I read today (I forget where it was, I was reading on my phone waiting for an appointment) that between 11% and 13% (or approx $80 Billion) of the yearly US Defense budget goes, in some form or fashion, to protect the flow of oil from the Middle East. This is ONLY the "on- budget" items. Much of the war spending is "off-budget", but that is another story.
In the US we consume approximately 138,000,000,000 billion (378 million per day X 365 days, then rounded up) gallons of gas PER YEAR.
If you divide $80 billion by 138 Billion gallons you get $.58 cents of defense spending per gallon of gasoline consumed in the US.
Something to think about the next time you are standing at the pump. That reminds me--I have to go fill up now...
Friday, January 27, 2012
Thursday, January 26, 2012
Nice graphic showing the change in manufacturing jobs relative to service jobs since 1960, the year of my birth. How things have changed in my lifetime.
The shift from employment in the manufacturing sector to the service sector has been in the works for a long time. It might be hard to see the small graph in the upper right hand corner, but it starts in 1960.
The drop in manufacturing employment (distinct from manufacturing output) has been due in large part to globalization and the adoption of advanced technology to the manufacturing process.
I was born in 1960. In my lifetime, only Sears (for now) and General Electric are left on this list. Amazing to me..
The drop in manufacturing employment (distinct from manufacturing output) has been due in large part to globalization and the adoption of advanced technology to the manufacturing process.
I was born in 1960. In my lifetime, only Sears (for now) and General Electric are left on this list. Amazing to me..
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| Source: NYTIMES |
This post is for those of you who don't quite understand (but want to!) the main technical issue surrounding compensation of Hedge Fund managers (related to Romney's "Tax Problem")...Objective analysis then my opinion on it...
Let me use as simple an example as possible to illustrate the point, because I am a simple man.
I am going to start my own Hedge Fund (or Private Equity Fund). I am going to be the lead investor of funds for 100 people who each have $1,000,000 to invest with me. Because I am a GREAT investor with a GREAT track record, all these investors are confident of my ability to get them GREAT returns on their investment.
I am going to tell these 100 investors that they don't have to pay me ANYTHING until I make them money. Because I am shouldering quite a bit of risk in doing this, I am going to charge them 20% on whatever I earn them OVER their original investment of $1M.
On day one of the opening of my Hedge Fund I have $100M to invest. I do.
I go play lots of golf in the meantime. In exactly one year (365 days) I go and check the fund balance and I see the total value of the fund is now $120 million! I have made a "Capital Gain" (the money over and above the original investment) or $20M. Converted into an interest rate that would be 20%. That is pretty darn good!
I quickly call my investors and tell them the good news. Assume all of them say "SELL!". I tell them their CRAZY to sell today and they should wait until TOMORROW!! Here is why...
If I sell a "qualified investment" in less than one years time any interest earned is taxed at a marginal tax rate of 35% (the highest tax bracket for any income earned over approx $365,000). Any interest earned from an investment that is cashed in AFTER one year is taxed at 15%. This 15% is what is termed the "Long Term Capital Gains Tax Rate".
After the investors pay me my 20% fee (20% of the $20 million in Capital Gain is $4 million) they divide the remaining $16 million between them. Each of the 100 will get $160,000. If they sell now, they will each pay $56,000 in taxes (35% of $160,000) or if they wait one more day they will pay $24,000 in taxes (15% of $160,000). Which would YOU choose to do?
All this is background to get down to how this affects ME. Most people would think the $4 million I received from operating my Hedge Fund would be classified as "income" paid to me by my investors for doing a good (no, great!) job for them. Call it income, a commission, whatever, but when I do my tax return I have to claim it as income, therefore putting me in the highest tax bracket of 35%, right? I should write a check to the IRS for about $1.4 million, right?? Hold your horses, Al Capone!
Remember the source of my $4 million was from the original $20 million in interest, or Capital Gain. For my investors after waiting more than one year to cash in were eligible for a the lower tax of 15%. Guess what? I AM TOO!! My portion is called, under interpretation of the tax code,"carried interest" Defined here:
So, on my $4 million I pay $600,000 in taxes as opposed to $1.4 million. Good deal for me, right?!?!
I don't won't to question the efficacy of capital gains OR the taxing of them. I think it is clear the value these gains on the economy AND we can have an honest debate as to how much we should tax them. I get that and you should too.
However, I do think it is relatively clear the way these gains are treated for the purposes of compensating Hedge Fund managers is not in accordance with reasonable tax policy and interpretation. In other words, it is not "fair" in any sense of the word...
How does this relate to Mitt Romney? Throughout is career he has been on BOTH sides of the illustration above. Money he earned from the Hedge Fund/Private Equity Fund he operated (Bain Capital) was taxed at the lower rate and the money he himself save from his earnings that he invested is/was taxed at the lower rate as well. A double capital gains dipper, if you will...
What do you think? Tell me where I am right or am wrong.
After all, I am just a squirrel trying to understand the nuts...
I am going to start my own Hedge Fund (or Private Equity Fund). I am going to be the lead investor of funds for 100 people who each have $1,000,000 to invest with me. Because I am a GREAT investor with a GREAT track record, all these investors are confident of my ability to get them GREAT returns on their investment.
I am going to tell these 100 investors that they don't have to pay me ANYTHING until I make them money. Because I am shouldering quite a bit of risk in doing this, I am going to charge them 20% on whatever I earn them OVER their original investment of $1M.
On day one of the opening of my Hedge Fund I have $100M to invest. I do.
I go play lots of golf in the meantime. In exactly one year (365 days) I go and check the fund balance and I see the total value of the fund is now $120 million! I have made a "Capital Gain" (the money over and above the original investment) or $20M. Converted into an interest rate that would be 20%. That is pretty darn good!
I quickly call my investors and tell them the good news. Assume all of them say "SELL!". I tell them their CRAZY to sell today and they should wait until TOMORROW!! Here is why...
If I sell a "qualified investment" in less than one years time any interest earned is taxed at a marginal tax rate of 35% (the highest tax bracket for any income earned over approx $365,000). Any interest earned from an investment that is cashed in AFTER one year is taxed at 15%. This 15% is what is termed the "Long Term Capital Gains Tax Rate".
After the investors pay me my 20% fee (20% of the $20 million in Capital Gain is $4 million) they divide the remaining $16 million between them. Each of the 100 will get $160,000. If they sell now, they will each pay $56,000 in taxes (35% of $160,000) or if they wait one more day they will pay $24,000 in taxes (15% of $160,000). Which would YOU choose to do?
All this is background to get down to how this affects ME. Most people would think the $4 million I received from operating my Hedge Fund would be classified as "income" paid to me by my investors for doing a good (no, great!) job for them. Call it income, a commission, whatever, but when I do my tax return I have to claim it as income, therefore putting me in the highest tax bracket of 35%, right? I should write a check to the IRS for about $1.4 million, right?? Hold your horses, Al Capone!
Remember the source of my $4 million was from the original $20 million in interest, or Capital Gain. For my investors after waiting more than one year to cash in were eligible for a the lower tax of 15%. Guess what? I AM TOO!! My portion is called, under interpretation of the tax code,"carried interest" Defined here:
""Carried interest is not interest in the sense of an interest-bearing savings account. It is a share in a fund. The person claiming that interest is the general manager of a private equity firm or hedge fund, and the carried interest is calculated as a percentage of the profits generated by the fund he manages. When the fund has a capital gain, the manager's percentage is treated as a gain to him, taxed like an ordinary capital gain on the sale of real estate or stock. Critics say this particular income source does not fit the correct definition of capital gain and should be taxed as wages.""
So, on my $4 million I pay $600,000 in taxes as opposed to $1.4 million. Good deal for me, right?!?!
I don't won't to question the efficacy of capital gains OR the taxing of them. I think it is clear the value these gains on the economy AND we can have an honest debate as to how much we should tax them. I get that and you should too.
However, I do think it is relatively clear the way these gains are treated for the purposes of compensating Hedge Fund managers is not in accordance with reasonable tax policy and interpretation. In other words, it is not "fair" in any sense of the word...
How does this relate to Mitt Romney? Throughout is career he has been on BOTH sides of the illustration above. Money he earned from the Hedge Fund/Private Equity Fund he operated (Bain Capital) was taxed at the lower rate and the money he himself save from his earnings that he invested is/was taxed at the lower rate as well. A double capital gains dipper, if you will...
What do you think? Tell me where I am right or am wrong.
After all, I am just a squirrel trying to understand the nuts...
Wednesday, January 25, 2012
Stay in school and help with the Federal budget. Another great chart showing the link between education and improved social outcomes. Oh, and we spend less money on social programs as well...
This post is not about the value of entitlement programs or if we spend too much or too little on them. This chart reinforces and extends my constant refrain regarding the strong connection between formal (Yes, I know I am limiting the definition) education and relative self-sufficiency. Usually it is about the link between education and income. This one connects education and the likelihood of needing benefits from one, two or all three very expensive Federal assistance programs.
Look at just the blue bars (ignore the recessionary period and just look at the "good times") for High Graduate versus Non-High School graduate. Just finishing high school reduces this populations likelihood of needing Federal assistance by approx 40%! (50% minus 30% = 20% then divided by 50% = 40%). That is a serious savings of resources, people and otherwise...Stay in school, PLEASE!
Look at just the blue bars (ignore the recessionary period and just look at the "good times") for High Graduate versus Non-High School graduate. Just finishing high school reduces this populations likelihood of needing Federal assistance by approx 40%! (50% minus 30% = 20% then divided by 50% = 40%). That is a serious savings of resources, people and otherwise...Stay in school, PLEASE!
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| Source: Economix |
President proposed granting many Tax Credits to various businesses. Why not Tax Deductions instead? Brief explanation here as to why...
In the State of the Union Address the President spoke of granting "Tax Credits" for various private sector investments. Why did he not say "Tax Deductions"? Many people do not completely understand the difference. Let me use a simple example to illustrate the difference.
Below is some simple data. Assume this represents a very small business operated by a single person.
Now the business owner only pays $17,500 as opposed to $20,000 in income taxes. Effectively that $10,000 piece of equipment cost the business only $7,500. Good Deal!
Notice the difference. A Tax Credit is a dollar for dollar subtraction from Income Tax owed, whereas the Tax Deduction reduced the amount of income subject to taxation.
Please note: I used a dollar-for-dollar amount for the Tax Credit when this business bought a piece of equipment, so the outcome in the reduction in taxes owed was quite dramatic. This is an unlikely scenario and the amount of the Tax Credit would probably be capped at a some percentage of an equipment purchase and/or at a maximum dollar amount.
However, the point is the same. It is generally better to get a Tax Credit as opposed to a Tax Deduction. The tax credit incentivizes a business to purchase equipment it might want to purchase or it accerlates forward the replacing of old equipment. Either way, it encourages the purchase of capital goods, hence encourages the production of those capital goods and away the economy goes...At least that is what is SUPPOSED to happen...
Hopefully this helps. If anyone sees a mistake in my math or methodogy, please let me know. Thanks!
Below is some simple data. Assume this represents a very small business operated by a single person.
Income from the business: $100,000
Qualified Tax Deductions: - $20,000
Net income to be taxed: $80,000
Tax Rate: 25% (guesstimate!)
Income Tax Paid (.25 x $80,000) $20,000
All individuals and/or businesses qualifiy for various Tax Deductions that are worth different dollar amounts. For a business, examples would be expenses such as wages paid to workers and other costs of producing a good or service. Deductions effectively reduce the amount of income that is subject to taxation. In this example, the business pays $20,000 in income tax based on a gross income (revenue) of $100,000.
Now assume the President proposes giving this business and additional "Tax Deduction" of $10,000 to purchase a $10,000 piece of equipment. This will help the business owner reduce the cost of purchasing the equipment by reducing their taxable income:
Income from the business: $100,000
Qualified Deductions: -$20,000
Additional Deduction: - $10,000
Net income to be taxed: $70,000
Tax Rate: 25%
Income Tax Paid: $17,500
Now the business owner only pays $17,500 as opposed to $20,000 in income taxes. Effectively that $10,000 piece of equipment cost the business only $7,500. Good Deal!
Now, assume instead of a Tax Deduction the business is granted a TAX CREDIT:
Income from the business: $100,000
Qualified Deductions: - $20,000
Additional Purchase: -$10,000
Additional Purchase: -$10,000
Net income to be taxed: $70,000
Tax Rate: 25%
Income Tax : $17,500
TAX CREDIT: -$10,000
Income Tax Paid: $7,500
Notice the difference. A Tax Credit is a dollar for dollar subtraction from Income Tax owed, whereas the Tax Deduction reduced the amount of income subject to taxation.
Please note: I used a dollar-for-dollar amount for the Tax Credit when this business bought a piece of equipment, so the outcome in the reduction in taxes owed was quite dramatic. This is an unlikely scenario and the amount of the Tax Credit would probably be capped at a some percentage of an equipment purchase and/or at a maximum dollar amount.
However, the point is the same. It is generally better to get a Tax Credit as opposed to a Tax Deduction. The tax credit incentivizes a business to purchase equipment it might want to purchase or it accerlates forward the replacing of old equipment. Either way, it encourages the purchase of capital goods, hence encourages the production of those capital goods and away the economy goes...At least that is what is SUPPOSED to happen...
Hopefully this helps. If anyone sees a mistake in my math or methodogy, please let me know. Thanks!
Tuesday, January 24, 2012
Listen to the State of the Union Address tonight! As an incentive, play this parlor game at the same time. Learn and earn!!!
Below is a list of common crutch phrases used by the President in various speeches he uses throughout the year. If you are going to watch the State of the Union Address tonight you might want to play this game during the many stoppages for applause and standing ovations.
There are 50 "cliches" listed. Bet $1.00 on each of them. To the left you will see the odds of this phrase being uttered. Check off each one as they are spoken then total up how much you have earned at the end of the speech. How much did you make/lose???
Cliché Betting: What Will Obama say first (Source: HERE)
There are 50 "cliches" listed. Bet $1.00 on each of them. To the left you will see the odds of this phrase being uttered. Check off each one as they are spoken then total up how much you have earned at the end of the speech. How much did you make/lose???
Cliché Betting: What Will Obama say first (Source: HERE)
- 8/1 We have more work to do
- 10/1 Health Care reform
- 10/1 As I stand here today
- 12/1 Fundamental belief
- 12/1 God Bless America
- 12/1 Crossroads of history
- 12/1 Defining moment
- 12/1 Make Washington work
- 14/1 Common purpose
- 16/1 Pursuit of happiness
- 16/1 Building a better America
- 16/1 Reduce the deficit
- 18/1 War on terror
- 18/1 It won’t be easy
- 18/1 Hungry for change
- 18/1 My civil liberties
- 20/1 Honour for me
- 20/1 I have a dream
- 20/1 Willing to listen to each other
- 20/1 Yes, we can
- 20/1 Don’t get me wrong
- 25/1 Hard to believe
- 25/1 I’m fired up
- 25/1 Withdraw our troops
- 25/1 There are better days ahead
- 25/1 Do Nothing Congress
- 25/1 We’ll have to make hard choices
- 25/1 We can be one people
- 25/1 A new direction
- 33/1 For far too long
- 33/1 Safe from harm
- 33/1 Jobs to the jobless
- 33/1 Reshapes our economy
- 40/1 Deepest gratitude
- 40/1 Greatness of our nation
- 40/1 Possibilities of this nation
- 40/1 Florida Primary
- 50/1 Believe in what this country can be
- 50/1 Unity is the great need of the hour
- 50/1 In the face of despair, you believe there can be hope
- 50/1 We can work together to keep our country safe
- 50/1 Abiding faith
- 66/1 Brighter day will come
- 66/1 Publish tax returns
- 66/1 Washington has a long way to go
- 80/1 Overcome the adversity
- 80/1 Bloated federal government
- 100/1 Diversity of my heritage
- 100/1 Yes, we might
- 250/1 Life is like a box of chocolates
Forget about SOPA/PIPA...2012 is the year the Internet is going to steal your Consumer Surplus!! See here how your online surfing and shopping habits are conspiring against you...
Price Discrimination results from a businesses ability to segment their customers on their willingness to pay for a good or service. An airline ticket is one that many/most teachers use as a prominent example. It is easy to segment customers, mostly based on time in advance for purchasing a ticket, and extract the highest price possible. If a business cannot segment their customers by preferences then they have to use a "one-price" model of pricing.
Even if a customer was "willing and able" to pay a higher price than the "one-price" they don't have to. This particular customer is reaping some "consumer surplus" in the market.
Example: I went to the mall preparing to pay $30 for a shirt but when I got there the price was only $20. I retained for myself $10 in consumer surplus. Consumers love this surplus and merchants/suppliers see it as missed profit opportunity. BUT that is changing!
Below is a short commentary on how the convergence of advancements in technology, the emergence of on-line shopping AND our own personal internet surfing habits are forming a perfect storm to conspire to transfer our Consumer Surplus to merchants and/or producers (aka "Producer Surplus"). I encourage you to read it and to recognize the trend.
It is also a reminder that "TINSTAAFL"...
Behavioral Pricing: A consumer’s worst nightmare, a merchant’s dream
What if when you bought a new Macbook, the price was higher because your tweets constantly referenced your love and devotion for Apple? What if Orbitz used the fact that your Facebook Likes include “Party Rocking in Miami” to charge you more for a flight to Miami?
This is called online behavioral pricing. It’s a consumer’s worst nightmare as it uses the traces of your online identity to maximize prices on the products and services you want most. It’s also an ecommerce merchant’s dream.
Behavioral pricing is a form of price discrimination. The goal of price discrimination is to maximize profits by adjusting the price that different customers pay based on data about the consumer. Price discrimination is common offline, such as the Museum of Modern Art charging adults $25 but students only $14.
Even if a customer was "willing and able" to pay a higher price than the "one-price" they don't have to. This particular customer is reaping some "consumer surplus" in the market.
Example: I went to the mall preparing to pay $30 for a shirt but when I got there the price was only $20. I retained for myself $10 in consumer surplus. Consumers love this surplus and merchants/suppliers see it as missed profit opportunity. BUT that is changing!
Below is a short commentary on how the convergence of advancements in technology, the emergence of on-line shopping AND our own personal internet surfing habits are forming a perfect storm to conspire to transfer our Consumer Surplus to merchants and/or producers (aka "Producer Surplus"). I encourage you to read it and to recognize the trend.
It is also a reminder that "TINSTAAFL"...
Behavioral Pricing: A consumer’s worst nightmare, a merchant’s dream
What if when you bought a new Macbook, the price was higher because your tweets constantly referenced your love and devotion for Apple? What if Orbitz used the fact that your Facebook Likes include “Party Rocking in Miami” to charge you more for a flight to Miami?
This is called online behavioral pricing. It’s a consumer’s worst nightmare as it uses the traces of your online identity to maximize prices on the products and services you want most. It’s also an ecommerce merchant’s dream.
Behavioral pricing is a form of price discrimination. The goal of price discrimination is to maximize profits by adjusting the price that different customers pay based on data about the consumer. Price discrimination is common offline, such as the Museum of Modern Art charging adults $25 but students only $14.
We’ve already seen online merchants make preliminary attempts at this. When the New York Times unveiled its digital subscriptions, it decided to charge $15 per month to subscribe on your clunky old Blackberry, but $20 per month to subscribe on your iPad. Yet, it doesn’t cost the New York Times more to deliver content to the iPad. Instead the assumption was that you, the owner of a $500 tablet, would be more willing to pay than your average smartphone user. But this rudimentary price discrimination is a mere hint of what’s coming with behavioral pricing…
Monday, January 23, 2012
No kidding this time! If you are a fan of population pyramids and what they say about society, THIS website is for you! The best I have seen...
If you know of one better, PLEASE let me know. I am a big fan of population pyramids. They can tell us so much about a society. HERE is the BEST interactive website I have seen dedicated to population pyramids. Just about every country is represented.
Below is the US from the year I was born (1960) until 2010. "I see old people", to paraphrase the movie "The Sixth Sense"....
Below is the US from the year I was born (1960) until 2010. "I see old people", to paraphrase the movie "The Sixth Sense"....
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| Source: World Life Expectancy via Chartporn |
MIT is offering a way for everyone to upgrade their education and skill-set for FREE! This IS part of the revolution we NEED in the US...
A terrific development: Quality online classes for people who cannot attend college but want to pursue higher education---for whatever their motivation is.
MIT offers MANY FREE online classes in a wide variety of subjects, complete with all the learning resources (including tests) needed to complete a class. I have looked at the one for Microeconomics, and I gotta tell you, IT IS NOT EASY. These are not adult education types classes.
Now, they are offering a certificate for completion:
MIT Mints a Valuable New Form of Academic Currency
If workers take the initiative and complete a class, they can redeem the certificate to their employer and receive compensation, of some sort. With the large selection of classes available, there has to be SOMETHING that is applicable to most workplaces.
Ok, it is just an idea. The classes are hard, but why not give it a try?
MIT offers MANY FREE online classes in a wide variety of subjects, complete with all the learning resources (including tests) needed to complete a class. I have looked at the one for Microeconomics, and I gotta tell you, IT IS NOT EASY. These are not adult education types classes.
Now, they are offering a certificate for completion:
MIT Mints a Valuable New Form of Academic Currency
MITx is the next big step in the open-educational-resources movement that MIT helped start in 2001, when it began putting its course lecture notes, videos, and exams online, where anyone in the world could use them at no cost. The project exceeded all expectations—more than 100 million unique visitors have accessed the courses so far.
Meanwhile, the university experimented with using online tools to help improve the learning experience for its own students in Cambridge, Mass. Now MIT has decided to put the two together—free content and sophisticated online pedagogy—and add a third, crucial ingredient: credentials. Beginning this spring, students will be able to take free, online courses offered through the MITx initiative. If they prove they've learned the material, MITx will, for a small fee, give them a credential certifying as much.""If I am a small/medium size employer I can see lots of potential in using this as an employee incentive tool as well as a very inexpensive way of helping my workforce aquire more advanced skills/training.
If workers take the initiative and complete a class, they can redeem the certificate to their employer and receive compensation, of some sort. With the large selection of classes available, there has to be SOMETHING that is applicable to most workplaces.
Ok, it is just an idea. The classes are hard, but why not give it a try?
Need your help in estimating the number of jobs either of these policies can/could create...
My thought of day:
Thanks!
"If a private company spends "X" number of dollars to build a pipeline and the government(s) spend the the same "X" number of dollars to fix roads, bridges, and other infrastructure, should the number of jobs created by either construction project be ROUGHLY the same?" Factor out for a minute the future benefits or costs either of these two projects might have on society. What is the impact on jobs immediately, since this seems to be the argument of the day regarding this two projects?I am no engineer. I do not know the answer. I dont care much about the politics. I just want to know why one project, in total, allegedly would create lots of jobs and the other would not. Seems like depending on your policial view, you can insert either "Pipeline" or "Roads, Bridges, other infrastructure" in the appropriate place and get the conclusion you want.
Thanks!
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