Greece: Is Default Imminent?

On Monday the banks will open again in Greece.  By the end of the week we could see the end of the experiment in European unity called the Euro, the common currency.

In recent elections, Greek voters repudiated the conservative political parties that had agreed to cut government spending in exchange for continued loans from the European Central Bank.  By European Central Bank, we really mean the Germans, since they are putting up most of the funding.

The ECB agreed to a complex deal that included holders of Greek government debt taking a fifty percent reduction in the face value of Greek bonds, and the Greek government agreeing to cuts that would reduce their deficit to around 3% of government spending.  In exchange, the ECB would loan Greece more money so that Greece could continue making interest payments on bond they had already issued.

The political parties that gained the most in the election have declared their intention to renegotiate the deal.  Their position is that pushing Greece into a depression so that German bondholders can continue to get interest payments is not a good deal for Greece.  The new guys position is essentially this: “If you don’t continue to loan us money, we’ll default, and then your banks will get 0% of their money instead of 50% of their money.  And your interest payments? You won’t get any of that either.”

The German position is pretty simple: “If we don’t loan you more money, your government defaults, you won’t be able to pay salaries or pensions, and you’ll have to pull out of the Euro zone and issue your own currency.  Who wants drachmas?  Nobody wants drachmas.  And even with your worthless currency, you still haven’t solved the problem that your government spends more than it takes in.”

The problem with what is essentially a high stakes game of chicken between the left wing Greek political parties and the ECB is that they are out of time.  The Greeks could not agree to form a ruling party after the elections, so now they are going to have another election on June 17.  After that election a clear winner may emerge, which can then form a government.  But the Greek government will require more bailout funds before then.

Meanwhile, Greek citizens are pulling their Euros out of banks, and either stuffing their mattresses or putting the money into non-Greek banks to hold.  This is a process that has been ongoing.  Last month Greeks pulled about 5 billion Euros out of Greek banks.  Last week they took 750 million Euros out of their banks on Monday alone.  If the pace of withdrawals accelerates, by the end of next week the Greek banking system could collapse, requiring a messy, unplanned exit of Greece from the Euro zone.

If the problems were limited to Greece, it probably wouldn’t be so bad over on this side of the Atlantic.  Our banks don’t hold a lot of Greek government debt, and we don’t do a ton of trade with Greece either.  What is keeping policy makers up at night is that nobody thinks the problem can be restricted to just Greece.  Portugal, Spain, and Italy are the next potential dominos to fall.  Italy alone is the eighth largest economy in the world.  If the southern periphery of the Eurozone falls apart, it will have major implications for the world economy as a whole.

That’s the problem with playing chicken.  Sometimes neither guy swerves out of the way in time.

Austerity vs. Growth

Two European nations have recently had elections: France and Greece. In both cases the electoral shift raises the level of uncertainty in financial markets.


At the polls this last week, both France and Greece threw out center right parties and replaced them with more left wing political coalitions. This is widely regarded as a reaction to the austerity policies being pushed by the current administrations. The incoming administrations will press an agenda more focused on growing the economy of their respective nations.

Why would you want to live a life of austerity when you could be growing your economy? That seems like kind of a no brainer. The answer lies in the disparate economic policies behind the buzzwords “austerity” and “growth.”

Austerity is a program of cutbacks in government spending, attempting to balance the budget, and maybe reduce government debt. Some of the cutbacks are immediate, in the form of pay cuts and layoffs of government employees. Some of the cutbacks are long term, such as raising the retirement age. The idea is to live within your means, and so reduce the risk that you will have to default on the money you have borrowed.

Growth policies mean spend money that you don’t have. Increase government deficit spending to employ more people. Those people will spend their government supplied income, leading to an expansion of the economy. As the economy expands, taxes go up along with the expansion. Classic Keynesian economics.

Of course, governments have run large deficits for years, in good times and bad. That is why they are starting to have problems borrowing money.

My thought is that it is better to cut spending now, while you still can borrow money, than to default, and then have to cut spending anyway. But if I was having to cut my standard of living, or lost my paycheck and had no other options, I might see things differently.

Spirit Airlines Baggage Fees

Spirit Airlines just announced that they are increasing the fee to check a bag up to $100.  This new fee increase is for carry on bags that are paid for at the boarding gate.  If you check in online, and pay for your carry on in advance, the fee is much lower.

Baggage fees are a terrific example of unbundling services.  Bundling is the practice of combining multiple services within a single price.  The airlines used to bundle a host of services together in their ticket price.  Once you bought your ticket, you got to fly, your bags got to fly, your carry on got to fly, they fed you, and you got the in flight movie.  The logic behind bundling is that most passengers use and appreciate the extra services, and it is more convenient.  Paying multiple fees feels like getting nibbled to death by ducks.

The downside of bundling is that if you don't want the extra services, well, that's tough, because you still pay the same price.  Not bringing any luggage?  Still the same price.  Airline food gives you indigestion?  You're still paying for it.  In a sense, bundling means that some passengers are subsidizing services for the other passengers.

So now the airlines are unbundling their services.  When you buy a ticket, that gets you from point A to point B.  You want to get luggage from point A to point B, that will be charged separately.  You want a headset?  Pony up two bucks, big spender.

For the light packer, unbundling baggage fees from ticket prices keeps ticket prices low.  The people who can't bear to be parted from their anvil collection, on the other hand, are paying the full price of flying their stuff all around the country.  Unbundling can lead to higher efficiency, as people pay for only the services they deem essential.  This is not a bad thing.

The downside is that unbundling increases the complexity of the transaction.  On Spirit Airlines baggage fee schedule, there are at least fourteen different ways of paying for a single bag brought onto a flight, which range from $18 to $100.  Trying to get the best deal can require a lot of thought, planning, and effort.

Like I said, it can be like getting nibbled to death by ducks.

Health Care: Right or Resource

“Healthcare is a right, not a business.”


This is a statement I have heard or read repeatedly during the entire debate over Obamacare during the last couple of years. It was the underlying assumption behind the administration’s arguments during the recent Supreme Court case. In talking about the individual mandate, the Solicitor General basic argument was: we have to get healthy people to pony up the money to pay for the sick people. Those sick people are going to need healthcare, and somebody’s got to pay for it.

I think that to argue that healthcare is a right is profoundly incorrect. In my view, healthcare is a resource. Like all resources, it is scarcer than the demand, and must be allocated in some fashion. Advocates of the private sector will argue that price is the appropriate mechanism to allocate healthcare. If you can’t afford the care you need, that’s just too bad. Advocates of a single payer system, such as Britain’s, ration care by use of waiting lists, or by refusal to provide certain procedures or pharmaceuticals. If you die before you can get treatment, that’s just too bad.

There has been a profound shift in the notion of what constitutes a “right” in the last couple of decades. Traditionally, having a right was intended as a limit on government. Freedom of speech means you cannot be arrested for calling for the overthrow of the government. Separation of church and state prohibits the government from using your tax dollars to prop up a religion that you don’t agree with. Rights are concerned with what the government can’t do.

The new version of rights, particularly in the economic sphere, posits responsibilities that government must do. For example, some have proposed a right to housing. And not just housing, but decent housing, whatever that means. This right absolves the individual of responsibility for providing their own housing. If we sign on to this new right, then it is the government’s problem to provide me with lodging. After all, I have a right to it.

The newer view of rights, instead of limiting government power, entails an expansion of government activity and control.

I come down on the other side of the question. In my view, the individual has no more a right to healthcare, than they have a right to health itself.

The GSA Parties Down!

The scandal concerning the Government Services Administration (GSA) has been getting a lot of airplay recently. In GSA district 9, they had a conference to reward a number of employees for…well, for something. Maybe they were exemplary employees selected from the rank and file. Maybe they were the senior managers, taking advantage of a boondoggle. Anyway, the conference, hosted in Las Vegas, was apparently pretty over the top. They spent about $822,000 for a conference with only a couple of hundred attendees

The GSA’s own internal auditor raised the issue in a report. Then it hit the media. Once the story broke, it picked up steam all on its own. The head of the GSA has now resigned. Congress is investigating. The head of district 9 pleaded the 5th when called in front of a congressional committee. Politicians of both parties are hyperventilating, declaring that they are “shocked, shocked to discover gambling is going on in this establishment.” Oh, sorry, wrong movie.

The politicians are appalled over this waste of government money. The government? Wasting money? How can you tell?

The people who worked at the hotels where the conference attendees stayed don’t think it was a waste of money. The entertainers hired don’t think it was a waste of money. They entertained the hell out of those bureaucrats!

The people whose businesses were supported by the GSA’s largesse don’t think it is a waste of money. They probably think that continuing to support a war in Afghanistan and bribing the Pakistanis to allow supply convoys through their territory is a waste of money. They might think that extending Federal unemployment payments to people who aren’t working is not as good a use of the government money as paying people to actually do a job. Maybe they think that having Medicare pay for medical services for people who die shortly thereafter is a waste of money. But I really doubt whether the folks who provided goods and services for the GSA’s conference thought that they were a waste of money.

Seriously, the government takes in wealth through taxation, and then redistributes that wealth. Some wealth is spread around employees of the government, and most is redistributed among the populace.

In holding this conference, the GSA was redistributing wealth. You could make an argument that they were doing their job.

Off Topic POst: Treyvon Martin

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

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

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

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

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

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

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

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

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

Adventures in Taxland: Filing Status

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

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

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

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

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

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

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

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

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

Pink Slime: Fact or Fiction?

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

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

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

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

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

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

Adventures in Taxland: RAL's

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

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

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

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

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

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

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

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

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

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

What Economists Do

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

Adventures in Tax Land II

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

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

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

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

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

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

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

The sense of entitlement is astonishing.

Making Ends Meet Via the IRS

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

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

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

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

GE's Superbowl Ads

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

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

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

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

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

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

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

What % Are You?

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

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

Adventures in Taxland, Part I

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

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

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

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

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

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

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

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

Mitt Romney's Tax Returns

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The EEOC muddies the waters.

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

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

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

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

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

Loewe's and Religious Discrimination

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

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

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

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

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

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

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

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

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

Illegal Immigration: Forever Guilty?

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

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

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

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

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

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