in the paid tax preparation market, ranging from CPAs to cash advance stores to sole practicianers who work out of their homes. But our competitive focus is on the large, multi-office chains. The biggest of these shall remain nameless, but their initials are JH.

I have always heard it said that "we don't do things like JH" or "those guys at JH don't care what they put on a tax return." If we were a bar, we would make cracks like "you can't find a clean glass in that place." I have always taken that trash talking with a grain of salt. After all, we're not over there every day; how do we know what they are doing? Still, running down the other guy is a good way to build morale in your shop.

But this week a woman came in asking us to review the work she had had done at JH. According to the woman, they had prepared and filed her tax return using her last pay stub from 2011. Once she had received her W-2, she realized that it did not agree with what she had filed, and she asked us to take another look.

IRS regulations say you are not supposed to file a tax return without the W-2 in hand. If a client comes into our office without one, we try and find one online, or failing that, we turn them away until they get that all important document from their employer. Clients don't care about this, of course. In their rush to get their hands on a tax refund, they will say or do anything to try and short circuit the process. But the paid preparer is supposed to care.

In this case, the pay stubs had not shown all of the earnings and withholding from the woman's job. Because her withholding was not all reported, it reduced her refund. Since she received both Child Tax Credit and Earned Income Credit, those were undercalculated as well. All told, not following the rules would have cost this woman hundreds of dollars in her refund.

To get the rest of her refund, the new client will have to file an amended return. The amendment will have to be mailed in, and she will have to wait a couple of months to receive the balance of her refund. Since my office will get paid for reworking her return and preparing the amendment, she will end up with less money then she would have gotten if she had come to us in the first place.

So maybe there is a difference in tax preparation services after all.

Wednesday, January 25, 2012

Mitt Romney's Tax Returns

Mitt Romney really took a beating over his failure to release his tax returns before theSouth Carolina primary. What I think he should have said was this:

"The Republican nominee traditionally releases his tax returns after he is designated the nominee, typically in April. If I am my party's nominee, I will follow that tradition. My opponents in this primary want me to release my tax return information now. They claim it is that is so that I can be 'vetted' by they and the media.

The real reason they want that information is so they can attack me for having more money than they do. I can understand that, but I'm not going to indulge them. As President, my policies will not be about attacking the rich (like the current administration), or about blaming the poor (like some of my opponents in this primary). Instead, my administration will concentrate on policies that create an economic environment where everyone's talents will take them as far as they can go. Americans aren't focused on envy of those who have more--they want the chance to do better on their own, without handouts from the government.

Yes, I'm wealthy. But nobody gave that money to me. I earned it by helping build businesses that returned money to their investors. I think that the Democrats are the party of class warfare and income redistribution. Republicans are the party of opportunity. So I'm not going to open the door for my primary opponents to attack me in that fashion."

Of course, he didn't say anything of the kind. He waffled on the issue, and it cost him. Big time.

Wednesday, January 11, 2012

Liquidity Preference, Opportunity Costs, and Arbitrage: Home Mortgage Edition

I was at a social outing last week, and during the conversation the subject turned to mortgages. The host averred his strong preference for not carrying a mortgage. “Just pay it off, and then you don’t have to worry about making that payment every month. Besides, I can’t stand paying all that interest every year.”

Now, most Americans do not have the wherewithal to pay off their mortgage 100%. Indeed, for most people paying off a car loan would be a stretch. But I could, and yet I continue to carry both a car loan and a home mortgage. So I thought I would write about why it can be a good idea to continue carrying debt, when you have enough assets to pay it off.

First and foremost, cash keeps your options open. Let’s say you have $100,000 in debt. Also suppose you have $100,000 in cash. You could extinguish all of your outstanding debt. But then, you would no longer have any cash on hand. You better hope the transmission in your car doesn’t go out, or the roof doesn’t leak, or any of a hundred possible contingencies does not occur. Because then you’ll wish you had held on to more of that cash.

The desire to keep cash on hand to cope with life’s curve balls is what finance professors call liquidity preference. Personal finance experts recommend you keep three to six months worth of cash on hand for just that reason. Okay, but going back to our hypothetical example, unless you’re a member of the 1%, you probably do not need $100,000 on hand to fund your lifestyle for six months, or even a year. Why not pay down the mortgage?

You give up the chance to do something better with the money, what economists call opportunity costs. Let’s run a more complicated version of our original scenario. This time we’ll start from the same place: a $100,000 mortgage and $100,000 in cash. Now we decide to hold $50,000 in cash for emergencies. We can use our remaining $50,000 in one of two ways. We can either pay off $50,000 of our mortgage, or we can pay $50,000 of Verizon stock. Verizon currently has a dividend yield of 5.15%, so our fifty grand would give income of $2575 a year. There is a little risk with holding the stock, but unless people stop making phone calls it is a pretty safe bet.

For the mortgage, assume a 15 year fixed rate mortgage at 3.5%. If you borrow $100,000, you will pay $3418 in interest the first year, and have dividend income of $2575. The net cost of the borrow and invest strategy is $843.

If you down debt and only have a $50,000 mortgage, you will pay $1709 interest the first year. Paying down debt will cost you $866 over the alternative strategy. Since the interest payments will drop each year of the mortgage, but the dividend payment should remain constant, the borrow and invest strategy will outperform the pay down debt strategy by a greater amount every year. By the fifth year, you will be $1152 ahead with the borrow and invest strategy.

Borrowing at a low interest rate and investing at a higher rate is an example of arbitrage, and it is one of the ways that the big boys on Wall Street earn their huge bonuses. They add a lot more zeroes to their numbers, of course.

I’m not saying you shouldn’t pay down debt, and there is something to the psychological lift you can get from not owing any money. But being debt free is not necessarily the best strategy for maximizing your financial well being.

Monday, January 2, 2012

The EEOC muddies the waters.

The New Year opens with a classic example of regulatory overreach. The EEOC has issued an opinion letter questioning whether employers who require a high school diploma for job openings are not violating the Americans with Disabilities Act (ADA). The EEOC’s reasoning is that a blanket requirement would discriminate against individuals who have a learning disability that prevents them getting a high school diploma, but who could learn to do the job in question with reasonable accommodations.

Frankly, although I have not yet heard of a potted plant graduating from high school, I suspect anyone with a pulse who showed up every day could. A for effort and all that. I just have to wonder how severe a learning disability has to be if you can go to school every day and still not complete the requirements for graduation. Based on my experience hiring high school graduates, the requirements for graduation certainly don’t include literacy.

Businesses don’t require high school diplomas because of the intellectual content of the job. It is more of a determinant of character than anything else. If you can’t make it through high school, you have to suspect problems like lack of focus, disrespect for authority, or sheer laziness. All characteristics that don’t exactly endear you to first line supervisors. Maybe over time those problems get resolved. After all, almost everybody eventually grows up. But if that is the case, you can always go back and get a GED.

Approximately 10% of Americans between the ages of 16 and 24 are classified as high school dropouts. Maybe some small percentage of that group has learning disabilities that prevent them from graduation, but don’t prevent them from being good employees. My own highly unscientific survey leads me to think the number is higher with advancing age. Given enough time a river will rub all the rough edges off all the stones in the streambed. But in the meantime employers should be allowed to impose filters on the applicant pool, to narrow the choice of candidates for a job offering. A high school diploma is one that has stood the tests of time and experience.

It’s not clear to me why the EEOC is inserting the government’s snout into private relationships like the hiring decision without presenting any evidence that a large pool of applicants is being discriminated against. Or, for that matter, telling employers what would constitute a reasonable accommodation.