Graph of Long Term Unemployment

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

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

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

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

The CARD Act or Building a House of Cards

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Two Views of Dysfunction

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

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

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

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

Adventures in Tax Preparation, Part II

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

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

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

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

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

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

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

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

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

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

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

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

Adventures in Tax Preparation

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

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

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

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

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

The Two-tier Economy

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

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

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

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

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

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

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

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

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

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

A Modest Proposal

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

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

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

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

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

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

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

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

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

New Year's Resolutions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Who Knows What Evil Lurks in the Hearts of Men?

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

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

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

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

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

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

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

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

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

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

King of the World

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

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

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

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

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

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

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

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

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

Phyrrhic Victories

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

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

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

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

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

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

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

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

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

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

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

We Have Met The Enemy ...

The other day I went to fill the gas tank on my car, like I have done thousands of times before. At the gas station I choose, you activate the pump by swiping your credit card, pushing a button to select the grade of gas, and then picking up the nozzle and inserting it into the gas tank.

In this case, after selecting the grade of gasoline I wanted, I went to put the nozzle in the tank, and it wouldn’t fit. I thought I had just missed the opening with careless placement, so I tried again. The nozzle still wouldn’t go in the tank. After the second attempt I realized that the nozzle was too big to fit into the filler tube on my gas tank.

Once I started actually looking at the nozzle, I realized that I had picked up the wrong one. This gas pump had separate hoses for gasoline and diesel fuels, and I had inadvertently picked up the diesel nozzle.

I thought this was a perfect example of a quality control technique called poka-yoke by the Japanese. Loosely translated, poka-yoke means mistake prevention, or mistake proofing. I usually call it idiot proofing. The idea is to design assemblies so that the parts can only go together one way. If they go together only one way, than the parts cannot be assembled incorrectly.

That is poka-yoke in its purest form. But the doctrine of mistake proofing has been used in many different ways. For example, in building an assembly, you can put quality checks in-line with the assembly process. Let’s say you put a switch on a base plate, then drive two screws to hold the switch in place. The next two stations in the assembly process could be a camera, to detect the presence of the two screws, followed by the installation of a cover plate to protect the switch. If you lock the assembly in place at the camera station, and only unlock it to move to the next step if the camera detects the screws, then you cannot put the cover plate on if the screws are missing.

Usually process controls like the one described above can be overridden by the people working on the line (usually a supervisor), which makes them less effective than going the route of designing an assembly that cannot be misassembled.

The problem with giving supervisors an override is that we assume mistakes are a function of poor training, or bad materials, or not caring about the job, or lack of experience. In my experience with the gas pump, however, the source of the error was none of those things. What happened to me was a momentary lapse of attention. So I was glad that the gas pump was designed so that I couldn’t get diesel fuel into the gasoline tank.

My experience with poka-yoke techniques at the gas station brought home another lesson for me.

No matter how much we idiot-proof our systems, we’re always outnumbered.

Recession vs. Recovery

A variety of salesmen have dropped in on me the last week or so. This being the Christmas season, they are making the rounds, bringing gifts to their customers. The table in our office break room is covered with boxes of chocolates and tins of cookies.

Invariably, as part of the visit, they ask how business is going. When I tell them that things are going pretty good, I get surprised looks. They tell me that at most of their customers, business is way off.

Maybe it’s just that my perspective is different. My company’s overall sales are down about 30% from their peak. So from that perspective, business is terrible. But that’s not my point of comparison. I’m comparing where we are now to where we were one year ago.

At the close of 2008, orders from customers were in free fall. Their requirements were dropping faster than we could reduce capacity. In response we took whole weeks out of our production schedule. We shut down for an entire week at Thanksgiving. We shut down for four weeks in December. We took a week off in February, and two weeks off in March. And every time we shut down, another round of people were laid off. It felt like we were on the edge of a precipice.

Finally, in April our business started to pick up again. Just as important, our production capacity was reduced to the point where it balanced with demand again. Since then, our order book has gotten a little stronger, allowing us to call some of the people back off layoff.

Fast forward to the end of 2009. Thanksgiving was a long weekend, not a week. We’re taking the traditional two week maintenance shutdown at the close of this month. The order book for the first quarter of next year is filling up, not getting emptied out by customer cancellations.

I know the economy is not out of the woods yet, that things could turn down again. I know unemployment is still historically high at 10%, and that there are six applicants for every job. Right now, though, things look relatively secure for me and the survivors at my company. So that’s what I choose to focus on in this season of celebration and counting blessings.

The old joke goes that if your neighbor is unemployed, it’s a recession. If you’re unemployed, it’s a depression. I want to add something to that. If you think you are going to lose your job, it’s still a recession. If you think you’re going to survive and stay in business, it’s a recovery.

Here’s to those who are recovering in 2010. It feels pretty good to still be standing. As Winston Churchill put it (in a different context), “there is nothing so exhilarating as to be shot at without effect.”

The Annual Christmas Diatribe

Plastic Santas have been pulled out of storage, and lights are strung throughout the neighborhood. Tune in to almost any radio station, and you are sure to hear the sounds of Christmas classics wafting over the airwaves. Envelopes of red and green are starting to appear in mailboxes. It’s that time of year again.

It’s time to rail against the rampant commercialism and compulsory gift giving that have hijacked the Christmas holiday.

If you take the practice of exchanging gifts as commonly practiced, and boil it down to the essentials, here’s what you get: You take your hard earned money, and you buy something for someone that they don’t really need. After all, if they had really needed it, they would have bought it for themselves. In exchange, they take their hard earned money and buy you something that you don’t really need.

Once the gift giving is completed and all the packages are opened, what do you have? (Besides two garbage cans filled with torn off wrapping paper and packaging.) You have a bunch of new stuff that you now have to store.

Americans are the most over stuffed people in the history of the planet. Our walk-in closets are filled to overflowing, so we haul our summer clothes up to attic to make room for the winter clothes. We have two car garages that hold only one car, because the rest of the space is stacked high with stuff, most of which never gets used. We have so much stuff that we rent mini-storage units to hold the overflow.

In an ideal world, we would have only the things we used. Our stuff would exist to take care of us. Instead, too often we spend our energy and money taking care of our stuff.

Besides, having too much stuff, most of the Christmas presents I’ve seen in the last few years are all made in China. So aside from a few store clerks, other Americans are not getting any benefit from our spending. We’re impoverishing ourselves to enrich people on the far side of the world. So much for the economic stimulus given by our rampant commercialism. Think about it: are you a net winner from the on-rush of Christmas spending?

I have to stop. Just thinking about this subject makes me foam at the mouth like a rabid squirrel. Right now I have more froth than a Starbucks cappuccino.

I’m not totally anti-Christmas. I love the festivities, the parties, the gatherings of friends and family that come with the season.

But the mandatory gift giving foisted on us by society? To that I say, Bah, humbug!

Scary Movie

Do you think vampire movies are scary? How about werewolves? Or maybe you like to watch Jason chop up teenagers in the Friday the 13th flicks. Well, this will scare the bejeezus out of you.

It's an animation showing the level of unemployment in every county in the US, starting in 2007 and progressing to the current time period. The map is color coded, with darker colors representing higher unemployment. Watching the darkness spread across the map over time is like following the progress of a plague or some other epidemic.

It creeps me out.

Afghanistan Troop Surge

President Obama went on television tonight to announce a major expansion of the US forces engaged in Afghanistan. The US will be sending 30,0000 more troops in the very near future. Troop levels will stay high for up to three years, although the President promised that he will start withdrawing US forces no later than 2011.

Although Obama did not label it as such in his speech, this looks essentially the same as George W. Bush's "surge" into Iraq. This is kind of ironic, because Senator Barack Obama was on record as strongly opposed to expanding the US military presence in Iraq at that time.

By the time the surge in Afghanistan is complete, the number of troops will have doubled from the level they were at at the beginning of the Obama administration. Make no mistake about it, an increase of 30,000 troops is a major military push.

If you're very quiet, and you listen very carefully, far off to the northeast you can hear a tiny popping sound.

That's the Norwegian Nobel Peace Prize committee. The one's who just awarded Barack Obama the Nobel Peace Prize.

Their heads are exploding.

Industrial Geek Porn

These guys love their work.

Breast Cancer Screening

One of the central cost containment ideas in “health care reform” got tested this week, and it failed miserably. I’m talking about using the idea of “best practices” to eliminate waste in the medical system.

The idea behind best practices, also known as evidence based medicine, is to do studies of what works and what doesn’t work in treating various medical conditions. Once the most effective protocol is determined, insurers will only pay for the approved protocol. Other treatments will not be reimbursed. The goal is to prevent overuse of medical testing and procedures that enrich doctors, but do little to improve overall outcomes.

It’s not a bad idea in theory. Too bad it doesn’t work in the real world.

The case in point from this week’s news is the new breast cancer screening guidelines. A group from the United States Preventive Services Task Force (USPSTF) studied the data, and concluded that as a nation, we are doing way too many mammographies. Instead of testing every woman over 40 every year, they are now setting a guideline of every woman over 50, every two years. The few additional live spans increased did not justify the extra biopsies, unnecessary lumpectomies, and related stress and anxiety caused by false positive screenings.

In exchange for doing a difficult job, loaded with hard technical analysis, the USPSTF was promptly thrown under the bus. You may substitute metaphors involving running into buzz saws or being fed to wolves if you prefer.

Katherine Sebelius, the Health and Human Services cabinet secretary, disavowed the findings of the Task Force, even though they were working for her when they did the study.

This does not bode well for the ability of any health care reform plan under consideration to lower costs if enacted into law.

Getting Ready for Tax Season

I have not had a lot of time for writing the last week or so. A few crises with vendors at my day job, combined with prepping for an exam at the accounting class I’m taking, with tax preparation classes piled into the mix for the last week. The combination of the three has kept me pretty busy.

But the process of getting ready for the start of tax season next January has brought up an issue I want to comment on, so once again I am spurred to set pen to paper (or push electrons onto CRT screen, whatever the computer equivalent is).

Part of the tax prep classes this weekend covered due diligence for tax preparers assisting clients in filing for the earned income credit. The EIC is supposed to supplement the income of wage earners, usually with children. It is a refundable credit, which means that even if you get all of your withholding back, you can still get thousands of dollars in additional money.

Under 2008 tax law, you max out your EIC with two children. If you have more than two children, you receive no additional benefit. If you have zero or one child, you get a smaller benefit. If you have less earned income, you get a smaller check from the government.

So what happens is that people with more earned income and fewer kids claim the children of people who have already maxed out their tax benefit. The amount of fraud and misrepresentation connected to the Earned Income Credit is massive. Every tax preparer in my class had a war story about making claims that just weren’t believable.

But do we turn those people away? No we do not. We accept the client’s statements at face value. We can question the story and document the answers, but we do not require any corroborating evidence. We leave that up to the IRS.

The thing that strikes me about that is that we aren’t being paid by our clients. Sure, the client is getting his or her withholding back. That’s part of their refund. But the lion’s share of the “refund” is provided by credits such as the EIC. The tax preparer is taking his fees out of the government’s money, not the tax filer’s.

That sets up a massive conflict of interest on the part of the tax preparer. If we turn a blind eye to holes in the client’s story in order to get them a bigger refund check, we get a bigger fee for doing the paperwork. The client has huge incentives to cheat, and the tax preparers have incentives to facilitate the cheating.

If I were the IRS, I would step up my auditing of tax preparer’s work by a factor of ten. That would make the tax preparers less willing to accept dodgy answers from a client.

After all, unlike many of the clients, I actually pay income taxes. I don’t want to see my tax dollars going to a fraud.

... Before a Fall

The US House of Representatives voted on a version of health care “reform” over the weekend. Actually, it would probably be more accurate to call the legislation health insurance overhaul. However, since various forms of health insurance pay for the overwhelming majority of medical care in this country, it is clear that if the legislation also gets out of the Senate, a gigantic restructuring of the health care sector of the economy is envisioned.

Health care is one of the largest sectors of the economy. Currently, about one out of every seven dollars spent in America is spent of health care. The House just passed a vision of how to reengineer 17% of the economy.

The final vote tally: 220 for to 215 against.

Now, call me crazy (you wouldn’t be the first one), but I think the scale of the legislation is wildly out of proportion to the margin in favor. As a conservative, my natural inclination is to make small, evolutionary changes to society’s existing structures, instead of big sweeping alterations. But even liberals who think they are smart enough to restructure one seventh of the economy in one fell swoop should at least wait until they had some kind of consensus, shouldn’t they?

220 for to 215 against doesn’t exactly shout out “consensus,” does it?

If the House wanted to change the speed limit on the Interstates, 220 to 215 is an acceptable margin of victory. Add a few square miles of Federal land to a national park? Hey, 220 to 215 means the will of the people is clear.

But to radically restructure the health insurance industry and create a massive new entitlement? It is an act of the highest degree of hubris to assume that because you have 50.6% of the votes, you should pass legislation of this scale, just because you can.

The ancient Greeks had a saying: Who the Gods would humble, they first make proud.