Apple vs. Samsung

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

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

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

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

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

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

Voter ID

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


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

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

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

Two thoughts on this issue:

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

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

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

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

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

The Deleveraging of America

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


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

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

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

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

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

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

Chick-Fil-A

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


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

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

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

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

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

Birds of a feather flock together, I guess.

Taxes, Transfers, and Progressivity

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


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

Bottom quintile: -301 percent

Second quintile: -42%

Third quintile: -5%

Fourth quintile: 10%

Top quintile: 22%

Top 1%: 28%

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

Two points on this spring to mind.

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

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

Yahoo's New CEO

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


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

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

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

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

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

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

There Oughta Be A Law

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

All the News is Bad

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


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

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

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

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

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

The Facebook IPO Debacle

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


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

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

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

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

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

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

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

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

Then there is how Facebook did it.

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

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

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

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

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

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.