## Saturday, December 15, 2012

### Congress wants to "Put a Cap in Yo Deductions"---Yes, it is as threatening as it sounds.

One such deduction (among several) is the "Mortgage Interest Deduction".  Here is a quick explanation and example.

If I get a loan to buy a house my payment consists of two things: Principal and Interest.

There are potentially other things included in your payment (i.e. State and Local taxes, mortgage insurance, etc--but we are going to ignore those for now to keep it simple).

The principal is the portion of the loan I actually borrowed and interest is the portion of the loan that compensates the lender for lending me that money. Below is an example of someone taking out a loan for \$200,000 at an interest rate of 5% and is going to pay back the loan over a 30 year period.
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 Source: GMAC

Notice in the "Loan Summary" the "Total of Payments" are \$386,513.24. Remember, I borrowed only \$200,000 so the difference between these two numbers represents the "Total Interest Paid" on the loan in 30 years--\$186,513.24.  ALMOST as much as I borrowed in the first place!!

Over time, in each monthly mortgage payment I make, I pay a portion of the principal and a portion of the interest to the lender.  This is reflected in the data below the Loan Summary.

I listed the first year of payments, 1-12.  Each month the borrower made a monthly payment of \$1,073.64.  Each month part of that payment is Principal and part is Interest. You can see that in the early stages of a loan, the interest is MUCH higher than the principal you pay back.  This is called a "front loaded" loan where you pay most of the interest up front and as you make payments the payback for principal increases and interest payback decreases.

In the first year you pay a total of approx \$9,930.00 (I rounded) interest alone (Principal was only \$2,946.00)

As incentive to buy homes, Congress allows homeowners to deduct the amount of interest from their taxable income.

For this homeowner, if they have enough other deductions to qualify to itemize these deductions (like the charitable deduction or deduction for State and Local Taxes), then they can DEDUCT from their total income the amount of interest paid---\$9,930.00.

This effectively reduces the income that will be subject to the Federal Income Tax by \$9,930.00, hence their tax bill be less as well.  This is a GOOD thing for the homeowner.  However, it reduces the amount of Federal tax revenue received by the Federal Government.  Consider it a "subsidy" for home ownership.  Renters do not get a similar subsidy. Neither do people who pay cash for their houses.

The larger the home loan, the larger the interest paid, the larger the deduction and the more that homeowner "saves" on taxes.

The mortgage deduction is a popular "middle class" to upper class tax break.

There is some talk about limiting this deduction to a smaller amount or getting rid of it altogether.  This will increase taxes on people with home loans, especially those in the early stages of a home purchase with a substantial home loan.

I don't think the total elimination will happen.  Probably a "cap" on TOTAL deductions will be put into place (the home mortgage PLUS charitable, state and local taxes, etc).

Hope it helps you understand this issue a little better.

## Friday, December 14, 2012

### "Disruption" in the corporate boardroom is a good thing. Especially when the source of the disruption is how to better serve consumers. Amazon.com---Retail is not quite ready to surrender!

Stores offer same-day delivery to compete with Amazon
""Tired of competing on price with online retailers, bricks-and-mortar chains are experimenting with same-day delivery. So far, few such services are available in sprawling Southern California....""
Businesses are in existence to serve customers.  At least they are supposed to.  When a business is not faced with significant competition they tend to get "fat and happy" and start to serve their own interests.  Perhaps not on purpose, but inertia seems to push them in that direction.

It usually takes some "disruptive" idea, technology or improvement in efficiency by a competitor to shake them up.

Lots of talk about how Amazon.com is crushing "brick and mortar" retail.  Probably inevitable that they will.

But I like that storefront retail IS at fighting back.  This takes effort, investment and new thinking regarding resources on the part of management to serve its customers.

Intense competition forces businesses to think about how to get their products into the hands of customers in the least expensive and most expeditious manner possible.

Disruption in the corporate boardroom because of competitive forces is a GOOD thing for the consumer.  Make them sweat to better serve us.  Works for me.

This seems like another way the Postal Service can improve its situation as well.  They already have the routes, vehicles and people in place to serve this niche (but so does UPS and FedEx!).  If they can move quickly perhaps they can get a large share of this market.  As the article notes, there are companies already lining up that would like to have this business.
""...Next week, the U.S. Postal Service begins an experiment in San Francisco. It's partnering with about 10 retailers, which have yet to be announced, to offer same-story delivery around the city, said spokesman John Friess....""

## Wednesday, December 12, 2012

### The number of people turning 65 revisited. How much in Social Security is that going to cost? See the analysis of the 2011 to 2012 bump here...

I am revisiting this graph because it fascinates me.

Just eyeballing it (and inserting two somewhat straight lines) and looking at the change from 2011 to 2012 astounds me.

There is roughly a daily average change in the number of people turning 65 of 1,500 people. That translates into 547,000 newly minted 65 year olds OVER the number minted in 2011.

If ALL those people filed for and received Social Security checks (the average check SS check for 2012 is \$1,230 according to the SSA) that would require a little over \$8 billion dollars to be added to the budget in one year on top of what is already paid in Social Security benefits in prior years.

Now, Medicare kicks in too. See how it adds up quickly.

### States with large outward migration patterns have the most generous State employee pay and benefits. States that have high inbound migration have less generous State employee pay and benefits. Correlation =Causation??

Correlation is not necessarily causation...but is this a coincidence?

Yesterday I posted the first graphic below showing population losses and gains for US States over the last few years.  California, Illinois, Michigan, Ohio, New York, Massachusetts, and New Jersey and large net losers of population.

The graphic below the map is one I found today.  It shows compensation levels, from highest to lowest, for State employees from the 10 most populated States.

Notice the list I made above of high outward migration States and the top 5 States in the compensation graphic.  Any similarities?  I think so.  Do they matter? Not sure.

Large States with high inbound migration have lower levels of State employee compensation.

States with high level of State employee pay and benefits are losing tax base. States with lower (relatively speaking) levels of State employee pay and benefits are gaining tax base.

Which States are going to be more fiscally sound and attractive places to live and work?

Correlation is not causation, but is this a coincidence? Or is it a lack of prioritizing between private and public policy goals?  Not sure. I am open to suggestions.

 Source: Bloomberg

## Tuesday, December 11, 2012

### Nice graphic on migration patterns in the US among the States. See where people are leaving and going to. All I can say is Texas is doing something right and California is not.

People on the move...Migration patterns in the US in the past few years.  California, New York, Michigan, Ilinois and Louisiana are all net losers in terms of migration.  Texas, Arizona, Georgia, and North Carolina are all gainers.

People go to where there are opportunities and businesses locate to States that have hospitable business climates and responsible government.

Kinda simple...

### Two excellent graphs showing the difference in the cost of producing an iPhone in the US and China and the profit margin associated with that difference.

I came across a research paper while reading about Apples announcement that it was going to move some of its production back to the US (article HERE). The paper is HERE. There were two graphs that I thought were interesting.

The first one show the cost of the component parts and labor (inputs) that go into producing an Apple 4G iPhone in China (keep in mind these are JUST the costs associated with these inputs. It does not include many other costs associated with making the phone and getting into your hands) and the second one shows the cost of producing it in the US.

Notice all component costs stay the same BUT the labor cost is the big variable between the countries.

I have no big point to make here. Just something to make you go "Hmmmm".... :)

### Nice graph showing the number of people turning 65 on a daily basis. This is important in the discussion of Social Security and Medicare. It is a numbers game---in terms of people and dollars.

Lately I have been talking to students about the fact that everyday there are greater numbers of Baby Boomers turning 65 years old, but I have never seen any actual numbers.  There is lots of talk about the "leading edge" of this generation that is going to put a financial strain on the Social Security and Medicare systems. This is a numbers game--in people and dollars.

I think I see that leading edge in the graph below--the year 2012.

This graph shows, over time and on a DAILY basis, the number of people turning 65. For instance, in 2000, a little over 5,000 people had their 65th birthday.   In 2007-2008 there was a bump up in the number that was sustained for 4-5 years.  BUT notice what happens in 2012. The daily number leaps up to 8,000 per day and you can see what happens from that point forward. One giant step for the birth of mankind!

So, what year was so special that in 2012 we have so many more people turning 65 at the same time. Well, subtract 65 from 2012 and you get 1947.  Just after "The Big One".

My cohort is 2025 (I was born in 1960).  We have our own special little bump in the daily retirement rate. Wonder what was going on then??

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 Source: The Economix

## Sunday, December 9, 2012

### "Manufacturing is Alive, Manufacturing jobs are Dead". Still hoping some politician somewhere will adopt this honest slogan for a campaign. See graph here on manufacturing employment

Jobs in the manufacturing (specifically, the goods producing sector), relative to other jobs in the economy, have been in decline for a long time. Now, it certainly is possible that there are more jobs in manufacturing overall BUT the number of other jobs has grown at a faster rate--hence manufacturing jobs as a percent of the total is smaller.

Well, I tried to make it look better, but I suspect this is not the case.

Remind me again why politicians spend so much political capital and ACTUAL capital trying to "save" manufacturing jobs?  I don't mean the manufacturing jobs of the future, but they are trying to rescue the jobs of the past, for the most part.

Maybe I am missing something. Help me out.

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 Source: HERE

### Why has the price of computers decreased but the price of broadband internet connection increased (or HAS it?). If you need an analysis for a Microeconomics class this will be helpful.

...or a Macroeconomics class as well...

The author of this blog entry (found HERE and also pasted in full below the fold at the bottom of this entry) uses a graph to show how, in the last 5 years, the price of computers (BLACK arrow) has decreased over 40%  but the price of Broadband (RED arrow) has increased (slight, but an increase).

While the blog entry is very short it suggests (explicitly and implicitly) 2 Microeconomic and 1 Macroeconomic concept that are important for students to know.

(1) In Microeconomics, two goods are considered Complements if they are used together. They are separate and distinct goods, each with their own market price and cost of producing. They are largely dependent on each other to function profitably in the market place.

When the PRICE of one of the complementary goods DECREASES (in this case computers), the DEMAND for the other good used with it INCREASES (Broadband Internet connection).  This makes sense.  People buy more computers so they need more internet access. This could be the reason, but...

(2) The computer market is vast and their are lots of competitors.  With more competition, prices tend to gravitate closer to the actual cost of production (this is a characteristic of a "perfectly competitive firm").  In broadband "production" this is less so:

"The high, fixed costs of broadband means that there hasn’t been a big rise in competition among providers, according to Scott Wallsten, Vice President for Research and Senior Fellow at Technology Policy Institute. Indeed, most Americans don’t have more than two options when it comes to wireline broadband providers...."

High fixed costs serve as a barrier to entry in markets. It takes very large upfront investments that may take years to re-cover.  Hence competition is more limited AND the producer is able to charge a price, dictated by the market demand for the good/service, that is something greater than the cost of producing.  In other words, the producer has pricing power ABOVE the Marginal Cost of producing extra units of the good/service.  This could be the answer, but...

The Macroeconomic concept comes from one the commenter's on the blog entry in regards as to how the Consumer Price Index is calculated and its accommodation for changes in the quality of a good or service over time.

Is the price consumers paid for broadband in 2007 the SAME broadband they pay for in 2012?

If the price of broadband (consider it just a single good/service) has increased 10% since 2007  BUT the amount of speed, quality of the connection, and places I can access it has increased, say 50% or more, am I not better off per dollar spent?

Has the BLS fully accounted for this quality change and it is built into the price change noted in the chart, so in real terms broadband has increased 10%?  This could be the reason, but...

This is why I love Economics! All three answers COULD be correct!

What do you think?  Which one seems the likely culprit or am I missing a piece of the puzzle?

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