The Fiscal Cliff

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

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

Unemployment Compensation

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

Automatic Sequestration

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

Payroll Taxes

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

Dividend Taxes

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

Income Tax Rates

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

Alternative Minimum Tax

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

Debt Ceiling

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

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

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

Michigan and Right to Work

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


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

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

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

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

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

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

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

Special Dividends

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

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

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

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

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

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

After the Fall

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

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

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

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

Hurricane andy, Part II

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

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

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

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

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

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

The symptom is the cure.

Hurricane Sandy

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

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

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

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

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

Caffeine Overdose?

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


How much caffeine is too much?

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

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

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

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

What I Want for Christmas

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

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

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

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

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

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

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

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

iPhone compatible, please.

New England Compunding Center

A tragedy is a story where no one wins.


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

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

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

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

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

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

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

NFL Referees

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


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

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

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

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

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

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

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

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

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

Airports

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


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

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

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

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

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

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

Apple vs. Samsung

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

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

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

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

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

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

Voter ID

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


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

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

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

Two thoughts on this issue:

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

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

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

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

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

The Deleveraging of America

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


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

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

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

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

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

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

Chick-Fil-A

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


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

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

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

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

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

Birds of a feather flock together, I guess.

Taxes, Transfers, and Progressivity

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


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

Bottom quintile: -301 percent

Second quintile: -42%

Third quintile: -5%

Fourth quintile: 10%

Top quintile: 22%

Top 1%: 28%

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

Two points on this spring to mind.

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

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

Yahoo's New CEO

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


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

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

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

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

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

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

There Oughta Be A Law

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

All the News is Bad

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


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

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

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

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

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

The Facebook IPO Debacle

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


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

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

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

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

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

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

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

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

Then there is how Facebook did it.

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

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

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

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

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