Eliot Spitzer, the disgraced former governor of New York, has written a piece attacking the investment bank Goldman Sachs for the on-line magazine Slate. In the column Spitzer raises the concept of “social utility.” He challenges Goldman Sachs to prove that the firm is socially useful by answering a series of questions regarding their internal trading operations.
The clear implication of the article is that Goldman Sachs is not “socially useful,” and therefore, should be eliminated, or at least reduced, by government fiat.
What a load of rot! That Spitzer can pronounce this pernicious twaddle with a straight face establishes that he hasn’t the faintest conception of how a free society functions.
You can deplore that the casino-like trading activities of Wall Street firms have swamped their traditional capital raising and capital allocation functions. You can be concerned that the lack of regulation of credit default swaps and other arcane financial instruments allowed some financial firms to pile up so much risk that they almost crashed the worldwide financial system. You can even argue that Goldman Sachs should not be allowed to sell securities that they have taken short positions against.
But banning or prohibiting activities because they lack “social utility”?
You would have a hard time providing an argument for the “social utility” of baseball cards, or beanie babies, Hummel figurines, but markets exist for all of those. The essence of a free market is that sellers offer something for sale, buyers offer payment, and a bargain is made between two willing parties. At no point does anyone have to meet a standard of serving a hypothetical greater good.
The essence of a free society is that you don’t have to justify your actions. You do have to take responsibility for them. If I wanted to light my farts on fire, and post the video on YouTube, I could do it, and I can’t think of anything of lower social utility than that.
And yet, a surprising number of people have chosen to spend their leisure in exactly that fashion.
Wednesday, April 28, 2010
Thursday, April 15, 2010
Beware the Ides of April
April 15 is Tax Day, the last day for filing your income taxes withourt incurring a penalty. The media has been full of stories about the run up to today. The thrust of most of the stories has been don’t be late, the deadline is looming.
The implication is that there are hordes of people out there who have not yet filed their taxes. The funny thing is, I worked as a paid tax preparer for H & R Block this year, and I was finished doing taxes in early March. As a matter of fact, 75% of the customers are handled during the first peak, from mid-January to early February.
After the first peak, the balance of the clients fall into three categories:
People with insanely complicated tax returns, who take months to get their paperwork in order.
Congenital procrastinators, the kind of folks who would be late to their own funeral.
People who still owe money to the IRS, over and above any withholding or prior payments.
If you’re going to get a refund, you will want to file as early as possible. After all, why leave a pile of money sitting in the government’s hands when it could be sitting in yours? And the vast majority of filers do get a refund.
First of all, almost half of all households pay no Federal income tax. The tax arm of Deloitte and Touche estimated that a married couple with two small children would have to have an income exceeding $50,000/year before they generate the first dollar of income tax liability. They will get all of their withholding back.
Many of those in the lower half of the income scale not only owe no money for taxes, but they also get significant income from the government, due to refundable credits such as the Additional Child Tax Credit and the Earned Income Credit. Of the returns I processed, most fit into this category. Only a handful actually paid income tax, and even those had a tax liability less than their withholding, so even they got a refund.
In the interest of full disclosure, I also got a tax refund, due to overwithholding on my part. I didn’t do a single return this year where the taxpayer had to send additional money to the IRS.
I guess my point is that the media shouldn’t make such a big deal about what the last day for filing your taxes is. Instead, they should run stories on February 1, the due date for employers to send out the W-2 forms needed to file your taxes. For most households, that is the primary, or even only, document they need to get their refund.
Now that would be news you could use.
Monday, April 12, 2010
Changing the Rules of the Game
Obamacare has been passed into law and signed. Despite fulminations from conservatives, it is unlikely to be repealed or found unconstitutional. All we can do now is wait for the unintended consequences to show up. Yet, like a moth to the flame, I am still drawn to write about the intertwined issues of health care and health insurance.
At the root of Obamacare is a profound shift in the understanding of what health insurance (or any insurance) is designed to do. The core concept driving any insurance plan is risk management. Basically, the lucky are subsidizing the unlucky.
If a tornado blows away your house, your neighbors who were missed are paying for your rebuilding through their policy payments. “Wow,” they think, as they write out the check, “that tornado just missed my street.” Or let’s say you beat the actuarial odds and die young. Your beneficiaries are taking advantage of all the other policy holders who didn’t die that year. “Gosh,” they think, sitting at the funeral, “that could have been me that got hit by that freak meteorite strike.”
The thing about the lucky subsidizing the unlucky is that you can never know in advance in what category you’re going to end up. So you pay your premiums, and you’re grateful if you never have to use the insurance.
At the heart of Obamacare is a radical conceptual shift. Instead of the lucky subsidizing the unlucky, the basic principle is now going to be the healthy subsidizing the unhealthy. Hence the push to require younger, healthier people to buy insurance, at the same time lifetime limits on care and exclusions for preexisting conditions are dropped. If you are sick, you are going to get all of the medical care your doctors want to give you, and the people who are well are going to have to pay for it.
The thing is, lucky or unlucky is pretty much a random event. For healthy versus unhealthy, there is not so much randomness involved. If you see someone who smokes, it is predictable that heart disease and breathing problems are in their future. Looking at someone who is grossly obese, you know they can plan on developing type II diabetes, followed by back pain, followed by joint replacement surgery. These tend to be chronic conditions. They can be managed, but somebody’s going to have to pay for them. The healthy are being asked (well, actually told) to foot the bill.
The thing about most insurance is that it is inherently fair. That’s why I willingly pay the premiums. But as someone who likes to eat, but has the self discipline to push away from the table, as someone who sweats it out at the gym several times a week, as someone who has never taken up smoking, I look at many of the unhealthy and question how fair it is that I’m being asked (well, actually told), that I am responsible for paying for the consequences of other people’s behavior.
Those of us who work hard at managing our risks should not have to subsidize the reckless. Frankly, I’ve got better ways to spend my money.
At the root of Obamacare is a profound shift in the understanding of what health insurance (or any insurance) is designed to do. The core concept driving any insurance plan is risk management. Basically, the lucky are subsidizing the unlucky.
If a tornado blows away your house, your neighbors who were missed are paying for your rebuilding through their policy payments. “Wow,” they think, as they write out the check, “that tornado just missed my street.” Or let’s say you beat the actuarial odds and die young. Your beneficiaries are taking advantage of all the other policy holders who didn’t die that year. “Gosh,” they think, sitting at the funeral, “that could have been me that got hit by that freak meteorite strike.”
The thing about the lucky subsidizing the unlucky is that you can never know in advance in what category you’re going to end up. So you pay your premiums, and you’re grateful if you never have to use the insurance.
At the heart of Obamacare is a radical conceptual shift. Instead of the lucky subsidizing the unlucky, the basic principle is now going to be the healthy subsidizing the unhealthy. Hence the push to require younger, healthier people to buy insurance, at the same time lifetime limits on care and exclusions for preexisting conditions are dropped. If you are sick, you are going to get all of the medical care your doctors want to give you, and the people who are well are going to have to pay for it.
The thing is, lucky or unlucky is pretty much a random event. For healthy versus unhealthy, there is not so much randomness involved. If you see someone who smokes, it is predictable that heart disease and breathing problems are in their future. Looking at someone who is grossly obese, you know they can plan on developing type II diabetes, followed by back pain, followed by joint replacement surgery. These tend to be chronic conditions. They can be managed, but somebody’s going to have to pay for them. The healthy are being asked (well, actually told) to foot the bill.
The thing about most insurance is that it is inherently fair. That’s why I willingly pay the premiums. But as someone who likes to eat, but has the self discipline to push away from the table, as someone who sweats it out at the gym several times a week, as someone who has never taken up smoking, I look at many of the unhealthy and question how fair it is that I’m being asked (well, actually told), that I am responsible for paying for the consequences of other people’s behavior.
Those of us who work hard at managing our risks should not have to subsidize the reckless. Frankly, I’ve got better ways to spend my money.
Tuesday, April 6, 2010
Positive Problems
Last January, late in the month, it was like somebody turned a switch. All of a sudden the phone started ringing with customers expediting their orders and increasing their release quantities. Ever since we've been playing catch up. The biggest issue has been getting enough raw material in house to support the increase in production.
This is an example of what I call "positive problems." These are the problems caused by growth in your business. Although stressful, they are drastically superior to the other kind of problem. For example, I'd rather spend my day wrestling with the question "how I am going to get raw material here to keep production going?" as opposed to the question "what am I going to do with all of the workers and not enough orders?" Or worse yet, "where is the cash coming from to meet payroll?"
The turn in the economy is beginning to look like a broad based phenomena to me. I spoke with one of our customers today, and she told me that her whole day had been spent expediting suppliers to cope with increases in customer demand. Upstream in my supply chain, lead times are moving out from both the steel mills and brass mills with whom I do business.
This increase in activity probably won't show up in the official government statistics for another quarter, but from where I'm sitting it looks like the growth cycle has picked up steam. I'm even hiring a couple of new people. In the meantime, we're considering working some overtime. That hasn't happened for well over a year.
This is an example of what I call "positive problems." These are the problems caused by growth in your business. Although stressful, they are drastically superior to the other kind of problem. For example, I'd rather spend my day wrestling with the question "how I am going to get raw material here to keep production going?" as opposed to the question "what am I going to do with all of the workers and not enough orders?" Or worse yet, "where is the cash coming from to meet payroll?"
The turn in the economy is beginning to look like a broad based phenomena to me. I spoke with one of our customers today, and she told me that her whole day had been spent expediting suppliers to cope with increases in customer demand. Upstream in my supply chain, lead times are moving out from both the steel mills and brass mills with whom I do business.
This increase in activity probably won't show up in the official government statistics for another quarter, but from where I'm sitting it looks like the growth cycle has picked up steam. I'm even hiring a couple of new people. In the meantime, we're considering working some overtime. That hasn't happened for well over a year.
Thursday, April 1, 2010
Starbucks Begins Paying Dividends
Last week Starbucks announced a big change in their financial policies. For the first time, the Seattle based company will begin paying dividends to stockholders. The company is touting this as proof that their turnaround plan is working. I’m skeptical. The management team may be turning the company around, but the fact that they are starting to pay dividends indicates to me that the company may have its best days as an investment behind it.
Think of it this way: Imagine that you have a business that is profitable. You have a decision to make. What are you going to do with the profits? You basically have two choices. One choice is to take the money out of the business, and give the profits back to the owners of the company. The alternative is to take the profits, and reinvest them back in the business. With the alternative of reinvestment, your hope and plan is to grow the business, and thereby make future profits even larger than they are now.
As an investor, a growing company provides a better return than an equally profitable company that is not growing. Picture two businesses. One business is going to earn a dollar a share this year, next year, and the year after that. The other business is going to earn a dollar a share this year, $1.50 next year, and $2.00 per share two years out. Which business would be worth more to you? You pay more today to capture the larger future cash flow.
The anticipation of larger future profits results in a higher multiplier between the current earnings and the price of a share of stock. Growing companies command a higher price/earnings ratio. As the manager of a business, you want to grow your earnings, because that makes the business more valuable, providing the highest return to the owners, the stockholders. Besides, most senior corporate execs have a large chunk of their compensation in stock options. Increasing the value of the shares benefits them personally.
But there is a risk with this model. What if you reinvest your profits in the business, but you fail to grow your earnings? Well, the technical term for this process is “pissing your money away.” The market hammers you for that.
If you think you have lots of opportunities to grow your business, you should reinvest your profits back into the business. If you don’t think you have as many chances to grow your earnings, then it becomes time to start pulling money out and giving it back to the owners.
The fact that Starbucks is going to start paying a dividend, returning profits to the stockholders, indicates to me that the management of the company thinks the days of their fastest growth are behind them. Which means as an investment, it is time to look for the next company that has the potential to grow quickly.
Starbucks. I love the coffee, but I’m not so wild about the investment.
Thursday, March 25, 2010
No Jobs to be Had?
An interesting situation has developed at the company where I work. Sales have picked up, though not yet to the pre-recession level. At the same time, one of our machine operators gave his notice this week. He’s moving on to a better job, and we wish him well.
But the impending vacancy means I have to go out and hire someone to take his place. The first place we decided to look was people who had worked for us in the past, but who we had laid off in the last year. After all, they would be known quantities.
Here’s where the interesting part starts. The first two people we called were working for $6 an hour, considerably less than what we would pay. It’s also less than the Federal minimum wage of $7.25 per hour. Both of these women were working cash jobs. Their employee was either treating them as subcontractors, but not submitting Form 1099 to the IRS, or else taking unreported cash income and paying their employees out of that stream of money.
Either one is tax fraud, of course, pure and simple. But no one is surprised that people cheat on their taxes. That’s dog bites man stuff.
What struck me is that both women turned down the job offer, even though the aftertax money from our position was greater than the $6 per hour. Why would you turn down a job that pays more than your current position? It turns out I had left out a factor in my calculations: extended unemployment benefits.
Although both women had been laid off from our company over a year ago, both were still drawing unemployment checks, courtesy of the Obama stimulus package. The combination of their unemployment benefit and their $6 an hour job exceeded the amount we were willing to pay. As rational economic actors, they were maximizing the utility of their work.
Conservatives will tell you that continuing to extend unemployment benefits provides a disincentive to work. Why take a job if you can continue to draw a check? Liberals will tell you there are no jobs available, so we have to keep providing benefits to people who have been laid off.
Based on my sample of two, I would argue that the conservatives are winning this argument.
But the impending vacancy means I have to go out and hire someone to take his place. The first place we decided to look was people who had worked for us in the past, but who we had laid off in the last year. After all, they would be known quantities.
Here’s where the interesting part starts. The first two people we called were working for $6 an hour, considerably less than what we would pay. It’s also less than the Federal minimum wage of $7.25 per hour. Both of these women were working cash jobs. Their employee was either treating them as subcontractors, but not submitting Form 1099 to the IRS, or else taking unreported cash income and paying their employees out of that stream of money.
Either one is tax fraud, of course, pure and simple. But no one is surprised that people cheat on their taxes. That’s dog bites man stuff.
What struck me is that both women turned down the job offer, even though the aftertax money from our position was greater than the $6 per hour. Why would you turn down a job that pays more than your current position? It turns out I had left out a factor in my calculations: extended unemployment benefits.
Although both women had been laid off from our company over a year ago, both were still drawing unemployment checks, courtesy of the Obama stimulus package. The combination of their unemployment benefit and their $6 an hour job exceeded the amount we were willing to pay. As rational economic actors, they were maximizing the utility of their work.
Conservatives will tell you that continuing to extend unemployment benefits provides a disincentive to work. Why take a job if you can continue to draw a check? Liberals will tell you there are no jobs available, so we have to keep providing benefits to people who have been laid off.
Based on my sample of two, I would argue that the conservatives are winning this argument.
Wednesday, March 24, 2010
Health Care: What Now?
Well, Obamacare was signed into law today, so I guess we just have to react to the new reality. The first thing we did on Monday was to ask the obvious question: "How does this affect our insurance program?"
Bona fide wellness programs are still allowed, so we can continue to provide incentives to our employees who control their weight, cholesteral, blood sugar, blood pressure and smoking. That's good.
The amount that can be contributed to Flexible Spending Accounts (FSA's) is limited to $2500. We're not sure if that includes the employer's contribution or not. Right now, the company matches the employee's pretax contribution on a dollar by dollar basis, up to a maximum of $3000. Most of what I've read so far indicates that I'm going to lose that $500 of tax benefit.
Our company uses a high deductability health insurance plan. The first $5000 of medical care is the responsibility of the employee. Blue cross/blue shield doesn't cover any of the bills until that limit is reached. I like it that way because it keeps the premiums low, freeing up money for other purposes (like bonuses), and I don't consume much in the way of healthcare. After 2014, it is not clear if that type of plan will continue to be on the market. Based on the rhetoric, I'm afraid that high deductible plans will be outlawed once this legislation gets ramped up.
It's interesting that children can be carried on their parent's health plans until age 26. Tax law says that you lose the dependentcy deduction at age 24, and even then you lose it at age 19 unless the child is a full time student. With our current premium structure, adding family coverage to the employee's coverage adds less to the premium than the cost of adding another employee to the policy. It's easy to see how people will begin gaming the system under those rules. Once this becomes widespread, look for dependent coverage to rapidly rise in price to compensate.
I wonder whose idea it was to remove the lifetime caps on medical spending. Because, you know, going through a million dollars of medical care wasn't enough. Maybe if you get another million dollars of someone else's money, they'll find a way to cure you.
You can't help noticing that the unpopular parts of this legislation, like the requirement to buy health insurance, and the fines for not doing so, are timed to all take effect after the next presidential election is over in 2014.
I haven't yet seen when the surcharge on unearned income (interest and dividends) starts up, but from what I have read so far, that only impacts high income individuals. Like the people who decide whether to pay my bonus or keep the money for themselves. I'm probably going to be stung on that one.
Bona fide wellness programs are still allowed, so we can continue to provide incentives to our employees who control their weight, cholesteral, blood sugar, blood pressure and smoking. That's good.
The amount that can be contributed to Flexible Spending Accounts (FSA's) is limited to $2500. We're not sure if that includes the employer's contribution or not. Right now, the company matches the employee's pretax contribution on a dollar by dollar basis, up to a maximum of $3000. Most of what I've read so far indicates that I'm going to lose that $500 of tax benefit.
Our company uses a high deductability health insurance plan. The first $5000 of medical care is the responsibility of the employee. Blue cross/blue shield doesn't cover any of the bills until that limit is reached. I like it that way because it keeps the premiums low, freeing up money for other purposes (like bonuses), and I don't consume much in the way of healthcare. After 2014, it is not clear if that type of plan will continue to be on the market. Based on the rhetoric, I'm afraid that high deductible plans will be outlawed once this legislation gets ramped up.
It's interesting that children can be carried on their parent's health plans until age 26. Tax law says that you lose the dependentcy deduction at age 24, and even then you lose it at age 19 unless the child is a full time student. With our current premium structure, adding family coverage to the employee's coverage adds less to the premium than the cost of adding another employee to the policy. It's easy to see how people will begin gaming the system under those rules. Once this becomes widespread, look for dependent coverage to rapidly rise in price to compensate.
I wonder whose idea it was to remove the lifetime caps on medical spending. Because, you know, going through a million dollars of medical care wasn't enough. Maybe if you get another million dollars of someone else's money, they'll find a way to cure you.
You can't help noticing that the unpopular parts of this legislation, like the requirement to buy health insurance, and the fines for not doing so, are timed to all take effect after the next presidential election is over in 2014.
I haven't yet seen when the surcharge on unearned income (interest and dividends) starts up, but from what I have read so far, that only impacts high income individuals. Like the people who decide whether to pay my bonus or keep the money for themselves. I'm probably going to be stung on that one.
Tuesday, March 16, 2010
Break Out the Bulldozers
The Obama administration and Speaker of the House Nancy Pelosi are determined to shred every procedural roadblock standing in the way of their massive restructuring of the health insurance industry in this country.
At first, it was only reconciliation. Normally, the House passes legislation. Then the Senate passes their own version of the same bill. Then a conference committee of Senators and Representatives negotiates a compromise version of the bill, that is voted on again by both Houses of Congress. When that passes, it goes to the President for signature to be enacted into law.
The problem with that system (at least from Obama and Pelosi’s point of view), is that the compromise legislation has to pass the Senate again. With the election of Scott Brown from Massachusetts to fill the seat of the late Edward Kennedy, there are now 41 Republicans in the Senate. With a united front, they can filibuster the bill until it dies a natural death.
Hence the reconciliation maneuver. Under Senate rules, passage of measures affecting the budget can have the compromise, or “reconciled” version passed through the Senate on a vote requiring only a majority of 51 votes. Since the filibuster does not apply, sixty votes are not required to cut off debate.
Pelosi’s reconciliation plan then becomes to push through a House vote on the original Senate version of the health insurance restructuring. The House will then pass a series of amendments to the Senate version, making it more to their liking. This package of amendments will then be presented as a budgetary reconciliation, which can avoid the filibuster. The fig leaf covering this end run around the rules is that Obamacare is intended to reduce the deficit.
I have been watching television for well over forty years. I have been exposed to millions of commercial messages. I have become quite adept at knowing when I’m being lied to.
I know that the fast food hamburger will not be plump and juicy like it shows on screen. I know that if I spray on a cheap cologne, women will not leap out of the woodwork, seeking to have their way with me. And I know that the current package of health insurance reform will not reduce the deficit.
Obamacare is not a budget reconciliation bill, it is a policy bill, and using the process of reconciliation to get a around the procedures of limited government stinks to high heaven.
At first, it was only reconciliation. Normally, the House passes legislation. Then the Senate passes their own version of the same bill. Then a conference committee of Senators and Representatives negotiates a compromise version of the bill, that is voted on again by both Houses of Congress. When that passes, it goes to the President for signature to be enacted into law.
The problem with that system (at least from Obama and Pelosi’s point of view), is that the compromise legislation has to pass the Senate again. With the election of Scott Brown from Massachusetts to fill the seat of the late Edward Kennedy, there are now 41 Republicans in the Senate. With a united front, they can filibuster the bill until it dies a natural death.
Hence the reconciliation maneuver. Under Senate rules, passage of measures affecting the budget can have the compromise, or “reconciled” version passed through the Senate on a vote requiring only a majority of 51 votes. Since the filibuster does not apply, sixty votes are not required to cut off debate.
Pelosi’s reconciliation plan then becomes to push through a House vote on the original Senate version of the health insurance restructuring. The House will then pass a series of amendments to the Senate version, making it more to their liking. This package of amendments will then be presented as a budgetary reconciliation, which can avoid the filibuster. The fig leaf covering this end run around the rules is that Obamacare is intended to reduce the deficit.
I have been watching television for well over forty years. I have been exposed to millions of commercial messages. I have become quite adept at knowing when I’m being lied to.
I know that the fast food hamburger will not be plump and juicy like it shows on screen. I know that if I spray on a cheap cologne, women will not leap out of the woodwork, seeking to have their way with me. And I know that the current package of health insurance reform will not reduce the deficit.
Obamacare is not a budget reconciliation bill, it is a policy bill, and using the process of reconciliation to get a around the procedures of limited government stinks to high heaven.
Monday, March 8, 2010
Rising Productivity
I don’t expect reporters to have much in the way of business literacy. Strategic planning and discounted cashflow analysis are difficult subjects, and it doesn’t surprise me that they aren’t part of the normal journalism curricula. But algebra? I had algebra in the 8th grade.
The source of my ire is a report that has been put out by the Labor Department, and the interpretation thereof by the media.
The gist of the report is that productivity grew at an unusually rapid rate in the fourth quarter last year. Labor productivity grew at an annual rate of 6.9% during the last three months of the year. At the same time, the report stated that unit labor costs dropped t a rate of 5.9%.
The commentary I have seen on this report so far makes it out to be bad news. The viewpoint seems to be that rising productivity means income is dropping. Also, if employers can increase output without hiring more workers, that doesn’t help the unemployed. This ignores the reality that increasing productivity is what increases standards of living. Without increasing productivity, we’d all be stuck at the hunter-gatherer stage, which doesn’t strike me as too much fun at all.
But what really gets me is the assumption that when labor costs fall, that means households have less money to spend. This is a complete misreading of the statistics.
What the report actually says is that unit labor costs have fallen. That does not mean workers are getting paid less. It means that workers are producing more product for the same amount of money. In point of fact, falling unit labor costs are just the same thing as rising productivity, expressed in a different way.
Let’s take an example. Assume that in 2008, a worker getting paid $10 per hour produces 100 units of product in an hour. The unit labor cost of that product is $.10, the $10 the worker got paid divided by the 100 units produced.
In the fourth quarter of 2009, the same worker would have produced 107 units of product in the same hour of production. To figure out the increase in productivity, we divide the 4th Q 2009 output by the 2008 output to get 1.07. Productivity increased by 7%. In this same example, the unit labor cost drops to $.0935. This is a 6.5% drop in unit labor costs. But the worker still gets the same $10 income he got before.
The real news is that productivity growth of over 6% cannot be sustained. That red hot pace is an artifact of starting from a lower base level, due to the recession induced drop in demand. Once demand started to pick up, the workforce that businesses kept on in anticipation of an upturn went from coasting along to serious work. A big jump in production was the result. It probably doesn’t hurt that most businesses, given any kind of a choice, will keep their most productive workers on the payroll, dropping the less than stellar performers.
This sharp jump in productivity is a sign that demand is picking up again. Once businesses have wrung all the benefit out of the existing workforce that they can get, the next step is to start hiring more employees.
Increasing productivity is good news, not bad news.
The source of my ire is a report that has been put out by the Labor Department, and the interpretation thereof by the media.
The gist of the report is that productivity grew at an unusually rapid rate in the fourth quarter last year. Labor productivity grew at an annual rate of 6.9% during the last three months of the year. At the same time, the report stated that unit labor costs dropped t a rate of 5.9%.
The commentary I have seen on this report so far makes it out to be bad news. The viewpoint seems to be that rising productivity means income is dropping. Also, if employers can increase output without hiring more workers, that doesn’t help the unemployed. This ignores the reality that increasing productivity is what increases standards of living. Without increasing productivity, we’d all be stuck at the hunter-gatherer stage, which doesn’t strike me as too much fun at all.
But what really gets me is the assumption that when labor costs fall, that means households have less money to spend. This is a complete misreading of the statistics.
What the report actually says is that unit labor costs have fallen. That does not mean workers are getting paid less. It means that workers are producing more product for the same amount of money. In point of fact, falling unit labor costs are just the same thing as rising productivity, expressed in a different way.
Let’s take an example. Assume that in 2008, a worker getting paid $10 per hour produces 100 units of product in an hour. The unit labor cost of that product is $.10, the $10 the worker got paid divided by the 100 units produced.
In the fourth quarter of 2009, the same worker would have produced 107 units of product in the same hour of production. To figure out the increase in productivity, we divide the 4th Q 2009 output by the 2008 output to get 1.07. Productivity increased by 7%. In this same example, the unit labor cost drops to $.0935. This is a 6.5% drop in unit labor costs. But the worker still gets the same $10 income he got before.
The real news is that productivity growth of over 6% cannot be sustained. That red hot pace is an artifact of starting from a lower base level, due to the recession induced drop in demand. Once demand started to pick up, the workforce that businesses kept on in anticipation of an upturn went from coasting along to serious work. A big jump in production was the result. It probably doesn’t hurt that most businesses, given any kind of a choice, will keep their most productive workers on the payroll, dropping the less than stellar performers.
This sharp jump in productivity is a sign that demand is picking up again. Once businesses have wrung all the benefit out of the existing workforce that they can get, the next step is to start hiring more employees.
Increasing productivity is good news, not bad news.
Wednesday, March 3, 2010
Chile's Hour of Need
The government of Chile is still restoring order after the magnitude 8.8 earthquake that struck the southern half of the nation last week. After some initial confusion, they have requested international aid. According to an interview with the US ambassador to Chile, the confusion was because Chile does not have a history of receiving international aid. In fact, Chile is a donor nation.
Still, the devastation is widespread, and they could use a hand.
So I'm going to go out and buy some grapes, and grape by-products.
Located south of the equator, Chile's seasons are the reverse of ours. Their summer is just ending, and their winter takes place during our summer months. This shift in growing seasons means Chile is in an ideal position to supply fresh fruit and vegetables when fresh produce is in short supply from our own growers. Ordinarily I try to buy American to the greatest extent possible, but due to the emergency I'll make an exception and stock up on Chilean grapes for the next few weeks.
And the grape by-products? I plan on picking up a case of Chilean cabernet.
I just figure it's better to help the Chileans by trading with them, then by giving them some kind of handout. If we help Chile's businesses, those businesses will take the lead in rebuilding the country. If we give handouts, we only encourage dependency.
Of course, I feel the same way about charitable giving in this country as well, and for the same reason.
Sunday, February 28, 2010
Graph of Long Term Unemployment
Okay, this scares me. here's a graph from an article in the New York Times last week concerning long term unemployment:
The number of long term unemployed is spiking about three times higher than it has been for the last thirty years. It is much higher than the recession of early eighties, and that one was rough. As a percentage of the workforce, it works out to be about 2.5%.The economy is beginning to show signs of improvement, but not quickly enough for these folks. Many of them are subsisting on unemployment benefits, and those benefits are starting to run out.
The old saying is that necessity is the mother of invention. A lot of people are going to have to be very creative to eke out a living for the next few years.
Wednesday, February 24, 2010
The CARD Act or Building a House of Cards
The Credit CARD Act went into effect this week, changing the rules for banks and other credit card issuers. One of the changes is that they will now have to put a statement on the front of your monthly bill, telling you how long it will take you to pay off your outstanding balance if you make only the minimum payment. I imagine that some people will get a notice that reads something like this:
“Your estimated life expectancy is 24 years and 7 months from your statement date. Four months later will be your last payment on the outstanding balance.”
Seriously, one of the major provisions of the legislation is that it prohibits the practice of universal default. Under the old rules, if you made a late payment on one bill, your credit card could raise your interest rate on the existing balance you had with them.
Universal default is one of those things that really hack people off. “I’ve never made a late payment to you guys,” the cardholder would cry out. “Why are you raising my interest rate?”
“Simple,” the bank would respond. “A) If you skipped a payment on one bill, we could be next. That puts you into the riskier class of customers who get charged higher interest rates. B) Because we can.”
I’ve never quite figured out the logic behind universal default. Oh, I get that once you start delaying payments, you are a riskier customer. The thing is, it looks to me like raising rates on an existing customer sets up a feedback loop. If you’re strapped for money, cranking up the interest you’re paying makes you more likely to default, not less. “Every month I pay, but my balance keeps getting bigger. Fine, I’ll just stop paying altogether. You want to hurt my credit rating, go ahead.”
I assume that the credit card companies have run the statistical models that tell them that even if they push some customers into default, the higher interest charges on the remaining customers more than make up for it. Or maybe their experience is that once the average customer misses a payment on any card, they only make a couple more payments on the other cards before they file bankruptcy, no matter what the interest rate is. In that case, you better make your money while you can.
Regardless, universal default is now banned. The credit card companies cannot raise your rate on existing balances just because you are late on another card. What they can do, however, is drop your credit limit with no prior notice.
To me, this looks like a fight over allocating risk management duties, between the guy who borrows the money, and the guy who loans it.
In the history of credit, there have been swings over time in terms of who bears the risk of default. For example, in the eighteenth and early nineteenth century, default risk was more evenly spread between borrower and creditor. Sure, if you stopped paying on your debts, your creditors had to write off the loss. But they in turn could stick you in debtor’s prison. That seems like a pretty fair tradeoff to me.
With the advent of modern credit cards, more of the default risk was shifted over to the creditor. All that backs up a credit card is your promise to pay it off. If you are an honest man, your word is your bond. When I meet one of those guys, I’ll let you know. Seriously, I don’t know too many people who would forego using a credit card to get something they wanted, just because they might have trouble paying off the debt. After all, what’s the worst that could happen? Your credit rating might get dinged. Most people will enjoy the good stuff now, and worry about that tomorrow.
With all of the risk on the part of the creditor, credit standards were naturally higher. It used to be much more difficult to get a credit card. As the pool of available credit expanded to include riskier borrowers, the banks undertook tactics designed to shift some of the default risk back onto borrowers. Tactics like universal default.
Now that Congress has pushed the pendulum back in the other direction, look for credit standards to tighten up again. Also, some of the benefits given to good credit risks, like rewards points and no annual fee accounts are probably going to fall by the wayside.
For our society as a whole that’s probably a good thing. Learning to live within your means isn’t a bad idea. In the meantime, I’m going to keep paying off my cards in full every month.
“Your estimated life expectancy is 24 years and 7 months from your statement date. Four months later will be your last payment on the outstanding balance.”
Seriously, one of the major provisions of the legislation is that it prohibits the practice of universal default. Under the old rules, if you made a late payment on one bill, your credit card could raise your interest rate on the existing balance you had with them.
Universal default is one of those things that really hack people off. “I’ve never made a late payment to you guys,” the cardholder would cry out. “Why are you raising my interest rate?”
“Simple,” the bank would respond. “A) If you skipped a payment on one bill, we could be next. That puts you into the riskier class of customers who get charged higher interest rates. B) Because we can.”
I’ve never quite figured out the logic behind universal default. Oh, I get that once you start delaying payments, you are a riskier customer. The thing is, it looks to me like raising rates on an existing customer sets up a feedback loop. If you’re strapped for money, cranking up the interest you’re paying makes you more likely to default, not less. “Every month I pay, but my balance keeps getting bigger. Fine, I’ll just stop paying altogether. You want to hurt my credit rating, go ahead.”
I assume that the credit card companies have run the statistical models that tell them that even if they push some customers into default, the higher interest charges on the remaining customers more than make up for it. Or maybe their experience is that once the average customer misses a payment on any card, they only make a couple more payments on the other cards before they file bankruptcy, no matter what the interest rate is. In that case, you better make your money while you can.
Regardless, universal default is now banned. The credit card companies cannot raise your rate on existing balances just because you are late on another card. What they can do, however, is drop your credit limit with no prior notice.
To me, this looks like a fight over allocating risk management duties, between the guy who borrows the money, and the guy who loans it.
In the history of credit, there have been swings over time in terms of who bears the risk of default. For example, in the eighteenth and early nineteenth century, default risk was more evenly spread between borrower and creditor. Sure, if you stopped paying on your debts, your creditors had to write off the loss. But they in turn could stick you in debtor’s prison. That seems like a pretty fair tradeoff to me.
With the advent of modern credit cards, more of the default risk was shifted over to the creditor. All that backs up a credit card is your promise to pay it off. If you are an honest man, your word is your bond. When I meet one of those guys, I’ll let you know. Seriously, I don’t know too many people who would forego using a credit card to get something they wanted, just because they might have trouble paying off the debt. After all, what’s the worst that could happen? Your credit rating might get dinged. Most people will enjoy the good stuff now, and worry about that tomorrow.
With all of the risk on the part of the creditor, credit standards were naturally higher. It used to be much more difficult to get a credit card. As the pool of available credit expanded to include riskier borrowers, the banks undertook tactics designed to shift some of the default risk back onto borrowers. Tactics like universal default.
Now that Congress has pushed the pendulum back in the other direction, look for credit standards to tighten up again. Also, some of the benefits given to good credit risks, like rewards points and no annual fee accounts are probably going to fall by the wayside.
For our society as a whole that’s probably a good thing. Learning to live within your means isn’t a bad idea. In the meantime, I’m going to keep paying off my cards in full every month.
Thursday, February 18, 2010
Two Views of Dysfunction
I ran across the Werking Gerl blog the other day. It's like staring at the scene of an accident. You know you shouldn't look, but you just can't pull your eyes away. The blogger is a free lance writer based in Brooklyn. Starting last November she lost her regular job, and decided that the solution to her problems was to rely on the New York City public assistance system (AKA welfare). Unsurprisingly, the city's bureaucrats have not leapt to provide the woman with the assistance to which she believes she is entitled.
If you start at the beginning, and read forward in time, it is like watching a descent into madness. Her tone gets increasingly strident with every encounter. One of the things that interests me is that even when she was gainfully employed, she was already drawing food stamps. That tells me that from the very beginning, the blogger has been drawing more off the system than she has been paying in taxes.
Of course, it is her right to draw food stamps, and it is also her right to have her rent paid by the city. Once you've grasped that basic concept, her outrage becomes much more explicable.
Then there's Filthy Richmond. Now this is just hilarious. This blogger puts the fun in disfunction. As a matter of fact, I think I did this girl's taxes.
If you start at the beginning, and read forward in time, it is like watching a descent into madness. Her tone gets increasingly strident with every encounter. One of the things that interests me is that even when she was gainfully employed, she was already drawing food stamps. That tells me that from the very beginning, the blogger has been drawing more off the system than she has been paying in taxes.
Of course, it is her right to draw food stamps, and it is also her right to have her rent paid by the city. Once you've grasped that basic concept, her outrage becomes much more explicable.
Then there's Filthy Richmond. Now this is just hilarious. This blogger puts the fun in disfunction. As a matter of fact, I think I did this girl's taxes.
Saturday, February 13, 2010
Adventures in Tax Preparation, Part II
At my day job, people know I do taxes for H & R Block. The number one tax question they ask me? “How does that other guy we work with get such big tax refunds? He said he got over $7000, and he makes less than I do, even with my side job.”
The short answer to this question is that the other guy has kids, but it is actually a little more complicated than that. To try and explain it, I run out some numbers for people.
Let’s assume that the other guy (we’ll call him TOG for short) is married, with two small children. We will further assume that Mr. and Mrs. Tog have a combined income of $26,000 between them. We’ll enter that $26K onto the front page of their Form 1040. So far, so good.
Now we’ll turn the Form 1040 over to page two, which is where all the real action is. First, the Tog’s will probably take the married filing jointly standard deduction of $11,400. Then the two adults and two children generate four personal exemptions of $3650, or a total of $14,600. You subtract the standard deduction and personal exemptions from their gross income to arrive at the Tog’s taxable income, which is $0. The Tog’s do not owe any Federal income tax.
So now, let’s start calculating the size of their refund. Right off the top, they get back any withholding taken from paychecks throughout the year. For the purposes of this illustration, we will use a figure of $1700. It could be more, could be less, depending what they set up with their employer. Whatever they withheld, they’re getting 100% of it back. Remember, they owe no taxes.
Next, we add in to their refund the Making Work Pay credit. This was part of the Obama stimulus package for 2009 and 2010. The Tog’s are married, so even if only one held a job, they still get $800.
Now we’re to the part where the children really come into play. If they actually owed taxes, they would be eligible for the Child Tax Credit of $1000 per child, which would wipe out the first $2000 of taxes owed. Since the Tog’s don’t owe any taxes, they don’t get the Child Tax Credit. Instead, they get the refundable Additional Child Tax Credit of $2000.
But, as the infomercials say, wait, there’s more! The Togs are a low income couple, qualifying for the Earned Income Credit. The EIC is a phase-in, phase-out credit, increasing to a plateau as you earn more income, than gradually reducing to zero as you earn a higher income. At $26,000 of earned income (note, the EIC works on earned income, not taxable income) you get about $3000. Fully refundable, of course.
That just about does it. Let’s tote up the board, shall we?
Withholding: $1700
Making Work Pay Credit: $ 800
Add’l Child Tax Credit: $2000
Earned Income Credit: $3000
Total: $7500
See, it wasn’t that hard to figure out how the Tog’s got such a big refund after all. Processing the paperwork is a different matter, of course which is why there is a market for paid tax preparers.
The thing that jumps out at you is how much of that money wasn’t the Tog’s in the first place. Even with no withholding, they would have received $5800 from the Federal government, a 22% boost in their income. These are straight transfer payments, going from people who actually pay taxes into the pockets of people who do not. Classic redistribution of wealth.
There are those of us who are concerned that the US is going to turn into a socialist state. But from the point of view of someone who prepares taxes, it has already happened.
The short answer to this question is that the other guy has kids, but it is actually a little more complicated than that. To try and explain it, I run out some numbers for people.
Let’s assume that the other guy (we’ll call him TOG for short) is married, with two small children. We will further assume that Mr. and Mrs. Tog have a combined income of $26,000 between them. We’ll enter that $26K onto the front page of their Form 1040. So far, so good.
Now we’ll turn the Form 1040 over to page two, which is where all the real action is. First, the Tog’s will probably take the married filing jointly standard deduction of $11,400. Then the two adults and two children generate four personal exemptions of $3650, or a total of $14,600. You subtract the standard deduction and personal exemptions from their gross income to arrive at the Tog’s taxable income, which is $0. The Tog’s do not owe any Federal income tax.
So now, let’s start calculating the size of their refund. Right off the top, they get back any withholding taken from paychecks throughout the year. For the purposes of this illustration, we will use a figure of $1700. It could be more, could be less, depending what they set up with their employer. Whatever they withheld, they’re getting 100% of it back. Remember, they owe no taxes.
Next, we add in to their refund the Making Work Pay credit. This was part of the Obama stimulus package for 2009 and 2010. The Tog’s are married, so even if only one held a job, they still get $800.
Now we’re to the part where the children really come into play. If they actually owed taxes, they would be eligible for the Child Tax Credit of $1000 per child, which would wipe out the first $2000 of taxes owed. Since the Tog’s don’t owe any taxes, they don’t get the Child Tax Credit. Instead, they get the refundable Additional Child Tax Credit of $2000.
But, as the infomercials say, wait, there’s more! The Togs are a low income couple, qualifying for the Earned Income Credit. The EIC is a phase-in, phase-out credit, increasing to a plateau as you earn more income, than gradually reducing to zero as you earn a higher income. At $26,000 of earned income (note, the EIC works on earned income, not taxable income) you get about $3000. Fully refundable, of course.
That just about does it. Let’s tote up the board, shall we?
Withholding: $1700
Making Work Pay Credit: $ 800
Add’l Child Tax Credit: $2000
Earned Income Credit: $3000
Total: $7500
See, it wasn’t that hard to figure out how the Tog’s got such a big refund after all. Processing the paperwork is a different matter, of course which is why there is a market for paid tax preparers.
The thing that jumps out at you is how much of that money wasn’t the Tog’s in the first place. Even with no withholding, they would have received $5800 from the Federal government, a 22% boost in their income. These are straight transfer payments, going from people who actually pay taxes into the pockets of people who do not. Classic redistribution of wealth.
There are those of us who are concerned that the US is going to turn into a socialist state. But from the point of view of someone who prepares taxes, it has already happened.
Tuesday, February 9, 2010
Adventures in Tax Preparation
Whoever came up with the name homo sapiens, “thinking man,” for our species clearly never worked as a tax preparer. Actual conversation:
Tax preparer: “How do you want to receive your refund? We can do direct deposit into your checking account, or at a higher charge we can cut you a check.”
Client: “I want a check.”
TP: “Are you sure? You told me you wanted to keep your fees as low as possible. We charge you $20 for a check. Direct deposit is free.”
C: “I’ve always gotten a check.”
TP: “Let’s work through this. If we cut you a check, you have to come back to this office to pick it up. You’ll then drive over to your bank to deposit the check. With direct deposit, the money is placed directly into your account. And we’re going to charge you $20 for putting you through the extra effort.”
C: “Okay. But I still want to get a check.”
At times like this I wonder how we ever managed to become the dominant life form on the planet.
What is interesting about this situation is that tax preparation firms are sometimes attacked for having “predatory pricing.” Like charging $20 to cut a refund check for a customer. But in the face of less expensive alternatives, some clients are going to choose what they are most comfortable with, even if it costs them extra.
One of the characteristics of living in a free society is the number of choices you have. Intrinsic to that is the right to make bad choices.
Tax preparer: “How do you want to receive your refund? We can do direct deposit into your checking account, or at a higher charge we can cut you a check.”
Client: “I want a check.”
TP: “Are you sure? You told me you wanted to keep your fees as low as possible. We charge you $20 for a check. Direct deposit is free.”
C: “I’ve always gotten a check.”
TP: “Let’s work through this. If we cut you a check, you have to come back to this office to pick it up. You’ll then drive over to your bank to deposit the check. With direct deposit, the money is placed directly into your account. And we’re going to charge you $20 for putting you through the extra effort.”
C: “Okay. But I still want to get a check.”
At times like this I wonder how we ever managed to become the dominant life form on the planet.
What is interesting about this situation is that tax preparation firms are sometimes attacked for having “predatory pricing.” Like charging $20 to cut a refund check for a customer. But in the face of less expensive alternatives, some clients are going to choose what they are most comfortable with, even if it costs them extra.
One of the characteristics of living in a free society is the number of choices you have. Intrinsic to that is the right to make bad choices.
Sunday, February 7, 2010
The Two-tier Economy
A sales rep I do business with called me the other day. He asked the standard icebreaker question for these kinds of calls: “How’s business going for you guys?”
I told him that things weren’t too bad. Our order book was pretty solid, and after the restructuring we did last year, it looked like we would be in the black, even at the lower recession level of business we were seeing. I felt like our business was as secure as any could be in these days of whirlwind change.
I expressed some sympathy for the salesman. With commission based income, he was probably hurting more than I. He assured me that he wasn’t doing too badly. His sales lines were diversified, and while some sectors were hurting, other sectors had picked up the slack.
Although the recession may have ended, things certainly have not returned to the pre-recession level. Good times are a long way away. Yet, here we were, both of us fairly comfortable and secure in our employment.
I think what has happened in the last six months is that the existential threat has gone away. Last year at this time, the people I talked to in business were all worried, wondering if the next round of cutbacks was going to hit them. We acted as if the sword of Damocles was hanging over our head.
Now that the decline has stopped, and things have improved (if only marginally), I don’t feel that immediate threat any more. We may not have enough work to need new workers, but there is plenty of work for those of who are left.
In the news, they call it a jobless recovery. I call it the two-tier economy.
In the top tier are the 90% of us who still have jobs. Bonuses, commissions, and overtime have been reduced, but we’re still standing. People in this tier are going to the movies, going out to eat, shopping in the stores. Life is back to normal, although maybe with a little less reliance on credit and a bit more saving.
Then there are the other 10%. These are the people who worked for businesses that failed, or plants that closed, or were laid off in cutbacks. For these folks, no possible reduction in lifestyle is going to be enough, because they no longer have an income. If the job situation doesn’t turn around, over time the people in the lower tier are going to lose everything. As their unemployment benefits run out, these people are going to start getting desperate. Assuming they’re not already desperate.
I don’t know what the solution is to the predicament of the people in the lower tier. I do know that I’m going to do what it takes to stay in the much larger top tier.
I told him that things weren’t too bad. Our order book was pretty solid, and after the restructuring we did last year, it looked like we would be in the black, even at the lower recession level of business we were seeing. I felt like our business was as secure as any could be in these days of whirlwind change.
I expressed some sympathy for the salesman. With commission based income, he was probably hurting more than I. He assured me that he wasn’t doing too badly. His sales lines were diversified, and while some sectors were hurting, other sectors had picked up the slack.
Although the recession may have ended, things certainly have not returned to the pre-recession level. Good times are a long way away. Yet, here we were, both of us fairly comfortable and secure in our employment.
I think what has happened in the last six months is that the existential threat has gone away. Last year at this time, the people I talked to in business were all worried, wondering if the next round of cutbacks was going to hit them. We acted as if the sword of Damocles was hanging over our head.
Now that the decline has stopped, and things have improved (if only marginally), I don’t feel that immediate threat any more. We may not have enough work to need new workers, but there is plenty of work for those of who are left.
In the news, they call it a jobless recovery. I call it the two-tier economy.
In the top tier are the 90% of us who still have jobs. Bonuses, commissions, and overtime have been reduced, but we’re still standing. People in this tier are going to the movies, going out to eat, shopping in the stores. Life is back to normal, although maybe with a little less reliance on credit and a bit more saving.
Then there are the other 10%. These are the people who worked for businesses that failed, or plants that closed, or were laid off in cutbacks. For these folks, no possible reduction in lifestyle is going to be enough, because they no longer have an income. If the job situation doesn’t turn around, over time the people in the lower tier are going to lose everything. As their unemployment benefits run out, these people are going to start getting desperate. Assuming they’re not already desperate.
I don’t know what the solution is to the predicament of the people in the lower tier. I do know that I’m going to do what it takes to stay in the much larger top tier.
Monday, January 18, 2010
A Modest Proposal
I am on my annual pilgrimage to ski country this week. I’ve noticed that the tilt towards the green side has become more pronounced over the last few years. It started with the invitation to reuse your towels, so that housekeeping didn’t have to expend so much fresh water on laundry. Now it has expanded to include the use of compact fluorescent bulbs throughout the condo unit we are staying in this week.
The management has posted a little notice in the room, stressing how energy conserving they are, doing their part to fight global warming. It put me in mind of an article I read in a skiing magazine a couple of months ago. The article profiled an activist in the ski town of Crested Butte. This woman was committed to fighting global warming, specifically to preserve heavy snowfalls in the Rockies. More snow, better skiing.
After thinking about this for a while, it gave me an idea of how we could really fight global warming to preserve snow: ban skiing.
Well, not really. My idea is not to ban skiing. Just to ban the sport as currently practiced. The modern ski vacation has got to be one of the most carbon intensive activities on the face of the planet.
To get to the resorts, we fly in from all over the country, if not the world (how much carbon do you emit to get to Colorado from Australia, I wonder). Once we’re here, we stay in luxury condos, housing that stands empty for eight months out of the year. That can’t be environmentally benign. In the last ten years, I have yet to stay in a unit that doesn’t have a gas fireplace. They’re not efficient heating units, but the flames are pretty, as we watch irreplaceable natural gas get converted into carbon dioxide and water vapor.
Then there is the sport of skiing itself. First off, to create the ski runs, they mow down swathes of National Forest. Last I checked, trees were carbon absorbers, but hey, we’re out to have some fun. Then, they install big diesel powered ski lifts. They haul us up the hill, solely so that we can slide down, back to where we started from. A less practical activity can scarcely be imagined.
Trying to offset all of these carbon emissions with compact fluorescents is like trying to bail out the Titanic. With a teaspoon.
No, if we were really serious about slowing down greenhouse gas emissions to preserve snow, we would close down the ski areas. Of course, that wouldn’t leave many people to care about whether there was fresh powder snow on the mountains or not.
I guess it would be a case of having to destroy the village in order to save it.
The management has posted a little notice in the room, stressing how energy conserving they are, doing their part to fight global warming. It put me in mind of an article I read in a skiing magazine a couple of months ago. The article profiled an activist in the ski town of Crested Butte. This woman was committed to fighting global warming, specifically to preserve heavy snowfalls in the Rockies. More snow, better skiing.
After thinking about this for a while, it gave me an idea of how we could really fight global warming to preserve snow: ban skiing.
Well, not really. My idea is not to ban skiing. Just to ban the sport as currently practiced. The modern ski vacation has got to be one of the most carbon intensive activities on the face of the planet.
To get to the resorts, we fly in from all over the country, if not the world (how much carbon do you emit to get to Colorado from Australia, I wonder). Once we’re here, we stay in luxury condos, housing that stands empty for eight months out of the year. That can’t be environmentally benign. In the last ten years, I have yet to stay in a unit that doesn’t have a gas fireplace. They’re not efficient heating units, but the flames are pretty, as we watch irreplaceable natural gas get converted into carbon dioxide and water vapor.
Then there is the sport of skiing itself. First off, to create the ski runs, they mow down swathes of National Forest. Last I checked, trees were carbon absorbers, but hey, we’re out to have some fun. Then, they install big diesel powered ski lifts. They haul us up the hill, solely so that we can slide down, back to where we started from. A less practical activity can scarcely be imagined.
Trying to offset all of these carbon emissions with compact fluorescents is like trying to bail out the Titanic. With a teaspoon.
No, if we were really serious about slowing down greenhouse gas emissions to preserve snow, we would close down the ski areas. Of course, that wouldn’t leave many people to care about whether there was fresh powder snow on the mountains or not.
I guess it would be a case of having to destroy the village in order to save it.
Thursday, January 14, 2010
New Year's Resolutions
I went to the gym this week, and the place was packed. Every machine had someone using it, and many of the machines had at least one person waiting their turn.
It’s always crowded this time of year. I attribute it to New Year’s resolutions. Folks get done with the holidays, resolve to lose some weight, and start going to the gym to work out. The crowds usually thin out by early March, as willpower gives in and old habits resurge.
I don’t really make New Year’s resolutions. My process is more like goal setting for the year. I start with areas of my life where I have commitments, than I develop tangible goals that relate to those commitments. It’s the underlying commitment that keeps me going, not the goal itself.
For 2010, my goals are based on three commitments. First, I want to push back against the decrepitude of the aging process. I’m committed to maintaining my physical capability to the greatest extent possible. Second, I’m going to increase my level of fiscal security. It is still a pretty dicey economy, and no job is certain in today’s world. Still, if I have to swim against the economic tide, I want to be the guy with fins on. Third, I’m committed to living as rich a life as I can, subject to the constraints of health and finances. Family, friends, and experiences enrich our lives, and I want as much of all of them as I can get. After all, you could move to a mountaintop in Idaho and subsist pretty cheaply, but who wants to live on a diet of potatoes?
In the area of health and fitness, my goal is to run 50 kilometers of road races throughout the year. When I run a 5K, I’m not competing against anyone but myself. I am not going to be the fastest runner, although I can win my age group if I’m the only one who shows up. However, the mere act of getting out there with other serious runners on a regular basis forces me to maintain a higher training level than I would without the road races. So far I’ve kept my body mass index below the 25 that is the threshold for overweight, and I intend to keep it that way.
In terms of economic security, I plan to work the problem on both defense and offense. By defense, I mean building up my cushion of assets in case I have to make an involuntary job transition. By offense, I’m talking about increasing either my current income, or my marketable skills.
On the defense side, my savings goal for the year is 20% of my earned income. Most of that will be automatic. Between salary deduction for my 401K and the matching corporate contribution, I’ll get to 15%. The last 5% will take the day to day discipline of saying no to temptation. Do without if you don’t need. Make instead of buy. Repair instead of replace. Since I am the least handy guy in North America, most of the heavy lifting in this category will be under the heading of “do without if you don’t need it.” I’m not planning on doing my own plumbing, or even changing the oil in my car.
I’m also going to continue the deleveraging project I started last year. By making extra equity payments on my mortgage (a guaranteed 6.5% rate of return), I hope to get my total indebtedness down below $60K, split between primary mortgage, home equity line of credit, and car loan. My credit cards will continue to be paid in full every month.
Increased savings improves my long term economic security. In the short term, I’m also taking steps to increase earnings and boost my marketability in a crummy job market. Tax season is starting, and I’m working for H & R Block again to make a little side money. The goal here is to pick up $2000 in additional income. This is just about what I pay my lawn service every year. Basically, I’m hoping to trade knowledge work in a climate controlled office for dirty, physical work outside. Based on last year’s results, $2000 will be a stretch. I may have to develop a Plan B to make up the balance of what I don’t earn doing taxes.
I’m also going back to school again. Post-MBA, I started taking graduate level classes in accounting last fall. My intent is to pick up 9 more credit hours in 2010. By taking one class in Spring, Summer, and Fall semesters, I’ll only need one more class to have enough credits to teach at the college level. Also, if the worst occurs at my current job, more accounting knowledge will help me stand out from the other job seekers out there.
But man does not live by bread alone. I could easily save more money by sitting at home watching television, only venturing out to work, jog, or attend classes, but that would be boring. Besides, my wife would only take so much of that before she snapped and smothered me in my sleep. So in addition to struggling to get rich, I’ll expend considerable energy and time into enriching myself in ways other than monetary.
It has been a few years since I’ve been out west on vacation. It’s a big country, and I want to see more of it. So one of my 2010 commitments is to visit one of the National Parks that I haven’t seen yet. The documentary maker Ken Burns calls the National Park system “America’s Best Idea.” I’m leaning towards Yosemite in Northern California, maybe in combination with a trip to the wine country.
There is an old saying: “No man is poor who is rich in friends.” I don’t have too many friends who will volunteer to pay my light bill, but I still cherish them. To celebrate and enjoy my friends, I’m committed to holding 12 in-home entertainment events this year. This covers everything from formal dinner parties to backyard cookouts to our annual Christmas party (even if I do end with the Chia pet playing “dirty Santa”).
The last of my enrichment projects is internal. Along with the formal education I’ve addressed above, I’m continuing to read authors from “The Lifetime Reading Plan,” a book I first discovered in my father’s library over thirty years ago. My goal for this year is to tackle three of the selections in 2010.
Finally, I’m going to continue posting in this blog. The goal here is a minimum of 60 posts over the course of the year, at least once a week.
After all, everybody deserves my opinions. And now back to our regularly scheduled productions.
It’s always crowded this time of year. I attribute it to New Year’s resolutions. Folks get done with the holidays, resolve to lose some weight, and start going to the gym to work out. The crowds usually thin out by early March, as willpower gives in and old habits resurge.
I don’t really make New Year’s resolutions. My process is more like goal setting for the year. I start with areas of my life where I have commitments, than I develop tangible goals that relate to those commitments. It’s the underlying commitment that keeps me going, not the goal itself.
For 2010, my goals are based on three commitments. First, I want to push back against the decrepitude of the aging process. I’m committed to maintaining my physical capability to the greatest extent possible. Second, I’m going to increase my level of fiscal security. It is still a pretty dicey economy, and no job is certain in today’s world. Still, if I have to swim against the economic tide, I want to be the guy with fins on. Third, I’m committed to living as rich a life as I can, subject to the constraints of health and finances. Family, friends, and experiences enrich our lives, and I want as much of all of them as I can get. After all, you could move to a mountaintop in Idaho and subsist pretty cheaply, but who wants to live on a diet of potatoes?
In the area of health and fitness, my goal is to run 50 kilometers of road races throughout the year. When I run a 5K, I’m not competing against anyone but myself. I am not going to be the fastest runner, although I can win my age group if I’m the only one who shows up. However, the mere act of getting out there with other serious runners on a regular basis forces me to maintain a higher training level than I would without the road races. So far I’ve kept my body mass index below the 25 that is the threshold for overweight, and I intend to keep it that way.
In terms of economic security, I plan to work the problem on both defense and offense. By defense, I mean building up my cushion of assets in case I have to make an involuntary job transition. By offense, I’m talking about increasing either my current income, or my marketable skills.
On the defense side, my savings goal for the year is 20% of my earned income. Most of that will be automatic. Between salary deduction for my 401K and the matching corporate contribution, I’ll get to 15%. The last 5% will take the day to day discipline of saying no to temptation. Do without if you don’t need. Make instead of buy. Repair instead of replace. Since I am the least handy guy in North America, most of the heavy lifting in this category will be under the heading of “do without if you don’t need it.” I’m not planning on doing my own plumbing, or even changing the oil in my car.
I’m also going to continue the deleveraging project I started last year. By making extra equity payments on my mortgage (a guaranteed 6.5% rate of return), I hope to get my total indebtedness down below $60K, split between primary mortgage, home equity line of credit, and car loan. My credit cards will continue to be paid in full every month.
Increased savings improves my long term economic security. In the short term, I’m also taking steps to increase earnings and boost my marketability in a crummy job market. Tax season is starting, and I’m working for H & R Block again to make a little side money. The goal here is to pick up $2000 in additional income. This is just about what I pay my lawn service every year. Basically, I’m hoping to trade knowledge work in a climate controlled office for dirty, physical work outside. Based on last year’s results, $2000 will be a stretch. I may have to develop a Plan B to make up the balance of what I don’t earn doing taxes.
I’m also going back to school again. Post-MBA, I started taking graduate level classes in accounting last fall. My intent is to pick up 9 more credit hours in 2010. By taking one class in Spring, Summer, and Fall semesters, I’ll only need one more class to have enough credits to teach at the college level. Also, if the worst occurs at my current job, more accounting knowledge will help me stand out from the other job seekers out there.
But man does not live by bread alone. I could easily save more money by sitting at home watching television, only venturing out to work, jog, or attend classes, but that would be boring. Besides, my wife would only take so much of that before she snapped and smothered me in my sleep. So in addition to struggling to get rich, I’ll expend considerable energy and time into enriching myself in ways other than monetary.
It has been a few years since I’ve been out west on vacation. It’s a big country, and I want to see more of it. So one of my 2010 commitments is to visit one of the National Parks that I haven’t seen yet. The documentary maker Ken Burns calls the National Park system “America’s Best Idea.” I’m leaning towards Yosemite in Northern California, maybe in combination with a trip to the wine country.
There is an old saying: “No man is poor who is rich in friends.” I don’t have too many friends who will volunteer to pay my light bill, but I still cherish them. To celebrate and enjoy my friends, I’m committed to holding 12 in-home entertainment events this year. This covers everything from formal dinner parties to backyard cookouts to our annual Christmas party (even if I do end with the Chia pet playing “dirty Santa”).
The last of my enrichment projects is internal. Along with the formal education I’ve addressed above, I’m continuing to read authors from “The Lifetime Reading Plan,” a book I first discovered in my father’s library over thirty years ago. My goal for this year is to tackle three of the selections in 2010.
Finally, I’m going to continue posting in this blog. The goal here is a minimum of 60 posts over the course of the year, at least once a week.
After all, everybody deserves my opinions. And now back to our regularly scheduled productions.
Friday, January 8, 2010
Who Knows What Evil Lurks in the Hearts of Men?
I learned a new expression this week. Shadow inventory. The term refers to real estate properties that haven’t been foreclosed on, but for which no one is paying a mortgage.
In the real estate business, inventory is the number of houses in an area that are listed for sale. There are four sources of inventory: new construction, voluntary sales because people are moving or downsizing, short sales, where the owner is selling for less than the mortgage, with the bank’s blessing, and foreclosures.
The last two, short sales and foreclosures, are forms of distressed sales. In a short sale, the bank takes a haircut on what it is owed, and the homeowner loses any equity they ever had. Banks don’t like short sales, but they prefer them to foreclosures. With a foreclosure, the bank has to get the former owner out of the property, a difficult and expensive process. Then the bank has to maintain the empty property until it can be sold, another difficult and expensive process.
With the collapse of the housing bubble and subsequent deep recession, banks have been so inundated with non-performing loans that their foreclosure departments have not been able to keep up. So they have put new foreclosures on hold until they can clear their books of the current wave of housing repossessions.
I know some people who are living in shadow inventory right now. They have lost their income and stopped making mortgage payments, but they haven’t been kicked out of the house yet. In some cases, people have been in default, but still in possession for over a year now. Basically, they’re squatters in what used to be their own home.
I’d hate to live with that sword of Damocles hanging over my head. It has got to be tough living your life from day to day, knowing that at some point the foreclosure people are going to work their way around to you and boot you out of the house. Even the name sounds sinister. Shadow inventory.
This shadow inventory is significant, because before the housing economy can recover, the excess inventory of houses built during the bubble years have to be absorbed. Until that process is completed, housing prices will continue to slide downwards.
One of the standard tools for forecasting the direction of the housing market is to watch the level of inventory. When inventories of houses listed for sale are low, prices tend to rise. When inventories are high, that is a signal that prices are going to fall.
With a pool of shadow inventory of unknown size, it becomes impossible to follow that process, because as houses are sold, more houses come on to the market to keep pricing levels down.
One thing’s for sure. If there is enough inventory hidden from the market to warrant a special name, we’re a long way off from hitting bottom.
In the real estate business, inventory is the number of houses in an area that are listed for sale. There are four sources of inventory: new construction, voluntary sales because people are moving or downsizing, short sales, where the owner is selling for less than the mortgage, with the bank’s blessing, and foreclosures.
The last two, short sales and foreclosures, are forms of distressed sales. In a short sale, the bank takes a haircut on what it is owed, and the homeowner loses any equity they ever had. Banks don’t like short sales, but they prefer them to foreclosures. With a foreclosure, the bank has to get the former owner out of the property, a difficult and expensive process. Then the bank has to maintain the empty property until it can be sold, another difficult and expensive process.
With the collapse of the housing bubble and subsequent deep recession, banks have been so inundated with non-performing loans that their foreclosure departments have not been able to keep up. So they have put new foreclosures on hold until they can clear their books of the current wave of housing repossessions.
I know some people who are living in shadow inventory right now. They have lost their income and stopped making mortgage payments, but they haven’t been kicked out of the house yet. In some cases, people have been in default, but still in possession for over a year now. Basically, they’re squatters in what used to be their own home.
I’d hate to live with that sword of Damocles hanging over my head. It has got to be tough living your life from day to day, knowing that at some point the foreclosure people are going to work their way around to you and boot you out of the house. Even the name sounds sinister. Shadow inventory.
This shadow inventory is significant, because before the housing economy can recover, the excess inventory of houses built during the bubble years have to be absorbed. Until that process is completed, housing prices will continue to slide downwards.
One of the standard tools for forecasting the direction of the housing market is to watch the level of inventory. When inventories of houses listed for sale are low, prices tend to rise. When inventories are high, that is a signal that prices are going to fall.
With a pool of shadow inventory of unknown size, it becomes impossible to follow that process, because as houses are sold, more houses come on to the market to keep pricing levels down.
One thing’s for sure. If there is enough inventory hidden from the market to warrant a special name, we’re a long way off from hitting bottom.
Monday, January 4, 2010
King of the World
The Hollywood director James Cameron has set the benchmark of most expensive movie ever made three times. When he made Terminator II: Judgment Day, it was the first movie ever made with production costs exceeding $100 million. Questioned about the high costs of making the movie, Cameron answered his critics by stating “It’s all up there on the screen.”
He was right. The special effects of Terminator IIwere ground breaking and spectacular. It was the first movie to use the technology of digital morphing, having a character change shape seamlessly on screen. Married to pulse pounding story and memorable characters, Terminator II went on to become a monster hit, spawning two additional sequels, and cementing Arnold Schwarzenegger as the #1 movie star in the world at that time.
Later, Cameron helmed the movie Titanic. The cost overruns on this $150 million movie were so extreme that Cameron had to forfeit his normal director’s fees before the studio would release additional funds to allow him to finish the movie his way. Before the movie was released, an executive of a rival studio sneered “Everybody knows what happened. The boat sinks. Everybody dies.”
The story of star-crossed lovers, combined with special effects and elaborate sets that created total realism, convinced audiences to see this movie over and over again. Titanic became the most successful movie in the history of cinema, pulling in over $1.8 billion in global box office.
This month James Cameron released his first movie in twelve years. Avatar took four years to produce, and cost estimates are ranging from $250 to $300 million. New motion capture technologies had to be invented to allow the screenplay Cameron wrote to be presented with the verisimilitude to allow the suspension of disbelief. At the upper end of that cost range, the movie would have to reach $750 million in global box office just to break even. Since the American movie going public typically supplies half the sales dollars for a film of this type, that means that the domestic gross on Avatar would have to be over $350 million to have a prayer of paying back the investors.
The early reports from this weekend’s box office are in. After just under three weeks, Avatar has pulled in $352 million in domestic sales. Globally, the news is even more spectacular. Avatar has just crossed over the $1 billion mark in global box office.
To put this into perspective, only four other movies have cracked past the billion dollar mark. The Dark Knight ($1.001B), Pirates of the Caribbean: Dead Man's Chest ($1.07B), Lord of the Rings: Return of the King ($1.1B), and Titanic ($1.8B). At this rate, by next week James Cameron will have directed the top two grossing movies of all time. He will be the only director to direct a billion dollar movie that wasn’t a sequel.
The movie business is one where you have to lay down large bets, and nobody really knows what is going to work. Even making a low budget film requires an upfront investment of $10 to $20 million, with no guarantee that anybody is going to want to pony up eight bucks for a ticket. For every My Big Fat Greek Wedding, which grossed $368 million worldwide on a $5 million production budget, you get a Speed Racer, which cost $120 million to make and earned $94 million in worldwide ticket sales.
Basically, making movies is a gigantic crapshoot, and nobody places bigger bets than James Cameron. But I wouldn’t bet against him.
He was right. The special effects of Terminator IIwere ground breaking and spectacular. It was the first movie to use the technology of digital morphing, having a character change shape seamlessly on screen. Married to pulse pounding story and memorable characters, Terminator II went on to become a monster hit, spawning two additional sequels, and cementing Arnold Schwarzenegger as the #1 movie star in the world at that time.
Later, Cameron helmed the movie Titanic. The cost overruns on this $150 million movie were so extreme that Cameron had to forfeit his normal director’s fees before the studio would release additional funds to allow him to finish the movie his way. Before the movie was released, an executive of a rival studio sneered “Everybody knows what happened. The boat sinks. Everybody dies.”
The story of star-crossed lovers, combined with special effects and elaborate sets that created total realism, convinced audiences to see this movie over and over again. Titanic became the most successful movie in the history of cinema, pulling in over $1.8 billion in global box office.
This month James Cameron released his first movie in twelve years. Avatar took four years to produce, and cost estimates are ranging from $250 to $300 million. New motion capture technologies had to be invented to allow the screenplay Cameron wrote to be presented with the verisimilitude to allow the suspension of disbelief. At the upper end of that cost range, the movie would have to reach $750 million in global box office just to break even. Since the American movie going public typically supplies half the sales dollars for a film of this type, that means that the domestic gross on Avatar would have to be over $350 million to have a prayer of paying back the investors.
The early reports from this weekend’s box office are in. After just under three weeks, Avatar has pulled in $352 million in domestic sales. Globally, the news is even more spectacular. Avatar has just crossed over the $1 billion mark in global box office.
To put this into perspective, only four other movies have cracked past the billion dollar mark. The Dark Knight ($1.001B), Pirates of the Caribbean: Dead Man's Chest ($1.07B), Lord of the Rings: Return of the King ($1.1B), and Titanic ($1.8B). At this rate, by next week James Cameron will have directed the top two grossing movies of all time. He will be the only director to direct a billion dollar movie that wasn’t a sequel.
The movie business is one where you have to lay down large bets, and nobody really knows what is going to work. Even making a low budget film requires an upfront investment of $10 to $20 million, with no guarantee that anybody is going to want to pony up eight bucks for a ticket. For every My Big Fat Greek Wedding, which grossed $368 million worldwide on a $5 million production budget, you get a Speed Racer, which cost $120 million to make and earned $94 million in worldwide ticket sales.
Basically, making movies is a gigantic crapshoot, and nobody places bigger bets than James Cameron. But I wouldn’t bet against him.
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