Off Topic POst: Treyvon Martin

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

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

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

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

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

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

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

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

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

Adventures in Taxland: Filing Status

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

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

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

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

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

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

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

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

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

Pink Slime: Fact or Fiction?

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

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

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

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

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

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

Adventures in Taxland: RAL's

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

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

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

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

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

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

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

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

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

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

What Economists Do

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

Adventures in Tax Land II

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

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

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

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

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

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

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

The sense of entitlement is astonishing.

Making Ends Meet Via the IRS

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

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

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

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

GE's Superbowl Ads

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

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

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

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

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

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

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

What % Are You?

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

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

Adventures in Taxland, Part I

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

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

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

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

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

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

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

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

Mitt Romney's Tax Returns

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The EEOC muddies the waters.

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

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

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

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

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

Loewe's and Religious Discrimination

There has been a minor kerfluffle regarding the giant home improvement retailer Loewe’s this past week.

There is a show called “All American Muslims” on TV. This show, centered on the large Muslim community in Dearborn, Michigan (also home to Ford Motor Company’s headquarters), is designed to show American Muslims assimilating into American culture. Something along the lines of “See, we’re not all terrorists. We’re just like everyone else. We just don’t serve bratwurst at our backyard barbeques. Or beer.” I have to admit I’ve never watched the program, but apparently Loewe’s was a major advertiser.

So Loewe’s was contacted by a Christian interest group called FFA. These guys felt that “All American Muslims” was actually Islamic propaganda, softening us up for the stealth jihad agenda of imposing Sharia law on the United States. FFA began organizing a boycott of Loewe’s.

In response to their threats, Loewe’s decided to pull their ads from the program. This decision got them in hot water with a bunch of other people. Crying out “Religious discrimination” a number of other commentators are calling for a boycott of Loewe’s.

Of course, Loewe’s did not pull their ads because of religious discrimination. If they were concerned about Islam, they never would have run the ads on the show in the first place. Loewe’s in neither pro Islam or pro Christianity. What Loewe’s is in favor of is DIY home improvement.

What Loewe’s is opposed to is the same thing every giant corporation is opposed to: getting their brand identity tied up into controversy. A little buzz about the show that gets people to tune in and be exposed to your advertising: good. A little buzz about your running your ads on that show: bad.

So now Loewe’s is trapped in a classic no win scenario. Continue to run the ads, and risk angering the hard Christian right. Pull the ads, and risk angering the ACLU types and the not insignificant Muslim-American community.

I don’t feel sorry for Loewe’s, though. Nor do I have a lot of sympathy for the FFA, the Muslim-American community, or the ACLU types. My sympathy is reserved for the low level media buyer who decided to place the ads on “All American Muslims” in the first place. Because that poor schlemiel is the guy who placed a multibillion dollar retailer right in the middle of a no win scenario. And somebody is going to have to pay for that mistake.

It’s a dreary, sad thing, losing your job in the middle of the holiday season.

Illegal Immigration: Forever Guilty?

I recently read a story in the news about a Mexican woman who had been deported after living in the US for 21 years. Both her children were US citizens, and she had left them behind. The immigration laws had effectively broken up her family.

Obviously the woman was cherry picked to put current immigration law in the worst possible light. But it does make you think about the nature of the crime she had committed.

Most crimes are crimes of commission, as in committing a felony. You steal an old lady’s purse. You assault someone. You burn down a house. Other crimes are crimes of omission. For example, if you fail to file a tax return, you have broken the law.

Illegal immigration, on the other hand, is neither a crime of commission or of omission. The reason we deport illegal aliens is not because they have entered the country, but because they are in the country. The crime is being here. Illegal immigration is an ontological crime. The only other ontological crime I can think of is DUI. Even if you are driving under the speed limit and obeying all posted traffic signs, if you get stopped by the cops and blow a high level, it is off to the pokey you go.

With DUI though, eventually you sober up. You never stop being an illegal immigrant. Even if you hold down a job for decades, pay taxes, and own property. There is something about that situation that offends my sense of fair play.

Any talk of amnesty for illegal immigrants is a hot button issue, sure to start a fight. But maybe we shouldn’t be using the word “amnesty.” Maybe we should be talking about a statue of limitations instead.

And Then There Were None

AMR, the parent company of American Airlines, filed for Chapter 11 bankruptcy reorganization yesterday. I’m pretty sure AA was the last major air carrier to do so, having been proceeded in bankruptcy court by Continental, USAir, United, Northwest, and Delta, along with lots of smaller airlines.

Interestingly, AMR still had billions of dollars left in the bank. Looking into the future, the management of the company felt that they were better served by filing now, rather than waiting another couple of years and filing for reorganization after running out of cash. This was a preemptive strike.

Although the shareholders got wiped out, they didn’t lose much, since the stock price is down about 90% in the last year. Management’s stock options are worthless, but they’ll be issued a bunch of new shares when the company emerges from the bankruptcy process. Passengers are okay, since the company has already announced they will continue to honor prepaid tickets and frequent flyer miles. The big loser in this process is going to be the employees.

When a company goes through Chapter 11 reorganization, contracts, particularly union contracts, can be renegotiated. And by renegotiated, I mean that the company can dump the pension plan, drop healthcare for retirees, and cut wages and benefits unilaterally, shoving the changes down their unions’ collective throats. We know that the company can do this, because that is pretty much what every other airline has done in bankruptcy.

After all their major competitors went through bankruptcy, American Airlines was stuck in the unenviable position as the airline with the highest costs. And since prices in a market are determined by the producer with the lowest costs, that explains why American lost money in 15 of the last 16 quarters.

American has been trying to wring concessions from their unions to avoid the step they took yesterday, but without much success. You cannot really blame the unions for being intransigent. Having to accept permanent downward mobility is a bitter pill to swallow. Now the concessions they would not agree to will be imposed on them, and maybe more to boot. After all, management will want to emerge from bankruptcy court as the new low cost provider.

Meanwhile, low cost carriers Jet Blue and Southwest continue to expand and prosper.

Penn State: What would you do?

I've been following the unfolding mess at Penn State for the last couple of weeks. For anyone who hasn't watched the news, a grad jury investigation has handed down indictments after investigations that went on for months. A retired defensive coach, who was still active on the Penn State campus, was charged with 40 counts (40!) of child molestation, over a period going back at least 12 years. Also indicted were the school's athletic director and the VP for Finance and Administration, charged with lying to the grand jury about an incident that occurred in 2002.

In the second act of the drama, Penn State's legendary football coach, Joe Paterno, as well as the university president, were both fired. The trustees felt they had not done enough to push the investigation of the retired coach, Jerry Sandusky. In 2002 they were given specific and credible allegations that Sandusky had been caught having sex with a minor on campus. They called him in and told Sandusky that he was not to bring any more children onto the campus. That was it. No police investigation, no attempt to identify the minor.

The third act of the drama has just begun. Lawyers have been parachuting into Pennsylvania, ringing doorbells in the search for more victims. The taxpayers of Pennsylvania are going to be on the hook for a big settlement by the time this is all through.

One of the more inexplicable aspects of the story was that not once, but twice, individuals walked in on a middle aged man clearly having sex with a young boy. In both cases, they did nothing to intervene, but merely turned around and walked out.

In watercooler conversations about this situation, the conventional wisdom is "I would have done something. I would have gone in there and torn that guy off the kid." I'm guessing that most of us would do no such thing. Why do we think we would behave in a more heroically active fashion than the 28 year old grad student who walked in on Sandusky and his victim in 2002.

History is full of examples of people not taking an active stand on behalf of their morals. In 1964 Kitty Genovese was knifed to death on a public street. At least a dozen people heard her cries for help, and no one intervened. In the sixties, sociologist Stanley Milgram conducted a series of studies where subjects administered what they thought were serious electrical shocks to others, solely because a man in a lab coat told them to. Recently, in China, a small child was struck by a car on a busy street. A number of people passed by in vehicles and on foot without stopping to help.

We all like to think we would act to help others, step in to right a wrong, even if there was some risk to ourselves. Sadly, the evidence indicates otherwise.

Another Inspirational Story from Occupy Wall Street

Really, you can't make this stuff up.

This is the lead of an article in The Nation, about an artist participating in the Occupy Wall Street protest in New York:

A few years ago, Joe Therrien, a graduate of the NYC Teaching Fellows
program, was working as a full-time drama teacher at a public elementary school
in New York City. Frustrated by huge class sizes, sparse resources and a
disorganized bureaucracy, he set off to the University of Connecticut to get an
MFA in his passion—puppetry. Three years and $35,000 in student loans later, he
emerged with degree in hand, and because puppeteers aren’t exactly in high
demand, he went looking for work at his old school.

One scarsely knows where to begin. What kind of elementary school has full time drama teachers? What exactly do they do? Put on the school pagent? I think this was the plot of an episode of Modern Family last year.

Apparently UConn offers a Master's program in puppetry. Who knew? Maybe the program was endowed by Jim Henson: the Kermit the Frog chair in puppetry studies, with the Miss Piggy fellowship available to selected students.

"puppeteers aren't exactly in high demand" Nah, really? Ya think?

But here's the $64 question: What kind of person borrows $35 grand to get an advanced degree in puppetry? I can understand having a passion for puppets. People have passions for all kinds of things. It's part of what makes the world such a varied and interesting place. I can even understand the impulse to try and make a living at it. The idea of making your avocation your vocation is deeply appealing.

But this guy quit a full time job in order to invest three years and $35,000 of somebody else's money in a pursuit so ludicris that it reads like the punchline to a joke. And now he is protesting because "the system" is unfair. It's guys like Joe who give the Occupy movement the high standing it currently enjoys among the employed.

The Christmas Economic Stimulus

Keynesian economists argue that when the economy is not providing enough jobs, the problem is a lack of demand. If more consumers were clamoring for additional goods and services, businesses would hire workers to provide them. If borrowers are tapped out, either overloaded with debt or saving more because of uncertainty, they cannot increase spending.

Governments, however, can usually continue borrowing even if individuals cannot. When the economy is in recession, the government can run a deficit, and spend the money to pump up demand. Once demand is higher, businesses will hire more workers. With more money in their pockets, workers will spend more, creating even more demand. Once the consumer demand recovers, government can then drop the deficit spending, as aggregate demand will have recovered. Keynes likened it to priming a pump.

This is the economic theory behind the various government stimulus packages that we have seen in the last few years. President Obama’s job program proposal was another along these same lines. It did not get off the ground, due both to partisan politics and a legitimate concern that the Federal government is already carrying too much debt.

It occurs to me, however, that the private sector is about to undergo a burst of increased demand. It’s called the Christmas selling season.

Goods are moving from the warehouses onto store shelves in anticipation of Black Friday. Retailers are hiring additional staff to handle the expected surge in buyers. And the increase in demand is not just limited to presents. At my employer, we are already making deposits for the caterer and DJ at our annual Christmas party. Folks are booking airline flights as they plan their holiday travel.

Viewed as a temporary increase in demand, the holiday season fulfills the same function of a government stimulus package. But we all know what happens after the first of the year. Seasonal workers get laid off. The inevitable credit card bills arrive, causing December’s free spending consumers to retrench in January. Economic activity drops back down again as people tighten their belts.

So when the private sector does a stimulus package, the effects are short term in nature. I wonder why we think it will be longer lasting when the government does it?

Occupy Wall Street Continued

The Occupy Wall Street movement has more legs than I originally gave them credit for. The protests have spread to an increasing number of cities, including a number of international sites. There are clearly a lot of people out there who both feel disenfranchised from the current economic system, and have too much time on their hands.

But I still don’t see any evidence of a coherent program of policy demands coming out of the protests. The op-ed writer Tina Depuy has put out a column that claims there is a demand: economic justice. In fact, she repeats the term “economic justice” five or six times in the course of the column. To me, trying to figure out what “economic justice” means is like looking at a Rorshach blot test. You can read anything into it that you want to see.

If you have $100,000 in student loans, maybe economic justice is having the debt written off by the bank. But if you are a stockholder in a bank, why should you write off those loans? Wouldn’t that make you poorer? What if you are a pension fund that has invested in student loans? Don’t you need the students to repay their loans so you can continue making payments to retirees who are depending on those checks? Writing off the debts of 20 somethings and sticking it to 70 somethings doesn’t seem very just to me.

How about the money paid to Wall Street bankers? You could consider it economically unjust that they are making such huge bonuses. But is bankers are going to have their incomes cut, shouldn’t we look at other highly paid individuals, like movie stars and athletes? Take the Yankee player A-Rod, for example. His salary alone is more than the total payroll of half the teams in Major League Baseball, yet the Yankees got eliminated early this year. Paying somebody that much for losing doesn’t seem very just to me.

Then there is joblessness. People need jobs! Of course, the last time I checked, the military was still recruiting. But the folks of OWS probably don’t want those jobs. They want the jobs they want.

Now, if you want to reinstate the Glass-Steagall Act, I could see how that could be a useful policy to advocate for. But I would bet that not one in a thousand of the OWS protestors world-wide could tell you what the original Glass-Steagall Act did, so somehow I doubt that is driving the train.

The problem with fuzzy concepts like “economic justice” is that they mean something different to almost everyone, which is like saying that they mean nothing at all.

Occupy Wall Street vs. Tea Party

Much comparison has been made between the Occupy Wall Street protestors and the tea party movement. The commentary is that even as the tea partiers are a grassroots movement espousing a varied, but generally conservative agenda, so the OWS crew is the left wing equivalent. The laundry list of desired policies from the Occupiers runs the gamut, from calls to intensively regulate the capital markets, to a push for some sort of government jobs program that will put large numbers of the unemployed back to work.

But I see far more structural and philosophical distinctions than similarities between the tea party and OWS, even taking their policy differences into account.

The tea party protests were geographically far flung, and were most effective by working within the democratic system. At literally hundreds of town hall meetings, all across the country, citizens came forward to meet with their elected representatives and express displeasure over government’s increasing reach. The same groups that showed up to protest went on to push for candidates who believed in limited government, and helped get a number elected.

The Occupy Wall Street protests are (so far) an exclusively urban phenomena, and do not seem to be spreading beyond a handful of cities. New York, Washington, Boston, Seattle and Chicago are the one’s I have heard of. No Occupy San Diego, or Occupy Indianapolis has made the news yet.

Also, while both Occupiers and tea partiers are activated by a sense that the government is no longer working for their interests, on the tea party side the theme is generally for a smaller government, and particularly an opposition to tax increases. Of course, many tea partiers are drawing plenty of government benefits already. A more nuanced statement of their position would be that the government is just big enough. Any benefit cuts should come out of programs they don’t use. The real desire is to oppose tax increases.

In a hyper-partisan political environment, saying no to taxes seems to be a strategy that is winning.

The Occupiers want a bigger government, or at least a government that is just enough bigger to give them something. Taken collectively, there would be quite a smorgasbord of increased spending to make all of them happy. To pay for their increased benefits, they want somebody else to foot the bill.

When the Federal government is already running a 40% deficit, expansion doesn’t seem like a good idea, even if you do get to soak the rich to help.

So you’ve got one movement that is geographically diverse, is focused on a primary objective, and is meeting the lawmakers in their districts. You’ve got another movement that is geographically restricted, wants lawmakers to come to them, and has a laundry list of demands.

Advantage, tea party.

Occupy Wall Street?

I confess I am absolutely mystified by the Occupy Wall Street protests. There doesn’t seem to be any coherent theme or agenda behind the protestors.

Are they advocating specific regulation in the financial industry? I certainly can’t tell that from the news coverage. Are they attempting to disrupt operations on Wall Street? If so, the organizers flunked out of protestor camp, because it is business as usual.

Now the labor unions are getting involved. Several unions have announced plans to join the Occupy Wall Street protests. The unions appear to be supporting the idea that union members should be getting higher wages and better benefits. What this has to do with credit default swaps and collateralized debt obligations is anybody’s guess.

The most recent stunt was for some of the protestors to wear zombie makeup and pretend to be zombie corporate workers. I’m just not sure what that is supposed to symbolize.

Lots of questions, and not very many answers. I know why the protestors are getting on the news every day. Protests make for great television visuals. But if you cannot articulate what you stand for, don’t be surprised when you don’t get what you want.

Unless you want to be an extra for the TV show The Living Dead. Because the protestors are getting great training for that.

How Do You Lose $2 Billion, Part II

News has continued to trickle out regarding the UBS rogue trader in London who lost $2 billion of the bank’s money. But not much news. It has dropped completely off the top stories on my Google news feed. There is plenty of speculation out there, however.

One piece of the story that has been out from the beginning is that the trader in question worked at the “Delta 1 trading desk” in UBS’s London office. This is a standard department in all of the big global investment banks. What these trading desks do is engage in trades for securities that are supposed to move up and down in lockstep. A change (or delta) in one stock of 1%, should be matched by a 1% change in other stocks. Of course, with any actively traded security, the correlation is never perfect, which opens up opportunities to make money.

The Delta 1 desk is supposed to engage in arbitrage, not speculation. Speculation involves swinging for the fences. Bigger risks, but correspondingly bigger rewards. Arbitrage, on the other hand, is about engaging in risk-free transactions that still provide a positive return.

Let’s say you are speculating on the price of wheat. Based on your analysis of global weather patterns, you think the harvest will be bad, and wheat prices will be higher a year from now. You can go into the futures markets and contract to buy (a long position) 10,000 bushels of wheat a year from now, with a price of $1.60 per bushel. A year from now, if you are right, the spot price of wheat goes up to $1.90 per bushel. But your contract says you can buy at $1.60. Your contract is now worth 1.90-1.60, 30 cents a bushel. But there is no guarantee. If the price of wheat actually falls, you can lose money. That’s speculation.

Now change the situation. Imagine that someone will sell you 10,000 bushels of wheat today for $1.50 per bushel. They’ll store it for a year for $200. Your cost of capital to buy the wheat is 5%. You buy the wheat, and then you go into the futures market and contract to sell (a short position) the wheat a year from now at the same $1.60 per bushel. Your costs for wheat, storage, and interest are $15000+200+750, for a total of $15950. A year from now you deliver your wheat and collect $16000. You make a small profit of $50. But by buying and selling simultaneously, you have eliminated any risk. The weather can be good, bad, or indifferent. You are insulated from movements in the spot price. That’s arbitrage.

What Delta 1 traders are supposed to be doing is arbitrage. The net total of your buy positions and the net total of your sell positions are always supposed to be close together. That way your bets are hedged. You can’t make much money on any individual trade, but if something unexpected happens, you won’t lose a lot of money either.

What UBS’s rogue trader was doing was faking one half of the equation. He was placing large speculative bets, and then falsifying the paperwork on the offsetting hedges. Eventually, someone noticed that things weren’t lining up properly, and he was caught.

But $2.3 billion is a lot of misalignment.

UBS Loses $2 Billion: Part I

The financial world was rocked by a scandal last week. UBS, the giant Swiss bank, announced losses of over $2 billion in unauthorized trades. The losses were generated by one trader in their London office.

The obvious reaction is "Two billion dollars! How does one guy lose two billion dollars?"

We don't know yet, and the details will only trickle out over the next few weeks. Already this weekend, UBS has revealed that the trades that generated the losses occurred over a period of about three months, and that the total losses came to about $2.3 billion.

"Two point three billion dollars! How does one guy lose two point three billion dollars?"

We have now seen enough of these "rogue trader" cases to make a few predictions about the story that will emerge as the investigation continues.

1. It started out much smaller. These guys don't start out placing $2 billion bets in the giant global casino known as our modern capital markets. Far more likely is that he screwed up some trades, maybe from something as mundane as a keystroke error. "Sell a million euros at the preset price. At most I'll lose a million. Holy crap, how did that extra zero get in there!" You lose a big enough chunk of money, and you will get fired. So now the thought process runs "I can't tell my boss about losing $10 million; I'll get fired. And my swanky bachelor pad costs $10 grand a month in rent. I have to earn that money back."

2. Risk controls were defeated. In the giant global casino known as our modern capital markets, the senior management of the investment banks is aware that it might not be the best idea to hand company credit cards with no limit out to a bunch of testosterone fueled 25-30 year olds who are amped up on Red Bull. So instead, they give them cards with credit limits. Essentially, every bank has systems in place to measure how much the bank could potentially lose from each trader's positions. In every case of a "rogue trader" those systems have been circumvented. Part of the problem here is that the big money is made by trading, and coming up with newer, ever more exotic financials instruments. The small money is made by working in risk management. The best and the brightest aren't clamoring to work in the field.

3. The problem got much bigger quickly. Once you've lost a bunch of money, decided to try and make it back, and figured out how to make bigger and bigger trades without senior management catching on, you start doubling down on your trading positions. Trading positions are what ordinary people would call betting, but we don't work in the giant global casino known as our modern capital markets. Let's say you start by losing $10 million. You place another $10 million bet to get it back. Once you lose that, now you've got to make $20 million back. The losses can grow geometrically at this point. If you double down and lose it all every time, it only takes 8 trades to get to the level of losses experienced by UBS.

The rest of this story will eventually emerge. When it does, I'm going to try and put the details into plain English.

Unemployment: We're On Our Own

The President is scheduled to make a major address on jobs and job creation this evening. He is going to unveil his plan for reducing the unemployment rate below the 9% level where it seems to be stuck. I plan to be doing something else during the speech, maintaining my near unbroken, bipartisan record of skipping presidential addresses.

President Obama will probably propose a bold new program of infrastructure rebuilding. This will be combined with tax credits for companies that hire new employees and maybe a request for money to retrain displaced workers. This will be combined with lines like “let’s get this country moving again.”

The problem is that almost none of what he proposes is going to work. Tax credits have been tried before, and failed miserably, during the Carter administration. A $500 credit, or even a $1000 credit, simply is not enough incentive to convince employers to add on employees they don’t need. Conversely, if you do need to hire someone, you are going to do it whether tax credits are available or not.

Retraining sounds like a good idea, but community colleges are set up to produce entry level employees with no experience. Taking a couple of classes for six months to a year will not lead to a new career.

As for a massive Federal jobs program, that is going to run into fiscal realities. The government is spending 40% more than it is taking in tax revenue. A bipartisan super committee of Congressmen and Senators is currently doing the planning for a major round of spending cuts.

Besides, what does an infrastructure rebuilding program really consist of? A bunch of work crews filling potholes and painting bridges. Does anybody really think that an unemployed office worker who’s a hundred pounds overweight is going to take a job on a road crew? Those positions would probably be filled by illegal immigrants with fake social security numbers.

Nope, a big jobs program is an idea that would be dead on arrival. All that’s left is a bunch of high sounding phrases about how the government is no going to abandon the people who need help in this crisis.

Now, it is easy for me to be blasé about the unemployment rate. After all, I still have a job. But it seems to me that the best thing the President can do about jobs in this country is tell the truth: we’re on our own. It is not the Federal government’s responsibility to provide jobs. Even if it was, deficit spending has reached its limit and beyond.

Anybody who is waiting for the Feds to ride in like the cavalry and create a bunch of jobs is going to be sorely disappointed. The first step to solving a problem is to admit that the problem exists. Everybody agrees that high unemployment is a problem. But the second step towards solving a problem is taking ownership of the problem. As long as we think it is the President’s, or Congress’s, or the Federal government problem to solve unemployment, people will not take whatever necessary steps to reinvent themselves and find work.

You see, it is up to us, to get this country moving again.

The Wisconsin Recall Elections

The results are in from Wisconsin's recall elections. Of the six state senate seats contested, four of them remain in the hands of the Republicans who won them in the 2010 regular election. This is considered a victory for the Republicans, who retain control of the state senate.

The concerted effort to undo the results of the last election was sparked last spring. The newly Republican legislature joined forces with the Republican governor to roll back benefits and limit union rights on benefit negotiations for state employees, including teachers. These moves sparked a firestorm or criticism, including massive demonstrations from union members.

The remaining Democratic members of the state senate actually left the state in an attempt to prevent the legislation from passing by denying a quorum. People are criticizing the tea party conservatives in the US House for not negotiating, but at least they stayed in town. Deserting your post to prevent the majority from passing legislation is bad enough. But then some chucklehead had the bright idea "hey, let's try and undo the results of the election."

It's important to remember the difference between a pure democracy, which we don't have at the state and Federal levels, and a representative democracy, which is our form of government. In a pure democracy, the populace votes directly the issues of the day. Think of a ballot referendum as an example.

In a representative system, we pick representatives for a set period of time. After their term is up, we get to decide if we want to keep them, or throw the rascals out and bring in a fresh set of rascals. If you're in the party that is on the outs, you organize, you fund raise, and you get ready for the next election. But you wait your turn.

The recall effort was the worst kind of cynical politics. The senators selected were not guilty of malfeasance. With one exception, they were not involved in scandal, and had won their elections fair and square. They were guilty of voting for the party platform they had campaigned for, and of having won by narrow margins in their districts.

The voters of Wisconsin wisely rejected this attempt at an end run around the electoral process. In a little over a year, the Democrats will get another, more legitimate chance to swing the pendulum back in their direction.

The Debt Ceiling: The Aftermath

Proving that when the chips are down, our elected representatives can craft a deal that nobody likes, the debt ceiling was successfully raised before the government ran out of cash. So, unless you’re working for the FAA, let the good times roll.

I have been stunned by the outpouring of scorn that has been heaped upon tea party Republican freshman in the House of Representatives. One op-ed piece in the New York Times actually compared them to terrorists. They have been called irresponsible for creating a crisis in Washington. How dare they threaten the full faith and credit of the US? The insolent nerve, to demand spending cuts and refuse to increase taxes! Didn’t they understand how bad a default would be? If government spending had forced to be reduced by 40% overnight, that would have been like running into a brick wall!

The attitude of the tea partiers seems to have been that it was better to run into the brick wall with $14 trillion in debt than wait ten years and run into the brick wall with $28 trillion in debt. And by run into the brick wall I mean have the Chinese government impose austerity plans on us in exchange for continued access to credit, ala the IMF and Greece. Created crisis? Certainly. Crisis that needed to be created? Maybe.

Looking at the deal that finally got done, I’m not entirely sure that it would not have been better to hit the wall now. At least that would have forced some tough choices. As it is, the deal that got signed does nothing to address entitlements and transfer payments. And the increase in the debt limit pushes the issue down the road two years, until after the next election. In two years we are going to go through all of this all over again. Only next time, the national debt will be $17 trillion, not $14.3 trillion.

So after all the Sturm and Drang, what we ended up with is pretty much business as usual. So much for hope and change.

Debt Ceiling Talks: The Scale of the Problem

We are less than a week away from hitting the debt ceiling, and there does not appear to be a bargain in sight. If both Houses of Congress and the White House do not get their act together, the US government will be limited in spending only what it receives in tax revenue. The result will be an immediate 40% cut in Federal spending.

I don’t think there has been enough said about that 40%. Congress has authorized spending for almost twice as much as they take in. Twice as much. The idea that we are going to close that gap, either by shutting down the national parks, NPR, and the State Department, as the right wishes, or by making the people in the top 10% of incomes pay another 4% of their income in taxes, as the left envisions, is ludicrous.

To close the gap on the revenue side would require the government to increase taxes by 67%. Since the top 5% of income earners pay 59% of total income tax, if you wanted to close the gap solely from that group, their taxes would have to double to about a 80% marginal rate. We would be telling people “if household income exceeds $200,000, 80 cents out of every extra dollar you earn is going to be taken away. If we did that, who would be left to contribute to politician’s reelection campaigns?

On the expense side of the equation, you would have to make huge cuts in the defense budget, along with eliminating all other discretionary spending to close the gap. No Federal prisons. No air travel, because no air traffic controllers. No repairs to the Interstate system. Nada.

Or, you could stop paying Medicare. Medicare accounts for about 40% of current Federal spending. Interestingly, most of the commentators I have been reading have assumed that Medicare spending would be a priority in the event the debt ceiling is reached, right after interest payments on the debt. But that topic is the subject of another post.

Another interesting thing about the current crisis is that it is completely made up. Created out of whole cloth. The debt ceiling has been raised 78 times in the last 50 years. It is simply a matter of Congress giving the Treasury Department permission to go out and dig the hole a little deeper. Congress could come back from lunch this afternoon and raise the debt ceiling on a voice vote. It is, as they say, merely a stroke of the pen.

The Republicans started the crisis going by declaring that the debt limit wasn’t going to go any higher until a deal was reached on spending cuts. Big spending cuts. The President then doubled down by threatening to veto any increase in the debt ceiling that didn’t include a “Grand Bargain” on spending cuts and revenue increases. The revenue increases to start right away, the spending cuts to take place sometime in the future. Preferably after the next election, when he is settling into his second term. Both sides think they can win the political game by being intransigent, and here we are.

At this point, there is not enough time left to put together major legislation on either spending cuts or revenue increases. This means that the most likely scenario is that at the eleventh hour both sides will toss in the towel and agree to increase the debt ceiling enough to get through the rest of this year, and part of next.

That only takes a stroke of the pen.

The Debt Ceiling: What happens if we hit?

We’re getting closer to our self imposed limit on the national credit card. The current debt limit is around $14 trillion. According to pronouncements from the Treasury, the government is spending money so fast that we are going to hit that limit on August 2, about two weeks away. As things stand now, neither side of the negotiations on the budget is giving way.

Once we lose the ability to continue tacking on more debt to the debt we already have, the US will default on its debt for the first time in the history of the country. The financial Apocalypse will have arrived.

Sort of. Because many people in this country have hit their individual debt limits. It’s called getting your credit card refused, or being denied for refinancing. But for a lot of those individuals, maybe most of them, being unable to dig the hole deeper doesn’t in and of itself require a default.

After all, it’s not as if the government is not still taking in tax revenues. My employer will continue tax withholding. Self employed individuals will continue making quarterly estimated tax payments. There isn’t going to be a complete shutdown of the Federal government. What there will be is a partial shutdown of the Federal government and Federal transfer payments.

One thing for sure is that the top priority for the money coming in is to continue making interest payments on existing government bonds. After all, if you stop making interest payments, the lenders won’t be too keen on loaning you more money after the debt ceiling problem is straightened out. Actually, the government will continue to sell bonds even without an increase in the debt ceiling. The money taken in from those bond sales will be used to pay off older bonds that are coming due. So first demand on the revenue will be to the bondholders.

Now, if you are making interest payments and paying off maturing bonds, I’m not even sure you can call it a default at all.

On the other hand, the Federal government is currently spending 40% more than it is taking in. Hitting the debt ceiling may not cause a default, but the immediate cuts required would entail huge disruptions to the economy. Either way, I’m not anxious to try it.

Migrant Labor as Skilled Labor

The inestimable Megan McArdle has a post on her blog over at The Atlantic where she argues that the work performed by illegal migrant workers requires more skill than we Anglos normally give credit for. Specifically, she writes about her experience at a pick-your-own raspberry farm. She noticed that a lot of the fruit was either missed or wasted, combined that with the aches and pains she felt for days afterward, and voila, picking fruit takes more skill than you realize.

Ordinarily I see Megan's point in everything she writes, and I agree with almost all of it. In this case, however, I believe the pain in her hamstrings has influenced her judgment. By her own admission, purple raspberries are an obscure, not widely grown fruit, which is more difficult to harvest than other varieties. That's probably why so few farmers grow them.

Even so, she lists only five rules for picking the fruit:

1. Get low to the ground.

2. Look under the leaves.

3. Go around to the back side of the bush.

4. A GO condition for the color--it must be purpler than some value of red, or it will be unripe.

5. A NOGO condition for gloss--the fruit cannot be too matte, or dull colored, because that means it is overripe and will mold.

By working with a skilled trainer, a sufficiently motivated trainee could learn these distinctions within about 500 iterations of the task. "That one is too dull. That one is too red. You forgot to look under all the leaves." That is a single basket of fruit. By sufficiently motivated I mean that is you cannot learn to get all of the acceptable fruit, and only the acceptable fruit off a bush, within a couple of hours, we fire you and you go back to unemployment. Once these quality control tasks are learned, the remainder of the job consists of physical conditioning and coming up to standard speed.

One week, or at most two, would be sufficient to master this job. Maybe a couple more weeks for other crops. This means the first farmer to hire an inexperienced picker suffers the losses during the learning curve, but the other farmers in the picking season will benefit thereby.

In my factory, it takes about a month to get signed off at the entry level machine operator position. With the current level of unemployment in our area, we are having no problem filling positions at a starting rate of $8/hour.

All labor is honorable, and some jobs are a lot tougher than others, but picking fruit is still unskilled labor.

Bristol Palin: Fortune's Child

I may have to revise my opinion of Bristol Palin.

My initial impression of Sarah Palin’s oldest daughter was that she is a thirty watt bulb. There’s a spark, but it is pretty dim. After all, she let herself get knocked up by Levi Johnston, who by all appearances and public statements is a pretty reprehensible character. After having her baby, she didn’t seem to be in any hurry to get back to school and continue her education past high school. I figured Bristol for a loser, another unwed mother who is supported by her parents.

But the events of the last year have made me reconsider.

First, there was the US magazine cover story, where she and Levi announced they were back together and getting engaged. Okay, the engagement lasted about three weeks, right up until Levi Johnston realized she meant it when she told him there would be no premarital sex. The public humiliation did nothing to enhance Bristol’s reputation as a sharp operator. But her share of the fee paid by US magazine for the scoop was $125,000. Not bad for a day’s work.

Meanwhile, she was the national spokesperson for an organization devoted to preventing teen pregnancy. According to USA Today, her salary for that gig was $209,000 per year. That is enough to put her compensation into the top 10% of households in the US.

Then there was “Dancing with the Stars.” Now, she was certainly not the worst dancer that season, but I watched some episodes of the show, and she was nowhere near the best. But her mother’s fan base kept her in the running, right up until the final three couples. As I understand the compensation structure of the show, you get $10,000 for the first episode, $20,000 for the second, and so on. The payout escalates the longer you survive the elimination. By my estimate, by making it to finals, Bristol grossed about $2 million that season.

Now she has written her memoir. The sum total of her life experience to date has been: getting pregnant by Levi Johnston, backstage observer on a failed political campaign, and a stint on DWTS. And she got a book deal out of it. Can you spell P U B L I S H E R’ S A D V A N C E?

At this point the lifetime earnings of this 21 year old are somewhere north of mine, and I’ve been working as a college educated professional for 30 years. You can’t argue with success, and this girl has had a ton of it in the last three years. So like I said, I’m going to have to revise my opinion of her talents upward significantly.

But damn, who’s her agent?

The Greek Crisis

The Greek capitol of Athens has been rocked by massive protests and civil unrest this week. The issue that has enraged the populace is the consideration by the Greek Parliament of a new round of tax raises and spending cuts. These “austerity measures” are the conditions placed on Greece by the IMF and the European Community Bank, in exchange for a second cash infusion that will allow the Greek government to continue to make payments on its existing debt.

At this point it looks like the politicians are going to vote in the austerity package in the face of overwhelming popular opposition, which is unusual in a democracy. Por qua? Well, the answer to that question is the politicians (or their senior advisors) can do basic math, and know what will happen is they turn down the IMF conditions. The protestors, on the other hand, are rioting for the privilege of continuing to live beyond their means, which they think is a right.

The protestors want the Greek government to cancel its debt, stiffing the mostly French and German investors who loaned the money. The dilemma the politicians face is that Greece’s current account deficit is just over 10%. For every euro the government takes in taxes, they are currently spending 1.1 euros. The austerity measures are designed to get that deficit down around a target of 3%. The IMF doesn’t require Greece to balance the budget. They just want the budget to be less unbalanced then it is right now.

If the Greek government defaults, the well founded concern is that they will be cut off from the international lending markets. Who is going to lend money to the guys who don’t pay it back? Without access to credit, there is an immediate, crisis-driven budget balancing, which means even more austerity than currently proposed.

Greece, although the cradle of Western civilization, is a small country with little industry and few natural resources. In today’s world, that is a recipe for being poor. Joining the Euro zone allowed Greece, for a few years, to live like they were richer than they really were. Facing the readjustment back to being poor is the root cause of the civil unrest currently wracking the country. But you can’t wish away the math by rioting in the streets.

Austerity? We don't need no stinking austerity!

Paul Krugman has put out an op-ed piece in the New York Times accusing governments on both sides of the Atlantic of not doing enough to provide jobs for the unemployed. He believes that governments are sacrificing the welfare of their citizens because they are giving undue influence to the owners of capital. The interests of bondholders are being protected at the expense of ordinary people. He doesn’t quite use the phrase “sinister cabal of international financiers,” but he comes close.

I know the guy has a Nobel Prize in Economics and I don’t, but really, I think he’s overstating his case. Krugman argues that as long as the unemployment rate is high, governments need to do more deficit spending, even if printing money to pay the bondholders kicks off a higher inflation rate. And if a few governments have to default on their loans, well, that’s a small price to pay. Sure, the bankers will take losses, but look how much good they’ve done!

Maybe the politicians are reluctant to dig the financial hole deeper because they remember their grandmother’s telling them to always spend a little less than they earn. Maybe the politicians don’t want to saddle their children with huge debt payments. You know, principled arguments against taking on too much debt. Aw, who am I kidding, these are politicians I’m talking about. They probably are listening to the bankers.

Still, there is nothing sinister about not wanting to lose money. I’m not an international financier, but I’m not wild about losing money on bad investments. Let’s picture a conversation between an International Financier and a Liberal Politician:

LP: I know we’re borrowing 40% of every dollar we spend, but I’m thinking we need to increase our spending.
IF: If you continue to increase your debt, there’s a good chance you won’t be able to pay back the money you’re borrowing. If I don’t think I’m going to be paid back, I’m not going to loan you any more money.
LP: But you have to keep loaning me money. Even after this crisis is past, we’re still going to be spending more than we take in taxes.
IF: You’re very telegenic, and you’ve got charisma coming out your ears, but I don’t think you heard me. If I don’t think I’m going to be paid back, I’m going to stop loaning you money.
LP: But people need jobs!
IF: Not my problem. My problem is getting paid back with interest. If I loan you too much money, you won’t be able to pay it all back.
LP: You will get paid back! I own a printing press, and I can just print off more money. Problem solved.
IF: *sigh* If you print more money, than you set off inflation. If you have 8% inflation, and my bonds are drawing 4% interest, that is a negative 4% return. I don’t loan people money in order to lose it.
LP: So you’re telling me that if I increase our deficit spending, you’re going to cut me off.
IF: In a nutshell, yes.
LP: Well, I guess I can’t increase the amount of deficit spending then, even though I want to.

There is no great conspiracy here. Just a lot of people pointing out that even great nations have to eventually pay back the money they borrow, and that it is a bad idea to dig that hole deeper then you can climb out of.

It doesn’t really take a Nobel Prize to figure that out.

Libya: Mission Creep

As part of the “Arab Spring,” the Libyan uprising against the government of Moammar Gadhafi was supposed to be over in only a few weeks, especially after NATO forces used airpower to enforce a no fly zone over the country. It is now almost summer, and there are very few signs of the regime folding its tents and going away. Instead, it now begins to look like NATO is supporting one side in what is shaping up as a civil war between the western and eastern halves of the country.

Of course, NATO’s military involvement has been about much more than just grounding the Libyan air force, right from the get go. Under the guise of a humanitarian mission, NATO aircraft (mostly from France and Britain) have been striking at Gadhafi’s military whenever targets present themselves. However, the fighter aircraft deployed are not the most effective weapon to use for close air support of the rebellion’s ground forces. It is hard to hit scattered artillery pieces when you are moving 500 miles an hour at a height of 2000 feet, even with precision guided munitions. So this week France announced that a force of attack helicopters would be sent to Libya to support the rebellion.

But it would only be twelve choppers. That’s not much of an investment, is it?

Well, not so fast. The twelve helicopters and their crews represent NATO’s fist. But it takes a lot of muscle to drive that fist. First of all, they have to be refueled after every mission, so you need fuel handlers and fuel storage. Second, when the choppers break, you’ve got to fix them, so you need a complement of aircraft mechanics and avionics technicians at the air base. On hot missions you fire off weapons, so you need ordinance personnel to store ammo and reload the guns. And because you need to house and feed all these guys, military units almost always carry their own logistical capability with them when they deploy.

Bottom line, when the politicians talk about sending twelve helicopters, they are really talking about sending a whole unit, a squadron. This means that the French will have about 250 of their airmen involved in the conflict. Once they are on the ground, they become legitimate military targets for Gadhafi’s forces. How much do you want to bet that as soon as the squadron commander sees the half trained militia providing security for his unit, he’ll start lobbying for more troops to protect his air base?

NATO is escalating its forces in Libya. From a US perspective, the only good thing about the situation is that the Obama administration has pushed this mess off onto the Europeans. Because once you start escalation, each incremental step gets easier and easier. And we still have our hands full in Iraq and Afghanistan.

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.