Friday, February 7, 2014

Tales from Tax Season: Part 1

The tax season is in full swing.  There has been a steady stream of clients for the last few weeks, including a number who came in during January, before the IRS even started accepting returns.  A common theme among many of these early season clients is the mix of desperation and entitlement.  Desperation, because they are flat broke, and they really need money.  Entitlement, because they have been led to expect that the IRS exists to give out money.

Now, I don't know about you, but I have never thought of the IRS as a source of cash.  To me, it has always been the other way around.  But for low income tax filers with children, the tax system is a conduit of funds from people who pay taxes directly to them.

The key to that last sentence however, lies in the words "low income" and "children."  If you have no income, or no kids, the tax system is not an overflowing cornucopia of cash.  This is true of the entire panoply of benefits available from the American welfare state.  However, since they talk to people who are getting big checks, they think they should get a big check too.

This leads to conversations that go a bit like this:

Client: "I hope you can help me out, because I really need a big refund this year."

Me: "Well, let's see.  With your standard deduction and personal exemption, those exceed the amount of money listed on your W-2.  That means you have no taxable income, so you are getting all of your withholding back.  Your refund will be $250, before we subtract our fees."

Client: "Wait, is that all!  That's not very much.  Can't you do any better than that?"

Me: Think: Did you hear me when I said you were getting all of your withholding back?  Say: "Without dependents, you con't get any Child Tax Credit, and only a little Earned Income Credit.  You only had a little withholding taken out of your check."

Client: "So I should tell them to have more withholding taken out?"

Me: Think: Lady, what part of this are you struggling with?  Say: "If you have more withholding taken out, you'll get less money every week, but you'll get it back at the end of the year.  I don't think you are really gaining from that situation."

Client: "It is not much money, but I guess it will have to do.  Can I get that today?"

Me: "Well, the refund actually comes from the IRS.  We are telling people to expect their refund in21 days or less from the date we file their return."

Client: "Twenty-one days!  So you're saying I drove all this way here for nothing."

Me: Think: I drove all the way here.  For this.  Say: "I'm sorry you're disappointed.  But I have no control over the IRS."

Entitlement and desperation is a bad mix.

Monday, January 20, 2014

IRS Schedule H

For the last few weeks I've been preparing to take  the IRS tests to achieve Enrolled Agent status.  This has sucked up most of my spare time and energy, taking away from reading and writing.

But part of getting ready for the first test has entailed having to poke about in some of the obscurer portions of the tax code.  Like Schedule H, for example.  Schedule A is for itemized deductions, Schedule B covers interest and dividends, and Schedule C is for sole proprietorships.  These are the schedules that most people are familiar with.

If you have capital gains, you report them on Schedule D.  Rental income and expense show up on Schedule E, and if you have a farm, you use Schedule F.  I've been trained and have seen all of those on tax returns.  But Schedule H?

It turns out Schedule H is for household employees.  When I first saw this, I thought it was pretty obscure for a test.  I mean, how many people actually have a butler?

However, it turns out you don't actually have to have a staff of full time servants to require this schedule.  If you pay anyone over the age of 18 over $1800 through the course of the year to do work in your home or property, you are required to file Schedule H.  You calculate how much Social Security and Medicare the employee owes, and then you subtract that amount from your refund.

Every so often you hear about a high ranking political appointee failing to pay taxes on a nanny, or a gardener.  It has derailed a couple of candidacies.  I've always wondered why the high powered types who get caught like that didn't just go through an employment agency, like a temp service.  Of course, a temp service adds their markup to the wages and taxes paid to the employee.  So a Schedule H is actually a more cost effective way to go.

So remember: if you hire the neighborhood kid to mow your lawn all summer, make sure he's under age 18.  Otherwise you're cheating on your taxes.

Yeah.  Like we're all quaking in our boots over that one.

Saturday, December 21, 2013

Obamacare (continued)

A couple of weeks ago my company renewed our insurance policy with Blue Cross Blue Shield.  Part of this process was all of the employees having to sign reenrollment paperwork.  This was where I found out that not only had the company’s share of the premium increased, but I was also going to have to pay in an additional $50 a month.  The real kicker, however, was the deductible.  It went from $2000 to $4000.  So in 2014 I’ll be paying more for less coverage.

The insurance agency we use had sent in a senior person, in addition to the clerks who normally process the open enrollment.  His job was to answer the inevitable questions.  His first response when asked about why I was paying more and getting less was some airy hand waving and “Obamacare.”  When pressed a little further, he came up with “we’re required to charge the actuarial value of the policy.”

I told him I understood about actuarial value, but that did not really answer the question.  Insurance is essentially a zero sum game.  Everyone with a policy puts money into the system.  Some people pull money out of the system, and use it to pay medical bills.  If I was putting more money in, then someone was getting the benefit thereof.  I wanted to know what the specific changes were that enabled someone else to get more money out.

You see, I was operating under the assumption that Obamacare had minimal impact on the small group health insurance market.  More fool I.

So, after the insurance agency rep agreed to be more specific, and I let him out of the headlock, he shared some of the details with me.  One of the big chunks is preexisting conditions.  I had not realized that with our current company insurance, there was a one year waiting period for coverage on preexisting condition.  So if we hired someone with cancer or AIDS, they would not be covered for a year under our policy.  Obamacare requires Day 1 coverage of all medical conditions.  This is a win for people who change jobs with chronic health problems.  It is a loss for everyone else.

Another area of increased cost is pediatric dental and eye care, for people with family coverage.  The new regulations now require that coverage.  This is a win for people with children.  It is a loss for people who do not have children on their policy.

The requirement to provide birth control is another regulatory requirement that has gotten a lot of news coverage.  If you use birth control: winner.  If you don’t, well … you know what category that puts you in.  The rep for the insurance agency ‘fessed up that there was no one large cost driver in the regulations.  There were a whole series of small adders that drove up the premium cost.

One of the selling points behind Obamacare was that it would “bend the cost curve.”  Put another way, part of the rhetoric used to sell it was that it would reduce the overall cost of health care in America.  That was BS then, and it is BS now.  The baseline philosophy behind the law was that all Americans have a right to unlimited medical care.  Since a single payer system was a political nonstarter, they decided on the current, massive injection of government into the health care system, through the insurance market.  The people selling the plan would have said anything in furtherance of that goal.

What they either forgot, or just did not care about, is that in a zero sum game like insurance, there are both winners and losers.  And what they really lost sight of was that in health care, there have to be a lot of losers to make up for a relatively small group of winners.  So everyone in my company is going to lose, so that a few people can win.

This is not the kind of game I enjoy playing.

Monday, December 9, 2013

The Minimum Wage: $15 or $10

I'm really not one for conspiracy theories, but I'm starting to wonder if there isn't a grand design at work behind the current rash of labor demonstrations by fast food workers.

For  most of this year, I have been reading news stories about the push to increase fast food wages up to $15 an hour.  There have been several multi-city event built around this theme.  They get a lot of media coverage, but no real impact that I can see so far.  The fast food industry has not been brought to its knees by the union organizers behind the demonstrations.  It is too widely dispersed, and the ownership is too fragmented for a few small demonstrations to create a big change.

And we are talking about a big change.  A $15/hour wage rate would close to double prevailing wages at most fast food outlets.  That's a pretty big jump for someone whose primary job skills are showing up on time and pushing the button with the picture of a large order of fries when the customer orders it.  So it seems like a pretty absurd demand on the face of it.

But maybe the true goal is not to increase the minimum wage to $15/hour.  After all, the White House is also pushing for an increase in the minimum wage.  The Obama administration has set a target of $10/hour.  That is a 38% increase, which seems steep to me.  But compared to $15/hour, it is not so extreme.  And the White House has been relatively quiet on this.  All the noise is being made by the organizers of the $15 campaign.

There is a concept in psychology called anchoring bias.  In a nutshell, we tend to make decisions based on the first piece of information presented.  The initial position presented sets the anchor, and then the ultimate decision is made in relation to the anchor.

You can see how this would work in regard to the minimum wage.  The position set out with a lot of fanfare is $15 an hour.  Even though it sounds outrageous, it sets the anchor.  Then alternative positions are compared, not to the current minimum wage, but to the anchoring position.  Suddenly a $10 per hour minimum wage seems much more reasonable.

Since the Obama administration has strong allies among labor unions, I can easily envision policy makers in the White House collaborating with union organizers on a plan to define the terms of the debate on the minimum wage.

Conspiracy?  Nah!  Its just politics as usual.

Sunday, November 24, 2013

Boeing Makes a Move

The labor market news coming out of Washington State continues to be interesting.  After voters in the airport district passed a $15 minimum wage, the next major news item was a contract negotiation between Boeing and the Machinists' Union.  Boeing currently builds the 777 wide body jetliner in Washington state.  However, they just announced a series of orders for a newer model of the plane, the 777X.

In order to keep building the new plane in Washington, Boeing renegotiated the contract.  The final offer would extend through 2021 and included several features that would not endear it to the union.  First, the wage increases in the contract were limited to 1% every other year.  Second, the new contract would introduce a two tier wage scale.  Under the current contract, assemblers start at $15 an hour.  after 6 years of annual increases, they top out at $35 and hour.  Under Boeing's offer, the new hires would take 20 years to reach that top rate.

The big enchilada, however, was the pension plan.  Boeing's workforce in Washington is currently covered by a traditional defined benefit pension plan.  With a defined benefit plan, once you retire, your monthly benefit is fixed.  The company bears all of the investment risk of choosing the right investments to make sure enough money is in the plan to make all of the payouts every month.

Boeing proposed to replace that with a defined contribution plan.  Under defined contributions plans, the company agrees to place a percentage of the employee's earnings into the employee's account.  The employee is then responsible for investing that account in such a way that it grows over time.  When the employee retires, the account is theirs to spend as they wish.  Don't spend it all at once, however, because the money has to last you for the rest of your life.

When the contract proposal was put to a vote, th Machinists voted it down by a two to one margin.  Reasons that were cited for the rejection included the fact that the company is highly profitable, and that the CEO of Boeing got a big increase in compensation.  Too bad for the Machinists that those things don't matter worth a squat.

What does matter is this: Boeing can build the new 777X in one of several new locations.  One possibility that was cited was North Charleston, South Carolina, where Boeing is currently starting to assemble 787 Dreamliners.  Although the 787 had a really rough launch, they seem to have gotten past their teething pains.  The workforce now has experience, and the good people of South Carolina would be thrilled to increase the Boeing payroll.

Another possibility is Long Beach, California.  Boeing currently assembles C-17 military transports in Long Beach.  That contract is going to end in 2015, about the same time Boeing will be gearing up for the 777X.  Although unionized, the folks in Long Beach recognize that without a new piece of business, they're toast.  They will be very receptive to Boeing's overtures, because they recognize that the alternative is massive unemployment.

Another area talking to Boeing is Huntsville, Alabama, where Boeing has located their space operations.  Alabama, like South Carolina, is another Right to Work state.

The Machinists' Union thinks they are calling a bluff on the part of the company.  They think that the skills of the workforce in Washington state are unique and irreplaceable.  You used to hear such statements coming out of the United Auto Workers as well.  At least, you did before the Japanese and Koreans opened up a whole series of assembly plants in the US using non-union labor from Right to Work states.

By rejecting the contract offer, the Machinists have gambled the future of their jobs.  I certainly would not cover their side of the bet.  I think they are going to find out their skills are not irreplaceable.  Then they are going to find out that nobody else thinks their skills are useful in any other situation than building aircraft.

Saturday, November 16, 2013

Obamacare II

What a difference a month can make.  This time last month the Republican party appeared to be self destructing, having taken the blame for both the government shutdown and nearly causing the US to default on its debt.

Now, the debacle around Obamacare’s website is controlling the news cycle, day after weary day.  I’ll bet that at the White House, it is all hands on deck.  Everybody coming in every day, preparing for twice daily briefings on the status of Obamacare’s launch.  Too bad none of the staffers can actually do anything constructive about fixing the problems.

The latest wrinkle is that the President has decided that he won’t enforce the law mandating certain levels of coverage, if the insurers would like to rescind some of the cancellations they have already sent out.

See, now you can keep your coverage if you like it, just like the President has been saying all along!

You have to wonder what the state insurance commissioners and insurance companies think about that.  Did anybody ask them?  Or is the spin machine getting geared up to blame the insurers for all the people who will lose their insurance coverage next January if the website is not straightened out?

One of the ironies of this situation is that Obamacare, which was intended to increase the number of people paying for health insurance, may end up significantly reducing the number of insured in this country.

Another irony is that the Republicans went to the mattresses trying to defund, or at least delay the implementation for a year.  I’ll bet Harry Reid wishes he had done just that, right about now.

Saturday, November 9, 2013

Increasing the Minimum Wage

The off year elections are over. Chris Christie of New Jersey stokes his Presidential
prospects by cruising to a win as Governor of New Jersey. Bill DeBlasio, an unabashed
tax and spend liberal, kicked the stuffing out of his Republican opponent to become
mayor of New York City.

The most interesting election result to me, however, was a referendum in the city of Sea-
tac, Washington. Seatac is in the Seattle metropolitan area. It gets its name from the
Seattle-Tacoma airport (Sea-Tac), which occupies about 25% of the land area of the city.
Seatac has what is described as a working class population. This probably means that
housing is cheap, so households in the bottom half of the income distribution can afford
it. The tradeoff is that every time a jet lands the windows shake.

The good people of Seatac just passed a law mandating a $15 per hour minimum wage,
the highest in the country. Seattle’s current minimum wage is $9.19, while the Federal
minimum wage is $7.75 an hour. So fast food workers at the airport who live in Seatac
just voted themselves a 63% raise.

The activists behind the campaign to increase the minimum wage were tactically brilliant.
The increase is limited to airport related businesses, and restaurants with more then 10
employees. This means most of the increased costs are being shoved onto travelers who
can presumably put the bills on their expense accounts. Since the area around Seatac is
already pretty built up, businesses will have a hard time relocating to just outside the city
limits to avoid the higher wage costs.

This is a classic union organizing tactic: target a large, immobile concentration of capital
assets. If the capital can’t move, then labor can organize to capture a larger percentage of
the economic value created. In the ‘30’s it was steel mills. Now, the capital asset is the

This will be a large scale experiment on the effects of a big increase in the minimum
wage. We should see a flow of marginally higher skilled workers across the boundary
of the city line, as better workers apply for the higher paying jobs, and businesses eject
less skilled employers in favor of superior applicants. Some of the Seatac residents who
voted for the increase may find themselves on the losing end of that transaction. Be
careful what you wish for.

We should also see a decrease in the number of employees, as businesses work to reduce
their higher labor costs. One of the most interesting results to watch will be the effect of
the higher minimum wage on people who now make between $10 and $20 an hour. If
you are making $12 dollars a hour today, do you accept your $3 raise and go on? I think
it far more likely that you go back to your boss and demand a bigger raise.

I can hear the conversation now: “Why should I work this (fill in the blank) job. I can go
to McDonalds and get the same money.” And because businesses have to compete for
even moderately skilled workers, wage scales will increase from top to bottom. What
I don’t know is whether the push back will be based on a fixed dollar gap or a fixed
percentage gap.

In other words, does the guy who is making $15 an hour today ask for a 63% increase to
$24.45? Or will he settle for a $7 increase up to $22.

One thing is for sure: I'm glad I don't own a business in Seatac

Sunday, November 3, 2013

Obamacare and Private Insurance

Despite being repeatedly told that you can keep your health insurance coverage if you like, hundreds of thousands, if not millions of Americans are getting cancellation notices in the mail.  It turns out that a lot of health insurance in the private market doesn't meet the definition of what the political appointees at HHS consider adequate coverage.

Maybe the problem is that it does not cover what the regulators think it should.  Because everyone, and I do mean everyone, needs maternity coverage.  If you don't believe me, just ask them.

Or maybe the deductible is too high.  The news coverage I have read is that the limit is $6000.  Higher deductibles than that are being outlawed.  I guess if you have $6000, and are in perfect health, that doesn't really matter.  You can't accept that risk in exchange for lower premiums.  Because someone in Washington decided they knew better than you.

Predictably, many of the people whose policies are being cancelled are finding out new coverage will cost considerably more going forward.  However, they're being told they shouldn't complain, because their new coverage is better, even though it costs more.  It covers more conditions, and kicks in earlier.

This reminds me of what the cable company tells me when they raise my price every year.  "Sure, our price went up 6%.  But look how many more channels you are getting."  News flash for you, buddy: I neither need nor want twelve versions of the Golf Channel.  Golf Grudge Match channel: this time it's personal!  What's up with that?

That's what you get when you hand things over to a monopoly.  And at least I can understand the reasoning of the cable company.  They're trying to maximize their profits.

But Obamacare was advertised as the way to lower prices.

Monday, October 21, 2013

Further Thoughts on the Shutdown

There has been a lot of news coverage of the terrible “costs” the government shutdown imposed on the US economy. The number I have been seeing the most is $24 billion. The ratings agencies have tossed out an estimate that the shutdown reduced 4th quarter growth from a 3% rate to a 2.4% rate. The subtext of all these reports is clear: “Evil Tea Party Republicans! Bad Republicans! Bad! Bad!”

 Let’s just do some back of the envelope calculations. The overall size of the US economy is around $16.6 trillion, or around $45 billion a day. Over the sixteen days of the shutdown, $24 billion works out to $1.5 billion a day. So whoever came up with the $24 billion number figured that a partial shutdown eliminated 3.3% of the American economy during that period.

 When you dig further into the numbers, the estimate for lost economic activity seems to boil down to two factors: reduced travel bookings, and the shutdown of the national parks. It does not include lost wages for Federal employees, because they were given back pay. Some contractors presumably had some lost time, but I have not seen those numbers broken out. The big enchilada is the reduction of business at the national parks. Now, the local communities undoubtedly suffered a loss of business during the shutdown period. But what the analysis ignores is the substitution effects caused by the park closures.

 The simplest way I can explain substitution effects is through an example. Have you ever gone to the multiplex to see a movie, only to find out that the movie you went to see is sold out? Every time this has ever happened to me, I pick another movie to see. I substitute one product for another. Notice, from the point of view of the hit movie producer, they have lost a sale. I didn’t go see the hit movie. But from the point of view of the producer of the plan B movie, they gained a sale. From the economic point of view of both myself and the movie theater, there was no change at all. The theater sold a ticket, and my wallet was lighter by the same amount.

 In this example, there were winners and losers, but the overall amount of economic activity was unchanged. Even if you don’t choose another movie, you’re already out of the house. You may go to a bar. You may go out to eat. You may go shopping. A rational person would conclude that consumers will substitute an alternative form of entertainment for the lost opportunity to see the hit movie.

Tourism, like all forms of entertainment, is a redistributive form of economic activity. No new wealth is created. Instead, wealth is transferred from those who have it (the tourists) to those who want it (the vendors). Change entertainment venues, and you have different winners and losers. But the net amount of wealth remains the same. Government statistics do not measure wealth; they measure activity. But even on the activity side, without an accurate measurement of the substitution effects, it is not possible to blithely announce that the economy suffered a significant loss because of the shutdown.

Thursday, October 17, 2013

Thoughts on the Shutdown

Well, the government shutdown is over and the debt ceiling has been raised.  This was an unmitigated defeat for the Republicans.  What the Democrats got was Obamacare is being funded, and the expansion of Medicare is going to be a reality.  What the Republicans got was a drubbing in the court of public opinion.

The conventional wisdom is now that the party that shuts down the government, or does not agree to raise the debt ceiling, will end up the loser in the fight.  The Democrats will now use this to expand the scope and scale of the Federal government.  It will work like a ratchet: whenever possible, the Democrats will create a new entitlement.  Then, to be fiscally responsible, taxes will have to increase to pay for it.  If you don’t want to be fiscally responsible, that’s okay, because the Chinese will be happy to loan us the money to pay for the goodies.  What could go wrong with that?

Since we are going to go through this again in three months, the Republicans are going to have to change their game plan.  One possible change is that they just go along with whatever the Democrats suggest.

But I think they could learn from their defeat.  On a tactical level, here are the things I think the Republicans could do the next time around:

1)    Hook together raising the debt ceiling with defunding entitlements.  Fiscally responsible people don’t default when they don’t have to.  The Republicans thought that threatening default increased their leverage.  Instead, it worked the other way around.  Next time, make the Democrats reject the extension of the debt ceiling, and precipitate the real crisis.  Remove the entitlements, and the debt will take care of itself.
2)    Redefine the National Park Service as an essential government service, just like the military and the air traffic controllers.  The primary means of inconveniencing the public during the shutdown was the closure of the parks.  Keeping them open makes it really hard for media stories about how bad the shutdown is to gain traction.  What is they gave a shutdown, and nobody outside of DC noticed?  After all, it was really only a partial shutdown.
3)    Resist the urge to retroactively pay furloughed workers.  That way, you can shape the narrative into how much you are saving the taxpayers every day.  The message is “We saved over $1 billion today.  Did you miss anything you really needed?”  

The philosophical divide between the two parties is deep and profound.  The Democrats want to increase the size of government, and increase taxes to pay for it.  The Republicans want to shrink the government, and use the money saved to cut tax rates.  We are going to dance this dance again.

Sunday, October 13, 2013

The Government Shutdown and Obamacare

The current Federal government shutdown is due to House Republicans unyielding opposition to Obamacare.  This desire to repeal the law is so strong tat they are willing to shut down the government to force the issue.

What the Republicans have not done is present a clear case for why their opposition is so strong.  Lacking that clear communication, the story that has emerged is presented as mere partisan bickering.  The Republicans just say no reflexively to everything the administration proposes; that’s the way the story runs.

But maybe “just say no” isn’t the whole story.  Maybe there is a reason to think that Obamacare should be opposed, and that the implementation should not go forward.

Let’s try this: Obamacare is going to create a gigantic new entitlement program, and massively increase the size of the Federal deficit.

We all know that the Federal government spends vastly more than it takes in (hence the upcoming fight over the debt limit).  Most of us know that funding demands on existing entitlement programs like Social Security and Medicare are going to grow, as the baby boomers age out of the workforce.  Solving these problems of sustainably funding entitlements is a huge political mess, largely because there are big segments of the electorate who are feeding at those troughs.  Among the list of sure fire ways to get elected, you will not find cutting benefits for the people who cast votes.

Knowing that the government is already overcommitted with unfunded mandates makes it a colossally bad idea to add on another unfunded mandate.  When you have dug yourself into a hole, the first step toward getting out of the hole is to stop digging.

Obamacare requires everyone to buy health insurance.  However, for people with lower incomes, there will be subsidies from the government.  Those subsidies were originally supposed to be funded through a series of revenue raising functions and cost saving changes in the health care system.  This article from Real Clear Politics details how many of the revenue enhancements and cost savings are already falling apart.

The bottom line is that it is increasingly apparent that full implementation of Obamacare is going to accelerate the growth of the Federal deficit.

Obamacare.  ‘Cause when a shovel is too slow, try digging with dynamite.

Sunday, September 29, 2013

Turning of the Tide

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

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

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

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

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

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

Maybe we’re seeing the turning of the tide.

Saturday, September 14, 2013

Defining Poverty

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

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

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

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

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

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

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

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

Sunday, September 8, 2013

Unemployment Statistics

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

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

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

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

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

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

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

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

Monday, September 2, 2013

Skills Development

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

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

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

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

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

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

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

Saturday, August 24, 2013

Minimum Wage and Poverty

President Obama is supporting a significant raise in the minimum wage, currently $7.25/hour.  The President is advocating an increase to $9.00 an hour, a 24% increase.  The applause line in his speeches on the subject is “no one who works a full time job should have to live in poverty.”  Cue the cheering.
This is actually a claim that can be numerically checked.  So let’s run the numbers.
If you work 40 hours a week for 52 weeks, that comes to 2080 hours.  At $7.25 per hour, you would receive an annual income of $15,080.  But really, nobody gets through a whole year without missing a little work.  Let’s use a more realistic 1800 hours a year for our calculations.  That gives a minimum wage income of $13,050.

Next, let’s check what the official poverty level is.  A quick search provides the following numbers for 2013:
Family of 2: $15510
Family of 3: $19530
Family of 4: $23550

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

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

But as the old Ronco informercials used to say “Wait, there’s more!”  We haven’t considered the Additional Child Tax Credit yet.  This Federal benefit pays $1000 per child for up to three children.  Once we add the Federal benefits in, the picture changes completely:
Family of 2: $13,050 + 3169 + 1000 = $17,219
Family of 3: $13,050 + 5236 + 2000 = $20,286
Family of 4: $13,050 + 5891 + 3000 = $21,941

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

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

Saturday, August 10, 2013

You Want Fries With That?

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

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

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

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

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

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

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

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

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

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

Saturday, July 13, 2013

Cheating Malthus: Egypt

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

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

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

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

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

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

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

Monday, June 17, 2013

Why Stimulus Fails

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

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

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

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

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

Not a lot of votes in that, though.

Wednesday, June 5, 2013

Graduation Speeches

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

What a load of malarkey.

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

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

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

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

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

Thursday, May 23, 2013

Winter is Coming

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

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

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

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

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

Tuesday, May 7, 2013

Regulating Ahead of the Facts

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

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

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

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

More government is not always to solution to every tragedy.

Thursday, May 2, 2013

Oregon Medicaid Study

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

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

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

At the end of three years, a study was published tracking the health results of the two groups, insured and uninsured.  The primary findings of the study:
  • Heath care utilization increased for the insured group.
  • Rates of depression were 30% lower in the insured group.
  • There were no statistically meaningful differences between groups in several measures of health: blood sugar, cholesterol, and blood pressure.
  • Hospital admissions and emergency room visits were statistically similar for both groups.

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

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

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

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

Sunday, April 21, 2013

Three Up. Three Down.

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

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

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

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

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

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

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