Title IX and Cheerleading

An interesting legal decision regarding Title IX came down this week. Title IX is the civil rights legislation that governs women’s collegiate sports, and is widely credited with dramatically expanding athletic opportunities for women in college. Basically, the legislation says that you cannot discriminate against woman’s sports in favor of men’s sports.

This is the sticky point. How can you tell if women’s sports are being discriminated against? The most commonly used test is called the proportionality test. What this means is that the percentage of women on the school’s sports teams should equal the percentage of women enrolled in the school. If your student body is 55% women, 55% of the athletes at the school must also be women. If not, you are guilty of discrimination: you better hand out more scholarships to girls, and by the way, you can pay the lawyers on your way out of court.

Since they have to pass the proportionality test, colleges play games with their sports programs, either adding women’s sports or dropping men’s sports. This brings us to the current case.

Quinnipiac University in Connecticut wanted to drop their women’s volleyball team. To make up for the number of slots lost, they claimed that cheerleading counted as a varsity sport. Making the substitution, the proportion of woman athletes was within 4% of the percentage of woman in the student body, which the University claimed was close enough. These claims were not unique to Quinnipiac. Other colleges have made the same assumptions.

Anyway, the volleyball team sued the school (with the help of the ACLU), and the judge ruled that cheerleading was not a sport. In a world where synchronized swimming is an Olympic event, how the hell do you rule out cheerleading as a sport?

What are the criteria to determine if an activity is a sport? I think we can all agree that it should be an organized physical activity, with coaches and competitions. Cheerleading seems to fit the bill in all of those particulars. Just go to YouTube, and you will find videos of astonishing athleticism and teamwork, taken at cheerleading competitions. If Quinnipiac decided that cheerleading was more cost effective (11 slots for volleyball vs. 30 slots for cheerleading), or more popular, than volleyball, what right has a court to interfere with that decision? After all, we live in a world where synchronized swimming is an Olympic event.

Apparently, the judge’s decision turned on the fact that the cheerleading team competed against several different types of other cheerleading teams. They competed against other colleges, but also against club teams not affiliated with any school. Also, the rules were different for different competitions.

Another part of the judge’s ruling dealt with how the school counted team membership. The college had women’s teams for cross-country, indoor track, and outdoor track. They counted the athletes who participated in all three sports three times. The judge cried foul on that practice. Interestingly, the school dropped men’s outdoor track last year. How much do you want to bet they will drop the women’s track team next year? After all, you don’t get any credit for it. Now, is that a good thing or a bad thing?

Ultimately, Title IX has become a form of affirmative action for women’s athletics. However, unlike affirmative action in college admissions, in the case of sports, quotas are not only encouraged, but required to meet the dictates of the law. Although it has unquestionably opened up more opportunities for women, it also leads to gaming the system and restricted opportunities for men. These are the results we would expect from any quota system.

Unemployment Benefits

I have friends among the ranks of the unemployed. I know one guy who has not had a full time job for almost two years now, and not for lack of trying. He has been to several out of state interviews, as well as numerous phone interviews, and he just can’t close the deal. This is probably largely due to his age (60+), but it also an indication of how tough the job market is these days.

However, I also know and have written of individuals who are working on the black market while continuing to draw unemployment (and food stamps, and welfare). In those circumstances, unemployment compensation is clearly a disincentive to taking on a regular job. So while I have some sympathy for those who struggling to find employment in today’s economy, I come down in favor of cutting off unemployment compensation after 75 weeks.

The Obama administration recently tried to push through another extension of unemployment benefits. It was stopped in the Senate by Republicans, concerned about the level of deficit spending. In the next six months, a number of the long term unemployed will lose their benefits as they expire.

I was reading the Freakonomics blog today, and I noticed an earlier post on this subject. As part of his post, one of the things Daniel Hamermesh said was

The original, and I believe continuing, purpose of unemployment insurance is to
maintain consumption of the unemployed—to prevent hardship.

I think the author has combined two different rationales in that sentence. There are two separate arguments for continuing unemployment benefits, and the Freakonomics author has folded them together. The easier argument to follow is to prevent hardship. It sucks to be unemployed. Having a little money coming in keeps food on the table and the lights turned on while looking for the next position. If you are living paycheck to paycheck, and then those paychecks are cut off, you are in deep trouble. With the current high level of unemployment, there are no jobs, so the need for the safety net is still there. In essence, this argument is “extend unemployment, because you could be next.”

The more complicated argument is that unemployment benefits maintain consumption. This is really a macroeconomic argument, as opposed to easing hardship at the microeconomic level of the household receiving benefits. The idea is that consumption drives demand, which drives production, which drives employment. Put another way, the argument is that if laid off people have no income, their spending drops to zero. When customers stop spending, businesses lay people off. If those laid off people also stop spending, the cycle will continue until no one is left standing. Basically, this boils down to “extend unemployment, or you will be next.”

After 18 months, however, both arguments begin to wear thin. Being an American citizen is a guarantee of certain inalienable rights. But it is not a guarantee of a standard of living, or even of a job. It is not the responsibility of the government to borrow money from the Chinese in order to send people checks in perpetuity. Enough is enough.

Disability Claims

We had one of our employees quit last week. She worked half a shift on Tuesday, left for a doctor’s appointment, then called in Tuesday afternoon to say she was quitting with no notice.

Here’s what was reported to me:

At the woman’s doctor appointment, she had reported symptoms so severe, that her doctor had declared that she should be on permanent total disability. He told her he would support her in her disability claim. The woman promptly went down to the local Social Security office and filed for disability. After filling out the paperwork, the first question the officials asked her was: are you still working? When she told them she was going to give two weeks notice, she was told not to give notice, as it would screw up her claim, by continuing to work after filing for disability status.

Additional information: The woman’s husband just started receiving his disability checks, after waiting almost two years for his claim to wend its way through the system. It usually takes at least a year for Social Security disability claims to be processed. However, it turns out that you get back pay: once your claim is approved, payments are made back to the date of first filing.

A few questions: Why are the bureaucrats at Social Security coaching applicants for disability? I would think that at best, part of their job would be root out attempts to defraud the taxpayers. At worst, they would maintain strict neutrality. If you want to go back to work after filling, who are they to advise against it. Let the chips fall where they may.

This leads me into my next question, and central point. If this woman was able to work two weeks notice, then how disabled could she be? For that matter, she worked a full shift Monday. I saw her do it. There was no evidence that I could see of a disabling medical condition. Not last week, or the week before, or the week before that. She never came to management and asked for an accommodation to any medical condition.

Here’s where I speculate: Our employee worked her job, supporting herself and her husband while his disability claim was processed. Now it’s his turn to support her. His back disability will support them while her claim is processed. Furthermore, now that he has learned the ins and outs of the system, he will be able to coach her while she goes for a second helping from the same pot.

This leads to one more question: How many people on disability have another member of their household also drawing disability? Once somebody in the house figures out how to get free money, how often does another member of the home decide to go for more free money?

Okay, that was two final questions.

A Favorable Omen

After the backyard barbeque and fireworks on the Fourth, I had a holiday today to recuperate. Later in the afternoon, I decided to go to the gym and try and work off some of the bratwurst and baked beans.

Walking up to the entrance of the gym, I noticed a small pile of change sitting on one of the platforms holding the faux columns that frame the entry. Three quarters, two dimes, and four pennies. Thinking that it could be some kind of trap, I restrained myself from grabbing the money on my way in the door.

After finishing my workout, I saw that the money was still there when I came out. Well, you don't have to tell me more than twice about free money before I go and see for myself. Half expecting some kind of hidden camera stunt to materialize, I snatched up the coins and pocketed them.

No one jumped out and accused me of stealing their money. So far, so good. Not only that, but as I walked across the parking lot, I spotted more change: a quarter here, a nickel there, a couple more pennies. My mama not having raised no fool for a son, I pocketed them as well.

Due to the long weekend, the coming week is going to be a short week at work. And now I'm up $1.31. Is this going to be a great week, or what?

Headlines in the News

You absolutely have to wonder who writes the headlines sometimes. Here is a headline from today's Washington Post: "Top Defense Officials Say They 'Fully Support' Obama on Removing McChrystal."

Well, duh! Given that McChrystal was removed from command of US forces in Afghanistan because of interviews where it sounded like he did not 'fully support' the administration and every member of the civilian staff, what would you expect them to say? They may think it was a terrible idea to fire the guy, and they would publicly say they fully support the decision.

You have to wonder what the troops on the line think about this kerfluffle. Actually, I can guess. I bet their thinking runs something like this: "The general screwed up and criticized the civilians, and they punished him by sending him home to the States. If I screw up like that, can I get punished the same way?"

The more things change ...

Recently I have been reading some of the works of Ralph Waldo Emerson, the nineteenth century philosopher and writer. In his essay titled Self-Reliance, I came across the following passage:

“…do not tell me, as a good man did today, of my obligation to put all poor men
in good situations. Are they my poor? I tell thee thou foolish philanthropist that I grudge the dollar, the dime, the cent, I give to such men as do not belong to me and to whom I do not belong. There is a class of persons to whom by all spiritual affinity I am bought and sold: for them I will go to prison if need be; but your miscellaneouspopular charities; the education at college of fools; the building of meeting-houses to the vain end to which many now stand; alms to sots, and the thousand-fold Relief Societies; -- though I confess with shame I sometimes succumb and give the dollar, it is a wicked dollar which by and by I shall have the manhood to withhold.”

Written in the 1840’s, this hit me like a thunderbolt. There really is nothing new under the sun. The only change to the terms of the debate in the last 160 years has been that now Emerson’s philanthropist would argue that it is the government’s job to “put all poor men in good situations,” and Emerson must give his money in taxes to support this worthy goal.

BP Oil Spill: What Not To Do

Although BP is having some success capturing the oil from their undersea well, some is still escaping into the Gulf, adding to the enormous amount of oil already spilled. As the oil slick continues to spread, and oil begins to come ashore in coastal communities, the sense of frustration in the general populace continues to mount.

I have been reading a lot of wild proposals coming from both op-ed writers and the commenters on news sites. I thought I might react to several of the most preposterous.

Boycott BP
This has got to be the dumbest idea yet put forward. Let’s “punish” BP by not buying their gasoline. Even if it were possible to get enough people acting in concert to impact BP’s sales, this would be a bad idea. Cleaning up this spill is going to take years, and a ton of money. If BP is going to be held responsible, they are going to need a continuing stream of cash flow to pay for this mess. They are going to get that money by continuing with their on-going business of producing and selling oil and gas. Starving your cash cow is never a good idea.

Turn the situation over to the armed forces
What are they going to do? Defend the beaches by shooting the oil as it tries to come ashore? Launch air strikes against an oil slick? I was in the army, and I was actually in a Corps of Engineers unit that had earthmoving and construction capabilities. One thing we were not trained or equipped to do was clean up spilled oil. Even more ludicrous is the idea that the military will take over efforts to shut down the leaking well. All they can do is provide unskilled labor. The know-how, gear, and systems for cleaning up will have to be provided by someone else.

A variant of this is the plea for the government to take over the effort to plug the leaking well. Nobody in the government knows jack-all about undersea well drilling operations. There is no evidence anywhere that BP’s management and operating personnel aren’t doing everything they can to plug this well, and they seem to be throwing all their resources into trying to solve the technical problem.

Criminal prosecutions against BP executives
I read a news story earlier this week that said people being polled wanted to see criminal prosecutions by a ratio of two to one. To even conduct the opinion poll is an example of mobacracy at its worst. I am hard put to imagine what the crime is supposed to be that the senior executives committed. Did they knowingly buy defective blowout preventers because they were cheap? Did they direct personnel to falsify test reports and bypass safety protocols? No evidence of any such activity has come to light.

Stop drilling oil wells
The fantasy here is that screwing in compact fluorescent bulbs and driving hybrid cars will drop our energy usage to the point that we can stop using petroleum. Even if we cut our energy usage in half, we still need to face the fact that all of our transportation systems are totally dependent on liquid fuels. Unless we want to outlaw air conditioning and airplanes, and put everyone on a bicycle, we’re going to continue to need oil to make our civilization function.

Frustrating as it is to watch the live video feed showing oil continuing to pour out BP’s well at the bottom of the Gulf, they will eventually solve the problem and seal off the leak. Containing, and then cleaning up all of the leaked oil will take years, maybe decades, and BP should have to pay, both for the clean up efforts and for the losses other people are going to suffer as a result of this disaster. As a going concern, BP has the size and scope of operations to compensate the victims of this colossal accident.

But striking out at the company as a result of built up frustration won’t solve anybody’s problems.

Helen Thomas: Did she really say that?

At 89 years old, Helen Thomas is both the oldest, and the longest serving member of the White House press corps. As the longest serving member, she not only gets a front row seat at the daily press briefings; by custom, she has the right to throw out the first question at the President's press conferences. By virtue of her longevity, she has transcended her position to become an institution.

She also appears to be a raving anti-Semite.

Last week she was captured on camera giving her opinion regarding the Israeli-Palestinian problems in the Middle East.

Now, you can deplore Israeli policy towards the occupied West Bank. You can call Israeli military actions against the Gaza strip completely disproportionate, compared to the provocations offered by Hamas. You can even make the argument that Israeli has ceded the moral high ground of a democratic society, and created an apartheid regime.

What you really can't do is state that Jews living in the Middle East should "Go home...to Germany and to Poland...and to everywhere else."

You might be able to make the excuse for Ms. Thomas that she has suffered enough microstrokes in her frontal lobes that it has seriously affected her judgement. Maybe she really doesn't mean, or even understand, the implications of her statements.

Be that as it may, it's time for her to go. When she recites what is basically the Hamas party line, she demonstrates that she is unfit for any position as a responsible journalist. The Hearst newspaper syndicate needs to fire her.

And people bitch about Rush Limbaugh.

Be Afraid. Be Very Afraid.

In high school (a long time ago), I took a class in Science Fiction as Literature. One of the themes of the course was the Frankenstein story.

Victor Frankenstein, a brilliant scientist, builds his creature without considering the consequences of creating artificial life. Once animated, Frankenstein is unable to control his monster, which goes on to destroy everything that Frankenstein holds dear. Finally, Frankenstein himself perishes in the attempt to destroy his creation.

At the heart of the Frankenstein myth is the fear of the unintended consequences of new and developing technologies. The Terminator movies are a version of the myth. Jurassic Park, and most of the other novels of Michael Crichton, merely ring changes on the theme.

I’m put in mind of Frankenstein by watching news coverage of the BP oil spill disaster. Seeing live video of that dark, mysterious cloud billowing out of the pipe, a mile under the surface. Watching satellite photos of the spreading oil slick in the Gulf of Mexico, spreading its tentacles further and further. The oil pouring up from the bottom of the sea is the monster.

Filling the role of mad scientist, BP’s drilling crews created the monster. And with every failure to stem the flow of oil, the lack of control over what they have created becomes more apparent.

In every good horror story, the real fear comes from the anticipation of what is going to happen, not the action itself. Life copies art in this respect as well. As of this writing, no one knows how much oil is eventually going to leak into the Gulf, or what the final environmental tally will be. We just know that it is going to be bad.

The biggest sinkhole ever.

Holy Cow!

This is an image of the sinkhole that opened up in Guatemala City over the weekend as a result of a tropical storm.

It looks like something out of a science fiction movie. Like the one where aliens burn a hole in the crust of the planet from space. Or maybe like the one where the supervillain activates his seismo ray device and chews up the heart of a city. Or maybe like the one where the hero realizes that all of what he thinks is real is actually a computer generated illusion.

Astonishingly, no one was killed when the sinkhole opened up, although it did swallow part of a building.

Violence vs Non-violence

I just watched the video of Israeli commandos rappelling onto one of the ships of the Gaza relief convoy. It looks like the commandos and the passengers on the ships are working off two different scripts. The Israelis are working off the standard non-violent resistance script. The Israeli role is to play the heavy, intercepting a peaceful humanitarian mission in international waters. The “activists” on the convoy, by peacefully resisting, establish the moral high ground, and focus international attention on the justice of their cause.

The folks on the convoy were apparently not working off that script. They were attempting to repel enemy boarders. There is nothing non-violent about clubbing someone to death with a metal bar, which is clearly what the passengers were attempting to do.

The Israelis were clearly surprised by the ferocity of the reaction to their boarding. Near the end of the video you can see one of the commandos pointing a paintball gun at the passengers. I’m thinking they wouldn’t have been carrying paintball guns if they had planned on things turning as ugly as they did.

Of course, at some stage of the proceedings the commandos declined to be swarmed and beaten to death. They pulled out the real guns they were carrying and used them. The escalation of the violence caused ten times the international reaction that a non-violent incident would have engendered.

This has become an public relations disaster for Israel.

Turning the Cards

At work we are still in hiring and training mode. The hiring is now not being driven by an expansion of our business, or even the turnover of experienced personnel from retirement or relocation. No, we are now hiring trainees to replace the trainees who washed out.

One guy found a better job, and we determined that a couple of others were not going to work out long term. From management’s point of view, it is always best to cut ties as early as possible, once you have decided that you have an unsatisfactory candidate. Why continue to invest training dollars in someone who is not going to make it?

Despite our best attempts at interviewing and upfront testing, hiring is largely a blind process. I know of no way to determine is someone is truly going to perform in a job, prior to having them start in our unique environment. With some people, it is apparent early on that they will excel, going far in our organization. Sometimes it’s an absolute disaster: the person who creates a quality problem, or breaks equipment, or gets someone hurt. But they all look pretty much the same coming in the front door.

It is also a linear process. When I say that it is linear, I mean that we can only try out one candidate at a time for a position. It would be tempting to hire multiple candidates simultaneously, and then select the best one at the end of training. You retain the star, and drop the others.

A Darwinian selection process would probably be more cost effective than working with one candidate at a time. But that approach strikes me as fundamentally flawed and unfair. We make hiring decisions in good faith. Hiring multiple people, with the intent of cutting some of them, breaks that faith. If a person can do the job, they get to keep the job. I will forego the possibility of finding someone even better.

So, hiring is both, blind, and linear. The metaphor I use to describe this process is playing solitaire. You can shuffle the deck all you want, but eventually you’re going to have to turn over a card. Most of the time you get a number card, a three, or an eight, or a ten. And that’s how many days they last. Then you have to turn over a new card, and try again.

You’re hoping for an ace, you’ll settle for a face card, and you’re praying you don’t get the joker.

Cell Phones for All

I discovered a fresh outrage this weekend. Unusually for me, I was glued to the tube, watching the series finale of Lost. Four minutes of show, three minutes of commercials. Anyway, from sheer repetition, commercials for Assurant Wireless began to penetrate my consciousness.

Assurant Wireless offers a free cell phone, along with 200 minutes of free nation-wide calling every month, as long as you qualify. The primary qualification is to be receiving food stamps, or to have income below 135% of the Federal poverty level.

The first problem with this is that the “free” cell phone service is not free, of course. It is being paid for out of the taxes attached to the paying customers’ phone bills every month. So I’m being taxed, not to pay for a common good like police or fire protection, but for someone else’s specific good. But the irritation doesn’t stop there.

I can kind of wrap my mind around the concept of food stamps. No one should starve in a nation full of food. But when was it decided that cell phone service is a right, not a discretionary expense?

Then there’s that 135%. The whole point of having a Federal poverty level is that is supposed to be the line demarcating the poor (who presumably need help from the government), from the not-poor, who should be able to fend for themselves.

Those are all bad enough to give me dyspepsia. The part that really frosts me, however, is the television commercials. The contract to provide the “free” cell service is so lucrative that the company (a division of Virgin Mobile) can afford a primetime TV ad campaign. They want to reach anyone who might be qualified, and get them to sign up. There used to be at least a little bit of a stigma associated with government assistance. You were supposed to have enough pride to take care of yourself. Not any more. Don’t be embarrassed to get free cell phone service. You’re entitled to feed at the government trough.

This whole situation irritates me, but in reality, it is only an irritant. The taxes that pay for this program are not unduly onerous. But I wonder how the folks who earn 140% of the poverty line feel. If they want cell service, they have to choose what to sacrifice to afford the luxury of a cell phone. I’ll bet this makes them just wild.

Synthetic Life

This was a big week for molecular biology geeks. Craig Venter and his team at the Venter Institute in Maryland announced that they had successfully created what they call “synthetic life.” Like Dr. Frankenstein, we have now created life from non-living material. Surely designer organisms that eat carbon dioxide and secrete oil are not far away, thereby solving both global warming and the energy crisis!

Well, maybe not.

When you get beyond the hype of the press release and examine what Venter’s team really did, it boils down to three things. 1) They completely decoded the DNA of an existing bacteria. This is known as sequencing the genome. 2) They artificially created a copy of the sequenced DNA, starting with the nucleotide bases that are the building blocks of the DNA molecule. As part of that process they modified some of the nonfunctional sections of the DNA to insert what are called “genetic watermarks.” 3) They took a different bacteria, removed the genetic material that was native to the germ, and implanted their prebuilt DNA. The newly implanted DNA then took over the machinery of the cell and began making copies of itself in the normal process of cell division.

These are all neat tricks, to be sure, and incredibly difficult to boot. But I think they fail two key tests for the claim of truly creating artificial life. First, true artificial life will have a genetic code designed from scratch. Venter borrowed the genetic code from an organism that had developed over a billion years of trial and error evolution.

Second, to be truly synthetic, they would have to combine their novel DNA with both a lab grown cellular membrane and built from scratch cellular metabolic machinery. If that assembly then began to grow and reproduce, then they could truly claim to have built an artificial life form.

We’re still a long way away from gleefully cackling “It’s alive! My creature lives!,” as we rub our hands together with glee. Consider: the bacterial DNA Ventner synthesized consisted of a little over one million base pairs, combined to make a single chromosome. Human DNA includes over three billion base pairs, spread out over 46 chromosomes. That’s three thousand times more genetic code.

Those caveats aside, it is still an astonishing technical achievement. Clearly with some fine tuning, they will soon be able to use their techniques to do the kind of design work mentioned above.

Educational Qualtiy Control

I want to build on my concept of testing as educational quality control that I started in my last post.

Quality control, or quality assurance, as it is sometimes called, is a core function in every manufacturing plant I’ve ever seen. We continuously check product at every stage, from incoming raw material to assembly to final audit before shipping. The question is always the same: does the product meet specifications? Put another way, what we are doing is verifying that the manufacturing process is generating the desired result.

If you check parts, and find you aren’t getting the correct result, then there is a problem with the process. But until you do your quality checks, you don’t know what you are producing. Also, one of the key guidelines of quality control is to check your quality as early in the process as possible. It makes no sense to wait until after you have finished final assembly to test the product and discover there was a problem with the first step in the assembly process. Finally, a good quality control program relies on objective evidence. If a good part has to be round within .004”, everyone agrees on that, and everyone agrees on how to measure the part. There is never any discussion of “the parts look round enough to me.” It is either round within .004”, or it is not. If not, then there is a problem, and we have to fix the problem.

In education, standards and standardized testing take the place of quality control. That’s why I can never understand why the educational establishment fights so hard against standardized testing. Actually, that’s not true. I completely understand why teachers fight so hard against testing. If I had a complete lack of accountability for producing the desired result in my job, I would want to protect that too.

What I don’t understand are the lame excuses offered as to why we shouldn’t use standardized tests to evaluate the performance of our education processes. For example, “all we do is teach to the test.” If the test is a representative sample of what we want students to know, than test scores should accurately show the students’ mastery of that body of knowledge.

Conversely, without testing, there is no way to establish that the student has learned anything. And based on my experience trying to employ a number of high school graduates, many of them really haven’t learned anything.

Training the Trainer

We’ve gone into hiring mode for the first time in a couple of years. This is due to two factors. First, business continues to strengthen, necessitating more workers to get the job done. Second, some of our people have moved on to greener pastures. When somebody leaves, it creates an opening for somebody else. The end result is that we’re not just calling back former employees who were laid off. We’re bringing new people into the organization.

Since it has been a couple of years since we have done that, we are relearning lessons on training new people. Our usual method of training is OJT or job shadowing. We assign the trainee to follow an existing employee for a few weeks. In theory, the trainer shows the trainee all of the ins and outs of the job. Anything the trainer doesn’t teach, can be picked up from the work instructions and operating procedures.

At least, that’s the theory.

We had one guy training for five weeks at one position. When we gave him a written test at the end of that time, he failed miserably. It turns out he couldn’t read the questions, either on the test paper or the work instructions that contained the answers. We had to let him go. Oh yeah, we’re supposed to test for literacy on the front end. So now we’ve reinstalled that part of our hiring procedures.

Another lesson we’ve relearned is to provide milestone tests to be administered during the training period. We fell into the lazy trap of waiting until the very end of training, and then testing everything at once. We had one person fail all of the tests. It turned out the trainer had used the “monkey see, monkey do” technique to have the trainee go through the motions of the job. But the trainer had never bothered to explain what the individual actions meant, or why they were included in the job.

It’s possible that the trainer had tried to explain these things. But this was the first time that particular trainer had ever trained anyone, it is very loud out on the shop floor, and the trainer was not particularly articulate in the first place. However, we realized that by virtue of hindsight. The bottlenecks to successful training could have been removed weeks earlier if we had enforced a testing regimen on both the trainee and trainer.

In our training model, testing performs a quality control function. If you want to know if your training is effective, than you devise a test that covers the material being trained. If the trainee can pass the test, then the training is effective. If they cannot pass the test, then your training is ineffective.

Obviously, if your training is going to be ineffective, you want to know as early in the process as possible. That way you can take steps to improve your training (maybe replace the trainer, maybe replace the trainee) before too much cost has been expended.

Because the testing is a pain in the butt, the trainers tend to push it off as long as possible. It’s up to management to enforce the testing regime. And as this whole incident has shown, everybody needs refresher training every now and again.

A New Passion: Off Topic Post

In the last couple of weeks a have discovered a new area of interest: molecular biology.

It started last year when I bought The Teaching Company course on Big History: The Big Bang, Life on Earth, and the Rise of Humanity. Fourteen billion years condensed into 48 lectures on CD. Woo-hoo!

One of the critical thresholds discussed in Big History was the origin of life on Earth. So a couple of months ago I bought the course The Origins of Life. To talk about the research into the origin of life, you have to talk about biochemistry. There is also a chicken and egg type of problem with the origin of life. To be recognizable as life, the organism has to have both metabolism, a way of extracting energy from the environment, and inheritable reproduction, a way of making copies of itself. Which came first, and how did they combine? Nobody knows ... yet.

One of the lectures in The Origins of Life course covered the basics of genetic coding, how RNA is built out of DNA, and how proteins are assembled by RNA. I was hooked. I know we can splice DNA, and I know we have sequenced the human genome, but I don't know what that means. So I'm on a journey to find out.

My current Teaching Company course is on fundamentals of biology, which includes a number of lectures on cellular mechanics. After listening to a couple of lectures, I went online and did some searches for molecular biology. I found a Berkeley molecular biology course, and listened to a couple of lectures. Different perspectives, but not as well structured as The Teaching Company course.

Then, on a whim, I went to YouTube and typed in "DNA Replication." I hit the mother lode. It turns out there are tons of animations for all kinds of biological processes: DNA replication, translation, and transcription. Under metabolism, there are animations for glucolysis, the Krebs cycle, the citric acid cycle, and ATP synthase.

The animations run the gamut from block diagrams to real time scale reproductions of cellular processes. What is most amazing to me is that we now actually know the shapes of the various large molecules in these processes.

This is a whole new area of human knowledge for me to explore, and I can totally get my geek on doing so. I foresee hours of fun chasing down the minutiae of various biochemical processes.

Yeah, I'm a nerd. You got a problem with that?

Greece's Problems

Greece’s fiscal problems have been much in the news recently. Essentially, the country is bankrupt. They have bond payments coming due this month, and they don’t have enough euros in the treasury to pay back the bond holders.

There is nothing unusual about that. Most governments don’t actually pay off their bond holders when the note comes due. What they do is issue new bonds, and just keep rolling the debt over. Greece’s problem is that they have hit their credit limit. The international financial markets are so nervous about how much debt has already been issued that they don’t want to allow Greece to continue digging the hole deeper.

This is not the first time a sovereign nation has run into this problem. Nations can’t handle their credit cards any better than the average American. The nation state playbook says that in a circumstance like this, you devalue your currency. Devaluation makes your exports cheaper, imports more expensive, and pays back the bond investors with a cheaper currency than they loaned you. The inflationary effects make everyone poorer, including the bondholders, who have to take a haircut on the value of their investment.

This isn’t an available option for Greece, because the Greeks don’t have their own currency anymore. They use the common European currency, the euro. If Greece defaults on its bonds, all of the countries in the Euro zone are in the splash zone. Hence the incentive for the other European Union countries to bail Greece out.

The other European nations, notably France and Germany, along with the International Monetary Fund, have agreed to be the lender of last resort to the Greek government. But there are conditions. They are requiring Greece’s government to reduce the government budget deficit from 13.9% of GDP to 3.9% over the next three years.

With their back against the wall, the Greeks are agreeing to the plan. They are cutting pensions, cutting salaries of government employees, and raising the retirement age. On the revenue side, consumption taxes are being increased one tenth, from 20% to 22%.

How big a cut is this going to be? Government spending makes up about 43% of the total Greek economy. The proposed austerity package of tax increases and budget cuts aims to get that down to about 35%. The government in Greece is going to have to shrink by about 20%. Overall, the average man on the street is going to get 10% poorer over the next couple of years, but the effect will be concentrated for government employees and retirees.

No wonder they’re protesting.

Social Utility

Eliot Spitzer, the disgraced former governor of New York, has written a piece attacking the investment bank Goldman Sachs for the on-line magazine Slate. In the column Spitzer raises the concept of “social utility.” He challenges Goldman Sachs to prove that the firm is socially useful by answering a series of questions regarding their internal trading operations.

The clear implication of the article is that Goldman Sachs is not “socially useful,” and therefore, should be eliminated, or at least reduced, by government fiat.

What a load of rot! That Spitzer can pronounce this pernicious twaddle with a straight face establishes that he hasn’t the faintest conception of how a free society functions.

You can deplore that the casino-like trading activities of Wall Street firms have swamped their traditional capital raising and capital allocation functions. You can be concerned that the lack of regulation of credit default swaps and other arcane financial instruments allowed some financial firms to pile up so much risk that they almost crashed the worldwide financial system. You can even argue that Goldman Sachs should not be allowed to sell securities that they have taken short positions against.

But banning or prohibiting activities because they lack “social utility”?

You would have a hard time providing an argument for the “social utility” of baseball cards, or beanie babies, Hummel figurines, but markets exist for all of those. The essence of a free market is that sellers offer something for sale, buyers offer payment, and a bargain is made between two willing parties. At no point does anyone have to meet a standard of serving a hypothetical greater good.

The essence of a free society is that you don’t have to justify your actions. You do have to take responsibility for them. If I wanted to light my farts on fire, and post the video on YouTube, I could do it, and I can’t think of anything of lower social utility than that.

And yet, a surprising number of people have chosen to spend their leisure in exactly that fashion.

Beware the Ides of April

April 15 is Tax Day, the last day for filing your income taxes withourt incurring a penalty. The media has been full of stories about the run up to today. The thrust of most of the stories has been don’t be late, the deadline is looming.

The implication is that there are hordes of people out there who have not yet filed their taxes. The funny thing is, I worked as a paid tax preparer for H & R Block this year, and I was finished doing taxes in early March. As a matter of fact, 75% of the customers are handled during the first peak, from mid-January to early February.

After the first peak, the balance of the clients fall into three categories:
People with insanely complicated tax returns, who take months to get their paperwork in order.
Congenital procrastinators, the kind of folks who would be late to their own funeral.
People who still owe money to the IRS, over and above any withholding or prior payments.

If you’re going to get a refund, you will want to file as early as possible. After all, why leave a pile of money sitting in the government’s hands when it could be sitting in yours? And the vast majority of filers do get a refund.

First of all, almost half of all households pay no Federal income tax. The tax arm of Deloitte and Touche estimated that a married couple with two small children would have to have an income exceeding $50,000/year before they generate the first dollar of income tax liability. They will get all of their withholding back.

Many of those in the lower half of the income scale not only owe no money for taxes, but they also get significant income from the government, due to refundable credits such as the Additional Child Tax Credit and the Earned Income Credit. Of the returns I processed, most fit into this category. Only a handful actually paid income tax, and even those had a tax liability less than their withholding, so even they got a refund.

In the interest of full disclosure, I also got a tax refund, due to overwithholding on my part. I didn’t do a single return this year where the taxpayer had to send additional money to the IRS.

I guess my point is that the media shouldn’t make such a big deal about what the last day for filing your taxes is. Instead, they should run stories on February 1, the due date for employers to send out the W-2 forms needed to file your taxes. For most households, that is the primary, or even only, document they need to get their refund.

Now that would be news you could use.

Changing the Rules of the Game

Obamacare has been passed into law and signed. Despite fulminations from conservatives, it is unlikely to be repealed or found unconstitutional. All we can do now is wait for the unintended consequences to show up. Yet, like a moth to the flame, I am still drawn to write about the intertwined issues of health care and health insurance.

At the root of Obamacare is a profound shift in the understanding of what health insurance (or any insurance) is designed to do. The core concept driving any insurance plan is risk management. Basically, the lucky are subsidizing the unlucky.

If a tornado blows away your house, your neighbors who were missed are paying for your rebuilding through their policy payments. “Wow,” they think, as they write out the check, “that tornado just missed my street.” Or let’s say you beat the actuarial odds and die young. Your beneficiaries are taking advantage of all the other policy holders who didn’t die that year. “Gosh,” they think, sitting at the funeral, “that could have been me that got hit by that freak meteorite strike.”

The thing about the lucky subsidizing the unlucky is that you can never know in advance in what category you’re going to end up. So you pay your premiums, and you’re grateful if you never have to use the insurance.

At the heart of Obamacare is a radical conceptual shift. Instead of the lucky subsidizing the unlucky, the basic principle is now going to be the healthy subsidizing the unhealthy. Hence the push to require younger, healthier people to buy insurance, at the same time lifetime limits on care and exclusions for preexisting conditions are dropped. If you are sick, you are going to get all of the medical care your doctors want to give you, and the people who are well are going to have to pay for it.

The thing is, lucky or unlucky is pretty much a random event. For healthy versus unhealthy, there is not so much randomness involved. If you see someone who smokes, it is predictable that heart disease and breathing problems are in their future. Looking at someone who is grossly obese, you know they can plan on developing type II diabetes, followed by back pain, followed by joint replacement surgery. These tend to be chronic conditions. They can be managed, but somebody’s going to have to pay for them. The healthy are being asked (well, actually told) to foot the bill.

The thing about most insurance is that it is inherently fair. That’s why I willingly pay the premiums. But as someone who likes to eat, but has the self discipline to push away from the table, as someone who sweats it out at the gym several times a week, as someone who has never taken up smoking, I look at many of the unhealthy and question how fair it is that I’m being asked (well, actually told), that I am responsible for paying for the consequences of other people’s behavior.

Those of us who work hard at managing our risks should not have to subsidize the reckless. Frankly, I’ve got better ways to spend my money.

Positive Problems

Last January, late in the month, it was like somebody turned a switch. All of a sudden the phone started ringing with customers expediting their orders and increasing their release quantities. Ever since we've been playing catch up. The biggest issue has been getting enough raw material in house to support the increase in production.

This is an example of what I call "positive problems." These are the problems caused by growth in your business. Although stressful, they are drastically superior to the other kind of problem. For example, I'd rather spend my day wrestling with the question "how I am going to get raw material here to keep production going?" as opposed to the question "what am I going to do with all of the workers and not enough orders?" Or worse yet, "where is the cash coming from to meet payroll?"

The turn in the economy is beginning to look like a broad based phenomena to me. I spoke with one of our customers today, and she told me that her whole day had been spent expediting suppliers to cope with increases in customer demand. Upstream in my supply chain, lead times are moving out from both the steel mills and brass mills with whom I do business.

This increase in activity probably won't show up in the official government statistics for another quarter, but from where I'm sitting it looks like the growth cycle has picked up steam. I'm even hiring a couple of new people. In the meantime, we're considering working some overtime. That hasn't happened for well over a year.

Starbucks Begins Paying Dividends

Last week Starbucks announced a big change in their financial policies.  For the first time, the Seattle based company will begin paying dividends to stockholders.  The company is touting this as proof that their turnaround plan is working.  I’m skeptical.  The management team may be turning the company around, but the fact that they are starting to pay dividends indicates to me that the company may have its best days as an investment behind it.

 

Think of it this way: Imagine that you have a business that is profitable.  You have a decision to make.  What are you going to do with the profits?  You basically have two choices.  One choice is to take the money out of the business, and give the profits back to the owners of the company.  The alternative is to take the profits, and reinvest them back in the business.  With the alternative of reinvestment, your hope and plan is to grow the business, and thereby make future profits even larger than they are now.

 

As an investor, a growing company provides a better return than an equally profitable company that is not growing.  Picture two businesses.  One business is going to earn a dollar a share this year, next year, and the year after that.  The other business is going to earn a dollar a share this year, $1.50 next year, and $2.00 per share two years out.  Which business would be worth more to you?  You pay more today to capture the larger future cash flow.

 

The anticipation of larger future profits results in a higher multiplier between the current earnings and the price of a share of stock.  Growing companies command a higher price/earnings ratio.  As the manager of a business, you want to grow your earnings, because that makes the business more valuable, providing the highest return to the owners, the stockholders.  Besides, most senior corporate execs have a large chunk of their compensation in stock options.  Increasing the value of the shares benefits them personally.

 

But there is a risk with this model.  What if you reinvest your profits in the business, but you fail to grow your earnings?  Well, the technical term for this process is “pissing your money away.”  The market hammers you for that.

 

If you think you have lots of opportunities to grow your business, you should reinvest your profits back into the business.  If you don’t think you have as many chances to grow your earnings, then it becomes time to start pulling money out and giving it back to the owners.

 

The fact that Starbucks is going to start paying a dividend, returning profits to the stockholders, indicates to me that the management of the company thinks the days of their fastest growth are behind them.  Which means as an investment, it is time to look for the next company that has the potential to grow quickly.

 

Starbucks.  I love the coffee, but I’m not so wild about the investment.

No Jobs to be Had?

An interesting situation has developed at the company where I work. Sales have picked up, though not yet to the pre-recession level. At the same time, one of our machine operators gave his notice this week. He’s moving on to a better job, and we wish him well.

But the impending vacancy means I have to go out and hire someone to take his place. The first place we decided to look was people who had worked for us in the past, but who we had laid off in the last year. After all, they would be known quantities.

Here’s where the interesting part starts. The first two people we called were working for $6 an hour, considerably less than what we would pay. It’s also less than the Federal minimum wage of $7.25 per hour. Both of these women were working cash jobs. Their employee was either treating them as subcontractors, but not submitting Form 1099 to the IRS, or else taking unreported cash income and paying their employees out of that stream of money.

Either one is tax fraud, of course, pure and simple. But no one is surprised that people cheat on their taxes. That’s dog bites man stuff.

What struck me is that both women turned down the job offer, even though the aftertax money from our position was greater than the $6 per hour. Why would you turn down a job that pays more than your current position? It turns out I had left out a factor in my calculations: extended unemployment benefits.

Although both women had been laid off from our company over a year ago, both were still drawing unemployment checks, courtesy of the Obama stimulus package. The combination of their unemployment benefit and their $6 an hour job exceeded the amount we were willing to pay. As rational economic actors, they were maximizing the utility of their work.

Conservatives will tell you that continuing to extend unemployment benefits provides a disincentive to work. Why take a job if you can continue to draw a check? Liberals will tell you there are no jobs available, so we have to keep providing benefits to people who have been laid off.

Based on my sample of two, I would argue that the conservatives are winning this argument.

Health Care: What Now?

Well, Obamacare was signed into law today, so I guess we just have to react to the new reality. The first thing we did on Monday was to ask the obvious question: "How does this affect our insurance program?"

Bona fide wellness programs are still allowed, so we can continue to provide incentives to our employees who control their weight, cholesteral, blood sugar, blood pressure and smoking. That's good.

The amount that can be contributed to Flexible Spending Accounts (FSA's) is limited to $2500. We're not sure if that includes the employer's contribution or not. Right now, the company matches the employee's pretax contribution on a dollar by dollar basis, up to a maximum of $3000. Most of what I've read so far indicates that I'm going to lose that $500 of tax benefit.

Our company uses a high deductability health insurance plan. The first $5000 of medical care is the responsibility of the employee. Blue cross/blue shield doesn't cover any of the bills until that limit is reached. I like it that way because it keeps the premiums low, freeing up money for other purposes (like bonuses), and I don't consume much in the way of healthcare. After 2014, it is not clear if that type of plan will continue to be on the market. Based on the rhetoric, I'm afraid that high deductible plans will be outlawed once this legislation gets ramped up.

It's interesting that children can be carried on their parent's health plans until age 26. Tax law says that you lose the dependentcy deduction at age 24, and even then you lose it at age 19 unless the child is a full time student. With our current premium structure, adding family coverage to the employee's coverage adds less to the premium than the cost of adding another employee to the policy. It's easy to see how people will begin gaming the system under those rules. Once this becomes widespread, look for dependent coverage to rapidly rise in price to compensate.

I wonder whose idea it was to remove the lifetime caps on medical spending. Because, you know, going through a million dollars of medical care wasn't enough. Maybe if you get another million dollars of someone else's money, they'll find a way to cure you.

You can't help noticing that the unpopular parts of this legislation, like the requirement to buy health insurance, and the fines for not doing so, are timed to all take effect after the next presidential election is over in 2014.

I haven't yet seen when the surcharge on unearned income (interest and dividends) starts up, but from what I have read so far, that only impacts high income individuals. Like the people who decide whether to pay my bonus or keep the money for themselves. I'm probably going to be stung on that one.

Break Out the Bulldozers

The Obama administration and Speaker of the House Nancy Pelosi are determined to shred every procedural roadblock standing in the way of their massive restructuring of the health insurance industry in this country.

At first, it was only reconciliation. Normally, the House passes legislation. Then the Senate passes their own version of the same bill. Then a conference committee of Senators and Representatives negotiates a compromise version of the bill, that is voted on again by both Houses of Congress. When that passes, it goes to the President for signature to be enacted into law.

The problem with that system (at least from Obama and Pelosi’s point of view), is that the compromise legislation has to pass the Senate again. With the election of Scott Brown from Massachusetts to fill the seat of the late Edward Kennedy, there are now 41 Republicans in the Senate. With a united front, they can filibuster the bill until it dies a natural death.

Hence the reconciliation maneuver. Under Senate rules, passage of measures affecting the budget can have the compromise, or “reconciled” version passed through the Senate on a vote requiring only a majority of 51 votes. Since the filibuster does not apply, sixty votes are not required to cut off debate.

Pelosi’s reconciliation plan then becomes to push through a House vote on the original Senate version of the health insurance restructuring. The House will then pass a series of amendments to the Senate version, making it more to their liking. This package of amendments will then be presented as a budgetary reconciliation, which can avoid the filibuster. The fig leaf covering this end run around the rules is that Obamacare is intended to reduce the deficit.

I have been watching television for well over forty years. I have been exposed to millions of commercial messages. I have become quite adept at knowing when I’m being lied to.

I know that the fast food hamburger will not be plump and juicy like it shows on screen. I know that if I spray on a cheap cologne, women will not leap out of the woodwork, seeking to have their way with me. And I know that the current package of health insurance reform will not reduce the deficit.

Obamacare is not a budget reconciliation bill, it is a policy bill, and using the process of reconciliation to get a around the procedures of limited government stinks to high heaven.

Rising Productivity

I don’t expect reporters to have much in the way of business literacy. Strategic planning and discounted cashflow analysis are difficult subjects, and it doesn’t surprise me that they aren’t part of the normal journalism curricula. But algebra? I had algebra in the 8th grade.

The source of my ire is a report that has been put out by the Labor Department, and the interpretation thereof by the media.

The gist of the report is that productivity grew at an unusually rapid rate in the fourth quarter last year. Labor productivity grew at an annual rate of 6.9% during the last three months of the year. At the same time, the report stated that unit labor costs dropped t a rate of 5.9%.

The commentary I have seen on this report so far makes it out to be bad news. The viewpoint seems to be that rising productivity means income is dropping. Also, if employers can increase output without hiring more workers, that doesn’t help the unemployed. This ignores the reality that increasing productivity is what increases standards of living. Without increasing productivity, we’d all be stuck at the hunter-gatherer stage, which doesn’t strike me as too much fun at all.

But what really gets me is the assumption that when labor costs fall, that means households have less money to spend. This is a complete misreading of the statistics.

What the report actually says is that unit labor costs have fallen. That does not mean workers are getting paid less. It means that workers are producing more product for the same amount of money. In point of fact, falling unit labor costs are just the same thing as rising productivity, expressed in a different way.

Let’s take an example. Assume that in 2008, a worker getting paid $10 per hour produces 100 units of product in an hour. The unit labor cost of that product is $.10, the $10 the worker got paid divided by the 100 units produced.

In the fourth quarter of 2009, the same worker would have produced 107 units of product in the same hour of production. To figure out the increase in productivity, we divide the 4th Q 2009 output by the 2008 output to get 1.07. Productivity increased by 7%. In this same example, the unit labor cost drops to $.0935. This is a 6.5% drop in unit labor costs. But the worker still gets the same $10 income he got before.

The real news is that productivity growth of over 6% cannot be sustained. That red hot pace is an artifact of starting from a lower base level, due to the recession induced drop in demand. Once demand started to pick up, the workforce that businesses kept on in anticipation of an upturn went from coasting along to serious work. A big jump in production was the result. It probably doesn’t hurt that most businesses, given any kind of a choice, will keep their most productive workers on the payroll, dropping the less than stellar performers.

This sharp jump in productivity is a sign that demand is picking up again. Once businesses have wrung all the benefit out of the existing workforce that they can get, the next step is to start hiring more employees.

Increasing productivity is good news, not bad news.

Chile's Hour of Need

The government of Chile is still restoring order after the magnitude 8.8 earthquake that struck the southern half of the nation last week. After some initial confusion, they have requested international aid. According to an interview with the US ambassador to Chile, the confusion was because Chile does not have a history of receiving international aid. In fact, Chile is a donor nation.

Still, the devastation is widespread, and they could use a hand.

So I'm going to go out and buy some grapes, and grape by-products.

Located south of the equator, Chile's seasons are the reverse of ours. Their summer is just ending, and their winter takes place during our summer months. This shift in growing seasons means Chile is in an ideal position to supply fresh fruit and vegetables when fresh produce is in short supply from our own growers. Ordinarily I try to buy American to the greatest extent possible, but due to the emergency I'll make an exception and stock up on Chilean grapes for the next few weeks.

And the grape by-products? I plan on picking up a case of Chilean cabernet.

I just figure it's better to help the Chileans by trading with them, then by giving them some kind of handout. If we help Chile's businesses, those businesses will take the lead in rebuilding the country. If we give handouts, we only encourage dependency.

Of course, I feel the same way about charitable giving in this country as well, and for the same reason.

Graph of Long Term Unemployment

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

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

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

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

The CARD Act or Building a House of Cards

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Two Views of Dysfunction

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

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

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

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

Adventures in Tax Preparation, Part II

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

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

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

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

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

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

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

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

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

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

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

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

Adventures in Tax Preparation

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

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

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

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

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

The Two-tier Economy

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

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

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

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

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

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

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

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

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

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

A Modest Proposal

I am on my annual pilgrimage to ski country this week. I’ve noticed that the tilt towards the green side has become more pronounced over the last few years. It started with the invitation to reuse your towels, so that housekeeping didn’t have to expend so much fresh water on laundry. Now it has expanded to include the use of compact fluorescent bulbs throughout the condo unit we are staying in this week.

The management has posted a little notice in the room, stressing how energy conserving they are, doing their part to fight global warming. It put me in mind of an article I read in a skiing magazine a couple of months ago. The article profiled an activist in the ski town of Crested Butte. This woman was committed to fighting global warming, specifically to preserve heavy snowfalls in the Rockies. More snow, better skiing.

After thinking about this for a while, it gave me an idea of how we could really fight global warming to preserve snow: ban skiing.

Well, not really. My idea is not to ban skiing. Just to ban the sport as currently practiced. The modern ski vacation has got to be one of the most carbon intensive activities on the face of the planet.

To get to the resorts, we fly in from all over the country, if not the world (how much carbon do you emit to get to Colorado from Australia, I wonder). Once we’re here, we stay in luxury condos, housing that stands empty for eight months out of the year. That can’t be environmentally benign. In the last ten years, I have yet to stay in a unit that doesn’t have a gas fireplace. They’re not efficient heating units, but the flames are pretty, as we watch irreplaceable natural gas get converted into carbon dioxide and water vapor.

Then there is the sport of skiing itself. First off, to create the ski runs, they mow down swathes of National Forest. Last I checked, trees were carbon absorbers, but hey, we’re out to have some fun. Then, they install big diesel powered ski lifts. They haul us up the hill, solely so that we can slide down, back to where we started from. A less practical activity can scarcely be imagined.

Trying to offset all of these carbon emissions with compact fluorescents is like trying to bail out the Titanic. With a teaspoon.

No, if we were really serious about slowing down greenhouse gas emissions to preserve snow, we would close down the ski areas. Of course, that wouldn’t leave many people to care about whether there was fresh powder snow on the mountains or not.

I guess it would be a case of having to destroy the village in order to save it.

New Year's Resolutions

I went to the gym this week, and the place was packed. Every machine had someone using it, and many of the machines had at least one person waiting their turn.

It’s always crowded this time of year. I attribute it to New Year’s resolutions. Folks get done with the holidays, resolve to lose some weight, and start going to the gym to work out. The crowds usually thin out by early March, as willpower gives in and old habits resurge.

I don’t really make New Year’s resolutions. My process is more like goal setting for the year. I start with areas of my life where I have commitments, than I develop tangible goals that relate to those commitments. It’s the underlying commitment that keeps me going, not the goal itself.

For 2010, my goals are based on three commitments. First, I want to push back against the decrepitude of the aging process. I’m committed to maintaining my physical capability to the greatest extent possible. Second, I’m going to increase my level of fiscal security. It is still a pretty dicey economy, and no job is certain in today’s world. Still, if I have to swim against the economic tide, I want to be the guy with fins on. Third, I’m committed to living as rich a life as I can, subject to the constraints of health and finances. Family, friends, and experiences enrich our lives, and I want as much of all of them as I can get. After all, you could move to a mountaintop in Idaho and subsist pretty cheaply, but who wants to live on a diet of potatoes?

In the area of health and fitness, my goal is to run 50 kilometers of road races throughout the year. When I run a 5K, I’m not competing against anyone but myself. I am not going to be the fastest runner, although I can win my age group if I’m the only one who shows up. However, the mere act of getting out there with other serious runners on a regular basis forces me to maintain a higher training level than I would without the road races. So far I’ve kept my body mass index below the 25 that is the threshold for overweight, and I intend to keep it that way.

In terms of economic security, I plan to work the problem on both defense and offense. By defense, I mean building up my cushion of assets in case I have to make an involuntary job transition. By offense, I’m talking about increasing either my current income, or my marketable skills.

On the defense side, my savings goal for the year is 20% of my earned income. Most of that will be automatic. Between salary deduction for my 401K and the matching corporate contribution, I’ll get to 15%. The last 5% will take the day to day discipline of saying no to temptation. Do without if you don’t need. Make instead of buy. Repair instead of replace. Since I am the least handy guy in North America, most of the heavy lifting in this category will be under the heading of “do without if you don’t need it.” I’m not planning on doing my own plumbing, or even changing the oil in my car.

I’m also going to continue the deleveraging project I started last year. By making extra equity payments on my mortgage (a guaranteed 6.5% rate of return), I hope to get my total indebtedness down below $60K, split between primary mortgage, home equity line of credit, and car loan. My credit cards will continue to be paid in full every month.

Increased savings improves my long term economic security. In the short term, I’m also taking steps to increase earnings and boost my marketability in a crummy job market. Tax season is starting, and I’m working for H & R Block again to make a little side money. The goal here is to pick up $2000 in additional income. This is just about what I pay my lawn service every year. Basically, I’m hoping to trade knowledge work in a climate controlled office for dirty, physical work outside. Based on last year’s results, $2000 will be a stretch. I may have to develop a Plan B to make up the balance of what I don’t earn doing taxes.

I’m also going back to school again. Post-MBA, I started taking graduate level classes in accounting last fall. My intent is to pick up 9 more credit hours in 2010. By taking one class in Spring, Summer, and Fall semesters, I’ll only need one more class to have enough credits to teach at the college level. Also, if the worst occurs at my current job, more accounting knowledge will help me stand out from the other job seekers out there.

But man does not live by bread alone. I could easily save more money by sitting at home watching television, only venturing out to work, jog, or attend classes, but that would be boring. Besides, my wife would only take so much of that before she snapped and smothered me in my sleep. So in addition to struggling to get rich, I’ll expend considerable energy and time into enriching myself in ways other than monetary.

It has been a few years since I’ve been out west on vacation. It’s a big country, and I want to see more of it. So one of my 2010 commitments is to visit one of the National Parks that I haven’t seen yet. The documentary maker Ken Burns calls the National Park system “America’s Best Idea.” I’m leaning towards Yosemite in Northern California, maybe in combination with a trip to the wine country.

There is an old saying: “No man is poor who is rich in friends.” I don’t have too many friends who will volunteer to pay my light bill, but I still cherish them. To celebrate and enjoy my friends, I’m committed to holding 12 in-home entertainment events this year. This covers everything from formal dinner parties to backyard cookouts to our annual Christmas party (even if I do end with the Chia pet playing “dirty Santa”).

The last of my enrichment projects is internal. Along with the formal education I’ve addressed above, I’m continuing to read authors from “The Lifetime Reading Plan,” a book I first discovered in my father’s library over thirty years ago. My goal for this year is to tackle three of the selections in 2010.

Finally, I’m going to continue posting in this blog. The goal here is a minimum of 60 posts over the course of the year, at least once a week.

After all, everybody deserves my opinions. And now back to our regularly scheduled productions.

Who Knows What Evil Lurks in the Hearts of Men?

I learned a new expression this week. Shadow inventory. The term refers to real estate properties that haven’t been foreclosed on, but for which no one is paying a mortgage.

In the real estate business, inventory is the number of houses in an area that are listed for sale. There are four sources of inventory: new construction, voluntary sales because people are moving or downsizing, short sales, where the owner is selling for less than the mortgage, with the bank’s blessing, and foreclosures.

The last two, short sales and foreclosures, are forms of distressed sales. In a short sale, the bank takes a haircut on what it is owed, and the homeowner loses any equity they ever had. Banks don’t like short sales, but they prefer them to foreclosures. With a foreclosure, the bank has to get the former owner out of the property, a difficult and expensive process. Then the bank has to maintain the empty property until it can be sold, another difficult and expensive process.

With the collapse of the housing bubble and subsequent deep recession, banks have been so inundated with non-performing loans that their foreclosure departments have not been able to keep up. So they have put new foreclosures on hold until they can clear their books of the current wave of housing repossessions.

I know some people who are living in shadow inventory right now. They have lost their income and stopped making mortgage payments, but they haven’t been kicked out of the house yet. In some cases, people have been in default, but still in possession for over a year now. Basically, they’re squatters in what used to be their own home.

I’d hate to live with that sword of Damocles hanging over my head. It has got to be tough living your life from day to day, knowing that at some point the foreclosure people are going to work their way around to you and boot you out of the house. Even the name sounds sinister. Shadow inventory.

This shadow inventory is significant, because before the housing economy can recover, the excess inventory of houses built during the bubble years have to be absorbed. Until that process is completed, housing prices will continue to slide downwards.

One of the standard tools for forecasting the direction of the housing market is to watch the level of inventory. When inventories of houses listed for sale are low, prices tend to rise. When inventories are high, that is a signal that prices are going to fall.

With a pool of shadow inventory of unknown size, it becomes impossible to follow that process, because as houses are sold, more houses come on to the market to keep pricing levels down.

One thing’s for sure. If there is enough inventory hidden from the market to warrant a special name, we’re a long way off from hitting bottom.

King of the World

The Hollywood director James Cameron has set the benchmark of most expensive movie ever made three times. When he made Terminator II: Judgment Day, it was the first movie ever made with production costs exceeding $100 million. Questioned about the high costs of making the movie, Cameron answered his critics by stating “It’s all up there on the screen.”

He was right. The special effects of Terminator IIwere ground breaking and spectacular. It was the first movie to use the technology of digital morphing, having a character change shape seamlessly on screen. Married to pulse pounding story and memorable characters, Terminator II went on to become a monster hit, spawning two additional sequels, and cementing Arnold Schwarzenegger as the #1 movie star in the world at that time.

Later, Cameron helmed the movie Titanic. The cost overruns on this $150 million movie were so extreme that Cameron had to forfeit his normal director’s fees before the studio would release additional funds to allow him to finish the movie his way. Before the movie was released, an executive of a rival studio sneered “Everybody knows what happened. The boat sinks. Everybody dies.”

The story of star-crossed lovers, combined with special effects and elaborate sets that created total realism, convinced audiences to see this movie over and over again. Titanic became the most successful movie in the history of cinema, pulling in over $1.8 billion in global box office.

This month James Cameron released his first movie in twelve years. Avatar took four years to produce, and cost estimates are ranging from $250 to $300 million. New motion capture technologies had to be invented to allow the screenplay Cameron wrote to be presented with the verisimilitude to allow the suspension of disbelief. At the upper end of that cost range, the movie would have to reach $750 million in global box office just to break even. Since the American movie going public typically supplies half the sales dollars for a film of this type, that means that the domestic gross on Avatar would have to be over $350 million to have a prayer of paying back the investors.

The early reports from this weekend’s box office are in. After just under three weeks, Avatar has pulled in $352 million in domestic sales. Globally, the news is even more spectacular. Avatar has just crossed over the $1 billion mark in global box office.

To put this into perspective, only four other movies have cracked past the billion dollar mark. The Dark Knight ($1.001B), Pirates of the Caribbean: Dead Man's Chest ($1.07B), Lord of the Rings: Return of the King ($1.1B), and Titanic ($1.8B). At this rate, by next week James Cameron will have directed the top two grossing movies of all time. He will be the only director to direct a billion dollar movie that wasn’t a sequel.

The movie business is one where you have to lay down large bets, and nobody really knows what is going to work. Even making a low budget film requires an upfront investment of $10 to $20 million, with no guarantee that anybody is going to want to pony up eight bucks for a ticket. For every My Big Fat Greek Wedding, which grossed $368 million worldwide on a $5 million production budget, you get a Speed Racer, which cost $120 million to make and earned $94 million in worldwide ticket sales.

Basically, making movies is a gigantic crapshoot, and nobody places bigger bets than James Cameron. But I wouldn’t bet against him.

Phyrrhic Victories

Pyrrhus was a king of Epirus, one of the city-states of ancient Greece during the Hellenistic period. He was considered one of the greatest generals of the ancient world. He led armies in wars against both Carthage and Rome, the two major powers in the Mediterranean at that time.

Invited in by Italian cities revolting against the growing power of Rome, in 275 BC he led a combined Greek and Macedonian army against Roman forces on the Italian peninsula itself.

In 279 BC, his army met a Roman army at the battle of Asculum. The Romans suffered losses of over 6000 men, while Pyrrhus lost only 3000 soldiers. The Roman legions were pushed off the field of battle, leaving Pyrrhus in possession of the ground. Tactically, Pyrrhus had won the fight.

But the Roman losses could be replaced with fresh recruits. Pyrrhus, operating far from his base of operations, could not replace his losses. Strategically, the loss at Asculum had weakened Pyrrhus more than it had Rome.

Knowing this, when a subordinate attempted to congratulate Pyrrhus on the victory, he was heard to say “Another such victory and we are undone.”

What has this story got to do with the health insurance reform bill passed by the Senate last week?

Well, the legislation passed the Senate on a straight party line vote. Not a single Republican senator could be induced to break ranks to vote for it, and we know that the inducements offered were huge. Democratic senator Ben Nelson of Nebraska got a $100 billion bribe, er, inducement, for his state as the last hold out from his caucus. Surely Olympia Snowe of Maine could have pried loose something from Harry Reid. A promise to make the Bath Iron Works the sole provider of ships to the Navy, perhaps.

But the Republicans stuck to their guns, leading to the spectacle of a major piece of legislation, affecting one sixth of the American economy, having to pass in a purely partisan fashion.

Although it got sixty percent of the available Senate votes, the health care insurance overhaul was far less popular among the populace it is intended to serve, and who will have to pay for it. I am speaking of the American public. According to the latest Rasmussen poll, 55% opposed the bill that the Senate just passed. Among likely voters, 81% think that the plan will lead to higher middle class taxes.

Among Democratic senators, the belief seems to have been that they had to do something in the area of health care, that leaving the system as currently configured would be worse than a bad bill.

The 2010 elections will show whether passing the current legislation was a true victory, or merely a step towards the Democrats becoming undone.