Monday, January 21, 2013

Ski Company Economics

Not much snow in Snowmass, Colorado this week. However, there is a good base from previous winter storms, so the skiing is still pretty good.


In the last twenty years, the history of the ski industry has been a two part tale. First, consolidation: several large companies have rolled up all of the independently owned ski areas. For example, Aspen Associates owns Aspen, Snowmass, and Buttermilk mountains, along with other areas in other states.

The second part of the story has been the evolution of the ski companies from entities that make most of their profits from skiing, to real estate developers that have ski areas attached. The ski company will put in a new lift line from the peak into a location at the bottom of the hill where they own all the land. The presence of the lift line turns cheap land into ski in/ski out home sites, that can be sold for millions of dollars each.

This transformation has changed the nature of the industry. Instead of trying to maximize the number of skiers, the ski areas are largely insulated from trying to increase lift ticket revenue. At the same time, people who can afford a million dollar home site display low price elasticity of demand. With the general public, if lift ticket prices increase 10%, demand will drop by more then 10%. People have other ways of spending their entertainment and recreation dollars.

With the 1%’s who can buy multimillion dollar second homes, a 10% price increase leads to a 10% increase in sales, with an even bigger boost to profits. From the perspective of the ski companies, the logic is compelling. Skiing has moved from a mass market sport to a luxury good. Prices for lift tickets and on-mountain ding reflect this shift.

Monday, January 14, 2013

The Fiscal Slope, Phase II

I’m working as a paid tax preparer for H & R Block again this year. The money’s not great, but you get fabulous stories out of the gig. In December my office was gearing up for January’s opening. Then the fiscal cliff intervened.


In past years the IRS has begun accepting tax returns during the second week of January. This year, Congress did not pass the tax bill until after January 1. Some of the provisions of that legislation were actually retroactive for 2012 taxes.

The IRS had prepared tax forms, instructions, and software based on what tax law was at the end of December. Come January 1, the law changed, and they had to make a number of systemic changes in a hurry. As a result, last week the IRS has announced that the first day that tax returns will be accepted will be January 30. At the tax office, we have been rescheduling clients for later in the month, and working on managing expectations for people who expect a large refund check before the end of January. Not going to happen.

Early season tax filers tend to be skewed towards the lower income quintiles. These are folks who not only get all of their withholding back, but also receive large payments from the Federal government for Earned Income Credit and Child Tax Credits.

A number of these low income filers have actually borrowed in the fourth quarter against their potential tax refunds. H & R Block has such a loan program. It is called Emerald Advance. These loans have a high interest rate, but are intended to be extremely short term, lasting only a month or two before being repaid out of the borrower’s tax refund.

The delay in starting to accept returns until the end of January has upset the apple cart to some extent. A number of people who did not plan on making an interest payment will now have to make at least one. But a bigger problem has begun to loom in the distance.

The debt ceiling.

The Federal government has already reached the limit of its borrowing ability. By deferring some payments into Federal health and pension funds, the Treasury has postponed a cash crunch. By the middle of February, however, the bag of tricks will be empty, and tough choices are going to have to be made. Some bills will be paid, and others will not.

I’m going to guess that funding tax refunds will be a lower priority than making military payrolls or paying bondholders. If I’m right, it may be more than just a couple of weeks delay before refunds are paid out, compared with previous tax years.

People who borrowed against their tax refund are going to take a haircut. People who planned on paying off Christmas bills with tax refunds are going to get stung.

What was billed as a fiscal cliff is really more of a steep slope. We’ve gone over the edge, and are rolling downhill. We missed the first boulder on the slope, but there are others.

Monday, January 7, 2013

Keynesian Stimulus Spending

The standard interpretation of Keynesian economics is that when unemployment is too high and the economy is not growing, the problem is a lack of aggregate demand.  Businesses would supply more goods and services, thereby boosting employment, if only people were out there buying.

If households aren't creating demand because they have no money and cannot borrow, government will have to fill in the gap for the short term.  The government can borrow more money than it takes in from tax revenue.  This deficit spending stimulates the economy by putting money back into peoples' pockets.   As they spend that money, business start expanding, and begin hiring, taking up the slack from the government.

The key idea is that a short term burst of spending will stimulate the economy, leading to a virtuous cycle of an  expanding economy and increased hiring.  That is the basic theory, as I understand it.  The longer I look at the economy, the more convinced I become that the theory doesn't work.

For example, consider Christmas.  Millions of households have spent recklessly buying presents this holiday season, charging their purchases onto credit cards.  In anticipation of this surge of economic activity, many businesses added on employees for the season.  So far, so good.  Short term deficit spending leads to increased hiring.

But now look at the sequel.  Now that the holidays are over, those short term, part-time positions are being eliminated.  No long term virtuous cycle has been started.

Or consider the case of Ohio and Pennsylvania.  both were battleground states in the last election, which means they were saturation bombed with political ads from both parties.  In addition to mass media buys, political operatives were parachuted into those states from all over the country, and those individuals spent freely.  Tons of money were pumped into those states, providing tons of short term stimulus spending.

Have Ohio and Pennsylvania become economic dynamos since the election, with big growth and massive hiring?  I haven't seen any evidence of it.

When stimulus spending fails to have the desired result, Keynesians always claim that the problem was not a with the theory, but that the stimulus offered was too small. or did not continue long enough.  The beauty of that argument is that it offers politicians something very appealing: they get to hand out money without having to raise taxes.

I don't think our political class is going to reject Keynes and his theories anytime soon.

Tuesday, January 1, 2013

The Fiscal Cliff


It now looks like we’re going to go over “the fiscal cliff.”  This will not be a fall off a steep cliff, ala Wily Coyote, where it is not the fall that hurts, but the sudden stop at the end.  Instead, this will be more like tumbling down a steep hillside, caroming off boulders along the way.  That is because a number of different provisions expire at midnight tonight.  Some will have an immediate effect, and some will only hurt much later.  Depending on who you are, you may not even notice a change, particularly if Congress plays nice with the President and reimplements some or all of the expiring tax provisions.

A very incomplete list, in the order of their immediacy of impact:

Unemployment Compensation
Extended unemployment authorization (beyond 26 weeks) runs out tomorrow.  If you have been unemployed for longer then 26 weeks, your check stops next week.  The Democrats want to extend unemployment benefits, the Republicans do not.

Automatic Sequestration
As part of the deal to extend the Bush tax cuts two years ago, Congress mandated huge, across the board spending cuts in both defense and domestic spending programs, unless a bipartisan commission could put together a plan of tax increases and spending cuts.  The commission failed about a year and a half ago, and nobody has done anything since then.  These cuts take place starting next week.  The odds are very high that Congress will move to reverse this next week, as nobody wants these cuts to take place.

Payroll Taxes
Specifically, the Social Security taxes that are paid on earned income.  For the last two years, the portion of Social Security taxes paid by the individual was dropped from 6.2% to 4.2%.  That ends Tuesday.  Congress has a week to decide what they want to do about this before it begins to bite.  The check you get next week will be taxed at the lower rate.  After that, plan on paying another 2% in taxes.  For the long term health of Social Security, those rates will probably have to rise.

Dividend Taxes
In 2012, dividends were taxed at the same rate as capital gains.  That was a piece of the Bush tax cuts.  Without Congressional action, in 2013 dividends will be taxed as ordinary income, at the same rates you pay on earned income.  The tax does not actually come due until the end of 2013, but if you have a lot of dividend income, you should increase your estimated tax payments by the end of the 1st quarter.

Income Tax Rates
These revert back to the level they were at the end of Bill Clinton’s Presidency.  There is a lot of wrangling over whether the top rates should increase, and what the threshold of income should be if they do.  Unless you make over $250,000, nobody, and I mean nobody in Congress or the Executive branch wants those rates to increase.  Look ofr a deal on that to conclude next week.  Unless you change your withholding, you should see no impact from this until the end of 2013.  If Congress and the President get their act together, they will make the retention of the old income tax rates retroactive to the first of the year.

Alternative Minimum Tax
The AMT is a separate tax system that is run in parallel with the ordinary income tax.  The AMT is designed to make sure high income taxpayers pay some income tax, no matter how many exemptions and deductions they have under the regular tax system.  The problem is that the definition of “high income” was set back in 1982.  Every year Congress has to pass a patch that adjusts for inflation.  Without the patch, millions of what are now middle income taxpayers will have to pay the AMT, which will increase their tax burden.  Congress has until next December to pass a retroactive patch to cover 2013.

Debt Ceiling
It’s baaaaack!  Congress increased the amount of debt the government is authorized to carry by $2 trillion two years ago.  That money is spent.  By March the Treasury Department will lose the ability to borrow more than it already has.  That will mean Federal spending will have to shrink by the equivalent of 7% of GDP.  Look for a repeat of the big fight we saw two years ago on increasing the debt ceiling.

It may look like total incompetence on the part of our elected officials, that they have allowed so many provisions of the current tax regime to lapse, when both sides agree that they do not want to cut spending or raise taxes as much as will happen.  But the controlling dynamic in Washington appears to be positioning your self, not to take credit for what is done, but to throw mud on your opponent for what fails to be done.

All is not lost, however.  It now looks like a farm bill will pass at the last minute, saving milk prices from doubling.