Turning of the Tide

Last year a major milestone for the global economy passed, all but unheralded.  In 2012 the working age population of China peaked.  This population is defined as the number of Chinese between the ages of 16 and 60.  There is a smaller pool of workers this year than there was last year.  That number will decline again next year, and every year after that for the next couple of decades.

This decline is the inevitable result of the one child per family policies put in place decades ago.  And the process is unstoppable.  Even if the Chinese government were to relax its population control policies tomorrow, and Chinese women to immediately react by having more kids, it would be at least 17 years before that increased fertility would begin lifting the number of workers.

This is a major milestone because China has become the world’s go to location for manufactured goods.  Export of manufactured products has powered the unprecedented growth of the Chinese economy.  However, two processes are about to collide.  As  the Chinese economy gets bigger, it is starting to generate more internal demand.  At the same time, the pool of labor is beginning to get smaller.  More demand for a scarcer resource inevitably means the price of that resource gets bid up.

We are already seeing that process starting.  In the southern coastal regions, which have been the major manufacturing areas, wage increases of 10% to 24% have been reported.

For the last ten years, powered by a seemingly inexhaustible supply of cheap labor, Chinese manufacturers have taken market share away from domestic producers.  Chinese made products have taken over whole industries.  This has been great for consumers, who have benefited from low prices, but for American manufacturers, it has meant layoffs and plant closings.  There are now signs of this process reversing.  Motorola has opened a factory in Texas to start making cell phones.  And Apple Computer has announced plans to begin making some computers in the US again.  GE is moving more production of appliances back to the heartland.

Of course, China is not the only low wage country out there.  Vietnam, India, the Philippines—the world is awash in low cost labor.  Also, if Chinese workers decide to stay in the labor force past age 60, the erosion in the size of their labor force will stop.  Still, as an American manufacturing manager, the last ten years have been like watching the tide go out, with every year bringing tighter margins and fewer opportunities.  So I can be forgiven for taking Chinese demographics as a hopeful sign.

Maybe we’re seeing the turning of the tide.

Defining Poverty

There is a great deal of discussion in this country about the poverty line, and the percentage of the population that lives below the poverty line.  In the debate about increasing the minimum wage, the issue is often couched in terms suggesting that the minimum wage should be high enough for a single wage earner to earn over the poverty line for a family of four.

In an earlier post, I pointed out that with current Federal antipoverty programs, one wage earner can get a family above the poverty line.  In this post, I want to look at a different question: where does the poverty line come from?  We say that a family of four that has less than $23,450 of annual income is living in poverty.  How do we make that determination?  It turns out it is not hard to find that information.

In 1963-64, an economist with the Social security Administration, Mollie Orshansky, made the first official definition of poverty.  Her methodology was simple.  She took a Department of Agriculture economy food plan that listed how much a person should eat during a week (3 lbs. of milk and cheese, 2 lbs. of meat, 5 eggs, etc.).  This amount of food was added together for various family sizes, then the cost was calculated.  Orshansky then multiplied the dollar cost of the food by a factor of three.  That was the definition of the poverty level adopted in 1965. 

Where did the factor of three come from?  In 1955, the Department of Agriculture did a survey that showed families of three or more persons spent about a third of their after tax income on food.

In 1969, this poverty line was indexed to changes in the consumer price index (CPI), so that it increases with inflation.  Other then minor changes regarding issues such as the distinction between farm and non-farm families, the formula has remained constant since then.  You can find this history here.

The problem with a static definition of poverty is obvious.  It does not take productivity growth and technological change into account.  Long term productivity growth means you can buy more stuff with less money.  For example, in 2011 Americans spent only about 8% of their income on food, tobacco, and alcohol combined.  That number reflects a remarkable shift in spending patterns over the last 50 years.  The money not spent on food is deployed in other ways.  For example, only 18% of household below the poverty line do not have air conditioning, and some of those people live in Alaska.  Television ownership is almost universal in our society.

Those in favor of more government intervention in the economy often cite poverty statistics to demonstrate that the government needs to do more giveaways of other people’s money.  I would argue that a bad definition of poverty leads to bad policy making. 

After all, if “poor” people are 50 pounds overweight, and walking around with smart phones, TVs and iPads, doesn’t that indicate that the “war” on poverty has been pretty much won?  Maybe we can declare victory and go home.

Unemployment Statistics

The official jobs number came out last week.  The news about employment was so-so at best.  The economy added about 170K jobs lat month, but the number for the previous two months were revised downward, meaning total employment didn’t increase by all that much.  Meanwhile, another 50,000 people dropped out of the workforce, presumably because they were discouraged by their inability to find a job.  The official unemployment rate declined to 7.3%, still too high a rate for anyone to start uncorking the Champaign.

The anemic recovery in the job market has spawned a host of commentary over the unemployment rate and how it is measured.  Most of the commentary focuses on how the statistics are under counting the unemployed.  I have seen estimates that calculate the unemployment rate as high as 16%.  To reach that number you have to include everyone who is working part time, everyone who has dropped out of the workforce, and everyone who considers themselves to be paid less than they think they are worth.

Against all the statistical hand wringing I can only counterpoise a couple of anecdotes.

I have a relative who graduated from college a little over a year ago.  He worked for a few months on a political campaign.  After the election, he spent a couple of months at a nonprofit, then followed that up with an internship.  None of these paid much more than minimum wage.  However, he landed a position with a retail company a few months ago.  The initial reports are that he is hitting his stride in his first real full time job.

In my church, I knew a senior manager who lost his position when his plant closed.  Despite excellent qualifications, he struggled to even get interviews.  But recently, he let me know that he had just started a new job as the second shift plant manager at a local company that is expanding.  It is not the equivalent of his old job, but it is stable employment, even if it is a step back down the career ladder, probably till the end of his career.  He spent over a year on the unemployment line.

Finally, I ran into a friend last month, who let me know about her husband’s job search.  He has just started at a new company, in a similar position to the one he lost two years ago.  He has a longer commute, but reckons that a small price to pay to be back in the game.

One of the threads that connect all three of these stories is persistence.  None of them ever gave up, despite all of he discouragement that a modern job search entails.  The other thread is flexibility.  All three made compromises of one form or another to get the job.

I guess the arguments about the proper way to measure unemployment are important.  But is seems to me that what is really important is whether you have a job.  And in getting one of those, persistence and the willingness to accept what the market is offering trumps any discussion of whether it is a “good” job market or a “bad” job market.

Skills Development

My company is adding some new product lines in the next couple of months.  Preparatory to starting production, I was entering all of the components and assemblies into our inventory database, and creating the codes that will manipulate that inventory.  It was a task that combined the need for exacting precision with mind numbing tedium.

Since I am fairly high up the food chain where I work, that got me thinking about whether the task I was working on fit the category of “highly skilled” work.  I concluded that it was.  Although the actual data entry was clerical in nature, navigating the systems and knowing what to input raised the skill profile.  I certainly could not have off-loaded the task to a clerk.  This led me to consider more generally the question of what constitutes a skill?

My model for skills involves the interaction of three separate components: education, talent, and experience.  Education includes everything from literacy and numeracy, through higher education.  It also encompasses task specific training.  This can range from simple job instructions like “Push this button.  Then when the green light flashes, open the mold, pull the part out and put it in the bin.” to brain surgery. 

Experience is the second part of skills.  Often times, training will cover the simplest and most basic scenario for a given task, or set of tasks.  Experience is what you get from the myriad variations that arise over time.  Also, experience provides the repetition that pounds home and cements the gains that training initiates.  The broader the range of experience you can build around a given task, the higher your skill level can get.

Talent is the wild card for skill development.  I could train with a coach for ten years, and never get within a million miles of NBA caliber basketball play.  We’ve all seen bad actors, and we’ve all seen actors who seem to effortlessly create memorable characters.  Talent is the difference.  But talent applies to every field, not just athletics or creative work.  I’ve seen factory maintenance mechanics who can take apart a piece of equipment, figure out what is wrong, and solve a problem, all without ever having worked on that particular piece of machinery.  I’ve known plenty of other mechanics who will work on equipment all day long, without ever actually solving the problem, if they’ve never had that particular problem arise before.  The difference in their work performance is due to that ineffable something called talent.

Talent also encompasses personality traits.  Part of my stock in trade is that I am willing to accept responsibility for the work that other people do.  A lot of people will not accept that responsibility.  That lack makes it tough for them to manage other people.

What does any of this matter?  Well, in an ever-changing economy, the only job security we can muster is by constantly upgrading our skills.  You can’t really do much about your talents.  You either have them or you don’t.  But you can know your talents.  If you combine that knowledge with ongoing education, and seek out an ever wider range of experiences, you can keep increasing your skills throughout your career.

Minimum Wage and Poverty

President Obama is supporting a significant raise in the minimum wage, currently $7.25/hour.  The President is advocating an increase to $9.00 an hour, a 24% increase.  The applause line in his speeches on the subject is “no one who works a full time job should have to live in poverty.”  Cue the cheering.

This is actually a claim that can be numerically checked.  So let’s run the numbers.

If you work 40 hours a week for 52 weeks, that comes to 2080 hours.  At $7.25 per hour, you would receive an annual income of $15,080.  But really, nobody gets through a whole year without missing a little work.  Let’s use a more realistic 1800 hours a year for our calculations.  That gives a minimum wage income of $13,050.

Next, let’s check what the official poverty level is.  A quick search provides the following numbers for 2013:

Family of 2: $15510

Family of 3: $19530

Family of 4: $23550

On the face of it, things look like the President may have a point.  Based on the information presented so far, a single mother with even one kid could work full time at minimum wage and still live below the poverty level.

Before we concede the point, however, we need to consider the impact of Federal tax policy, specifically the Earned Income Credit (EIC).  This is money the government gives to low income people, like those making minimum wage.  With $13,050 in wages and one child, the EIC pays out $3169.  With two children, the EIC payout is $5236, and with three children it tops out at %5891.  Things aren’t looking so bleak for our single mother anymore.

But as the old Ronco informercials used to say “Wait, there’s more!”  We haven’t considered the Additional Child Tax Credit yet.  This Federal benefit pays $1000 per child for up to three children.  Once we add the Federal benefits in, the picture changes completely:

Family of 2: $13,050 + 3169 + 1000 = $17,219

Family of 3: $13,050 + 5236 + 2000 = $20,286

Family of 4: $13,050 + 5891 + 3000 = $21,941

The single mother with three children is still below the poverty level, but with one or two children you are now above the line.  Once you plug in food stamps, and maybe even child support (after all, our single mother wasn’t alone when the children were created), and I think you can call the President’s myth busted.

I’m not saying that it wouldn’t be tough to try and make ends meet when you’re close to the poverty line.  I am saying that the claim that you can work full time and still be below the poverty line does not hold water.

You Want Fries With That?

A series of small strikes occurred in several major cities last week.  Strikes is probably too strong a word, since they were more like protests.  The targets of the demonstrations were fast food outlets.  The demonstrators were employees of fast food restaurants.  The object appears to be both trying to organize unions, and to protest for higher wages.  The target wage desired was an eye-popping $15 an hour.

If by some bizarre chain of circumstances these strikers would actually gain their chief demand, they might not like the consequences of their “victory.”  I have seen estimates for the fast food industry that claim labor costs run from 25% to 50 % of the total cost of operation.  Doubling labor costs would require a substantial increase in prices.  Good-bye dollar menu items.

Axiomatically, when you increase the price of a good, volume sales for that good drop off.  If something costs more, fewer people will decide that it is worth buying.  Economists call this shifting upward on the demand curve.  Now, a drop off in demand for fast food maybe a good thing for society as a whole.  With the obesity epidemic, we could all stand to eat more salads, and fewer French fries.

A good thing for society, in this case, would be a disaster for the fast food restaurants, and by extension, their employees.  If you are selling fewer hamburgers, you don’t need as many hamburger flippers.  Hours would be cut and positions eliminated.  Maybe the demonstrators don’t care.  Maybe they figure that they’ll still be ahead, even if they work less, because of the increase in wage rate.

The next shoe to drop would be management’s response to higher wage rates.  When the cost of a production input rises, a prudent response would be to start working on ways to use less of it.  In Australia, where the minimum wage is significantly higher than over here, McDonald’s is already using touch screens for ordering, eliminating the need for cashiers.  They may bring those over to America anyway, but higher wages improves the case for a faster rollout.  When they arrive, not everybody protesting would survive the ensuing cutbacks.

Certainly demand for fast food workers would drop if wages were to shoot up.  But another factor that I don’t think the protestors have considered in making their demands is that the supply of ready workers would also increase.  Anytime you increase the price paid for something, like an hour of labor, the number of providers willing to supply increases.  Shifting upwards on the supply curve is the exact opposite of shifting upward on the demand curve.  Increasing the price offered leads to a drop in demand.  Increasing the price taken leads to an increase in supply.

Fast food restaurants are both the entry level job and the employer of last resort.  No education beyond the most basic level, and no special skills are required.  The work is not particularly physically demanding.  Increased experience does not benefit you in performing the job.  Flexible scheduling on the part of the employee is allowed and even expected.  All of these factors have allowed fast food employers to keep wages low.  The current fast food employees are the beneficiaries of the low job requirements.  What I am saying here is that these people are working at fast food jobs because they cannot get better positions with other firms.

If you increase wages sharply, however, lots of applicants who would not consider fast food jobs now would give it a second look.  People with better education, better work ethic, higher capabilities.  Now ask yourself: if you were an employer, would you want to retain employees with low capabilities when you could replace them with better employees?  Or would you begin looking for pretexts to trade up?

I don’t know that new employees would squeeze existing fast food workers out if they did get the big raises they’re asking for.  But I’ll bet the demonstrators never considered the possibility.

You really need to be careful what you ask for.  Sometimes you won’t like it so much after you get it.

Cheating Malthus: Egypt

It has been disheartening to watch the news from Egypt over the last couple of weeks.  The elected President Muhammed Morsi was deposed by the military.  The generals have installed a caretaker government, and promised new elections in the near future, but the lesson is clear: any new President has to keep the generals happy.

A friend asked me how things fell apart so fast, after the hopes raised by the Arab Spring movement that toppled the Mubarrek government, and allowed for free elections for the first time.  My response is that democracy doesn’t necessarily solve problems.  The question for me is whether any form of government can solve Egypt’s underlying problems.

The population of Egypt is around 84 million people, and the land area of the country is about the size of the state of Texas.  That would lead to a high population density, but it does not really tell the story.  Most of Egypt’s land area is desert, with almost no one living there.  Instead, the vast majority of the people live in the Nile valley and delta.  The arable land area of Egypt is only about the size of Maryland.

Egypt does not produce enough food to support itself.  Without significant natural resources or manufacturing industries, the primary means of raising foreign currency to buy food on international markets is tourism.  Even if all the recent unrest hadn’t caused tourism to tank, it still does not pull in enough wealth to support the population.  In recent years, as numbers have increased, the slices of the economic pie shared by the poor have continued to shrink.  Unemployment is rampant, and a significant percentage of Egypt’s population spends up to half their income on food.  The phrase “your daily bread” has real significance to many Egyptians.

This deep and worsening poverty is the true root cause of the political unrest in the country.  The hope was that, by electing a new government, more economic opportunities would arise.  The problem is that although governments can redistribute wealth, they are not very good at creating wealth.  Expectations were high, and the Morsi administration failed to deliver.  Although Morsi made significant missteps, it is hard to see what another administration would have done differently on the economic front.

One of the truisms of foreign policy is that you can’t solve political problems through military means.  It seems every generation of leaders has to relearn this lesson, as we have found to our sorrow in Afghanistan and Iraq.  I want to suggest a corollary for domestic policy.  You can’t solve economic problems by political methods.  With the miserable track record of stimulus spending and quantitative easing that we have seen in this country, that should be no surprise.  The Egyptians, to their sorrow, appear to be learning that lesson themselves.

It is disheartening to watch the democratic gains of the Arab Spring falter.  But it is not surprising.

Why Stimulus Fails

Entropy is the tendency for ordered systems to become disordered over time.  The second law of thermodynamics says that entropy affects all closed systems over time.  Clocks wind down.  Batteries go dead.  Fires eventually burn themselves out.  The amount of useful work that can be performed is always less than the stored energy available at the starting state.

What is true in physics is also true in economics.  In economic terms, wealth functions as a kind of stored energy.  As wealth is deployed, some of it is continually lost to entropic effects.  This sounds more complicated than it really is. 

Consider your weekly grocery shopping.  When you buy food, you are converting wealth from one form (money), into a different form (groceries).  At the end of the week, however, you have less wealth, since you no longer have either the money or the groceries.  Where did that wealth go?  You ate it, of course, and the food was burned off in your metabolism.

I think entropy has a lot to do with why unemployment is still so high, and the economy so fragile, even though we have had massive government stimulus through transfer payments during this recession.  Government programs like food stamps, extended unemployment benefits, Medicaid expansion and the like have all gone straight into consumption.  No new wealth is being created by any of these programs.

Once the stimulus is removed, economic activity drops off again.  In order to have lasting effects at growing the economy, the government should be focusing on creating wealth, instead of merely propping up consumption.

Not a lot of votes in that, though.

Graduation Speeches

The last couple of weeks have been the season of college graduations, and we all know what that means: commencement speeches.  A number of schools will score high profile speakers from the worlds of entertainment, media, and business.  Sometimes the speaker has mastered all three (see Winfrey, Oprah).  Many of these high profile speakers will provide career advice along the lines of “follow your dreams” or “do what you love to do, and the money will follow.”

What a load of malarkey.

If we all followed advice like that, the job market would collapse, and society would soon follow.  Nobody grows up dreaming of the day they’ll be able to go to work washing dishes in a restaurant.  Yet every restaurant needs somebody to wash dishes.  Conversely, the number of video game testers is ludicrously small.  Yet there are legions of youngsters whose passions are sleeping late, playing video games, and drinking beer.  Plenty of those individuals are doing what they love, having moved back in with their parents after college.  We don’t need to be advising the most recent set of graduates to join them.

The job market exists to match what people are both willing and able to do, with what employers need, and are able to pay.  The idea that we are going to be a nation of entrepreneurs ignores the fact that the vast majority of new businesses fail, leaving behind nothing but the debts incurred to raise start up capital.

Here’s my advice to graduates:

Get a job.  Any job.  It is easier to get hired for a new position if you already have a paying gig.  Work hard, and focus on making your boss happy.  If you consider that “selling out,” too bad for you.  I consider it smart.  After a couple of years, start looking around for a new position that suits you better, either inside or outside of your current employer.

While you are paying your dues, learn as much as you can in as many areas as you can.  For the remainder of your career, continue to increase and update your skills.  That is your stock in trade to sell in the job market.  Meanwhile, take advantage of your 401K, and save, save, save.

For most of us. It’s hard to indulge your dreams without a ready supply of cash.

Winter is Coming

I recently started watching the hit HBO series Game of Thrones. I’m watching it on DVD, starting with season 1, episode 1, and working my way forward. The series concerns the dynastic struggles of a series of noble houses, set in the fictional kingdom of Westeros, a medieval fantasy realm.


One of the noble houses, the Starks of the North, have the familial motto “Winter is Coming.” In the context of the series, the constant awareness of a cold, bleak future engenders a certain dourness of outlook, a dogged determination to perform one’s duty without joy.

But it occurs to me that as mottos go, when could do far worse. For Winter is coming! Not just the season of snow and cold. But the metaphorical winter that periodically comes to all of us. We are all subject to the unexpected illness, the unplanned breakdown. All of us occasionally face family emergencies. On the career side, very few of us escape winter’s storms. A plant closing or big layoff catches us. A market shift or technological change can doom or current career, and make our skill set obsolete.

Winter is coming, and the time to prepare is during the more verdant seasons of our lives. Spend less than you earn, and invest the difference. Keep a cash reserve, to help weather the storms. One of the most neglected ways to prepare is to invest in ones self. Education is a lifelong process, and we should all be trying to both stay current with rapidly advancing technology and acquire new skills in areas that may be far away from our current careers.

Winter is coming. But the actions we take as individuals have a lot to do with how long winter lasts. By our own efforts we can protect ourselves from the worst of winter’s ravages, and bring about an early spring.

Regulating Ahead of the Facts

Three weeks ago a horrific accident occurred in the US. This was the massive fire and explosion at the fertilizer plant in West, Texas that killed 14 people. Most of those killed were fire fighters and other first responders who were fighting the blaze just before the explosion occurred.


This accident is being investigated, and as of this writing a cause has not been identified. In the case of the fertilizer explosion, there has been considerable commentary indicating that at the heart of the disaster was some sort of regulatory failing.

I have to disagree with this perspective. Three weeks of investigation have not revealed the cause of either the fire or the subsequent explosion. Although there were large quantities of ammonium nitrate at the plant, ammonium nitrate alone is not explosive. Typically it is mixed with diesel fuel to create the conditions for a bomb. Even then it requires a detonator.

If you don’t know what causes a problem, it is difficult to guard against the problem before it occurs. This fertilizer plant was in operation for at least forty years before the accident, and it is one of many scattered across the country. In the last 60 years, this is only the third unintended explosion of this type to occur in the US. When you operate for tens of thousands of man-hours between incidents it is difficult to make a case that underregulation is to blame.

More government is not always to solution to every tragedy.

Oregon Medicaid Study

A couple of years ago, Oregon decided to add people to their Medicaid rolls.  However, the state didn’t have enough money to add everyone who was uninsured, but wanted to get Medicaid coverage.  So in the interest of fairness, Oregon held a lottery.  The winners of the lottery got access to Medicaid coverage.  The losers continued on without insurance coverage.

It turns out that this is a perfect experiment to test the theory that having insurance coverage leads to better health outcomes.  The idea is that with insurance, people will have better access to physicians.  This access will increase monitoring and counseling.  Also, there will be less emergency rooms visits, leading to lower cost healthcare overall.  To test this theory, you would need a randomized group trial that would control for all the possible factors that would differentiate a population that already had insurance from a population that did not.

The lottery is what makes this a perfect experiment.  It separated the participants into two randomly selected groups: a control group with no insurance, and a test group with Medicaid insurance.  A randomized trial is the gold standard of experimental design.

At the end of three years, a study was published tracking the health results of the two groups, insured and uninsured.  The primary findings of the study:

• Heath care utilization increased for the insured group.
• Rates of depression were 30% lower in the insured group.
• There were no statistically meaningful differences between groups in several measures of health: blood sugar, cholesterol, and blood pressure.
• Hospital admissions and emergency room visits were statistically similar for both groups.

Liberal commentators are focusing on the first two bullet points: “Isn’t it great!  We’ve found a way to make poor people happier!”  “At last poor people can get the health insurance that is their birthright.”

Conservative commentators have focused on the last two bullet points.  “If your use of primary care goes up (by over a $1000 per person on average), but you don’t cut hospital and emergency room visits, aren’t you just pissing away the money spent on primary care?”  “More medical care does not lead to improved outcomes?  Then why are we expanding Medicaid?”

One of the interesting points is that even though the use of diabetes drugs increased in the insured group, their blood sugar (actually, glycolimated hemoglobin) did not drop.  This would not surprise anyone who has ever seen someone swallow a blood sugar pill, and then wash it down with a Mountain Dew.

Ultimately, I think this study shoots down the theory that the key to good health is going to the doctor regularly, which is kind of a silly idea when you think about it.  Healthy people don’t go to the doctor regularly.

Three Up. Three Down.

There have been three high profile criminal cases in the news in the last month.  Although very different, all three were prominent because of the element of randomness involved, as well as the potential to be terrorist incidents.

First was the shootings of two district attorneys in Texas, two months apart.  Both were shot at home.  Media speculation centered on the possibility that the Aryan Nation prison gang was attempting to intimidate prosecutors.  The second case was letters containing ricin, a poison.  These letters were mailed to both a Mississippi senator and President Obama.  The sending of poisoned letters recalled the anthrax scare of 2002.  Finally, of course, there was the bombing of the Boston Marathon.

In all three cases, the anonymity of the criminals was a major factor in the prominence of the case.  That you could be at home, or at work, or walking down the street, and violence could strike you, is an unnerving prospect.

This week all three cases were solved.  In the case of the Texas prosecutors, it was not assassination by free members of a prison gang.  It was the far more mundane and tawdry story of a justice of the peace, who had lost his job because he was caught stealing computer monitors.  The two prosecutors had worked together to convict the man, who lost his job as a result.  After arresting the former justice of the peace, police connected the man’s wife to the crimes.  She broke down and confessed her role in a single interrogation session.

The poisoned letters was a case that was cracked even more quickly.  The FBI traced the letters back to a man in Mississippi, and scooped him up.  It didn’t hurt the investigation that the sender put his initials at the bottom of the letters.  After his arrest, his family came forward with the revelation that they had been trying for years to get the obviously mentally ill man committed before he hurt someone.  In the best detail of the case, it turned out that the perpetrator had worked on more than one occasion as an Elvis impersonator.  You just can’t make that stuff up.

Finally, the case of the Boston Marathon bombing was cracked within three days.  Police were aided by the plethora of closed circuit cameras in the area, as well as the cell phone pictures and video that spectators provided.  As we all now know, one of the two bombers was killed in a shoot out with police, while the other was found after a lockdown search of a suburb of Boston, and is currently in custody.  Turns out they were just a pair of young immigrants who had failed to assimilate in the US.  Their own uncle, a successful immigrant, assigned the proper label to these two: losers.

The big lesson from these three cases is that in the post 9/11 world, the government has a lot of extra resources and tools for catching criminals.  If the case is big enough, they will use those tools to find the criminals.  It really is a CSI world out there.

The Ideology of Equality

It has been interesting to watch the ideology of equality take hold over the last couple of years. Occupy Wall Street and their cries against “the 1%” were part of this movement. Aside from the street theater level of the Occupy movement, the topic of inequality is having more and more media coverage devoted to it.


The evolution of the fixation on equality starts with the concept of a social safety net (unemployment insurance, disability programs), progresses on to socialist concepts like a guaranteed minimum income, or extensive government services (free child care, government paid health care), and in the latest incarnation, has proceeded on to attacking higher incomes themselves.

After all, in a country where 70% of adults are overweight to obese, it is hard to argue that there is a true problem with hunger. When 99% of households have televisions, and over 90% have air conditioning and cell phones, it shifts the definition of poverty. So now the problem isn’t the lack of food, clothing, or shelter. Now the problem shifts to the supposition that some people have too much money; more than their fair share.

Personally, I don’t worry that 1% of the households in this country hold 40% of the wealth. Instead, I worry a lot about whether I will have enough wealth to retire when I choose to. Since I don’t get a lot of transfer payments from the government, higher taxes in exchange for more government services does nothing for me. Mostly I would like the government to leave me alone.

Naked Emperors

Last week Matt Yglesias at Slate.com posted an article entitled "Print Money.  Mail Everybody a Check."  The hypothesis of the article was that the solution to our economic woes would be for the Federal Reserve to print up a whole bunch of money, and then follow up by sending the money out to everybody in the country.  The policy was pretty much encapsulated by the headline.

Amplifying on the original concept, Yglesias goes on to explain that giving everyone free money will stimulate the economy.  People will use their free money by going out and spending it.  In spending the money, business will see increased demand, and hire more workers.  Those workers, once hired, will get paychecks, and spend them.  The paycheck spending will stimulate more demand, leading to more hiring.  A virtuous circle of spending and hiring will take place until the economy is back at full employment.

This is pretty standard Keynesian thinking.  The only problem is that it would not work.  As long as they were receiving the free money, spending would continue.  Once the free money stop arriving in the mail, the stimulative effects would dampen out quite quickly.

I  know this is true, because we have just finished trying it.  Twice.

The most recent round is just finishing up.  We call it "tax season."

Think about it.  The way the tax and withholding system works in America, most people get a refund.  I know I did.  The lower the income level, the more likely you are to receive a big refund, largely because of the Earned Income Credit and Additional Child Tax Credits.  The majority of households received those refund checks from mid February through the end of March.  You may have noticed that stores and restaurants were a little fuller during that time period.  You may have also noticed that there was no great surge in Help Wanted signs appearing.  Once the free money disappears, the stimulative effects decline rapidly.

Back in December was the previous time we tried stimulus spending.  It was called Christmas spending.  Once the spending stopped, the seasonal hires started to get pink slips.  No long term beneficial results in terms of increased hiring by businesses.

Standard Keynesian economics holds that the problem of modern industrial economies is a lack of demand, and that the government can increase demand by deficit spending.  All of the various pump priming schemes put forth are variants of that basic idea.  Now, maybe in the '30's that idea worked, although evidence is emerging that it didn't work as well as originally thought.  But in the new millennium,  deficit spending has proven to be a colossal failure.  Our economy is structured to absorb big deficit spending without reigniting long term economic activity.

So I'll go out on a limb here, and just say it: Keynes was wrong.  Too bad, so sad, sucks to be us.

To find an alternate policy approach, we need to stop deifying the approach that is not working.  The emperor isn't wearing any clothes.  And frankly, there's shrinkage.

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.