Friday, August 5, 2011

A small math problem for you---Your parents and grandparents would be greatful if you can solve it for them...

Math is the greatest enemy of our Federal budget---an increasing number of baby boomers approaching retirement relative to the number of workers working to pay the 6.2% payroll tax that funds Social Security payments. Here are the projected ratios.
To Fix this imbalance, possible solutions are:

(1) increase the percentage paid by workers to something more than 6.2%
(2) decrease payments to Social Security recipients (i.e. indexing to a chained CPI)
(3) Some combination of (1) and (2)
(4) Economic Growth---Get to Full-Employment with higher wages (or even without) so at 6.2% more money is available for the "olds".
(5)  Immigration---it is a numbers game. The quantity and quality of your migrants.  If our domestic population is not growing sufficiently then we must look outside the borders.

Am I missing any other solutions? I would like to add to my list...

"The Rent is too Damn High!" Actually it is import taxes...Would YOU do this to your car to avoid paying the tax?

Ukrainians cut cars in half to reduce import tax at customs (HT: Carpe Diem)

""Today I received some tax saving wisdom from a taxi driver in Ukraine. He told me that people who import cars to Ukraine sometimes cut the car in two separate pieces and carry it through the customs this way. By doing this, they save a fortune on import tax. A car carried in two pieces is seen as spare parts and therefore is taxed at a much lower rate than a normal car.""

Source of photos HERE

Thursday, August 4, 2011

Two nice graphs/charts showing the emergence of developing countries and their influence on resource demand. What an amazing 20 years...Are you preparing to serve these markets???

Both of these graphs/charts come from The Economist.  I continue to emphasize the rise of emerging markets around the world. We can see this as a problem or as an opportunity.  Businesses looking for opportunities for the future are increasingly looking outside the US. Are YOU on board with this in planning your future?

The decline and growth of respective world share of GDP in the graph below (left) since 1990 is quite dramatic.  If does not mean that our GDP has not increased but our share of global GDP has decreased.  Analogy: while our slice of the GDP pie is got bigger, the pie itself got larger too. Economic growth is not a zero sum game.  Wealth is not fixed, and through processes, technology and productivity it increases over time.

How do hotels get people to re-use the linens if they are staying multiple nights? Well, trick them, of course...Read how La Quinta did it to me.

 "Help reduce the amount of water and energy we use. Place this card on your pillow and your linens will be changed daily. No card on your pillow means your linens will be changed every three days"
I took this photo at a La Quinta in College Station, Texas...Interesting lesson in incentives and how to "Nudge" people into doing something you would like them to do with an overwhelming sense of coeresion.  It is subtle but La Quinta uses a little reverse psychology to achieve a goal, financial mostly and environmentally secondarily, although La Quinta wants you to think the opposite by the way they designed the card.

If you care about the environment then you will be pro-active in doing small things to try to make a difference--that is just the way you roll. If you don't care about the environment you won't lift a finger to do much to advance that cause.

La Quinta requires the opposite. If your concern for the environment is greater than your concern for clean sheets everyday, then La Quinta asks you to do nothing.  No effort required and you get the same linens for 3 days. However, if your concern for clean linens is greater than your concern for the environment, then you have to DO SOMETHING to get them changed everyday.

I certainly understand BOTH groups of people could simply want clean linens regardless of their views on environmental issues.

I am interested in the potential response of 3 groups of people in this scenario. The first two might be alienated by the policy (for different reasons) and are certainly the outliers, but the third is the real target group, in my opinion:

(1) the environmentally conscience people who support this and will dutifully follow instructions BUT might feel a little cheated by not being able to demonstrate their commitment by not actively putting the card on the pillow ("Conspicuous Conservation"--a terrific podcast on this topic from Freakonomics).

(2) the non-environmentally conscience people who when they come back at the end of the day and curse the "damn Liberals" because they could not be bothered to put the card on the pillow but want clean linens because that it what they pay for.

(3) the "guilt-trip middle", for a lack of a better term.  As with most issues, this represents the largest number of people and are the ones you want to "nudge" in numbers that will make a difference in the bottom line AND in saving the planet.  The card is very bold in its design and you cannot miss it or avoid the message.  If La Quinta can move a good number of these people to the side of re-using linens, it can save money on the bottomline, and yes, help the planet too.

I am reading the book Nudge right now about using economic priniciples and behavioral science to get people on a micro-level to do things they might now otherwise do.  Pretty interesting and if you are interested in this type of thing I recommend it highly.

Wednesday, August 3, 2011

An explanation of the "Corporate Jet Tax Break for the Wealthy". Some workers who make and service these will lose their jobs, but Congress needs that money to create jobs..What is so hard to understand??

The tax benefit that corporate jet owners (i.e. the "rich") receive has been part of the Presidents speeches lately.  It SOUNDS bad, but what is it, exactly?

It is all about the rate at which a corporation can depreciate the cost of the jet for tax purposes.  Currently jet owners can depreciate the cost of a jet over 5 years. The owners of a charter jet used for charters depreciate over 7 years. These depreciation rates were CONTINUED under the fiscal stimulus plan of 2009 (the Pres plan).  Simple example:

Company "A" buys a \$10 million jet for corporate use. Say, NBC purchases a jet to fly the cast of Seinfeld to Paris, France.  For taxation reasons, NBC can depreciate the value of the jet over 5 years,  In other words, it can subtract \$2 millon (\$10M/5) from its taxable income for 5 consecutive years. It simply spreads the cost of the jet over a 5 year time period.

Company "B" buys a \$10 million jet for charter purposes. Say, Hayward Air is going to contract out to a travel company to take people to private islands.  For taxation purposes, Hayward Air can depreciate the value of the jet over 7 years. In other words, it can subtract \$10M/7 = \$1.43 million from its taxable income for 7 consectutive years. It simply spreads the cost of the jet over a 5 year time period.

In Year 1, "A" deducts \$2M and "B" 1.43M. "A" will have less taxable income in Year 1.  "A" will pay LESS in corporate taxes than "B" in Year 1, and will have a higher immediate cash flow relative to "B".

The advantages of a faster depreciation schedule: (1) a company on the edge of deciding to buy a jet, may go ahead and do it if they can get more of an immediate tax advantage which translates into increase cash flow. (2) If a company exhausts the depreciation allowance in a shorter time span, they may give them an incentive to sell the used jet and then upgrade/replace. (3) Many/Most corporate jets are made in the USA and provide lots of high skill, hence high paid jobs. The planes are parked somewhere and serviced as well.  The jobs created are very "seen".

Companies can expense, through depreciation, all sorts of qualifying capital equipment but it does not receive the scorn of politicians.  Corporate jets do serve a function--they are a piece of capital-- but we have a preconceived notion of the type of person who uses one and their motives for doing so.

The administration estimates eliminating this deduction will bring in \$3 billion in tax revenues over 10 year, or \$300 million per year.

The savings are small relative to what needs to be cut in the Federal budget, but the populist sound of the message "greedy corporate jet owners" is, well, supersonic boom-like...

Having said all this, the deduction has to be eliminated.  Some workers who make and service them will suffer, but the larger picture of soothing the populist beast must take precedent.  The politics is more important at this point than creating (or maintaining) jobs.

To make it clear, I am NOT defending "greedy corporate jet owers"...However, I would defend the workers who make, service, fly or otherwise are employed in the private aircraft business because of the existence of  thoses, "greedy corporate jet owners"...Why is that so hard to understand???

Reality Check for the Left and Right on Healthcare spending in the US---We already have a de facto single payer system. Question is: How do we make it better?

Medicare and Medicaid spending since the beginning of 2008 (that is only 2 1/2 years ago) has gone from \$748 billion to \$992 billion, a 33% increase. The Federal government already pays a majority of the healthcare bills due in the US (USA TODAY):
""Medicare and Medicaid paid a record 57.5% of patient bills for hospital, doctors, drugs and other care in the last quarter, up from 49.3% in 2005.""

 Source: USA Today
What accounts for this increases in Mandatory spending in the Federal Budget?
""The latest spending surge in federal health care is driven by more people getting more treatment, not by price increases. Health care inflation is at its lowest level in more than a decade — a 1.7% annual rate — but the aging population and the weak economy are sending more patients to government-financed care.""
FYI:

•Medicare. The insurance program for the elderly and disabled grew 8.3% from a year earlier to a \$554 billion annual rate in the past three months, the BEA reports. Enrollment will grow from 49 million today to 60 million in 2018.

•Medicaid. The federal-state cost of medical care for the poor and nursing homes for the elderly rose 12.3% to a \$438 billion annual rate. The expiration of the stimulus law will cut the federal share of the program from about 70% to 60% in the last half of this year, shifting about \$40 billion in annual costs back to the states.

Tuesday, August 2, 2011

Nice chart showing why a downgrade in our credit rating would be met with a yawn by ACTUAL purchasers of our debt...

The US Treasury issues a lot of debt (US Treasuries) --59% of the worlds supply of it (total debt issued by all nations).  When speaking about "default" and the credit rating/risk of the US, the question has to be asked "relative to what?" Even if our rating was downgraded, would it matter much, other than to hurt our pride?  While other countries might have a higher bond rating than the US, there are few places for people/governments to park their currency reserves for safe keeping.  It is a form of financial co-dependency. Do they need us just as much as we need them?...Not a relationship built on love...
 Source: Matthew Yglesias
""America’s AAA-rating on our sovereign debt is useful to the American people. But it also plays a crucial role in the global economy as a whole. People and firms want access to safe sovereign debt for a variety of purposes. If we lose that rating, can people just start using German debt instead?

Basically, no. There’s not nearly enough German or French or British AAA-rated debt out there to play the kind of global role that U.S. Treasuries currently play. The world’s second largest economy, China, doesn’t have liquid capital markets, and the third largest economy, Japan, has already lost its AAA-rating.

[UPDATE] Incidentally, the “other” AAA-rated countries are the Netherlands, Australia, Austria, Norway, Singapore, Switzerland, Sweden, Denmark, Finland, Luxembourg, and Hong Kong. So the issue, as you can see, isn’t so much a shortage of non-U.S. AAA-rated sovereigns, it’s that these are all small countries who are highly rated in part because they don’t have very much debt outstanding.""---Matthew Yglesias

Just for persepective---here are previous National Debt limits and the dollar amount increases authorized by Congress...

Here is the dollar amount of the various national debt limits set in the past 10 years and the dollar amount change authorized by Congress from one level to the next.

Date                          New Limit        Change from previous limit

June 28, 2002       \$6,400  (T)        \$450 (Billion)

May 27, 2003       \$7,384                \$ 984 (B)

Nov. 19, 2004      \$8,184                 \$800 (B)

Mar. 20, 2006       \$8,965                \$781 (B)

Sept. 29, 2007      \$9,815                \$850 (B)

July 30, 2008     \$10,615                \$800 (B)

Oct. 3, 2008       \$11,315                \$700 (B)

Feb. 17, 2009     \$12,104               \$789 (B)

Dec. 28, 2009     \$12,394              \$290 (B)

Feb. 12, 21010   \$14.294               \$1.9  Trillion

Aug 2, 2011       \$16.694             \$2.4 (Trillion)

Nice graph contrasting educational attainment and employment levels. I also see income inequality, don't you?

It is generally accepted that the mantra "the more you learn, the more you earn" is still valid even in our changing economy. Perhaps more so now.  How much of the increasing income gap in the US can be attributed to the "knowledge gap". The graph below contrasts college graduates (use scale numbers of the left) with high school dropouts(use number scale on the right) and their respective employment levels. These represent the extreme ends of educational attainment, so you have to assume the other levels (HS grad, some college, Associates Degree, Trade School, etc) are somewhere in between.  Notice the relatively constant upward trajectory for college graduates--I see an explicit knowledge gap and an implicit income gap.
 Source: Carpe Diem
In the chart below, look at the income data on the right. While this is just a snapshot of income comparison in one year, I am going to go out on a limb and guess if you take data 15 years before and 3 years after 2009 you will find the same trend---increasing income inequality based on level of education.
 Source: Wikipedia

Monday, August 1, 2011

Excellent Graphic and Article Explaining the Four Components of GDP. Good Stuff...

Here is an excellent graphic showing the 4 components of GDP using the Expenditure Method of counting Gross Domestic Product and the full article from the Wall Street Journal explaining each one. How these 4 sectors of the economy mesh together is a critical part of understanding our economy. It is vital for an AP Macroeconomics or Introductory college class in Economics.

 Source: Wall Street Journal

Four Ways the Economy could Grow or Shrink
It looked as if the pieces were finally coming together for the U.S. economy in 2011. Instead, they fell apart.
Whether the rest of the year is better or worse depends on four factors: Will consumers spend more readily? Will business investment pick up? Will federal, state and local governments continue to retrench? And will U.S. exporters manage to sell more goods and services to the world?

Friday's report that gross domestic product grew at a mere 0.8% annual rate in the first half of 2011 suggests that the risks to the economy are significant. Recent Federal Reserve research shows that when an economy grows as slowly as it has this year, it often hits "stall speed" and falls into recession—making a "double dip" a very real possibility.The economy's weakened trajectory also makes shocks, such as the European financial crisis and wrangling in Washington over the debt, all the more threatening.

This year, the four key GDP components—consumption, investment, government and trade—have all fallen short of forecasts. But economists, citing factors such as lower gasoline prices and easing supply disruptions from Japan, say growth will be stronger in the second half. To set the recovery back on course, some or all of the four need to do better.

Sunday, July 31, 2011

This cannot be emphasized enough---New charts showing the weight of Entitlement programs have on the Federal Budget..

Two helpful charts that show the rise of direct public transfer payments over time. The first shows, in percentage terms, cash transfers to individuals last year.  The two biggies, Social Security and Medicare, consume 76% of those payments. The rest are crumbs comparably. The second chart shows the rise of payments to individuals relative to defense spending and interest paid on national debt. The scarry part of this graph is it is projected that paying interest on the debt will surpass spending on Defense.  Yikes!! HT: Carpe Diem

WOW! You REALLY can't see the forest for the trees...

""...But it's getting a bit crowded in Yosemite, where more than a hundred years of prompt firefighting have allowed towering pines and cedars to clog the park's meadows and valleys. These days, you can barely see the granite for the trees.
That's about to change. Yosemite National Park officials say thousands of trees will be felled to preserve the iconic views of the park's waterfalls and the craggy faces of El Capitan and Half Dome....""LA TIMES

 The granite walls of the Yosemite Valley are illuminated by stars and the moon on a clear winter night. The stand of evergreens at the base of the cliff would obscure such a view for most drivers and visitors. (Mark Boster / Los Angeles Times)
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An easy 10 step guide as to where your Social Security Payroll Taxes end up. You are not going to like this journey...

1. You and 9 of your friends work this month.

2. Each of you are subject to a mandatory payroll tax of 6.2% of your paycheck for Social Security.

3. Your employer ALSO pays on your behalf 6.2% of y'alls paychecks in Social Security Taxes.

3. Each of you earns \$3,000 per month in gross pay (before any deductions). Total income for all of you is \$30,000.

4. Collectively you pay \$1,860 in Social Security taxes (\$30,000 X 6.2%) and your employer pays the same amount. So \$3,720 (\$1,860 X 2) is submitted to__??___. This is where the story gets murky for most.

5. The payment of Social Security checks to retirees (and others) comes from the Federal Govts "General Fund/Budget" (that monstrosity that the President proposes and the Congress approves)--not from the Social Security Trust Fund, which I believe most people think. This SS tax money you and your employer pay goes directly to the General Fund.

6. Assume this month there are 2 retirees eligible for S.S. checks and each one is entitled to \$1,500---for a total of \$3,000 in current S.S. obligations. That is a 5 to 1 ratio (10 workers for every 2 retirees)--about right, I believe.

7. The \$3,720 arrives in Washington. The US Treasury takes control of it. ALL of it goes into the General Fund BUT only \$3,000 goes to retirees. The rest goes into a cash account with the Social Sec.Trust Fund, right??? Not so fast...In an accounting move, the US Treasury issues special Social Security Trust Funds Bonds in the amount of \$720 (the amount collected, \$3,720) OVER current obligations (\$3,000) to the Social Security Trust Fund.  Congress then uses this \$720 for, well, whatever they want to spend it on.  Effectively, the Federal Government has borrowed this \$720 from itself.  Specifically, they have borrowed from taxpayers. More specifically, they have borrowed from FUTURE taxpayers, but that is for another day...

8. When people say there is no money (to speak of) in the Social Security Trust Fund, they are technically right. Current workers earning money and paying payroll taxes is enough to pay the current obligations for payouts to retirees AND there is some surplus left-over, which Congress borrows every month to pay for other things.

9. Rinse and Repeat

10. As a result of decades of doing this, there is roughly \$2.6 Trillion in Bonds (IOU'S) held in the Social Security Trust Fund.  This is a part of the \$14.3 Trillion National Debt number that is well known to us all by now.

Have a nice day!!

Nice pie chart showing federal spending...Congress is focusing its appetite on the wrong side of the pie..

The lableling key to this chart starts with the darkest green slice at the top and goes clockwise. While not technically mandatory spending, all the green pieces of the pie would be considered politically mandatory items to fund in terms of prioritizing in the unlikely event the debt ceiling is not raised.  Excluding military payroll and VA benfits from the pie you can see our budget problem---interest on the national debt, Social Security and Medicare absorb 50% of the federal budget and it is rising.
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