High Gas Prices: Who's to Blame?

I spent over $65 filling up the gas tank of my car the other day. Six months ago that would have cost me less than $50. Gasoline prices have shot up over the past year, and are well over $4.00 a gallon in many parts of the country.

The rapid rise in prices is putting a squeeze on many household budgets. Inevitably, people tend to hate on the big oil companies, blaming them for the increase in energy costs. And those companies are reporting high profits. Rather than blaming the oil companies for high prices, however, we need to look deeper to understand what is driving the costs of a barrel of oil upward. After all, when oil prices drop, so do gasoline prices. Not always as fast a drop as when they go up in lockstep with cost increases, but if oil prices were to fall substantially, gas prices would eventually follow.

The first of the forces pushing upwards on the cost of oil is the Federal Reserve’s program of Quantitative Easing. In order to try and stimulate the economy, the Fed has been printing money and putting it in circulation. $600 billion on this round, and this is QE II. The theory is that flooding the economy with money will jumpstart spending, because people will have more cash to spend.

Another term for quantitative easing is devaluing the currency, but that would be politically incorrect to say, so no one in Washington is using that term. Devaluation does help expand exports, so in that sense it does stimulate the economy. But it also makes imports more expensive. As the dollar becomes worth less, because there are more of them around, commodities that trade on global markets, like oil or gold or cotton, go up in dollar terms. Printing money is a big chunk of why gas prices ascended to the stratosphere in the last six months or so. But it’s not the whole story.

The other piece of the puzzle to higher gas prices is financial speculation. There is a very active market in oil and gas futures. These are contracts where you can lock in a price for future deliveries of oil at a specified price. If you don’t need to take delivery of the oil, you can resell the contract and pocket a gain or loss, depending on what direction oil prices have moved since the original contract was purchased.

There are bona fide purchasers of oil futures, companies like airlines and large trucking companies. These guys like the stability of knowing what their fuel costs are going to be six months down the road. There are also speculators trading in contracts for profit. They never intend to take delivery of the oil, but merely to resell the contract. Traders perform an important market function. They provide the liquidity that makes the market function.

But when speculative trading outweighs bona fide purchases, then the market is driven by speculation, and not the underlying fundamentals of supply and demand for the actual commodity being traded. Fueled by borrowed money, Wall Street hedge funds are now buying and selling more oil contracts then bona fide oil users.

We are seeing straightforward momentum investing driving oil prices these days. Rising oil prices make futures contracts more valuable. Other investors see the profits, and leap into the market as well, driving the price higher. The higher prices make the new contracts profitable, pulling more money into the market. The result is a price spiral that continues as long as money pours into the market, and with borrowed funds, money can pour in for a long time.

The villains at the gas pump are not the oil companies. It is a combination of government debasing the coinage, and Wall Street speculation that is pushing up prices at the pump.

In the face of large impersonal forces beyond my control, I’m not shaking my fist and cursing at the oil companies, or even at the hedge funds running the game. I’m trading in my gas hog for a small car that gets better milage.

Raising Taxes on Oil Companies

All the signs of spring are here. The grass has started growing again, the birds are singing, and the sap has started rising in Washington.

As a response to high gasoline prices, legislation has been proposed to increase taxes on the five largest oil companies. It is being billed as the removal of tax breaks, which strikes me as terribly disingenuous. If you are raising revenue, that is a tax increase.

The news reports I have read are short on details about what specific subsidies are being changed or lifted. Apparently some of the provisions under review have been part of the tax code since the 1920’s.

The biggest piece of the puzzle, however, is undoing a change to the tax code that was made in 2005. This change lowered the maximum income tax rate from 35% to 32% for companies in certain manufacturing industries. The proposed legislation raises the income tax rate for these five companies from the current 32% to 35%. This tax increase provides $18 billion of the total $21 billion increased tax revenue of the whole package.

First off, when the government changes your tax rate from 32% to 35%, that’s not eliminating a subsidy, that is a tax increase. The next point of contention I have with this is why single out the oil and gas industry? Why not increase taxes on the car companies, or paper products manufacturers? And then there is the question of what makes these five companies so special? That proviso has Supreme Court challenge written all over it.

The most amazing thing about this proposed legislation, however, is that it will do nothing to reduce gas prices. High gas prices are what made these companies a target in the first place.

So let’s take a concern of the citizenry, use that as an excuse to raise taxes by scapegoating the largest players in an industry. Ignore the reality that what you propose is probably unconstitutional. Sell it by claiming you are eliminating subsidies, instead of calling it an increase. And finally, the actions you propose will do nothing to address the original concern of the citizens. That’s our Congress for you!

There are times when I despair for the future of the republic.

Osama Bin Laden Sleeps with the Fishes

Well, it took ten years, but justice finally caught up with Osama Bin Laden. Chalk one up for the good guys.

I’m intrigued by what appears to be unseemly haste in disposing of the carcass. I understand the desire to appear responsive to the Islamic world’s sensibilities, but it was less than twelve hours after the news broke that the first deniers and conspiracy theorists began making pronouncements that the whole incident had been faked. I would have dumped the body in a freezer until an independent authority could verify the identification process. Then weight the corpse and deep six it.

For me, the revelation that Bin Laden wasn’t hiding out in a cave is the most fascinating and disturbing part of the whole story. Abbottabad is only forty miles outside of Islamabad, the capital of Pakistan. One of the interesting wrinkles is that the entire operation was a massive violation of Pakistani territorial sovereignty. This was not a drone missile strike in the tribal areas along the border with Afghanistan, where the central government’s control is honored more in the breach than the observance. We flew multiple helicopters deep inside Pakistan for a smash and grab operation. I would like to see more reporting on the Pakistan reaction to our unilateral military action inside their borders.

The big news is that it really calls our Afghanistan strategy into question. We invaded Afghanistan nine years ago for two purposes: bring Bin Laden to justice, and prevent al Qaeda from using the country as a staging ground for terrorist attacks on the US. It now turns out that for the last few years, all of our efforts in Afghanistan seem to have been wasted in advancing those goals. Bin Laden wasn’t in Afghanistan to find, and the locus of terrorist planning has shifted to other countries, such as Yemen.

We are involved in a hugely expensive exercise in state building in Afghanistan, working at the end of extremely long supply lines, and after nine years we have little to show for our efforts to build up Afghan institutions. If we stopped propping up the Karzai government with both money and troops, I have little doubt it would collapse like a house of cards. We may be accomplishing small incremental gains in nation building over there, but from what I read, there is nothing like self sustaining development occurring in Afghanistan.

We have achieved our war aims in Afghanistan. It is time to declare victory and go home.

Not working, and not looking for work

Whenever I read anything about the unemployment rate in this country, it usually includes the caveat that the official statistics for unemployment only include people who are looking for a job. There follows a comment to the effect that the true unemployment rate is actually higher, because people who have gotten discouraged and quit looking for a job are not counted.

I can never quite figure out how that works. If you've "gotten discouraged" and "quit looking for a job," the implication is that you have no income, and you are not actively seeking income. The implication of the articles I read is that there are a lot of these people.

What do they eat?

I wake up hungry every morning. Furthermore, approximately six hours after my last meal, I can predict that I will be hungry again. As far as I can tell, we are all in the same boat.

Now, there may be some hunter-gatherers living out in the bush in Alaska who provide all their subsistence from foraging, but the rest of are getting our calories in the form of groceries from the supermarket. That takes money.

I'm also addicted to electricity. When I turn that switch, I for sure want the lights to come on. Okay, maybe I can get by without the lights, but by God that TV better come on. Now the discouraged people without jobs might be able to get off the electrical grid. All it takes is adopting the lifestyle of a medieval peasant. But I can't think of any way that somebody can beat their own metabolism.

And yet we are supposed to believe that large numbers of people are dropping out of the labor force. I just wonder how they make that work.

The Shores of Tripoli

Remember the Powell Doctrine? This was the set of principles to guide the use of military force, developed by General Colin Powell out of his experience in Viet Nam. There were basically three tenets to the doctrine; actually more like three tests to be met before using military force.
1. Can the mission be accomplished with military force? Don’t look for political solutions to be imposed by soldiers.
2. Are we going in with overwhelming force? Once the shooting starts, you better have enough guns to finish the job.
3. Is there a defined exit strategy? Once you have committed to the use of force, how are you going to extricate your troops? Democracies make poor occupying powers.

The first Gulf War was a classic application of this doctrine. We kicked the Iraqis out of Kuwait, and then we went home. The countervailing examples are Iraq and Afghanistan, of course. Nine years later we are still trying to build stable democratic societies so we can get out.

To show that we never seem to learn from our mistakes, consider the military involvement in Libya. Part of the mission seems clear enough, and militarily feasible: our war aim is to end the regime of Moammar Gadhafi. But who do we want to end up in charge over there? Our policy is a little vague on that score, since we don’t seem to be able to identify exactly who the rebels are.

As an aside, in a classic bit of Orwellian Newspeak, our military intervention has been labeled “a humanitarian mission.” Sure, because nothing says you are overflowing with the milk of human kindness like firing off 160 cruise missiles.

Although the NATO forces have complete air supremacy, the Gadhafi regime has not obliged us by folding up their tents and moving into exile. We control the skies, but the regime is reextending its hold on the ground. So we’re in a shooting war, but we haven’t committed the forces required to win.

Finally, what is our exit strategy? Since we don’t have any ground forces committed, we could just end the mission and send the planes and ships home. But after shooting at Gadhafi, what do we do then? If we leave him still in charge, doesn’t that make the humanitarian problem worse? After all, now that the rebels have announced themselves, I don’t think he’ll be satisfied with a live and let live policy.

The time to think about these issues is before you commit military force. Instead, our policy was based on optimistically assuming that the regime would quietly surrender, or go into exile, or some undefined happy outcome. Happy for us, that is. Not so great for Gadhafi or his family.

From where I’m sitting, the situation in Libya looks like a fiasco unfolding in slow motion.

Government Shutdown Averted!

I didn't look at the news much this weekend. As I matter of fact, I pretty much ignored outside events from Thursday afternoon until Sunday night. So I jumped directly from headlines about an imminent government shutdown to headlines that the crisis had been temporarily averted. The Republicans and Democrats had come up with a compromise to keep the Federal government running, at least on a short term basis. My thought was "Crisis? What crisis?" In my average day, I don't interact with the Federal government. It could have been shut down over the weekend, and I would not even have noticed. It makes me wonder: how long could I have gone without the Federal government in operation before it impinged on my life? One way to answer that question is to hope that it would be a good long time before I noticed the lack. In the week of brinkmanship leading up to the final compromise, the media was full of stories about how bad it would be if the shutdown happened. In the television coverage I saw, the unanimous position was that a shutdown would be a Very Bad Thing. But when you really examine the stories, they mostly boil down to this: the National Parks would have to close down for the duration. Oh, the humanity! I went to Yosemite National Park last summer. It was terrific. Not going back this year, though. I don't want to argue that we don't need a central government, and we need to fund the operations of that government. But in determining the level of that funding, there is some instructional value in realizing that it would take awhile to miss it if it was gone.

Japan's Nuclear Nightmare

It takes a lot to overshadow a natural disaster that kills 10,000 people in a First World country like Japan. The specter of a nuclear reactor melting down, with a corresponding massive release of radiation will do it, however. The prospect of five nukes blowing up will really focus your attention.

At this point it is impossible to say just how bad the situation at the Japanese nuclear power plant will end up being. The best guess is that it will be somewhere between the US experience at Three Mile Island (small radiation release, no public harm documented), and the Russian experience in Chernobyl (massive radiation release, thousands of deaths attributable to the accident).

Clearly, the contingency planning on the part of Tokyo Electric was fatally flawed. It looks like their earthquake preparation actually worked as intended. At the first tremor, the reactors shut themselves down. The problems seemed to have a root cause in the tsunami that accompanied the earthquake.

Once a reactor of the type in question is shut down, it still needs circulation of cooling water for days afterward to carry away the residual heat of the nuclear reaction. The circulation is done by big, electrically powered pumps. But when the reactor shuts down, it stops generating power for the all important pumps. The design solution is to install diesel powered backup generators on-site. These generators automatically kick in when the reactor shuts down. In the case of the Fukushima Daiichi plant, these diesel generators were located in a low lying area. They, and the switches that route the electricity, were flooded out by the big wave.

In the aftermath of this crisis, we will face a fork in the road with regard to the peaceful use of atomic energy. One path is to decide that nuclear power is too dangerous to use, that the risks are not worth the rewards. People who follow this path will say “See, we listened to the experts, and they were wrong. They promised us it was completely safe, and now there has been a radiation release. We have to shut down all the nuclear power plants right now.”

This appears to be the position of the German government. This week they shut down seven reactors, and plans are afoot to close another ten. Since nuclear power provides about 25% of Germany’s electricity, that will leave a large gap to fill. The Germans are acting as is there is an imminent failure risk, in spite of the fact that Germany is tectonically stable, and has never been known to suffer from tidal waves.

The other path is to learn from this situation, and apply those lessons going forward. There is an old saying that experience is what you get when things go wrong. Plenty has gone wrong at the Fukushima Daiichi power station. But we can learn from the mistakes, whether they be mistakes of planning or of execution.

In light of concerns with global warming and oil depletion, due to the uncertainty of wind and the inability to store solar energy for nighttime use, nuclear power is one of our best bets for a secure, reliable energy future. We can close the systemic gaps revealed by the current Japanese disaster, and strengthen the safety systems going forward. But we have to have the will to face the problems, instead of turning our backs to the technology.

We have Democratic and Republican parties. We have Green parties and Tea parties. I’d like to see a Let’s Keep the Lights On party.

Strategize This!

Embedded into our notion of what “character” means is the concept of consistency. When we talk about a person’s character, to some extent we mean predictability. Your character shapes your response to a changing situation. By knowing someone’s character, we can have confidence in how that individual will react to circumstances. If we speak of someone as brave, we would be surprised if they ran from danger. If we speak of someone as cowardly, the surprise would be if that person stood up to danger.

I bring this up because the Obama administration is behaving out of character with regard to the recent rise in gas prices. The President has made statements indicating that he is considering opening up the Strategic Petroleum Reserve and selling oil to bring down gasoline prices.

These comments make me think that the administration is having a hard time with the concept of a “strategic” reserve. Strategy implies a long term orientation. In the case of the Strategic Petroleum Reserve, it was established to ensure a US based source of oil in the event of a major supply disruption, like the OPEC oil embargo.

There is no evidence of any supply interruption occurring in today’s situation. There are no shortages of gasoline being reported. Instead, smoothly working market mechanisms have driven up oil pricing in response to the Federal government printing money (the Fed’s quantitative easing II), and geopolitical instability, particularly the civil war in Libya.

I like low gas prices as much as the next guy. But when gas prices go up, I tend to try and find ways to drive less. When pump prices cracked past $3.25 per gallon, we cancelled that tractor pull set up for next week. This is normal market behavior. When the price of a commodity increases, buyers begin to use less of that commodity. Long Sunday drives: bad; long Sunday crossword puzzles: good.

The reason I find the Obama administration’s reaction to high gas prices inconsistent is because they want us to use less gasoline. Internal combustion engines are a major source of greenhouse gas emissions. If you’re opposed to the prospect of global warming, you should celebrate increases in gas prices. Every nickel rise in gasoline prices moves another thousand hybrid vehicles off showroom floors. Pumping oil out of the Reserve to lower gas prices works directly against that situation. So you can see why it appears out of character for this administration.

Unless the true character of the administration is to pander to the voters in every possible way. The President’s statements are perfectly in character with that end.

Politicians on the Lam

Wisconsin’s Democratic state senators are still missing in action. They fled the state a couple of weeks ago to deny a quorum, preventing the incoming Republican majority from passing legislation that would eliminate the right of state employees to bargain for fringe benefits. Since a large chunk of the union dues paid in the state flow directly into Democratic campaign coffers, The Democrats’ desperation to defend their power base, as well as the Republicans’ determination to reduce union power are both understandable.

When the Dems first bolted across the border to Illinois, I appreciated the free entertainment. I enjoy a good piece of political theater as much as the next man, and it was good of our fellow countrymen in the great white north to provide a terrific piece of grandstanding. It reminded me of professional wrestling. The same histrionics. The same larger than life conflicts. And ultimately, the same preordained conclusion. After all, the Republicans had the votes.

By going on the lam, the Democratic senators focused a lot of media attention on the issue. They also bought time to try and swing public support to their side. All well and good, and for the first few days, entertainment value aside, I thought the desertion a legitimate delaying tactic.

That changed when the Democrats realized they could stay away indefinitely, and began issuing demands for their return. They would return to the state capitol, but only if the offending legislation was removed from consideration. That is not only profoundly undemocratic, but it sets a dangerous precedent as well.

Representative democracy is primarily a matter of majority rule. If you get 50% plus one vote on an issue, the gavel comes down, and it is the law. 100% of the citizens must comply. There are two types of exceptions to the rule of the majority. First are rights that are built into the state or Federal constitution. These rights, such as freedom of speech and religion, are unalterable by a majority, no matter how large. A minority of one gets to practice his right of free speech, no matter how repellent that speech is, and 100% of the citizens must allow that. An independent judiciary acts as the safeguard of those rights.

You can also have preset procedural rules requiring a greater than 50% plus one majority for certain purposes. Three quarters of the states have to ratify an amendment to the US constitution. In the US Senate, 60% of the Senators must agree to stop debate before a measure can be voted on. California has a rule that two thirds of the legislature has to approve a tax increase before it can take effect. The key to these procedural safeguards against change are that they must be put in place before they take effect.

What the Wisconsin Democrats are doing is demanding a power be ceded to them, the power to block legislation they don’t like, even though they are in the minority. Regardless of your stand on their objections to the law in question, this tactic is a power grab, plain and simple. It goes beyond partisanship into a tribal level of identity politics.

It also provides a dangerous precedent. Until recently, Wisconsin was a majority Democrat state, with the Republicans in the minority. If, during the Republicans time of ascendency, this refusal to participate actually bears fruit for the Democrats, they will find the taste of that fruit bitter indeed, and sure to prove indigestible.

After all, what is sauce for the goose is sauce for the gander. Should the current Democratic tactics work, then the Republicans will surely adopt them when next the political pendulum swings to the other party.

We will have moved from principled disagreement and potential compromise to the political equivalent of hostage taking.

Better Living Through Tax Credits

Middle class and upper middle class people are always astonished when I tell them that the battle to redistribute income is over, and they lost decades ago. The Federal government does a massive amount of income redistribution, and has for a long time. Nobody is even talking about limiting this.

I’m referring to the Earned Income Credit, and the Additional Child Tax Credit, which are two of the big tools the government uses to hand out money to the lower class. Consider a single mother with two children, making $19350 a year as a nurse’s aide. Assume she pays $1935 in withholding a year.

First, her standard deduction as Head of Household, combined with three personal exemptions, reduces her taxable income to $0. Most people don’t have a problem with this. If you don’t make much money, we’ll give you a pass on paying income tax. After all, everyone else gets those same opportunities to avoid taxes, based on their household scenario. So this woman will get a full refund of the money withheld from her paychecks, $1935.

But we’re not anywhere close to done. She has two kids, which is a tax advantaged situation. If she had owed taxes, she would have been eligible for the Child Tax Credit, a nonrefundable credit of $1000 per child. Since she doesn’t owe taxes, instead she qualifies for the Additional Child Tax Credit, a refundable credit of $1000 per child. This boosts her refund by $2000. Her refund check is now up to $3935.

Now let’s look at the Earned Income Credit. The amount of the credit varies with the number of children (up to three) and the amount of earned income. As income goes up, so does the credit, until it reaches a plateau. As income continues to go up, the credit begins to phase out. In our example, with earned income of $19350 and two children, the amount of EIC will be $4427.

As the piece de resistance, let’s not forget to add in her Making Work Pay Credit. This $400 credit is part of the Obama stimulus package, and will not be part of the tax code next year. It is essentially a refund of the Social Security taxes you pay on the first $6000 of earned income.

Let’s add it all together:
Withholding $1935
Add’l Child Tax Credit $2000
Earned Income Credit $4427
Making Work Pay $ 400
Total Refund $8762

In our example, our hypothetical tax filer got $6427 from the government, in addition to $2335 returned to her from paycheck withholding. That’s a wage increase of 33%. Where does that 33% increase in pay come from? Why, it comes from the taxes that higher income taxpayers put into the system. Or even from the taxes that lower income taxpayers without minor children pay into the system. Or from the taxes that married couples that both work pay.

But however you slice it, the government is taking money away from some individuals, and handing it over to other individuals, without asking anything in return. That is the income redistribution that is at the heart of socialism.

Adventures in Taxland

True conversation with a tax client:
“How come I’m not getting as big a refund? Last year I got almost $6000, and you’re telling me that this year I only get $1000.”

“Well, sir, last year you claimed your daughter and granddaughter as dependents. The child entitled you to the Additional Child Tax Credit and the Earned Income Credit on your wife’s earnings. That made the difference.”

“Why can’t I claim my daughter and granddaughter this year?”

“Your wife told me that they moved out after living with you for only five months last year. They have to live with you at least half the year to claim them as dependents.”

“I’m just going to make a call to my daughter, and then we’re going to get that changed. She’ll tell you she lived with us all year long.”

“Sir, I’m not going to change this return. Before you got here your wife gave me this information, and you can’t unring a bell. If I knowingly falsify a tax return, I could lose my license.”

“Then I’m just going to get my return done somewhere else.”

Here is where we deviate from what actually happened. What I would have liked to have said:
“Sir, sit your ass back down. I have your social security number, and your wife’s social security number. I also have the 800 number the IRS uses to report tax fraud. Unlike you, I actually pay taxes, and I’m offended by your attempt to defraud the system. Now, we’re going to file your tax return as it stands, and you’re going to sit there and sign it.”

Of course, blackmailing your clients probably isn’t a good business model in the long run. What I actually said:
“It’s your prerogative to get your taxes done anywhere you want. Here is your wife’s W-2 form.”

You can’t always get what you want.

Egypt

Watching the events unfold in Egypt over the last couple of weeks puts me in mind of the old saying that the written Chinese character is the same for both “crisis” and “opportunity.” This peaceful revolution, fueled by massive discontent at all levels of Egyptian society, has swept away the Mubarek administration. Whether this is the start of true regime change, or merely a shuffling of faces at the top remains to be seen.

It was interesting to watch the waffling and sail trimming of the Obama administration as events unfolded. If you don’t have any influence on a situation, and you don’t have a clue as to how it is going to turn out, it is probably best if you keep your mouth shut about things, for fear of inserting your own foot. Aside from philosophical support for democracy in general, and the basic human right of peaceable assembly in particular, US policy should have been that this was an internal Egyptian matter, end of comment.

Much of the discontent with the Mubarek regime was driven by economic issues, both of the middle class and of the poor. By some estimates, half of the recent college graduates in the country are unemployed. Among the poor, the desperation and despair are even sharper.

Egypt does not produce enough food to feed its 79 million people. As a food importer, the country has been buffeted rises in commodity prices over the last year. In America, when wheat prices double, a family’s grocery bill goes up five or six dollars a week. In Egypt, when wheat prices double, people who were spending 50% of their income on food are now spending 100% of their income on food. When a large percentage of your population goes to sleep hungry at night, that is a recipe for political instability.

My take on things is that the mandate of the new government will be to create huge numbers of new jobs, while simultaneously lifting incomes and guaranteeing subsidence for the bottom 30% of the populace. And, oh yeah, you’ve got to do this fast, before the euphoria wears off and things turn ugly again.

Sometimes the crisis outweighs the opportunity.

Cut and Run

Jane Harmon has just announced that she will be resigning from the US House of Representatives to take over as the head of the Woodrow Wilson Center, a Washington think tank specializing in international relations. Harmon is a nine term Democrat holding the seat for California’s 36th District, a swath of coastal Los Angeles.

Excuse me, but didn’t she just get reelected, like, three months ago? What happened? Did she get to Congress after the last election, realize that the Democrats weren’t in charge of the House anymore, and immediately put her resume on the street?

Hers was apparently a pretty safe district, but she didn’t run unopposed, which meant that she probably spent at least a million bucks on her reelection campaign. That’s a lot of money. Other people’s money. I doubt her conversation with major donors included a line about her needing their cash, because she needed a paycheck while she was searching for a better gig. How about the campaign staff? Not the professionals, but the volunteers. “I need you to give up your time to support me, at least until I hear back from the search committee.” And don’t even get me started about perpetrating a fraud on the voters, who now get to foot the bill for a special election to replace her.

I don’t know all the ins and outs of her situation, but it’s hard not to be contemptuous of someone who runs for office, and then bails out upon receipt of a better offer. Of course, in all fairness, I feel pretty much the same way about Sarah Palin.

Bundling versus Unbundling

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

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

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

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

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

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

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

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

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

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

Tax Tales

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

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

Or another:

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

Or this one, taken over the phone:

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

Martin Luther King Day

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

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

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

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

Hit the Ground Running

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

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

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

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

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

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

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

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

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

Sarah Palin and Gabrielle Giffords

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

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

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

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

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

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

2011 Goal Setting

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

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

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

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

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

Refund Anticipation Loans

There has been interesting news in the tax preparation world this week. The Office of the Controller of the Currency (OCC) announced on Christmas Eve that it was directing HSBC Bank not to fund any refund anticipation loans for H & R Block in 2011. Accordingly HSBC cancelled their contract with HRB, leaving Block without a provider for the coming tax season.

Since the ability to provide refund anticipation loans (RAL) to tax clients was a major marketing tool for Block, this is considered a body blow to the company. Shares of HRB dropped almost 8% when the news was announced.

A RAL is a short term loan made at the time a tax return is filed. The size of the loan is usually the calculated amount of the refund, less tax preparation fees, interest, and charges. Basically, the tax client signs over their IRS refund to the bank making the loan. When the IRS sends the refund to the bank, the loan is repaid. With electronic filing, the time the loan is outstanding averages about 10 days.

H & R Block bent over backwards to prevent this from happening. The company even offered to cover any credit losses that HSBC would have had, making the loans essentially risk free. Since the OCC did not change their position, I have to conclude that protecting the integrity of the banking system was not driving the regulatory action. This looks like a politically driven decision, based on consumer protection arguments.

Consumer protection activists dislike RAL’s, because the loans have very high calculated interest rates. This is because the $29.95 charge to process the loan is added to the actual interest charges, then divided by the length of the loan to determine the APR. For an example, let’s suppose you borrow $2000 at a 24% interest rate for 10 days. The interest charge would be about $13. A high interest rate, but the overall bite of $13 bucks isn’t too bad.

Now, add in the $30 loan processing fee to the $13, and work the calculation backwards. That calculation is $43, divided by $2000, times 36. That comes out to just over a 77% annual percentage rate.

Your outrage over this depends a lot on how you look at the transaction:
Outlook I
“I’m going to loan you money and charge you 77% interest.” “That’s usury! You’re no better than a loan shark!”

Outlook II
“I’m going to loan you $2000 for one to two weeks, and it will cost you $43.” “That doesn’t sound so bad, and I’d like to get the money as soon as I could. I’ll take the deal.”

In point of fact, millions of tax clients took the deal every year. Now they will be “protected” from making this choice by the OCC.

Qualitative Easing Explained...Twice

There is a service that takes text and converts it to simple animated video. Here is one that has been making the rounds. It is quite critical of the Fed's move towards quantative easing (AKA pumping money into the economy). The deadpan delivery of the computer generated voices makes it hysterically funny.


The video above got enough play to cause somebody to generate a response in the same format:


It is not as funny as the first one, but probably a little more balanced. I still think the Fed is playing with fire by running the printing presses.

A Bad Deal All Around

Sometimes compromise means taking the best from both sides of an issue, creating a consensus that leads the way forward.

That’s not what happened with the recent tax deal put together between the White House and the Republican leadership, however. In that case, the worst of both sides was adopted. The deal panders to the short term interests of the principals, while creating the conditions that will lead to more long term pain further down the road.

The Republicans campaigned on the twin themes of rolling back ObamaCare and enforcing fiscal discipline. The White House wanted to raise taxes to combat the deficit spending they created. So, to compromise, let’s do neither of those things.

The White House agrees not to raise anyone’s taxes. In exchange, the Republicans will support extending unemployment benefits for another 13 months, along with two more years of not applying social security taxes to the first $6600 of earned income. Oh yes, we’re continuing heightened payouts on the earned income credit as well.

The net effect of this deal is that government spending will exceed revenues by almost a trillion dollars next year and the year after. We will continue to provide a reverse incentive to find work, allowing people over two years to stay on the dole. The long term sustainability of the social security program is made worse, because we are starving the program of revenues from a vast cross section of the employed.

This is the reverse of leadership. This is kicking the problem of fiscal deficits down the road two years, while entrenching an entitlement mentality ever more firmly into a large section of the populace.

In every game of musical chairs, eventually the music stops. In this game of political musical chairs, what scares me is that by the time the music stops, we’ll find that all of the chairs have been taken away, and we’ll all fall down.

'Tis the Season ...

This is my annual Christmas diatribe. I can’t keep up my reputation as a “Bah, humbug” kind of guy without one.

This is the time of year when we are encouraged to give more. Everywhere you turn, someone has their hand out, asking for a donation. Bell ringers at the grocery store. Angel trees at church. At work we are running a cash drive to raise money to buy Christmas presents for a number of families.

I think we should all just go out to eat instead. Take the twenty bucks we could give away to buy presents for somebody else’s child, and buy a steak dinner with it.

“Oh, that’s horrible.” “Have you no Christmas spirit?” No, not much. Still, even if I had the Christmas spirit, my method makes more economic sense.

First, consider multiplier effects. In economic terms, a multiplier is when you spend a dollar, and the business where you spend it pays their employees and their suppliers. Those suppliers, in turn, spend their share of that dollar on their suppliers, and so on. Economic activities with a high multiplier give you more bang for the buck. A low multiplier means that the impact of a dollar spent is damped out pretty quickly. So if you want to spread Christmas cheer as widely as possible, you should seek out ways of spending your money with higher multiplier factors.

Think of throwing a stone into a pond. The ripples spreading out from that event are a function of the multiplier. The higher the multiplier factor, the further the ripples spread before dying out.

Consider buying toys with your money. Almost all of the toys in the stores are imported from China. Even if the retail markup on those toys is 50%, the immediate impact on the American economy is less than a dollar. If the first stage of your calculation is .5, it is very difficult to see how your multiplier can get over 1.0. Instead of throwing a stone into a pond, imagine throwing a stone into mud.

Now consider dining out. When you buy that steak dinner, the employees of the restaurant get paid. But all of the purveyors to the restaurant also get paid. And those purveyors are sourcing Colorado beef, corn fed with Iowa grain. All of the money you spend stays on shore, and get respent by Americans. The multiplier effect is much higher than if you buy toys at Wal-Mart.

Also, if you’re feeling generous after your steak dinner, you can give a bigger tip to the server. After all, it’s Christmas time. That way, the server can go out and buy presents for her own kids, instead of having strangers buy for them. Maybe it is just me, but I’d rather support the working poor than the non-working poor. At least the working poor are in the game, trying to support themselves and their families. Between Section 8 subsidized housing, food stamps, and Medicaid, I feel like my tax dollars are providing enough charity. I want to use my uncompelled donations to give extra benefits for extra effort.

And finally, if you give cash to the annual Christmas drive, you don’t even get to see the results of your giving. When you eat out, you get to enjoy your meal, deriving a real and tangible benefit from your expenditure. All in all, it makes a lot more sense to dine out more than to give to charity this time of year.

Oh, who am I kidding? I put twenty bucks in the envelope along with everybody else.

Full Body Scanners

There has been a ton of foofarah surrounding airport security procedures this last week. The TSA has rolled out the new full body scanners at terminals across the country. These are the machines that use a low level of backscatter x-rays to produce a picture that looks like a shadowy outline of you without any clothes on. Installing the scanners was put on a crash basis after last Christmas' underwear bomber. He only managed to set his own genitals on fire, but his aborted attack revealed a weakness in the current security system.

People are complaining that it is too invasive, that the new scans violate privacy. Others claim that it is an unwarranted government intrusion into our lives. I have read some people urge that we boycott the air travel system until these scanners are pulled.

Worse, because there is a low level of x-ray exposure that is cumulative, frequent fliers may choose to opt out of the scans. If they do, the alternative is a "pat down" inspection. I've got to admit, I have no desire to have a TSA representative prod my genital area, checking to see if I have strapped explosives to my inner thigh.

But you know who I really feel sorry for? The TSA employees.

You want to see what I look like with no clothes on? Bring it, but I can't promise you'll be able to sleep at night. You need to "touch my junk?" Go ahead. You'll be the one to wake up screaming, not me.

It's not just me. A third of all Americans are obese, with another third in the category of overweight. I can just imagine the daily meeting at the airport where jobs for the day are assigned. "Joe, you'll be working the body scanner today." "Oh geez, no! Can't I x-ray bags instead, please!"

Seriously, I can't imagine a more thankless task than trying to stop terrorists from blowing up random flights.

The Pnedulum Swings Back

A week after the election, and the changed realities in Washington are still settling in. The electorate has decided to throw the rascals and scoundrels out, and bring in a new crew of rascals and scoundrels.

The results are not really too surprising, given the partisan overreach of the first two years of the Obama administration. After all, slapping the label “liberal” on a candidate carries significant negative connotations with the public at large. Even the liberals agree with that, which is why they’ve tried to rebrand themselves as “progressives.”

Two years ago, the picture looked quite different. There was plenty of talk about a new New Deal, the assumption that Democratic Party gains signaled a mandate for a gigantic expansion of the power and reach of the Federal government. America was finally going to take its rightful place among the nations of Europe.

It turns out that most Americans don’t want to live in France, even if they could find it on a map. If they did, Massachusetts would be a lot more crowded.

Even more shocking were the pronouncements made about the Republican party. One pundit wrote that the GOP was doomed to be a “rump party of southern white males.” Astonishingly, just two weeks ago editorial writer DeWayne Wickham wrote:
"Don't be fooled by the political gains Republicans are expected to make in the midterm elections. The GOP is on the critical list. The wins it will score, possibly enough to give it control of the House of Representatives, will be short lived. They are the dying gasp of a political party that has become too intolerant and too white in a nation whose population soon will be dominated by Hispanics, blacks and Asians."

Sure, because if you think massive expansions in government programs, along with tax rates to match, it must be because you are racist. The last time I checked, to gain a majority in the House of Representatives, the Republicans had to have more than half the voters choose their candidate in more than half the Congressional districts in this country. That seems pretty egalitarian to me.

But I think the best riposte to the claim that to be a conservative is to be exclusionary is this: New Mexico elected a new governor this week. Susana Martinez is the nation’s first female Hispanic governor. She’s a Republican.

Election Day

If the polls are correct, the Republican Party is poised to retake control of the House of Representatives. The outcome in the Senate is more in doubt. Although the Republicans will certainly pick up several seats, they will probably not gain the majority.

The most likely result will be divided government and gridlock, to which I say: Long live gridlock!

As a proponent of limited government, I am quite pleased at the prospect of a government that can’t get anything done. A government that can’t get anything done will not expand. A government that can’t get anything done will, of necessity, leave the citizens to their own devices. There is a technical term for that state of affairs. It’s called freedom.

The Republicans don’t need control of the Senate to resist the threat of encroachment into private concerns by the power of the state. Under Senate rules, they only need enough votes to prevent cloture and continue debate. The filibuster is a powerful tool for conservatism.

In the US Senate, it requires 60 votes to be an irresistible force. But it only takes 40 votes to be an immovable object.

Not Long Before the End

The fact that we only have one more week before the election makes we want to shout "hurray!" I think we should all have a celebration on Election Day. No, not because we get to see the awesome power of democracy in action, as we and our fellow citizens get to exercise our basic right to choose our political leaders.

The celebration is because after the election, they'll finally stop running campaign ads on television. Thank God for small favors.

Here's an attack ad:
"This politician supports amnesty for illegal aliens and increasing the income tax. He wants to export jobs to China. Do we really want a leader who thinks it's okay to give our jobs to illegals?"

That's an ad attacking a Republican!

Then there are the ads put out by the candidates themselves:
"I'm a gun-totin', truck drivin', Bible reading conservative."

That's from a Democrat!

Then there are the robocalls:
"We have a quick two question survey. 1. Do you support the rise of the anti-Christ, like our opponent? 2. Do you support having good jobs, like our candidate?"

Yes, I'm looking forward to the day after Election Day. Nothing like a little piece and quiet.

Foreclosure Moratoriums

You can look at the mess in the mortgage banking industry, and the current foreclosure moratorium, from two different directions. Looked at from one side, it a mess of terrible complexity and ambiguity. Uncertainty clouds the outlook. Looked at from the other side, there are no issues, and everything is as clear as a summer’s day.

The current moratorium is being imposed by the banks that process mortgage payments. In almost every case, these banks do not actually own the mortgage in question. The bank may not even have been the original lending institution for the mortgage. In today’s housing market, most mortgages are resold shortly after the real estate closing. Thousands of mortgages are pooled together into securities, which are then sold and resold. What the bank is doing is servicing the mortgage on behalf of the investors who actually own it. So in a foreclosure, the bank has to submit paperwork to prove that it has standing to foreclose on an individual. That is complication number one.

The systems for processing mortgage payments are highly automated, which keeps the cost down. Because almost all of the work is done by computer, it only takes a few people to handle thousands of mortgages. But the legal system is not automated at all. In a foreclosure proceeding, paper documents have to be submitted for every case, covering every aspect of the procedure. That is complication number two.

In the past, only a few mortgages were in foreclosure at any one time, compared to the number of mortgages outstanding. After all, is the borrower couldn’t make the payments, they were encouraged to sell the house to get out from under the mortgage. As long as home prices were rising, this worked. With the collapse of the housing bubble, millions of homeowners are underwater, owing more on their house than it can be sold for. Combined with high levels of unemployment, that means the number of houses being foreclosed upon has grown by leaps and bounds. There are vastly more houses in foreclosure than just a couple of years ago. That is complication number three.

In a foreclosure proceeding, the bank has to submit paperwork to back up their position. In the absence of the original loan documents, bank employees sign affidavits attesting that they have reviewed all of the documents connected with a case. It turns out that, faced with a crushing backlog, some of the document signers were filing up to 400 packages a day. They could not possibly have been reading all of the documents to ensure accuracy.

Now that this has come to light, some attorneys who represent homeowners facing foreclosure are arguing that not only are current foreclosure proceedings invalid, but that many past foreclosures are also questionable. That’s the background for the current moratorium. Lots of heat, not much light and clarity.

But as I mentioned before, there are two sides to the story. The other way to look is at the homeowners. These are people who borrowed the money to buy houses, and aren’t paying it back. I think even the attorneys representing them will admit that these guys have stopped paying the mortgage, sometimes years ago.

To me, this seems pretty simple. You stop making payments, you get your butt thrown out onto the street.

Right now, the squatters keep possession of the house until the bank can prove it has right of ownership. All of the delays are on the bank side of the equation. But it strikes me as unjust, that some people can get away with not paying back a loan without consequences. My solution: throw the deadbeats out, but don’t allow the bank to resell the property until they can catch up on the appropriate paperwork. In the meantime, the bank has to pay to maintain the properties, which they have to do anyway, until they can find a buyer.

This way, the squatters don’t get to make chumps out of the majority of homeowners who continue to pay their mortgage every month. At the same time, the banks have a powerful incentive to get their paperwork straightened up. Case closed.

A Right to Fire Protection?

Much has been made of the recent new story in Obion County, Tennessee. This was the story about the rural trailer that caught fire. When the fire department arrived on scene, they realized that the homeowner had failed to pay the annual $75 fee for fire protection. Accordingly, the firemen were ordered to back off, allowing the trailer to burn to the ground, a total loss.

The chief of the fire department has been roundly castigated for his decision. Apparently the trailer owner had paid the fee in years past, but this year he “forgot.” But I don’t see how the fire chief could have made the decision any other way. If the fire had been put out, not only would they have no guarantee that the homeowner would pay up next year, but as word spread, surely other homeowners would also choose to make the payment optional. “I just don’t have the money this month. Besides, what are they going to do, just let the place burn? They won’t do that.”

Here’s what I would like to see reported: in the week or so since this story broke, how many $75 checks have arrived at the Obion County courthouse, from other homeowners who had “forgotten” to pay for fire protection? “Holy crap, ma, they’re serious! They just let the Jones place burn to the ground! We gotta come up with the money, just in case.”

Many people, including me, had not realized that purchasing fire protection insurance was optional. It seems that this situation applies in many rural areas. When you think about it, this makes sense. In cities, and even in the suburbs, built up densities are high enough that a fire that starts in one structure can easily spread to surrounding buildings. Accordingly, fire protection becomes a common good. Everyone bears the risk, and the costs are covered through tax revenues.

In this case, the risk was isolated to the individual property owner. He could have pooled his risk with the other property owners by paying the fee, but whether on purpose or through negligence, he bore the risk alone.

He chose to roll the dice on needing the fire department. This time the dice came up snake eyes.

This does not bode well.

In 2009, Frito Lay started selling their Sun Chips brand in a new kind of packaging. They began using a biodegradable polymer made from corn in their plastic bags. The corn based plastic bags would break down much, much faster in a landfill than the traditional bags, which will probably still be recognizable as snack food packaging when the Sun expands to a red giant star.

A giant corporation is taking a step to protect the environment. Yay!

There was only one problem. The new bags were much noisier than the old ones. Noisier? Yup, a lot noisier. The corn based bags made a crinkling sound, kind of a cross between cellophane and tin foil being crumpled up. That is, if a jet engine was being fueled by tin foil and spitting out cellophane exhaust.

Well, the increased amount of noise was sufficiently irritating that customers began calling up and complaining. Apparently the folks stuffing their pie holes with salty snacks want the chips to be crunchy, but not the packaging. Frito Lay has listened to their customers, and has pulled the new biodegradable plastic from production on all but one flavor of Sun Chip. They’ll probably switch that line over as well in a year, once they’ve used up the corn-based plastic resin they are contractually obligated to buy.

They’ve probably already contracted for oil tankers to bring in the petroleum for next year’s plastic. No doubt from some despotic Middle Eastern country where the only other export is hatred for America. “We would spit on you decadent, chip loving Americans, but we have no water, so our bodily moisture is precious to us.”

What strikes me about this situation is that this one small step towards sustainablility is being retracted for the most miniscule of reasons. Some poor sap at Frito Lay headquarters made the gutsy decision to try out the biodegradable packaging material. Don’t you know that guy’s career is in the toilet now. It’ll be a long time before anyone else suggests changing the packaging to improve the environment.

“You’re a bright guy, Jones, and you’ve got a bright future with the company. So let me give you some advice. See that poor, shambling wreck of a man? The ruined giant pushing the broom around the offices? He was the man who championed the Sun Chips packaging change back in ’09. Don’t go pushing the ecology thing. It won’t be healthy for you.”

To deal with resource depletion, global warming, and dependence on imported oil, we will all have to make changes in our lifestyles. Here we have an example of a positive change that was rejected by the consuming public because the bags were too noisy. That gives you an indication of how far the average man in the street will go to protect the environment.

No, it doesn’t bode well at all.

The Democratization of Indolence

The modern industrial state has created a phenomenon that I call the democratization of indolence. That is the expansion of the number of people who do not work for a living, but instead have their economic support provided by others. Once the preserve of the wealthy, freedom from the need to work has now grown to cover large numbers of every socioeconomic class is our society.

Historically, almost everyone labored for their sustenance, almost until the hour of their death. If you were too old and broken down for physical labor, you were taken in by your children to support. Almost the only exceptions were the landed gentry, whose lifestyles were supported by the possession of large estates. The cash flow from that capital base enabled a lifestyle freed from the requirement to hold down a job.

Two factors have enabled enormous growth in the number of people who are exempted from the need to work. The first factor has been the institution of social security, disability, and pension programs. If you are old enough, sick enough, or have worked at one place long enough, these programs guarantee you monthly cash payments for life.

The second factor has been the dramatic advances in medical knowledge of the last few decades. It used to be that retirement would last only a few years, if you reached that point, before some degenerative disease would take you out. But nowadays our medical abilities have advanced to the point that diseases can be arrested, or symptoms managed.

Clogged arteries? We can put in a stent, and you’ll have more energy than you’ve had in years. Cancer? Catch it early enough, and we can cure it, or at least put it into remission for years. Joints worn out? We can replace them, giving you decades of increased mobility. I even know some folks who are “disabled,” yet give few signs of it. After all, once you get on the free money train, why would you ever get off?

Consider the case of a 55 year old schoolteacher who retires after 30 years on the job. A reasonable expectation is a life expectancy of 85 years, meaning she will be supported without having to work for as long as she actually worked. And for much of that time she will be able to sustain a high level of vigorous activity. Or not. After all, I call this the democratization of indolence. The key is, our hypothetical schoolteacher now has the cash flow to support a life of leisure, and the health to pursue whatever interests tickle her fancy. An enviable position.

The problem is that the promises to pay were made before the advances in life expectancy came about. The system is in danger of breaking down, because it is financially unsupportable. In France, the government is proposing to increase the minimum retirement age from 60 to 62. The result has been large scale protests and a general strike. Everyone wants a life of financial freedom, even if someone else has to pay for it.

The economist Herbert Stein once famously remarked “if something cannot continue, it will stop.” Despite the amazing advances in productivity of the last century, our society will not support half the people working while the other half does not. So we can either find a solution to the problem and coast to a stop, or stop by hitting a brick wall. It’s like jumping off a tall building. It is not the fall that kills you. It is the sudden stop at the end.

Education: Risk versus Reward

All investment entails risk. It is built into the very nature of the activity. You cannot expend resources, hoping for the promise of a reward, without accepting the possibility that the resources will be lost, and the award not achieved. After all, we cannot predict the future.

Anytime you make an investment, there is a chance that it will not pan out. As so many of us have discovered during the last couple of years, that is certainly true of our financial investments in our 401K’s. But it also true of the capital we invest in ourselves.

I’m talking about the money and time spent on higher education, specifically about post-graduate work. It’s not cheap. I’m taking graduate level classes in accounting at a local university. This is after completing an executive MBA a couple of years ago. Tuition and fees run about $1500 per class. I’m trying to get 18 credit hours (six classes) under my belt, because that is the minimum required to teach at the college level. I’m not quitting my day job, but I would like to teach at the adjunct level, part-time.

So I’m spending around $9 grand, along with hundreds of hours, plus the gas money to get to class, plus the opportunity costs of giving up what I could be doing with my time and money instead. In exchange, I get the potential to teach junior college students entry level classes, for about $1500 per class taught.

Strictly from an economic perspective, it is hard to make the numbers line up on this endeavor. Even ignoring the time value of money, it will take more than a few years to recoup the cash investment alone, disregarding the time invested. And what if I try teaching a class and discover that, contrary to my hopes, I hate teaching? There’s a technical term for that experience: it would suck.

From the risk-reward perspective, it is hard to make a valid case for continuing to go to school. The obvious question is: why do I continue to make this dubious investment?

First of all, I have a deep seated belief that continued acquisition of new skills is vital, both to expanding career opportunities and to enhancing job security. The more versatile and up-to-date your skill set is, the better able you are at withstanding the vicissitudes of an uncertain job market.

But ultimately, I have discovered that I love being a student. Oh, I’m not so fond of it when a paper is due, or I’m struggling with a problem set. But overall, I truly enjoy the educational process.

Basically, I’m an education junkie.

A Modest Proposal: National Park Pricing

I just got back from a week in northern California, including three nights in Yosemite National Park. The admission fee for the park is one of the best things going. It costs $20 for a carload. The problem is that the price is too low. The Park Service is underfunded, and has a backlog of maintenance projects that aren't getting completed. The other problem with underpricing admission to the National Parks is that it leads to overuse and overcrowding.

One thing you will notice almost immediately when you visit a National Park is that a lot of the visitors are not Americans. I would guess that half of the people at Yosemite when I was there were Europeans or Japanese.

I wonder if anyone has ever studied the idea of increasing the price of admission, then offering a discount to US citizens. Lets say the price goes up to $40 dollars a carload (still cheap), but drops in half if the driver presents an American driver's license. You could even include Mexican and Canadian driver's licenses, on account of NAFTA.

This type of differential pricing would raise a lot of additional revenue for the Park Service. The potential downside is that it might dissuade some foreign visitors from coming, and with car rentals, lodging, and meals, foreign tourists pump a lot of money into the US economy. You certainly don't want to injure that golden goose.

Because we have a lot of National Parks, we could conduct an experiment. Several of the parks could be selected for a trial run of this idea. The makeup of the attendees could be monitored both before and after the price change to see if it makes a difference. If there is no change, the new pricing structure could be rolled out across the entire system.

There may be existing international agreements in place prohibiting such a scheme. If that is the case, we still should increase the price charged for entry into the parks. That way the people who use the parks will be paying to maintain them. And I don't think there is any argument against maintaining the National Parks, so that future generations will also be able to enjoy them.

Anyone who has visited the wonders of one of our National Parks will agree with that.

If the Inmates Run the Asylum

Even though I am a conservative, even I have to admit there is a loony right wing fringe:
“Obama is a Muslim.”
“The income tax is unconstitutional.”
My personal favorite:
“Keep the government’s hands off my Medicare.”

But there is also a loony left:
“The previous administration should all be shipped off to the Hague to face war crimes charges.”
“It’s the government’s job to provide everyone with a minimum income. And unlimited healthcare. And housing.”
“We should unilaterally disarm and shut down the Pentagon, then take the money we save and give it to the poor.”

The thing is, the right wing is the side of the debate that argues for limited government. The left wing proposes more government intervention as the solution to almost every problem.

You can be as crazy as you want in your own home, and I’ll still sleep well at night. But give the crazies access to the machinery of the state, and a license to expand the state’s power and reach, and that’s when I get scared.

Great Moments in "Duh!"

The New York Times put out an editorial this week regarding Tom Delay, the former House majority leader. It included this breathtaking assertion:

But many of Mr. DeLay’s actions remain legal only because lawmakers have chosen
not to criminalize them.

This is the New York frigging Times, for cripes sake! I do not often agree with their political positions, but I always respected their smarts, at least till now. I know they have spell checkers, and I know they have fact checkers. Maybe they need thought checkers. Repeat after me, guys: “I will not print tautological statements above the fold.”

The statement does reveal an interesting mind set, however. Apparently, if the editors of the Times don’t like something, that means it ought to be illegal. It is clear that the Times thinks Tom Delay is a Very Bad Man, and must be punished even though his actions were all legal.

This is kind of like the left wing version of the current complaints about the Fourteenth Amendment. “I don’t like it when the children of illegal immigrants become citizens, solely because they were born in this country.” Really? What do you propose as an alternative? And while we’re on the subject, on what do you base your claim for citizenship?

Gridlock in government keeps looking better and better.

Ground Zero Mosque

At the center of the controversy over the proposed “Ground Zero mosque” in New York City lies a dichotomy between two opposing concepts: you can have an absolute right to pursue a course of action, and yet it is absolutely wrong to pursue said course of action.

The backers of the mosque have a right to build a house of worship anywhere zoning allows. The First Amendment, and over two hundred years of case law, establishes that fact quite clearly. However, I can see how some people could find it offensive to site a mosque only two blocks from the site of a massive attack upon America that was committed in the name of Islam.

I don’t often say things like this, but I do feel President Obama has struck the correct tone in his comments regarding this issue. You can defend the right to build the mosque, without being in favor of the project. In any case, this is a local issue, not a national one.

The Republicans howling about this project are doing the worst kind of demagoguery. They’re throwing stones, knowing that they don’t have to accept responsibility for actually taking any kind of action. If they were the party in power, they would be defending First Amendment rights as well. If Democrats were pointing this out, instead of calling Republicans bigots, they would have a more effective argument as well.

On the other hand, commentators who claim this is only a “cultural center” and not a mosque are deluding themselves, and attempting to delude the public as well. I don’t care that the plans for the fifteen story building include gym and an auditorium. There is a large Southern Baptist church only a couple of miles from my home. On their campus is an events center, an athletic center with four basketball courts, a school, and meeting rooms. Nobody is deceived that all of that is not ancillary to the real purpose, which is a church.

Ultimately, those offended by the presence of the Cordoba Center will have to make their peace with the project, for the concept of freedom of religion trumps all of the objections. And I think that is the best argument for allowing the project to proceed. The World Trade Center was attacked by extremists whose world view called for very little tolerance. What could be a greater repudiation of that world view than to promote tolerance by shutting up and allowing the project to proceed.?

Federal vs. Private Employment

The Cato Institute had an interesting analysis on their web site. They aggregated the compensation of all Federal employees, and compared that to the aggregated compensation for all private sector employees.

The first figures presented were for average cash compensation:
Federal Employees: $81,258
Private Sector Employees: $50,462

Federal employees average much higher wage and salary than the private sector. However, the difference does not become eyepopping until you include the public versus private benefits packages:
Federal Employees: $123,049
Private Sector Employees: $61,051

Well, the Feds get better pay, and they get much better benefits. But they have to put up with higher risk of getting fired or laid off, right? Oh, wait, no, it’s the other way around. The annual risk of getting laid off or fired:
Federal Employees: 7.7%
Private Sector Employees: 24.1%

Not only is the private sector (i.e. the taxpayers) footing the bill for this disparity, but the gap in all of these measures has increased over the last ten years.

You can’t call them civil servants. Better to call them civil masters.

Plan A, Plan B, and Plan C

One theme that has been consistently sounded throughout the saga of the BP oil spill has been that “BP didn’t have a plan.” The idea is that it is irresponsible to drill for oil in deep water without knowing how to turn the well off if things go wrong. The proof that BP did not have a plan is that it took over 100 days before they were able to devise a method of capping the well, and that several of the approaches they tried (the top shot, and the large containment cap) did not work as planned.

Now, I’m no petroleum engineer, but I suspect that characterization is unfair. BP did have a plan for what to do if things went wrong with their wellhead, a mile under the water. That plan was to use the blowout preventer to seal off the well in the event of problems.

The blowout preventer is a large, expensive piece of equipment that is installed at every wellhead. Its function is to automatically seal off the well if pressures inside the well exceed specified levels. Indeed, the pressures inside the well are used to drive the mechanical rams that pinch shut the opening inside the well pipe. Failing an automatic shutoff, the blowout preventer also has a manual shutdown mode as well.

Blowout preventers are a well proven piece of technology, having been originally developed in the 1920’s. Used worldwide, there are many instances of their stopping oil gushers from occurring in multiple environments throughout the world.

Of course, the blowout preventer installed on the Deepwater Horizon rig failed to work on the day of the accident, allowing the explosion that sank the rig. That was as bad as it had ever gotten on an oil drilling site. A couple of days later BP sent down a deep water submersible, to manually close off the blowout preventer. That’s when things got worse, because turning the manual valve had no impact on the gusher of oil spewing into the Gulf.

When Plan A fails, you go to Plan B. If the combination of Plan A and Plan B has always worked, you don’t need to prepare a Plan C ahead of time. That is the situation the BP engineers found themselves in a little over 100 days ago.

The building where I work, like almost all commercial buildings in this country, is protected from fire hazard by a sprinkler system. In addition, we have fire extinguishers strategically located throughout the building. The experience of BP in handling the Deepwater Horizon disaster would be like having a fire break out in our building, and the sprinklers failed to pop. Then, when we rushed to the fire extinguishers, we found that they were all empty.

If we then had to invent the Fire Department, while simultaneously trying to capture all of the smoke to control air pollution, that would be analogous to what BP has tried to do in the last three months. The miraculous thing is that they have eliminated three quarters of the spilled oil while using a mix of proven and invented techniques to close off the broken well.

There was plenty of opportunity for negligence in the operation of the Deepwater Horizon rig. But the real question will be why did Plan A and Plan B not work, not why was there no Plan C on tap. The central issue will be: why did the blowout preventer fail?

Maybe this incident shows the need for a Plan C. Perhaps equipment recapping undersea wellheads needs to be stockpiled, ready for use if an incident like this ever happens again. But that wasn’t obvious in advance, and I’m not sure it is obvious even now.

One thing I do know: experience is what you get when things go wrong.

Where did the oil go?

A panel of experts from the Interior Department and NOAA has released a report today estimating that 74% of the oil that gushed into the Gulf of Mexico from the damaged BP oil well is already gone. About 20% of the spill was skimmed from the surface, or collected by BP and burned off in “flaring” operations.

Where did the rest of the oil go? Apparently a lot of it simply evaporated. A large portion of the oil was “bioremediated.” That’s a fancy word that means bacteria in the water are eating the oil, breaking it down into water and carbon dioxide. This is a natural process that has been greatly accelerated, both by summer storms moving through the Gulf, and by the enormous amounts of chemical dispersants dumped on the oil slick by BP. The dispersants break up the oil into teeny tiny droplets. The more surface area, the more the bacteria can get at the oil.

It is not a bad idea to be skeptical about these kinds of announcements. How did they get to 74%? Why not 71%, or 76%? Still, this is not BP’s estimate. This is a theoretically independent government panel. They’ve got no reason to low ball the amount of oil left to be cleaned up.

If this is true, it is an extraordinary claim. The implication is that in light of what is widely claimed as the worst environmental disaster in the nation’s history, three quarters of the problem was cleaned up in real time. They haven’t finished cementing the well shut yet, and 74% of the oil is already gone.

If the efforts of both man and nature continue at this rate (unlikely), the oil spill will be gone by the end of hurricane season. The oil that has already hit beaches and marshes will still have to be cleaned up, and I’m sure that somebody is going to have to scoop up tar balls that float ashore for years to come. However, it begins to look like the worst of this mess is already behind us.

BP has been widely excoriated for not having a plan in place to deal with the situation ahead of time. I think people have been selling the company short. They have brought enormous resources to bear in a remarkably short time, and that huge effort seems to be working. The media has underestimated what the can-do attitude of Americans can accomplish, when faced with an emergency, and backed up by a butt load of money.

2010 Goals: Progress Report

We’re a little past the halfway point of 2010, so I thought it would be a good idea to review the progress so far towards my personal goals for the year. It is an axiom of management that you don’t get what you want, you get what you measure. This is as true in one’s personal life as it is in business.

Goal: Run 50 kilometers of road races.
Status: Complete.
A heavy race schedule in March, April, and May, including one 10K, let me complete this goal by early in June. No races are set for the hot part of the summer, but they will pick up again in September/October time frame. I clearly low-balled this goal. Next year I may have to commit to a half marathon.

Goal: Complete three authors from The New Lifetime Reading Plan.
Status: Complete.
I tackled the English Lake District poets first: Wordsworth and Coleridge. Then I jumped forward forty years and read selected works from the American essayist and philosopher Emerson. Having plucked the low hanging fruit, I have started in on The Story of the Stone, a massive Chinese novel of the late Ming period. At 2500 pages in four volumes, this will keep me occupied until the end of the year. If I get through that this year, next year I may decide to take on Proust’s Remembrance of Things Past, all seven volumes of it.

Goal: Entertain at home 12 times throughout the year.
Status: Ahead of schedule.
Man does not live by money alone. A recent study showed that people who had a bigger network of friends tended to live longer. Within my experience, I would argue that they also live better. We are social animals, happiest in a group setting. So far this year we have entertained at home eight times. These have ranged from intimate dinners with another couple to outdoor barbeques with 30+ attendees. Party on, dude!

Goal: Save 20% of earned income.
Status: On-track.
Due to a larger than expected income tax refund, I was able to fund my Roth IRA with the equivalent of 5% of estimated earnings in the first quarter of the year. Between my contribution to the company 401K and the corporate match, another 15% is being added to my retirement funds. Now if only the stock market would recover and start growing again.

Goal: Reduce total debt to less than $60 K.
Status: Ahead of schedule.
Including the payments made at the end of July, I am now down to $62 K in debt from mortgage, car loan, and line of credit. I am paying down principle at the rate of $800 per month, including tripling the equity payment on the monthly mortgage. Debt reduction and savings rate are linked. I could apply a higher percentage to savings, and slow down on debt reduction. But I get a guaranteed 6.5% return on capital by drawing down my mortgage faster, and in today’s market that looks pretty good.

Goal: Earn $2000 at H & R Block.
Status: Failure.
I only made about $1000 during tax season this year. Including the training hours I put in, my hourly rate was very little better than minimum wage. After peak season was over, walk in traffic dropped down to zero, and I dropped my hours down to zero. No point in coming in just to sit in the office. I need to take certification tests to increase my compensation rate, but even then I don’t see myself hitting this goal next year. On the other hand, doing taxes does provide good blog fodder, so I’ll give it at least one more year.

Goal: Take 9 credit hours of graduate level accounting classes.
Status: On track.
My original plan was to take one class (3 credit hours) in Spring, Summer, and Fall semesters. After completing one class in Spring semester, I wasn’t able to find a summer class that fit my schedule. So I have doubled up, and am signed up for two classes starting in September. This is about half a standard academic load, and is more than I have ever taken since I started working. So we’ll see how this goes in the fall.

Goal: 60+ blog posts.
Status: On track.
Seven months into 2010, and I have kept my average of 5 posts a month. I need to focus on posting at least once a month for the balance of the year.

It is easy to focus on goals, and lose sight of the reality that the milestones and measurements are intended to represent. So, to put this progress report into a different perspective: I am healthy and fit, and enjoying time with a wide circle of friends and family. I am continuing to grow both intellectually and professionally, while storing up resources against the vicissitudes that inevitably come to everyone. Life is good!