Whenever I read anything about the unemployment rate in this country, it usually includes the caveat that the official statistics for unemployment only include people who are looking for a job. There follows a comment to the effect that the true unemployment rate is actually higher, because people who have gotten discouraged and quit looking for a job are not counted.
I can never quite figure out how that works. If you've "gotten discouraged" and "quit looking for a job," the implication is that you have no income, and you are not actively seeking income. The implication of the articles I read is that there are a lot of these people.
What do they eat?
I wake up hungry every morning. Furthermore, approximately six hours after my last meal, I can predict that I will be hungry again. As far as I can tell, we are all in the same boat.
Now, there may be some hunter-gatherers living out in the bush in Alaska who provide all their subsistence from foraging, but the rest of are getting our calories in the form of groceries from the supermarket. That takes money.
I'm also addicted to electricity. When I turn that switch, I for sure want the lights to come on. Okay, maybe I can get by without the lights, but by God that TV better come on. Now the discouraged people without jobs might be able to get off the electrical grid. All it takes is adopting the lifestyle of a medieval peasant. But I can't think of any way that somebody can beat their own metabolism.
And yet we are supposed to believe that large numbers of people are dropping out of the labor force. I just wonder how they make that work.
Tuesday, April 26, 2011
Tuesday, April 19, 2011
The Shores of Tripoli
Remember the Powell Doctrine? This was the set of principles to guide the use of military force, developed by General Colin Powell out of his experience in Viet Nam. There were basically three tenets to the doctrine; actually more like three tests to be met before using military force.
1. Can the mission be accomplished with military force? Don’t look for political solutions to be imposed by soldiers.
2. Are we going in with overwhelming force? Once the shooting starts, you better have enough guns to finish the job.
3. Is there a defined exit strategy? Once you have committed to the use of force, how are you going to extricate your troops? Democracies make poor occupying powers.
The first Gulf War was a classic application of this doctrine. We kicked the Iraqis out of Kuwait, and then we went home. The countervailing examples are Iraq and Afghanistan, of course. Nine years later we are still trying to build stable democratic societies so we can get out.
To show that we never seem to learn from our mistakes, consider the military involvement in Libya. Part of the mission seems clear enough, and militarily feasible: our war aim is to end the regime of Moammar Gadhafi. But who do we want to end up in charge over there? Our policy is a little vague on that score, since we don’t seem to be able to identify exactly who the rebels are.
As an aside, in a classic bit of Orwellian Newspeak, our military intervention has been labeled “a humanitarian mission.” Sure, because nothing says you are overflowing with the milk of human kindness like firing off 160 cruise missiles.
Although the NATO forces have complete air supremacy, the Gadhafi regime has not obliged us by folding up their tents and moving into exile. We control the skies, but the regime is reextending its hold on the ground. So we’re in a shooting war, but we haven’t committed the forces required to win.
Finally, what is our exit strategy? Since we don’t have any ground forces committed, we could just end the mission and send the planes and ships home. But after shooting at Gadhafi, what do we do then? If we leave him still in charge, doesn’t that make the humanitarian problem worse? After all, now that the rebels have announced themselves, I don’t think he’ll be satisfied with a live and let live policy.
The time to think about these issues is before you commit military force. Instead, our policy was based on optimistically assuming that the regime would quietly surrender, or go into exile, or some undefined happy outcome. Happy for us, that is. Not so great for Gadhafi or his family.
From where I’m sitting, the situation in Libya looks like a fiasco unfolding in slow motion.
Monday, April 11, 2011
Government Shutdown Averted!
I didn't look at the news much this weekend. As I matter of fact, I pretty much ignored outside events from Thursday afternoon until Sunday night. So I jumped directly from headlines about an imminent government shutdown to headlines that the crisis had been temporarily averted. The Republicans and Democrats had come up with a compromise to keep the Federal government running, at least on a short term basis. My thought was "Crisis? What crisis?" In my average day, I don't interact with the Federal government. It could have been shut down over the weekend, and I would not even have noticed. It makes me wonder: how long could I have gone without the Federal government in operation before it impinged on my life? One way to answer that question is to hope that it would be a good long time before I noticed the lack. In the week of brinkmanship leading up to the final compromise, the media was full of stories about how bad it would be if the shutdown happened. In the television coverage I saw, the unanimous position was that a shutdown would be a Very Bad Thing. But when you really examine the stories, they mostly boil down to this: the National Parks would have to close down for the duration. Oh, the humanity! I went to Yosemite National Park last summer. It was terrific. Not going back this year, though. I don't want to argue that we don't need a central government, and we need to fund the operations of that government. But in determining the level of that funding, there is some instructional value in realizing that it would take awhile to miss it if it was gone.
Thursday, March 17, 2011
Japan's Nuclear Nightmare
It takes a lot to overshadow a natural disaster that kills 10,000 people in a First World country like Japan. The specter of a nuclear reactor melting down, with a corresponding massive release of radiation will do it, however. The prospect of five nukes blowing up will really focus your attention.
At this point it is impossible to say just how bad the situation at the Japanese nuclear power plant will end up being. The best guess is that it will be somewhere between the US experience at Three Mile Island (small radiation release, no public harm documented), and the Russian experience in Chernobyl (massive radiation release, thousands of deaths attributable to the accident).
Clearly, the contingency planning on the part of Tokyo Electric was fatally flawed. It looks like their earthquake preparation actually worked as intended. At the first tremor, the reactors shut themselves down. The problems seemed to have a root cause in the tsunami that accompanied the earthquake.
Once a reactor of the type in question is shut down, it still needs circulation of cooling water for days afterward to carry away the residual heat of the nuclear reaction. The circulation is done by big, electrically powered pumps. But when the reactor shuts down, it stops generating power for the all important pumps. The design solution is to install diesel powered backup generators on-site. These generators automatically kick in when the reactor shuts down. In the case of the Fukushima Daiichi plant, these diesel generators were located in a low lying area. They, and the switches that route the electricity, were flooded out by the big wave.
In the aftermath of this crisis, we will face a fork in the road with regard to the peaceful use of atomic energy. One path is to decide that nuclear power is too dangerous to use, that the risks are not worth the rewards. People who follow this path will say “See, we listened to the experts, and they were wrong. They promised us it was completely safe, and now there has been a radiation release. We have to shut down all the nuclear power plants right now.”
This appears to be the position of the German government. This week they shut down seven reactors, and plans are afoot to close another ten. Since nuclear power provides about 25% of Germany’s electricity, that will leave a large gap to fill. The Germans are acting as is there is an imminent failure risk, in spite of the fact that Germany is tectonically stable, and has never been known to suffer from tidal waves.
The other path is to learn from this situation, and apply those lessons going forward. There is an old saying that experience is what you get when things go wrong. Plenty has gone wrong at the Fukushima Daiichi power station. But we can learn from the mistakes, whether they be mistakes of planning or of execution.
In light of concerns with global warming and oil depletion, due to the uncertainty of wind and the inability to store solar energy for nighttime use, nuclear power is one of our best bets for a secure, reliable energy future. We can close the systemic gaps revealed by the current Japanese disaster, and strengthen the safety systems going forward. But we have to have the will to face the problems, instead of turning our backs to the technology.
We have Democratic and Republican parties. We have Green parties and Tea parties. I’d like to see a Let’s Keep the Lights On party.
At this point it is impossible to say just how bad the situation at the Japanese nuclear power plant will end up being. The best guess is that it will be somewhere between the US experience at Three Mile Island (small radiation release, no public harm documented), and the Russian experience in Chernobyl (massive radiation release, thousands of deaths attributable to the accident).
Clearly, the contingency planning on the part of Tokyo Electric was fatally flawed. It looks like their earthquake preparation actually worked as intended. At the first tremor, the reactors shut themselves down. The problems seemed to have a root cause in the tsunami that accompanied the earthquake.
Once a reactor of the type in question is shut down, it still needs circulation of cooling water for days afterward to carry away the residual heat of the nuclear reaction. The circulation is done by big, electrically powered pumps. But when the reactor shuts down, it stops generating power for the all important pumps. The design solution is to install diesel powered backup generators on-site. These generators automatically kick in when the reactor shuts down. In the case of the Fukushima Daiichi plant, these diesel generators were located in a low lying area. They, and the switches that route the electricity, were flooded out by the big wave.
In the aftermath of this crisis, we will face a fork in the road with regard to the peaceful use of atomic energy. One path is to decide that nuclear power is too dangerous to use, that the risks are not worth the rewards. People who follow this path will say “See, we listened to the experts, and they were wrong. They promised us it was completely safe, and now there has been a radiation release. We have to shut down all the nuclear power plants right now.”
This appears to be the position of the German government. This week they shut down seven reactors, and plans are afoot to close another ten. Since nuclear power provides about 25% of Germany’s electricity, that will leave a large gap to fill. The Germans are acting as is there is an imminent failure risk, in spite of the fact that Germany is tectonically stable, and has never been known to suffer from tidal waves.
The other path is to learn from this situation, and apply those lessons going forward. There is an old saying that experience is what you get when things go wrong. Plenty has gone wrong at the Fukushima Daiichi power station. But we can learn from the mistakes, whether they be mistakes of planning or of execution.
In light of concerns with global warming and oil depletion, due to the uncertainty of wind and the inability to store solar energy for nighttime use, nuclear power is one of our best bets for a secure, reliable energy future. We can close the systemic gaps revealed by the current Japanese disaster, and strengthen the safety systems going forward. But we have to have the will to face the problems, instead of turning our backs to the technology.
We have Democratic and Republican parties. We have Green parties and Tea parties. I’d like to see a Let’s Keep the Lights On party.
Friday, March 11, 2011
Strategize This!
Embedded into our notion of what “character” means is the concept of consistency. When we talk about a person’s character, to some extent we mean predictability. Your character shapes your response to a changing situation. By knowing someone’s character, we can have confidence in how that individual will react to circumstances. If we speak of someone as brave, we would be surprised if they ran from danger. If we speak of someone as cowardly, the surprise would be if that person stood up to danger.
I bring this up because the Obama administration is behaving out of character with regard to the recent rise in gas prices. The President has made statements indicating that he is considering opening up the Strategic Petroleum Reserve and selling oil to bring down gasoline prices.
These comments make me think that the administration is having a hard time with the concept of a “strategic” reserve. Strategy implies a long term orientation. In the case of the Strategic Petroleum Reserve, it was established to ensure a US based source of oil in the event of a major supply disruption, like the OPEC oil embargo.
There is no evidence of any supply interruption occurring in today’s situation. There are no shortages of gasoline being reported. Instead, smoothly working market mechanisms have driven up oil pricing in response to the Federal government printing money (the Fed’s quantitative easing II), and geopolitical instability, particularly the civil war in Libya.
I like low gas prices as much as the next guy. But when gas prices go up, I tend to try and find ways to drive less. When pump prices cracked past $3.25 per gallon, we cancelled that tractor pull set up for next week. This is normal market behavior. When the price of a commodity increases, buyers begin to use less of that commodity. Long Sunday drives: bad; long Sunday crossword puzzles: good.
The reason I find the Obama administration’s reaction to high gas prices inconsistent is because they want us to use less gasoline. Internal combustion engines are a major source of greenhouse gas emissions. If you’re opposed to the prospect of global warming, you should celebrate increases in gas prices. Every nickel rise in gasoline prices moves another thousand hybrid vehicles off showroom floors. Pumping oil out of the Reserve to lower gas prices works directly against that situation. So you can see why it appears out of character for this administration.
Unless the true character of the administration is to pander to the voters in every possible way. The President’s statements are perfectly in character with that end.
I bring this up because the Obama administration is behaving out of character with regard to the recent rise in gas prices. The President has made statements indicating that he is considering opening up the Strategic Petroleum Reserve and selling oil to bring down gasoline prices.
These comments make me think that the administration is having a hard time with the concept of a “strategic” reserve. Strategy implies a long term orientation. In the case of the Strategic Petroleum Reserve, it was established to ensure a US based source of oil in the event of a major supply disruption, like the OPEC oil embargo.
There is no evidence of any supply interruption occurring in today’s situation. There are no shortages of gasoline being reported. Instead, smoothly working market mechanisms have driven up oil pricing in response to the Federal government printing money (the Fed’s quantitative easing II), and geopolitical instability, particularly the civil war in Libya.
I like low gas prices as much as the next guy. But when gas prices go up, I tend to try and find ways to drive less. When pump prices cracked past $3.25 per gallon, we cancelled that tractor pull set up for next week. This is normal market behavior. When the price of a commodity increases, buyers begin to use less of that commodity. Long Sunday drives: bad; long Sunday crossword puzzles: good.
The reason I find the Obama administration’s reaction to high gas prices inconsistent is because they want us to use less gasoline. Internal combustion engines are a major source of greenhouse gas emissions. If you’re opposed to the prospect of global warming, you should celebrate increases in gas prices. Every nickel rise in gasoline prices moves another thousand hybrid vehicles off showroom floors. Pumping oil out of the Reserve to lower gas prices works directly against that situation. So you can see why it appears out of character for this administration.
Unless the true character of the administration is to pander to the voters in every possible way. The President’s statements are perfectly in character with that end.
Thursday, March 3, 2011
Politicians on the Lam
Wisconsin’s Democratic state senators are still missing in action. They fled the state a couple of weeks ago to deny a quorum, preventing the incoming Republican majority from passing legislation that would eliminate the right of state employees to bargain for fringe benefits. Since a large chunk of the union dues paid in the state flow directly into Democratic campaign coffers, The Democrats’ desperation to defend their power base, as well as the Republicans’ determination to reduce union power are both understandable.
When the Dems first bolted across the border to Illinois, I appreciated the free entertainment. I enjoy a good piece of political theater as much as the next man, and it was good of our fellow countrymen in the great white north to provide a terrific piece of grandstanding. It reminded me of professional wrestling. The same histrionics. The same larger than life conflicts. And ultimately, the same preordained conclusion. After all, the Republicans had the votes.
By going on the lam, the Democratic senators focused a lot of media attention on the issue. They also bought time to try and swing public support to their side. All well and good, and for the first few days, entertainment value aside, I thought the desertion a legitimate delaying tactic.
That changed when the Democrats realized they could stay away indefinitely, and began issuing demands for their return. They would return to the state capitol, but only if the offending legislation was removed from consideration. That is not only profoundly undemocratic, but it sets a dangerous precedent as well.
Representative democracy is primarily a matter of majority rule. If you get 50% plus one vote on an issue, the gavel comes down, and it is the law. 100% of the citizens must comply. There are two types of exceptions to the rule of the majority. First are rights that are built into the state or Federal constitution. These rights, such as freedom of speech and religion, are unalterable by a majority, no matter how large. A minority of one gets to practice his right of free speech, no matter how repellent that speech is, and 100% of the citizens must allow that. An independent judiciary acts as the safeguard of those rights.
You can also have preset procedural rules requiring a greater than 50% plus one majority for certain purposes. Three quarters of the states have to ratify an amendment to the US constitution. In the US Senate, 60% of the Senators must agree to stop debate before a measure can be voted on. California has a rule that two thirds of the legislature has to approve a tax increase before it can take effect. The key to these procedural safeguards against change are that they must be put in place before they take effect.
What the Wisconsin Democrats are doing is demanding a power be ceded to them, the power to block legislation they don’t like, even though they are in the minority. Regardless of your stand on their objections to the law in question, this tactic is a power grab, plain and simple. It goes beyond partisanship into a tribal level of identity politics.
It also provides a dangerous precedent. Until recently, Wisconsin was a majority Democrat state, with the Republicans in the minority. If, during the Republicans time of ascendency, this refusal to participate actually bears fruit for the Democrats, they will find the taste of that fruit bitter indeed, and sure to prove indigestible.
After all, what is sauce for the goose is sauce for the gander. Should the current Democratic tactics work, then the Republicans will surely adopt them when next the political pendulum swings to the other party.
We will have moved from principled disagreement and potential compromise to the political equivalent of hostage taking.
When the Dems first bolted across the border to Illinois, I appreciated the free entertainment. I enjoy a good piece of political theater as much as the next man, and it was good of our fellow countrymen in the great white north to provide a terrific piece of grandstanding. It reminded me of professional wrestling. The same histrionics. The same larger than life conflicts. And ultimately, the same preordained conclusion. After all, the Republicans had the votes.
By going on the lam, the Democratic senators focused a lot of media attention on the issue. They also bought time to try and swing public support to their side. All well and good, and for the first few days, entertainment value aside, I thought the desertion a legitimate delaying tactic.
That changed when the Democrats realized they could stay away indefinitely, and began issuing demands for their return. They would return to the state capitol, but only if the offending legislation was removed from consideration. That is not only profoundly undemocratic, but it sets a dangerous precedent as well.
Representative democracy is primarily a matter of majority rule. If you get 50% plus one vote on an issue, the gavel comes down, and it is the law. 100% of the citizens must comply. There are two types of exceptions to the rule of the majority. First are rights that are built into the state or Federal constitution. These rights, such as freedom of speech and religion, are unalterable by a majority, no matter how large. A minority of one gets to practice his right of free speech, no matter how repellent that speech is, and 100% of the citizens must allow that. An independent judiciary acts as the safeguard of those rights.
You can also have preset procedural rules requiring a greater than 50% plus one majority for certain purposes. Three quarters of the states have to ratify an amendment to the US constitution. In the US Senate, 60% of the Senators must agree to stop debate before a measure can be voted on. California has a rule that two thirds of the legislature has to approve a tax increase before it can take effect. The key to these procedural safeguards against change are that they must be put in place before they take effect.
What the Wisconsin Democrats are doing is demanding a power be ceded to them, the power to block legislation they don’t like, even though they are in the minority. Regardless of your stand on their objections to the law in question, this tactic is a power grab, plain and simple. It goes beyond partisanship into a tribal level of identity politics.
It also provides a dangerous precedent. Until recently, Wisconsin was a majority Democrat state, with the Republicans in the minority. If, during the Republicans time of ascendency, this refusal to participate actually bears fruit for the Democrats, they will find the taste of that fruit bitter indeed, and sure to prove indigestible.
After all, what is sauce for the goose is sauce for the gander. Should the current Democratic tactics work, then the Republicans will surely adopt them when next the political pendulum swings to the other party.
We will have moved from principled disagreement and potential compromise to the political equivalent of hostage taking.
Monday, February 21, 2011
Better Living Through Tax Credits
Middle class and upper middle class people are always astonished when I tell them that the battle to redistribute income is over, and they lost decades ago. The Federal government does a massive amount of income redistribution, and has for a long time. Nobody is even talking about limiting this.
I’m referring to the Earned Income Credit, and the Additional Child Tax Credit, which are two of the big tools the government uses to hand out money to the lower class. Consider a single mother with two children, making $19350 a year as a nurse’s aide. Assume she pays $1935 in withholding a year.
First, her standard deduction as Head of Household, combined with three personal exemptions, reduces her taxable income to $0. Most people don’t have a problem with this. If you don’t make much money, we’ll give you a pass on paying income tax. After all, everyone else gets those same opportunities to avoid taxes, based on their household scenario. So this woman will get a full refund of the money withheld from her paychecks, $1935.
But we’re not anywhere close to done. She has two kids, which is a tax advantaged situation. If she had owed taxes, she would have been eligible for the Child Tax Credit, a nonrefundable credit of $1000 per child. Since she doesn’t owe taxes, instead she qualifies for the Additional Child Tax Credit, a refundable credit of $1000 per child. This boosts her refund by $2000. Her refund check is now up to $3935.
Now let’s look at the Earned Income Credit. The amount of the credit varies with the number of children (up to three) and the amount of earned income. As income goes up, so does the credit, until it reaches a plateau. As income continues to go up, the credit begins to phase out. In our example, with earned income of $19350 and two children, the amount of EIC will be $4427.
As the piece de resistance, let’s not forget to add in her Making Work Pay Credit. This $400 credit is part of the Obama stimulus package, and will not be part of the tax code next year. It is essentially a refund of the Social Security taxes you pay on the first $6000 of earned income.
Let’s add it all together:
Withholding $1935
Add’l Child Tax Credit $2000
Earned Income Credit $4427
Making Work Pay $ 400
Total Refund $8762
In our example, our hypothetical tax filer got $6427 from the government, in addition to $2335 returned to her from paycheck withholding. That’s a wage increase of 33%. Where does that 33% increase in pay come from? Why, it comes from the taxes that higher income taxpayers put into the system. Or even from the taxes that lower income taxpayers without minor children pay into the system. Or from the taxes that married couples that both work pay.
But however you slice it, the government is taking money away from some individuals, and handing it over to other individuals, without asking anything in return. That is the income redistribution that is at the heart of socialism.
I’m referring to the Earned Income Credit, and the Additional Child Tax Credit, which are two of the big tools the government uses to hand out money to the lower class. Consider a single mother with two children, making $19350 a year as a nurse’s aide. Assume she pays $1935 in withholding a year.
First, her standard deduction as Head of Household, combined with three personal exemptions, reduces her taxable income to $0. Most people don’t have a problem with this. If you don’t make much money, we’ll give you a pass on paying income tax. After all, everyone else gets those same opportunities to avoid taxes, based on their household scenario. So this woman will get a full refund of the money withheld from her paychecks, $1935.
But we’re not anywhere close to done. She has two kids, which is a tax advantaged situation. If she had owed taxes, she would have been eligible for the Child Tax Credit, a nonrefundable credit of $1000 per child. Since she doesn’t owe taxes, instead she qualifies for the Additional Child Tax Credit, a refundable credit of $1000 per child. This boosts her refund by $2000. Her refund check is now up to $3935.
Now let’s look at the Earned Income Credit. The amount of the credit varies with the number of children (up to three) and the amount of earned income. As income goes up, so does the credit, until it reaches a plateau. As income continues to go up, the credit begins to phase out. In our example, with earned income of $19350 and two children, the amount of EIC will be $4427.
As the piece de resistance, let’s not forget to add in her Making Work Pay Credit. This $400 credit is part of the Obama stimulus package, and will not be part of the tax code next year. It is essentially a refund of the Social Security taxes you pay on the first $6000 of earned income.
Let’s add it all together:
Withholding $1935
Add’l Child Tax Credit $2000
Earned Income Credit $4427
Making Work Pay $ 400
Total Refund $8762
In our example, our hypothetical tax filer got $6427 from the government, in addition to $2335 returned to her from paycheck withholding. That’s a wage increase of 33%. Where does that 33% increase in pay come from? Why, it comes from the taxes that higher income taxpayers put into the system. Or even from the taxes that lower income taxpayers without minor children pay into the system. Or from the taxes that married couples that both work pay.
But however you slice it, the government is taking money away from some individuals, and handing it over to other individuals, without asking anything in return. That is the income redistribution that is at the heart of socialism.
Thursday, February 17, 2011
Adventures in Taxland
True conversation with a tax client:
“How come I’m not getting as big a refund? Last year I got almost $6000, and you’re telling me that this year I only get $1000.”
“Well, sir, last year you claimed your daughter and granddaughter as dependents. The child entitled you to the Additional Child Tax Credit and the Earned Income Credit on your wife’s earnings. That made the difference.”
“Why can’t I claim my daughter and granddaughter this year?”
“Your wife told me that they moved out after living with you for only five months last year. They have to live with you at least half the year to claim them as dependents.”
“I’m just going to make a call to my daughter, and then we’re going to get that changed. She’ll tell you she lived with us all year long.”
“Sir, I’m not going to change this return. Before you got here your wife gave me this information, and you can’t unring a bell. If I knowingly falsify a tax return, I could lose my license.”
“Then I’m just going to get my return done somewhere else.”
Here is where we deviate from what actually happened. What I would have liked to have said:
“Sir, sit your ass back down. I have your social security number, and your wife’s social security number. I also have the 800 number the IRS uses to report tax fraud. Unlike you, I actually pay taxes, and I’m offended by your attempt to defraud the system. Now, we’re going to file your tax return as it stands, and you’re going to sit there and sign it.”
Of course, blackmailing your clients probably isn’t a good business model in the long run. What I actually said:
“It’s your prerogative to get your taxes done anywhere you want. Here is your wife’s W-2 form.”
You can’t always get what you want.
“How come I’m not getting as big a refund? Last year I got almost $6000, and you’re telling me that this year I only get $1000.”
“Well, sir, last year you claimed your daughter and granddaughter as dependents. The child entitled you to the Additional Child Tax Credit and the Earned Income Credit on your wife’s earnings. That made the difference.”
“Why can’t I claim my daughter and granddaughter this year?”
“Your wife told me that they moved out after living with you for only five months last year. They have to live with you at least half the year to claim them as dependents.”
“I’m just going to make a call to my daughter, and then we’re going to get that changed. She’ll tell you she lived with us all year long.”
“Sir, I’m not going to change this return. Before you got here your wife gave me this information, and you can’t unring a bell. If I knowingly falsify a tax return, I could lose my license.”
“Then I’m just going to get my return done somewhere else.”
Here is where we deviate from what actually happened. What I would have liked to have said:
“Sir, sit your ass back down. I have your social security number, and your wife’s social security number. I also have the 800 number the IRS uses to report tax fraud. Unlike you, I actually pay taxes, and I’m offended by your attempt to defraud the system. Now, we’re going to file your tax return as it stands, and you’re going to sit there and sign it.”
Of course, blackmailing your clients probably isn’t a good business model in the long run. What I actually said:
“It’s your prerogative to get your taxes done anywhere you want. Here is your wife’s W-2 form.”
You can’t always get what you want.
Wednesday, February 16, 2011
Egypt
Watching the events unfold in Egypt over the last couple of weeks puts me in mind of the old saying that the written Chinese character is the same for both “crisis” and “opportunity.” This peaceful revolution, fueled by massive discontent at all levels of Egyptian society, has swept away the Mubarek administration. Whether this is the start of true regime change, or merely a shuffling of faces at the top remains to be seen.
It was interesting to watch the waffling and sail trimming of the Obama administration as events unfolded. If you don’t have any influence on a situation, and you don’t have a clue as to how it is going to turn out, it is probably best if you keep your mouth shut about things, for fear of inserting your own foot. Aside from philosophical support for democracy in general, and the basic human right of peaceable assembly in particular, US policy should have been that this was an internal Egyptian matter, end of comment.
Much of the discontent with the Mubarek regime was driven by economic issues, both of the middle class and of the poor. By some estimates, half of the recent college graduates in the country are unemployed. Among the poor, the desperation and despair are even sharper.
Egypt does not produce enough food to feed its 79 million people. As a food importer, the country has been buffeted rises in commodity prices over the last year. In America, when wheat prices double, a family’s grocery bill goes up five or six dollars a week. In Egypt, when wheat prices double, people who were spending 50% of their income on food are now spending 100% of their income on food. When a large percentage of your population goes to sleep hungry at night, that is a recipe for political instability.
My take on things is that the mandate of the new government will be to create huge numbers of new jobs, while simultaneously lifting incomes and guaranteeing subsidence for the bottom 30% of the populace. And, oh yeah, you’ve got to do this fast, before the euphoria wears off and things turn ugly again.
Sometimes the crisis outweighs the opportunity.
It was interesting to watch the waffling and sail trimming of the Obama administration as events unfolded. If you don’t have any influence on a situation, and you don’t have a clue as to how it is going to turn out, it is probably best if you keep your mouth shut about things, for fear of inserting your own foot. Aside from philosophical support for democracy in general, and the basic human right of peaceable assembly in particular, US policy should have been that this was an internal Egyptian matter, end of comment.
Much of the discontent with the Mubarek regime was driven by economic issues, both of the middle class and of the poor. By some estimates, half of the recent college graduates in the country are unemployed. Among the poor, the desperation and despair are even sharper.
Egypt does not produce enough food to feed its 79 million people. As a food importer, the country has been buffeted rises in commodity prices over the last year. In America, when wheat prices double, a family’s grocery bill goes up five or six dollars a week. In Egypt, when wheat prices double, people who were spending 50% of their income on food are now spending 100% of their income on food. When a large percentage of your population goes to sleep hungry at night, that is a recipe for political instability.
My take on things is that the mandate of the new government will be to create huge numbers of new jobs, while simultaneously lifting incomes and guaranteeing subsidence for the bottom 30% of the populace. And, oh yeah, you’ve got to do this fast, before the euphoria wears off and things turn ugly again.
Sometimes the crisis outweighs the opportunity.
Tuesday, February 8, 2011
Cut and Run
Jane Harmon has just announced that she will be resigning from the US House of Representatives to take over as the head of the Woodrow Wilson Center, a Washington think tank specializing in international relations. Harmon is a nine term Democrat holding the seat for California’s 36th District, a swath of coastal Los Angeles.
Excuse me, but didn’t she just get reelected, like, three months ago? What happened? Did she get to Congress after the last election, realize that the Democrats weren’t in charge of the House anymore, and immediately put her resume on the street?
Hers was apparently a pretty safe district, but she didn’t run unopposed, which meant that she probably spent at least a million bucks on her reelection campaign. That’s a lot of money. Other people’s money. I doubt her conversation with major donors included a line about her needing their cash, because she needed a paycheck while she was searching for a better gig. How about the campaign staff? Not the professionals, but the volunteers. “I need you to give up your time to support me, at least until I hear back from the search committee.” And don’t even get me started about perpetrating a fraud on the voters, who now get to foot the bill for a special election to replace her.
I don’t know all the ins and outs of her situation, but it’s hard not to be contemptuous of someone who runs for office, and then bails out upon receipt of a better offer. Of course, in all fairness, I feel pretty much the same way about Sarah Palin.
Excuse me, but didn’t she just get reelected, like, three months ago? What happened? Did she get to Congress after the last election, realize that the Democrats weren’t in charge of the House anymore, and immediately put her resume on the street?
Hers was apparently a pretty safe district, but she didn’t run unopposed, which meant that she probably spent at least a million bucks on her reelection campaign. That’s a lot of money. Other people’s money. I doubt her conversation with major donors included a line about her needing their cash, because she needed a paycheck while she was searching for a better gig. How about the campaign staff? Not the professionals, but the volunteers. “I need you to give up your time to support me, at least until I hear back from the search committee.” And don’t even get me started about perpetrating a fraud on the voters, who now get to foot the bill for a special election to replace her.
I don’t know all the ins and outs of her situation, but it’s hard not to be contemptuous of someone who runs for office, and then bails out upon receipt of a better offer. Of course, in all fairness, I feel pretty much the same way about Sarah Palin.
Sunday, January 30, 2011
Bundling versus Unbundling
I ran into a terrific example of the concept of economic bundling last week.
Every year I go on a ski trip, arranged by a ski club. When I started going on club trips (a long, loong time ago), the process was remarkably simple. You wrote the club a big check, and you were told when to show up at the airport. Once there, the trip leader handed you an airline ticket. You deposited a massive amount of gear at the gate (skiers travel with more equipment than your average Himalayan expedition), and got on the plane.
When the plane landed, you got on a bus that took you to the resort. After check in, you got your lift ticket for the week. Invariably, several dinners were included in the price of the trip, so you would get together with other members of the club and swap lies about how adventurous you had been.
The dominant feature of the pricing was that it was all inclusive. That is, you paid one fee, and everything was included. Put another way, all of the various services had been put together in one bundle by the club.
This year's trip provides quite a contrast with those earlier experiences.
First, I had to make my own airline reservation, separate from the payment for the club trip. I also had to pay an additional fee to cover the bus transfer from the airport to the resort. Several years ago, the lift ticket had been broken off from the rest of the trip package. You select the number of days you want to ski, and pay for those apart from the main trip fee.
When I bought my airline tickets, I thought I had a pretty good deal. That illusion stood until I got to the airport with all my luggage, and had to pay baggage fees, which were equal to 30% of the original ticket cost. Since the airlines no longer serve food on the flights, we bought something at the airport to eat on the plane. The trip price also included only one final dinner at the end of the week. There were other group activities planned, but they were pay as you go.
All of the discrete pieces of the original trip package had been separated, or unbundled, from each other.
The advantage of unbundled prices is the additional freedom and flexibility it offers the individual. When prices are bundled, you pay for everything, whether you use it or not. You don't like airline food? Tough, you still have to pay for it. Renting your equipment to ski? You don't get to use all of the baggage allowance built in to the ticket price. You like to rent a car and drive yourself to the resort? The other people who are riding the bus appreciate your subsidizing their ride. So unbundled prices give you a chance to save some money.
Bundling prices offer a couple of advantages, however. First of all, it is less complex, both for the buyer and the seller, and complexity costs money. If you use bundled prices, you only have to pay one time, and there is only one revenue collection point for the seller. In the context of my ski vacation example, bundling has another, even larger benefit. By grouping together a number of individuals, the club was able to get discounts by buying in bulk. A batch of wholesale purchases bundled together are going to be cheaper than the same set of purchases made at the retail level.
For my trip this year, I had more options, but the sum of my individual choices cost me more than what the old group price would have been. For once, I can actually put a price on freedom.
Every year I go on a ski trip, arranged by a ski club. When I started going on club trips (a long, loong time ago), the process was remarkably simple. You wrote the club a big check, and you were told when to show up at the airport. Once there, the trip leader handed you an airline ticket. You deposited a massive amount of gear at the gate (skiers travel with more equipment than your average Himalayan expedition), and got on the plane.
When the plane landed, you got on a bus that took you to the resort. After check in, you got your lift ticket for the week. Invariably, several dinners were included in the price of the trip, so you would get together with other members of the club and swap lies about how adventurous you had been.
The dominant feature of the pricing was that it was all inclusive. That is, you paid one fee, and everything was included. Put another way, all of the various services had been put together in one bundle by the club.
This year's trip provides quite a contrast with those earlier experiences.
First, I had to make my own airline reservation, separate from the payment for the club trip. I also had to pay an additional fee to cover the bus transfer from the airport to the resort. Several years ago, the lift ticket had been broken off from the rest of the trip package. You select the number of days you want to ski, and pay for those apart from the main trip fee.
When I bought my airline tickets, I thought I had a pretty good deal. That illusion stood until I got to the airport with all my luggage, and had to pay baggage fees, which were equal to 30% of the original ticket cost. Since the airlines no longer serve food on the flights, we bought something at the airport to eat on the plane. The trip price also included only one final dinner at the end of the week. There were other group activities planned, but they were pay as you go.
All of the discrete pieces of the original trip package had been separated, or unbundled, from each other.
The advantage of unbundled prices is the additional freedom and flexibility it offers the individual. When prices are bundled, you pay for everything, whether you use it or not. You don't like airline food? Tough, you still have to pay for it. Renting your equipment to ski? You don't get to use all of the baggage allowance built in to the ticket price. You like to rent a car and drive yourself to the resort? The other people who are riding the bus appreciate your subsidizing their ride. So unbundled prices give you a chance to save some money.
Bundling prices offer a couple of advantages, however. First of all, it is less complex, both for the buyer and the seller, and complexity costs money. If you use bundled prices, you only have to pay one time, and there is only one revenue collection point for the seller. In the context of my ski vacation example, bundling has another, even larger benefit. By grouping together a number of individuals, the club was able to get discounts by buying in bulk. A batch of wholesale purchases bundled together are going to be cheaper than the same set of purchases made at the retail level.
For my trip this year, I had more options, but the sum of my individual choices cost me more than what the old group price would have been. For once, I can actually put a price on freedom.
Wednesday, January 26, 2011
Tax Tales
If you ever want to know how loose the average American’s connection to the concept of honesty is, you just have to do taxes for a while. Most folks will say anything to get a bigger refund. What’s even more amazing is that they expect the person preparing their taxes to collude with them. Some examples:
“Off the record, I did air conditioning repair work last year. But I had to buy my tools all over again, because somebody stole them, so I didn’t hardly make enough money to talk about. We don’t have to report that, right?”
That would be a Schedule C business, and the excess of revenue over expenses has to be reported as income. And yes, you do have to report it, especially when you have just told the tax preparer that you have a side business.
Or another:
“I was separated from my husband in 2008 and 2009, so I filed as Head of Household. But my husband I got back together a few months ago.”
So you were married on December 31. You and your husband will have to file as Married, either Jointly or Separately. If you choose Married Filing Separately (MFS), you will lose the Earned Income Credit, along with most of the refund you got last year.
“We only got back together a few months ago, and he doesn’t want to file with me. Can’t we just forget I mentioned him?”
You can’t unring a bell. You can’t change your story after learning the tax consequences. The good news is that you get the share the joys of connubial bliss again.
Or this one, taken over the phone:
“I get $8000 a year in disability payments. Someone else claimed me on their tax return. How much of his refund belongs to me?”
If he provided more than 50% of your support, he can claim you as a dependent, in which case his refund belongs to him. If he did not provide half your support, and you knew he was going to claim you as a dependent, you have both committed tax fraud. What did you say your name was?
“*click*”
“Off the record, I did air conditioning repair work last year. But I had to buy my tools all over again, because somebody stole them, so I didn’t hardly make enough money to talk about. We don’t have to report that, right?”
That would be a Schedule C business, and the excess of revenue over expenses has to be reported as income. And yes, you do have to report it, especially when you have just told the tax preparer that you have a side business.
Or another:
“I was separated from my husband in 2008 and 2009, so I filed as Head of Household. But my husband I got back together a few months ago.”
So you were married on December 31. You and your husband will have to file as Married, either Jointly or Separately. If you choose Married Filing Separately (MFS), you will lose the Earned Income Credit, along with most of the refund you got last year.
“We only got back together a few months ago, and he doesn’t want to file with me. Can’t we just forget I mentioned him?”
You can’t unring a bell. You can’t change your story after learning the tax consequences. The good news is that you get the share the joys of connubial bliss again.
Or this one, taken over the phone:
“I get $8000 a year in disability payments. Someone else claimed me on their tax return. How much of his refund belongs to me?”
If he provided more than 50% of your support, he can claim you as a dependent, in which case his refund belongs to him. If he did not provide half your support, and you knew he was going to claim you as a dependent, you have both committed tax fraud. What did you say your name was?
“*click*”
Monday, January 17, 2011
Martin Luther King Day
Watching the news this morning, there was a story about school districts that are not taking off Martin Luther King Day as a holiday this year. Because of unusually heavy snowfall's this year, these school districts are using MLK Day to makeup for snow days they have had to take.
Outraged over the lack of reverence shown to the memory of Dr. King and the civil rights struggle, it was reported that there were calls for parents to pull their children out of school for the day. These calls for a boycott were led by...wait for it...Al Sharpton and Jesse Jackson. There's a shock for you.
Somehow, I don't think that the legacy Dr. King wanted to leave was that it is okay to skip school. Much of the civil rights struggle was about gaining access to education. You know, the whole Brown v. Board of Education thing.
The Reverends Al and Jesse could have campaigned for special class sessions on civil rights on MLK Day for schools that were in session. Instead, they argued for a boycott of education. Maybe it is just me, but the priorities seem a little screwed up.
Outraged over the lack of reverence shown to the memory of Dr. King and the civil rights struggle, it was reported that there were calls for parents to pull their children out of school for the day. These calls for a boycott were led by...wait for it...Al Sharpton and Jesse Jackson. There's a shock for you.
Somehow, I don't think that the legacy Dr. King wanted to leave was that it is okay to skip school. Much of the civil rights struggle was about gaining access to education. You know, the whole Brown v. Board of Education thing.
The Reverends Al and Jesse could have campaigned for special class sessions on civil rights on MLK Day for schools that were in session. Instead, they argued for a boycott of education. Maybe it is just me, but the priorities seem a little screwed up.
Thursday, January 13, 2011
Hit the Ground Running
I read an article on the Motley Fool website the other day that referred to the “Red Queen” economy. In Alice in Wonderland, the Red Queen is the one who says you have to run as fast as you can just to stay in place. If you want to get anywhere, you have to run faster than that.
In the Motley Fool article, the phrase “Red Queen economy” was used to describe deleveraging in the face of falling asset values. Normally, deleveraging, or paying down debt, increases your net worth, because you still own your assets, there is just less of a claim on them by the bank. If asset values are falling, however, you can pay down debt and still go under water, with your equity less than the remaining debt. You have to run as hard as you can just to stay in place.
I thought it was such a good metaphor that I’m going to try and use it in the area of work skills. When I started my career, back before globalization had taken hold, and at the start of the information technology revolution, it was possible to learn one set of skills, and use those skills for an entire career, oftentimes at the same company.
Early in my career, I met a man who was a draftsman. In his fifties, he had spent his entire adult life making drawings on a drafting board. When times were slow, he was laid off. When business picked up, he went back to his drafting board.
He had done basically the same job for the last thirty years. In the 20+ years since then, he would have had to reinvent his skill set twice to stay employed. First, he would have had to master computer aided drafting. A few years later, mastery of three dimensional modeling software. That's two reinventions of the job, for a field that had been the same for the previous fifty years.
In today’s economy, whole industries are created and wiped out in near record time. To stay ahead of this wave of creative destruction, you have to be upgrading your skills all the time. This requires a couple of judgment calls on the part of the skill seeker. First, you have to place a bet on what skills are going to be in demand. Second, you have to acquire those skills.
Formal education can only get you so far. You also need to find ways to sharpen and deepen new skills acquired in the classroom. To keep yourself employable, a necessary step is to pick up some experience, as well as education.
In the meantime, you have to continue performing in your current position. Run as fast as you can just to stay in place.
Like the survivors in the movie Zombieland, there are rules for surviving the Great Recession. Rule number 1: Cardio.
In the Motley Fool article, the phrase “Red Queen economy” was used to describe deleveraging in the face of falling asset values. Normally, deleveraging, or paying down debt, increases your net worth, because you still own your assets, there is just less of a claim on them by the bank. If asset values are falling, however, you can pay down debt and still go under water, with your equity less than the remaining debt. You have to run as hard as you can just to stay in place.
I thought it was such a good metaphor that I’m going to try and use it in the area of work skills. When I started my career, back before globalization had taken hold, and at the start of the information technology revolution, it was possible to learn one set of skills, and use those skills for an entire career, oftentimes at the same company.
Early in my career, I met a man who was a draftsman. In his fifties, he had spent his entire adult life making drawings on a drafting board. When times were slow, he was laid off. When business picked up, he went back to his drafting board.
He had done basically the same job for the last thirty years. In the 20+ years since then, he would have had to reinvent his skill set twice to stay employed. First, he would have had to master computer aided drafting. A few years later, mastery of three dimensional modeling software. That's two reinventions of the job, for a field that had been the same for the previous fifty years.
In today’s economy, whole industries are created and wiped out in near record time. To stay ahead of this wave of creative destruction, you have to be upgrading your skills all the time. This requires a couple of judgment calls on the part of the skill seeker. First, you have to place a bet on what skills are going to be in demand. Second, you have to acquire those skills.
Formal education can only get you so far. You also need to find ways to sharpen and deepen new skills acquired in the classroom. To keep yourself employable, a necessary step is to pick up some experience, as well as education.
In the meantime, you have to continue performing in your current position. Run as fast as you can just to stay in place.
Like the survivors in the movie Zombieland, there are rules for surviving the Great Recession. Rule number 1: Cardio.
Tuesday, January 11, 2011
Sarah Palin and Gabrielle Giffords
Everyone has heard the classic definition of insanity: doing the same thing over and over again, and expecting different results. But sometimes insanity expresses itself by doing something wildly different than what has been before.
The mass shooting in Arizona is a case in point. Interviews with the shooter’s former college professors at Pima Community College have indicated pretty clearly that he was barking mad, but not violent. He was unstable, but there was no evidence of being a danger to self or others. The fact that he was obviously off his rocker was a necessary, but not sufficient prerequisite for what he did. That is to say, he had to be crazy to do what he did, but there are plenty of people who run the spectrum from mentally ill through to pure looney tunes, and most of them don’t bring a loaded Glock to a political meet and greet event.
So we are left with the question: what drove the shooter’s behavior? In these cases, the insanity of the action is defined by the fact that it defies rational analysis. We’re never going to know why he shot all those people, beyond the fact that he was crazy.
There has been considerable commentary expended on trying to connect this tragedy with Sarah Palin. On the web site of her political action committee, there was a graphic that showed a bulls eye over the Arizona congressional district of Gabrielle Giffords. It has been claimed that this somehow incites or condones violence.
This is absurd. I have seen the graphic in question. It is actually a map of the United States with all of the states outlined. There are cross hairs drawn on districts considered vulnerable, because they voted for McCain/Palin in 2008, but elected a Democrat to Congress. If it was a photo of specific congressmen taken through a rifle scope, the idea might have some traction, but it is a graphic of the entire country.
I would say trying to connect Sarah Palin to the shooting of Gabrielle Giffords was crazy but I don’t believe that it is. After all, the commentators airing this theory are, as far as I can tell, diametrically opposed to her on the political spectrum. Trying to discredit a political opponent’s rhetoric by tying her to a dangerous, violent lunatic’s attacks on innocent people? It doesn’t take much rational analysis to understand that course of action.
The mass shooting in Arizona is a case in point. Interviews with the shooter’s former college professors at Pima Community College have indicated pretty clearly that he was barking mad, but not violent. He was unstable, but there was no evidence of being a danger to self or others. The fact that he was obviously off his rocker was a necessary, but not sufficient prerequisite for what he did. That is to say, he had to be crazy to do what he did, but there are plenty of people who run the spectrum from mentally ill through to pure looney tunes, and most of them don’t bring a loaded Glock to a political meet and greet event.
So we are left with the question: what drove the shooter’s behavior? In these cases, the insanity of the action is defined by the fact that it defies rational analysis. We’re never going to know why he shot all those people, beyond the fact that he was crazy.
There has been considerable commentary expended on trying to connect this tragedy with Sarah Palin. On the web site of her political action committee, there was a graphic that showed a bulls eye over the Arizona congressional district of Gabrielle Giffords. It has been claimed that this somehow incites or condones violence.
This is absurd. I have seen the graphic in question. It is actually a map of the United States with all of the states outlined. There are cross hairs drawn on districts considered vulnerable, because they voted for McCain/Palin in 2008, but elected a Democrat to Congress. If it was a photo of specific congressmen taken through a rifle scope, the idea might have some traction, but it is a graphic of the entire country.
I would say trying to connect Sarah Palin to the shooting of Gabrielle Giffords was crazy but I don’t believe that it is. After all, the commentators airing this theory are, as far as I can tell, diametrically opposed to her on the political spectrum. Trying to discredit a political opponent’s rhetoric by tying her to a dangerous, violent lunatic’s attacks on innocent people? It doesn’t take much rational analysis to understand that course of action.
Wednesday, January 5, 2011
2011 Goal Setting
I let other people make New Year’s resolutions. I do goal setting. I had a lot of success with my goals for last year, hitting the mark on eight out of nine. My targets for the year ahead will be pretty similar to last year’s, with some tweaking around the edges. The objectives fall into three rough categories: personal finance, professional development, and private life.
Personal Finance
Save 20% from earned income. The heavy lifting on this goal is done by salary contribution to a 401K, with accompanying company match. That combination gets me to 15%, with the last 5% done the old fashioned way—not spending all of my take home pay.
End the year with less than $70K in debt. The deleveraging that started in 2010 will continue in 2011. Working against that is my plan to buy a new car before the end of the year. Since I pay off my current car loan in March, every month I defer that big ticket purchase allows me to build a bigger down payment on the new vehicle. Meanwhile, I will continue to make extra equity payments on my home mortgage. The goal of $70 K is actually $10 grand more than 2010’s goal, but I’ll be trading a fully depreciated asset for a new one.
Earn $2000 from outside sources. Last year the target was to earn $2 grand from tax prep with H & R Block. I was only able to get halfway there. If tax preparation isn’t enough this year, I will have to find some other kind of moonlighting gig to take up the slack. Needless to say, my day job comes first.
Professional Development
Take 9 credit hours of graduate accounting classes. With the classes already taken, accomplishing this goal will get me 2/3 of the way towards finishing the prerequisites for a Masters degree in accounting.
Build two new Access databases. One of the classes taken last year was a course in database programming. The student project is up and running, although it still needs some tweaking. The goal here is to deepen and extend that knowledge by building two new projects.
Private Life
Run 60K of road races. I’ve upped this from last year’s goal of 50K. At least one race will be at the longer 10K distance.
Entertain at home at least once a month. This encompasses everything from private dinner parties to blow out barbeques with thirty guests.
Read Proust’s “Remembrance of Things Past.” I’ve only got 3700 pages left to go. In addition to Proust, I’m going to continue with my Shakespeare reading group for at least another six plays.
I keep these goals written on a Post-It note on my desk, to keep them present for all year long. I’ll post on my progress around the mid year mark.
Tuesday, December 28, 2010
Refund Anticipation Loans
There has been interesting news in the tax preparation world this week. The Office of the Controller of the Currency (OCC) announced on Christmas Eve that it was directing HSBC Bank not to fund any refund anticipation loans for H & R Block in 2011. Accordingly HSBC cancelled their contract with HRB, leaving Block without a provider for the coming tax season.
Since the ability to provide refund anticipation loans (RAL) to tax clients was a major marketing tool for Block, this is considered a body blow to the company. Shares of HRB dropped almost 8% when the news was announced.
A RAL is a short term loan made at the time a tax return is filed. The size of the loan is usually the calculated amount of the refund, less tax preparation fees, interest, and charges. Basically, the tax client signs over their IRS refund to the bank making the loan. When the IRS sends the refund to the bank, the loan is repaid. With electronic filing, the time the loan is outstanding averages about 10 days.
H & R Block bent over backwards to prevent this from happening. The company even offered to cover any credit losses that HSBC would have had, making the loans essentially risk free. Since the OCC did not change their position, I have to conclude that protecting the integrity of the banking system was not driving the regulatory action. This looks like a politically driven decision, based on consumer protection arguments.
Consumer protection activists dislike RAL’s, because the loans have very high calculated interest rates. This is because the $29.95 charge to process the loan is added to the actual interest charges, then divided by the length of the loan to determine the APR. For an example, let’s suppose you borrow $2000 at a 24% interest rate for 10 days. The interest charge would be about $13. A high interest rate, but the overall bite of $13 bucks isn’t too bad.
Now, add in the $30 loan processing fee to the $13, and work the calculation backwards. That calculation is $43, divided by $2000, times 36. That comes out to just over a 77% annual percentage rate.
Your outrage over this depends a lot on how you look at the transaction:
Outlook I
“I’m going to loan you money and charge you 77% interest.” “That’s usury! You’re no better than a loan shark!”
Outlook II
“I’m going to loan you $2000 for one to two weeks, and it will cost you $43.” “That doesn’t sound so bad, and I’d like to get the money as soon as I could. I’ll take the deal.”
In point of fact, millions of tax clients took the deal every year. Now they will be “protected” from making this choice by the OCC.
Since the ability to provide refund anticipation loans (RAL) to tax clients was a major marketing tool for Block, this is considered a body blow to the company. Shares of HRB dropped almost 8% when the news was announced.
A RAL is a short term loan made at the time a tax return is filed. The size of the loan is usually the calculated amount of the refund, less tax preparation fees, interest, and charges. Basically, the tax client signs over their IRS refund to the bank making the loan. When the IRS sends the refund to the bank, the loan is repaid. With electronic filing, the time the loan is outstanding averages about 10 days.
H & R Block bent over backwards to prevent this from happening. The company even offered to cover any credit losses that HSBC would have had, making the loans essentially risk free. Since the OCC did not change their position, I have to conclude that protecting the integrity of the banking system was not driving the regulatory action. This looks like a politically driven decision, based on consumer protection arguments.
Consumer protection activists dislike RAL’s, because the loans have very high calculated interest rates. This is because the $29.95 charge to process the loan is added to the actual interest charges, then divided by the length of the loan to determine the APR. For an example, let’s suppose you borrow $2000 at a 24% interest rate for 10 days. The interest charge would be about $13. A high interest rate, but the overall bite of $13 bucks isn’t too bad.
Now, add in the $30 loan processing fee to the $13, and work the calculation backwards. That calculation is $43, divided by $2000, times 36. That comes out to just over a 77% annual percentage rate.
Your outrage over this depends a lot on how you look at the transaction:
Outlook I
“I’m going to loan you money and charge you 77% interest.” “That’s usury! You’re no better than a loan shark!”
Outlook II
“I’m going to loan you $2000 for one to two weeks, and it will cost you $43.” “That doesn’t sound so bad, and I’d like to get the money as soon as I could. I’ll take the deal.”
In point of fact, millions of tax clients took the deal every year. Now they will be “protected” from making this choice by the OCC.
Wednesday, December 15, 2010
Qualitative Easing Explained...Twice
There is a service that takes text and converts it to simple animated video. Here is one that has been making the rounds. It is quite critical of the Fed's move towards quantative easing (AKA pumping money into the economy). The deadpan delivery of the computer generated voices makes it hysterically funny.
The video above got enough play to cause somebody to generate a response in the same format:
It is not as funny as the first one, but probably a little more balanced. I still think the Fed is playing with fire by running the printing presses.
The video above got enough play to cause somebody to generate a response in the same format:
It is not as funny as the first one, but probably a little more balanced. I still think the Fed is playing with fire by running the printing presses.
Sunday, December 12, 2010
A Bad Deal All Around
Sometimes compromise means taking the best from both sides of an issue, creating a consensus that leads the way forward.
That’s not what happened with the recent tax deal put together between the White House and the Republican leadership, however. In that case, the worst of both sides was adopted. The deal panders to the short term interests of the principals, while creating the conditions that will lead to more long term pain further down the road.
The Republicans campaigned on the twin themes of rolling back ObamaCare and enforcing fiscal discipline. The White House wanted to raise taxes to combat the deficit spending they created. So, to compromise, let’s do neither of those things.
The White House agrees not to raise anyone’s taxes. In exchange, the Republicans will support extending unemployment benefits for another 13 months, along with two more years of not applying social security taxes to the first $6600 of earned income. Oh yes, we’re continuing heightened payouts on the earned income credit as well.
The net effect of this deal is that government spending will exceed revenues by almost a trillion dollars next year and the year after. We will continue to provide a reverse incentive to find work, allowing people over two years to stay on the dole. The long term sustainability of the social security program is made worse, because we are starving the program of revenues from a vast cross section of the employed.
This is the reverse of leadership. This is kicking the problem of fiscal deficits down the road two years, while entrenching an entitlement mentality ever more firmly into a large section of the populace.
In every game of musical chairs, eventually the music stops. In this game of political musical chairs, what scares me is that by the time the music stops, we’ll find that all of the chairs have been taken away, and we’ll all fall down.
Monday, December 6, 2010
'Tis the Season ...
This is my annual Christmas diatribe. I can’t keep up my reputation as a “Bah, humbug” kind of guy without one.
This is the time of year when we are encouraged to give more. Everywhere you turn, someone has their hand out, asking for a donation. Bell ringers at the grocery store. Angel trees at church. At work we are running a cash drive to raise money to buy Christmas presents for a number of families.
I think we should all just go out to eat instead. Take the twenty bucks we could give away to buy presents for somebody else’s child, and buy a steak dinner with it.
“Oh, that’s horrible.” “Have you no Christmas spirit?” No, not much. Still, even if I had the Christmas spirit, my method makes more economic sense.
First, consider multiplier effects. In economic terms, a multiplier is when you spend a dollar, and the business where you spend it pays their employees and their suppliers. Those suppliers, in turn, spend their share of that dollar on their suppliers, and so on. Economic activities with a high multiplier give you more bang for the buck. A low multiplier means that the impact of a dollar spent is damped out pretty quickly. So if you want to spread Christmas cheer as widely as possible, you should seek out ways of spending your money with higher multiplier factors.
Think of throwing a stone into a pond. The ripples spreading out from that event are a function of the multiplier. The higher the multiplier factor, the further the ripples spread before dying out.
Consider buying toys with your money. Almost all of the toys in the stores are imported from China. Even if the retail markup on those toys is 50%, the immediate impact on the American economy is less than a dollar. If the first stage of your calculation is .5, it is very difficult to see how your multiplier can get over 1.0. Instead of throwing a stone into a pond, imagine throwing a stone into mud.
Now consider dining out. When you buy that steak dinner, the employees of the restaurant get paid. But all of the purveyors to the restaurant also get paid. And those purveyors are sourcing Colorado beef, corn fed with Iowa grain. All of the money you spend stays on shore, and get respent by Americans. The multiplier effect is much higher than if you buy toys at Wal-Mart.
Also, if you’re feeling generous after your steak dinner, you can give a bigger tip to the server. After all, it’s Christmas time. That way, the server can go out and buy presents for her own kids, instead of having strangers buy for them. Maybe it is just me, but I’d rather support the working poor than the non-working poor. At least the working poor are in the game, trying to support themselves and their families. Between Section 8 subsidized housing, food stamps, and Medicaid, I feel like my tax dollars are providing enough charity. I want to use my uncompelled donations to give extra benefits for extra effort.
And finally, if you give cash to the annual Christmas drive, you don’t even get to see the results of your giving. When you eat out, you get to enjoy your meal, deriving a real and tangible benefit from your expenditure. All in all, it makes a lot more sense to dine out more than to give to charity this time of year.
Oh, who am I kidding? I put twenty bucks in the envelope along with everybody else.
This is the time of year when we are encouraged to give more. Everywhere you turn, someone has their hand out, asking for a donation. Bell ringers at the grocery store. Angel trees at church. At work we are running a cash drive to raise money to buy Christmas presents for a number of families.
I think we should all just go out to eat instead. Take the twenty bucks we could give away to buy presents for somebody else’s child, and buy a steak dinner with it.
“Oh, that’s horrible.” “Have you no Christmas spirit?” No, not much. Still, even if I had the Christmas spirit, my method makes more economic sense.
First, consider multiplier effects. In economic terms, a multiplier is when you spend a dollar, and the business where you spend it pays their employees and their suppliers. Those suppliers, in turn, spend their share of that dollar on their suppliers, and so on. Economic activities with a high multiplier give you more bang for the buck. A low multiplier means that the impact of a dollar spent is damped out pretty quickly. So if you want to spread Christmas cheer as widely as possible, you should seek out ways of spending your money with higher multiplier factors.
Think of throwing a stone into a pond. The ripples spreading out from that event are a function of the multiplier. The higher the multiplier factor, the further the ripples spread before dying out.
Consider buying toys with your money. Almost all of the toys in the stores are imported from China. Even if the retail markup on those toys is 50%, the immediate impact on the American economy is less than a dollar. If the first stage of your calculation is .5, it is very difficult to see how your multiplier can get over 1.0. Instead of throwing a stone into a pond, imagine throwing a stone into mud.
Now consider dining out. When you buy that steak dinner, the employees of the restaurant get paid. But all of the purveyors to the restaurant also get paid. And those purveyors are sourcing Colorado beef, corn fed with Iowa grain. All of the money you spend stays on shore, and get respent by Americans. The multiplier effect is much higher than if you buy toys at Wal-Mart.
Also, if you’re feeling generous after your steak dinner, you can give a bigger tip to the server. After all, it’s Christmas time. That way, the server can go out and buy presents for her own kids, instead of having strangers buy for them. Maybe it is just me, but I’d rather support the working poor than the non-working poor. At least the working poor are in the game, trying to support themselves and their families. Between Section 8 subsidized housing, food stamps, and Medicaid, I feel like my tax dollars are providing enough charity. I want to use my uncompelled donations to give extra benefits for extra effort.
And finally, if you give cash to the annual Christmas drive, you don’t even get to see the results of your giving. When you eat out, you get to enjoy your meal, deriving a real and tangible benefit from your expenditure. All in all, it makes a lot more sense to dine out more than to give to charity this time of year.
Oh, who am I kidding? I put twenty bucks in the envelope along with everybody else.
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