Adventures in Taxland, Part V

Last week I had a tax client that was a real success story. They went from a starting point of owing the IRS over $6000 to receiving a $175 refund. There were several twists and turns in the story, but by the proper application of tax law I was able to help the couple avert what would have been a calamity for their personal finances.


The first question is how they got into the position of having to pay in so much in the first place. The answer is that they made a lot of money. Sort of.

The wife worked a full time job, and made about $30,000 for 2012. She had taken out enough withholding to more than cover the taxes on that income, if that had been the couple’s only income.

The next piece of the puzzle was the husband. In 2012 his request for disability was approved. With social security disability, benefits accrue from the date you apply for disability. If and when you are finally approved, the accrued benefits are paid, up to the date of approval. In essence, you get back pay. The husband received a lump sum payment for 2010, 2011, and 2012, totaling $30,000. The worksheet for calculating the taxability of social security benefits is complicated, but the bottom line is that about $13,000 of the lump sum was taxable income. So now they were up to $43,000 in taxable income.

Then came a twist. Qualifying for disability is one of the few ways you can discharge federally guaranteed student loan debt. Death is about the only other way you can get out from under. You can’t even drop student loans debt through bankruptcy. The husband had old student loan debt that was written off. This one of those good news, bad news situations. The good news is that the bill collectors stop calling, trying to collect on the debt. The bad news is that cancelled debt is income. If you negotiate to close a credit card for less than the balance due, the amount written off is considered income. If your house is foreclosed on, and the bank sells it for less than the loan, the difference is income. More people are getting caught up in this since the Great Recession began in 2008.

With unpaid interest charges tacked on, the cancelled debt came to $21,000. So the couple’s income now included wages of $30,000, taxable social security of $13,000, and cancelled debt income of $21,000. Total income of $64,000. After taking the standard deduction and two personal exemptions, taxes due were over $6000. They sure didn’t take enough withholding to cover that.

From this starting point I sprang into action. Well, I didn’t actually spring. It was more of a tap, tap, tap on the keyboard, along with some filling out worksheets by hand.

First, we went to work on the cancelled debt income. Cancelled debt can be excluded from income to the extent that you are insolvent. You add up all your debts, including the student loan. Then you add all your assets, including your 401K, car, and personal possessions. To the extent your liabilities exceed your assets, you are insolvent. We went through the IRS approved worksheet, and determined that the couple was insolvent to well over the amount of the student loan debt. So we filed a Form 982 to exclude the income. That took care of that part of the problem.

The next step was to tackle the lump sum disability payment. The IRS allows what is called a Lump Sum Election (LSE). You go back through every year of the disability payments, and calculate how much of the Social Security would have been taxable under each year’s situation. In this case it required going over the couple’s tax returns for 2010 and 2011, as well as 2012, and figuring out how much of the Social Security was taxable in each year. Then that was lumped together and entered on their Form 1040, with a special notation. That reduced the taxable portion from $13,000 down to $5000. The bottom line of these machinations was to bring their reported income down from $64,000 to $35,000. And they had taken enough withholding to cover the tax bill on that, with $175 left over as a refund.

This case shows the benefit of training, experience, and cooperation among tax professionals can make a difference over just trying to use the software. The use of knowledge and judgment in applying the software made the difference between a big pay in and getting a refund for this client.

Not bad for a plumber who only does taxes part time.

Adventures in Taxland, Part IV

A few weeks back, at the start of tax season, I caught one of Turbo Tax’s television spots. This is the ad campaign that pokes fun at tax preparers who do taxes part time, and work other day jobs. The one that has been running most often features a husband coming home from the office, wearing a coat and tie. He walks into the kitchen to see that his wife has called in a plumber to fix the kitchen sink. The plumber pulls himself out from underneath the sink, and as he wipes muck off his hands, greets the husband by name. “Don’t you remember me?” asks the plumber. “I did your taxes.”


These ads are devastatingly effective. The first time I saw one, I thought to myself “Boy, who would use a plumber to do their taxes. You’d have to be an idiot to do that.” Then I realized that the ad was targeting my clients. I am a part timer who works for H & R Block on the side, and I was sucked in. Like I said, devastatingly effective.

The ad was targeting all users of office based tax preparation services. The message was that if you use Turbo Tax at home and have a question, you can call in and get answers from CPA’s and Enrolled Agents, licensed professionals in taxation. Go to a service like H & R Block, and you get a plumber.

What the ad doesn’t mention is that Turbo Tax is software that you use at home. You only get to talk to one of their professionals if you call in with a question. One of the advantages of coming in to a tax office to get your taxes done is the interaction with between you and the person doing your taxes. You may think you know your own tax situation, but someone with training and experience can guide you into areas of the tax code you didn’t even know about, to your benefit. The interaction should be less you asking questions of the expert, and more the expert asking questions of you.

Another problem I have with the ads is that I actually might qualify to meet Turbo Tax’s standards. After all, I have both an MBA and a Master’s degree in Accounting. But I will confess, I go to more experienced tax preparers for guidance on a regular basis. Some of the “part timers” I work with have decades of experience, and have handled thousands of tax returns. The least experienced person working in an H &R Block office takes 70 classroom hours of instruction before seeing their first client, and you are required to get continuing education every year to maintain your status.

So go ahead, trust that plumber to do your taxes. Now, trusting a marketing guy to unplug your drain? That’s a different story.

Adventures in Taxland, Part III

I recently had a client who had received a letter from the IRS regarding her 2011 tax return. The gist of the letter was that the IRS had received information that the person associated with social security number xxx-xx-xxxx, claimed as a dependent on my client’s return, had earned more than $3700 in 2011. Exceeding that income threshold had made the person ineligible to be claimed as a dependent. The letter asked the client to verify whether this was true of not. If true, she would have to amend her 2011 return.


Me: “Who did you claim as a dependent?”
Client: “My brother. He must have had a job I didn’t know about for a few months.”
Me: “Why don’t you ask him?”
Client: “He’s in prison. He wouldn’t know how much he made before he went in.”
Me: When did he go to prison?”
Client: “I’m not real sure. It was early in 2011. He would have only worked a couple of months before he went in.”
Me: “So your brother was in prison for most of 2011, but you still claimed him as a dependent? Maybe he was working in the prison laundry, or was stamping out license plates. Those guys get paid something for that, even if it is prison wages.”
Client: “After I paid for all those collect calls, and bought him all that stuff he asked for, I figured I needed to get something back for all the money I spent. If he was working, he should have bought his own stuff.”
Me: “Let’s get started amending your return. You’ll have to pay back part of your refund from 2011. I’ll print out a payment voucher you can use to send with the money.”

After I finished amending the client’s 2011 return, I started thinking about prison wages, so I looked it up. In my state, prison wages run from $.17 to a little over $.50 an hour, depending on the type of work. You can’t get up to $3700 in annual earnings at those rates. So unless the brother worked a lot of hours before he got sent away, he wasn’t the person working for those wages.

It occurred to me that my client’s brother could have been the victim of identity theft. His social security number could have been sold to an illegal immigrant, who was using it to hold down a job. Until he gets out, he would have no way of knowing, nor would the Social Security Administration, because only one person would be working under that number. He is actually benefitting, because whoever is using his social security number is building up credits for him to use in retirement (assuming he eventually gets out).

It further occurs to me that such a scheme could be run on a large scale, providing a funding source for organized crime. On the macro level, I wonder what a cross check of prisoners with social security payers would reveal.

On the micro level, I wouldn’t want to go back to the IRS and claim that the earnings reported couldn’t be associated with my brother, because he was in jail the whole time. They would probably take a dim view of that explanation. So identity theft or no, I’m glad we amended the client’s return for 2011.

When we did her return for 2012, she filed as single, no dependents.

Adventures in Taxland, Part II

I have done the taxes for a couple of people who cashed in their retirement plans so far this year. Let me tell you, from a tax perspective it is a really bad idea.


I had a client this weekend who pulled all the money out of her 401K plan. First of all, the IRS considers 100% of that to be current income. The real whammy, however, comes from the 10% penalty tax. This penalty is applied even if you have no taxable income.

For example, let’s say you are a single parent of two kids with $9000 of earned income, combined with closing out a 401K worth another $9000. With a Head of Household standard deduction and three personal exemptions, your taxable income is reduced to $0. You get all your withholding back, plus Earned Income Credit, plus Additional Child Tax Credit. But the penalty tax of $900 is applied anyway, reducing your refund by that amount.

For this weekend’s client she got the double whammy. She cleaned out her 401K, and thought she had protected herself by withholding 20% of the money. But there was enough money in the 401K account to double her income for the year. What that increase did was push her into a higher tax bracket. She was in the 25% bracket for almost all of the retirement money. So instead of withholding 20%, she should have withheld 35%.

Let’s add up the damage:
• She had to pay in an additional $1100 to the IRS due to the unplanned tax liability.
• A third of her money was lost before it ever hit her bank account.
• And the real kicker: she doesn’t have a retirement fund anymore.

For low income individuals, the temptation to tap into the pot of money represented by a retirement account is pretty strong. But the results of giving in to that urge are never pretty.

Adventures in Taxland, Part I

Tax season is in full swing. I enjoy doing taxes. Only working nights and weekends, it is difficult to make much money, but the puzzle solving aspect appeals to me. And you get great stories out of it.


Last week I had a client come in whose primary source of income was Social Security disability payments. He lived off about $20,000 a year of tax free income. He also had a small pension from a previous employer.

For reasons that the client was not able to articulate, the client had not been drawing on the pension. When he turned 60, he took a large distribution from the pension, a little over $27,000. But he only had $250 in withholding taken out of the payment. The rest was deposited into his checking account. He knew that the distribution was taxable income, so the client came into the tax office.

The pension distribution was not marked as a lump sum payment, so I don’t know the specifics of payout. The client was a little vague on when he had received the cash. Maybe June, maybe July.

Because of the pension distribution, the client owed about $3000 in taxes for 2012. This included a penalty for failure to pay sufficient withholding. Clients are never too pleased when they learn they owe the IRS money, and this gentleman was no exception. For my part, I was starting to worry about how he was going to pay for the tax prep fees. But it turned out he had brought in enough cash to pay the bill.

When I printed out the payment voucher to send in along with his payments, the client told me he was going to have to set up a payment schedule with the IRS. I was surprised. “I hate it for you that you’re going to have to write that big check, but you must have the money in your checking account, right? You knew this day was coming.”

He looked at me like I was his idiot nephew. “I don’t have any money in my checking account. That money done been spent.”

This guy had received a chunk of money into his account that exceeded his normal annual income, and six months later it was gone.

I took the cash he had brought to pay his tax prep fees, gave him his return, with payment voucher, and wished him well. When he left, he was on his cell phone to his girlfriend, finding out what the monthly amount was on her payment agreement.

Now I have more insight into those stories about lottery winners who run through all the money in just a couple of years. The character of some people is just put together in a way that they will never build any wealth.

Billionaire Boy's Club

An extraordinary conversation took place on air at CNBC earlier this week. Carl Icahn, billionaire investor and financier, and billionaire hedge fund manager Bill Ackman of Pershing Square Capital, phoned in to a live show being aired from the floor of the New York Stock Exchange.


Ackerman makes his money, among other things, by short selling stocks. This is the practice of placing large bets that a company’s stock price is going to drop. Short selling is one of the ways that capital markets self correct. If the price of a stock becomes irrationally high, short sellers begin to emerge, hoping to make money when the rest of the market realizes they have overbid a particular company. If you think that a company is overvalued, and you have bet that the price is going to fall, you should tell people that, by way of getting the ball rolling. That is what Ackman is doing, making presentations to investors about why he thinks a company called Herbalife is a “pyramid scheme.”

Ackman was calling into CNBC, when Icahn joined the conversation. Icahn thinks Ackman is wrong about Herbalife, and impugns Ackman’s ethics, integrity, business judgment, and manhood. He also shouts down the moderator about ten minutes into the segment. The on air moderator asks Icahn if he owns shares in Herbalife, if Icahn is “long” on the stock. If Icahn owns shares, he does not want to see the stock price drop. Instead of answering a direct question, Icahn claims the moderator is “bullying” him, and threatens to never go back on air at CNBC in the future.

Frankly, Ackman comes across as pretty calm and reasonable. He may be completely blowing smoke about Herbalife, but he lays out his positions without getting personal and calling names.

Icahn, on the other hand, comes across as a piece of crap. He acts like if you can keep the other guy from talking, you automatically win the argument. He may be an amazing investor, and he has made billions of dollars, but based on this segment, Carl Icahn is a pretty miserable human being. 

You can watch the exchange here.

Ski Company Economics

Not much snow in Snowmass, Colorado this week. However, there is a good base from previous winter storms, so the skiing is still pretty good.


In the last twenty years, the history of the ski industry has been a two part tale. First, consolidation: several large companies have rolled up all of the independently owned ski areas. For example, Aspen Associates owns Aspen, Snowmass, and Buttermilk mountains, along with other areas in other states.

The second part of the story has been the evolution of the ski companies from entities that make most of their profits from skiing, to real estate developers that have ski areas attached. The ski company will put in a new lift line from the peak into a location at the bottom of the hill where they own all the land. The presence of the lift line turns cheap land into ski in/ski out home sites, that can be sold for millions of dollars each.

This transformation has changed the nature of the industry. Instead of trying to maximize the number of skiers, the ski areas are largely insulated from trying to increase lift ticket revenue. At the same time, people who can afford a million dollar home site display low price elasticity of demand. With the general public, if lift ticket prices increase 10%, demand will drop by more then 10%. People have other ways of spending their entertainment and recreation dollars.

With the 1%’s who can buy multimillion dollar second homes, a 10% price increase leads to a 10% increase in sales, with an even bigger boost to profits. From the perspective of the ski companies, the logic is compelling. Skiing has moved from a mass market sport to a luxury good. Prices for lift tickets and on-mountain ding reflect this shift.

The Fiscal Slope, Phase II

I’m working as a paid tax preparer for H & R Block again this year. The money’s not great, but you get fabulous stories out of the gig. In December my office was gearing up for January’s opening. Then the fiscal cliff intervened.


In past years the IRS has begun accepting tax returns during the second week of January. This year, Congress did not pass the tax bill until after January 1. Some of the provisions of that legislation were actually retroactive for 2012 taxes.

The IRS had prepared tax forms, instructions, and software based on what tax law was at the end of December. Come January 1, the law changed, and they had to make a number of systemic changes in a hurry. As a result, last week the IRS has announced that the first day that tax returns will be accepted will be January 30. At the tax office, we have been rescheduling clients for later in the month, and working on managing expectations for people who expect a large refund check before the end of January. Not going to happen.

Early season tax filers tend to be skewed towards the lower income quintiles. These are folks who not only get all of their withholding back, but also receive large payments from the Federal government for Earned Income Credit and Child Tax Credits.

A number of these low income filers have actually borrowed in the fourth quarter against their potential tax refunds. H & R Block has such a loan program. It is called Emerald Advance. These loans have a high interest rate, but are intended to be extremely short term, lasting only a month or two before being repaid out of the borrower’s tax refund.

The delay in starting to accept returns until the end of January has upset the apple cart to some extent. A number of people who did not plan on making an interest payment will now have to make at least one. But a bigger problem has begun to loom in the distance.

The debt ceiling.

The Federal government has already reached the limit of its borrowing ability. By deferring some payments into Federal health and pension funds, the Treasury has postponed a cash crunch. By the middle of February, however, the bag of tricks will be empty, and tough choices are going to have to be made. Some bills will be paid, and others will not.

I’m going to guess that funding tax refunds will be a lower priority than making military payrolls or paying bondholders. If I’m right, it may be more than just a couple of weeks delay before refunds are paid out, compared with previous tax years.

People who borrowed against their tax refund are going to take a haircut. People who planned on paying off Christmas bills with tax refunds are going to get stung.

What was billed as a fiscal cliff is really more of a steep slope. We’ve gone over the edge, and are rolling downhill. We missed the first boulder on the slope, but there are others.

Keynesian Stimulus Spending

The standard interpretation of Keynesian economics is that when unemployment is too high and the economy is not growing, the problem is a lack of aggregate demand.  Businesses would supply more goods and services, thereby boosting employment, if only people were out there buying.

If households aren't creating demand because they have no money and cannot borrow, government will have to fill in the gap for the short term.  The government can borrow more money than it takes in from tax revenue.  This deficit spending stimulates the economy by putting money back into peoples' pockets.   As they spend that money, business start expanding, and begin hiring, taking up the slack from the government.

The key idea is that a short term burst of spending will stimulate the economy, leading to a virtuous cycle of an  expanding economy and increased hiring.  That is the basic theory, as I understand it.  The longer I look at the economy, the more convinced I become that the theory doesn't work.

For example, consider Christmas.  Millions of households have spent recklessly buying presents this holiday season, charging their purchases onto credit cards.  In anticipation of this surge of economic activity, many businesses added on employees for the season.  So far, so good.  Short term deficit spending leads to increased hiring.

But now look at the sequel.  Now that the holidays are over, those short term, part-time positions are being eliminated.  No long term virtuous cycle has been started.

Or consider the case of Ohio and Pennsylvania.  both were battleground states in the last election, which means they were saturation bombed with political ads from both parties.  In addition to mass media buys, political operatives were parachuted into those states from all over the country, and those individuals spent freely.  Tons of money were pumped into those states, providing tons of short term stimulus spending.

Have Ohio and Pennsylvania become economic dynamos since the election, with big growth and massive hiring?  I haven't seen any evidence of it.

When stimulus spending fails to have the desired result, Keynesians always claim that the problem was not a with the theory, but that the stimulus offered was too small. or did not continue long enough.  The beauty of that argument is that it offers politicians something very appealing: they get to hand out money without having to raise taxes.

I don't think our political class is going to reject Keynes and his theories anytime soon.

The Fiscal Cliff

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

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

Unemployment Compensation

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

Automatic Sequestration

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

Payroll Taxes

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

Dividend Taxes

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

Income Tax Rates

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

Alternative Minimum Tax

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

Debt Ceiling

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

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

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

Michigan and Right to Work

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


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

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

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

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

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

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

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

Special Dividends

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

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

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

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

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

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

After the Fall

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

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

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

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

Hurricane andy, Part II

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

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

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

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

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

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

The symptom is the cure.

Hurricane Sandy

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

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

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

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

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

Caffeine Overdose?

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


How much caffeine is too much?

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

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

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

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

What I Want for Christmas

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

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

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

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

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

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

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

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

iPhone compatible, please.

New England Compunding Center

A tragedy is a story where no one wins.


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

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

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

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

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

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

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

NFL Referees

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


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

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

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

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

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

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

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

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

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

Airports

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


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

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

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

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

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

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