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Companies are cutting costs … that’s a good thing, right?

October 13, 2009

Ken’s Take: I think that the realization is setting in that businesses have — partially out of necessity — cut back their bloated cost structures — big time. Short run, it’s out of necessity — just to survive. Medium run, the skinnier cost structures will provide profit leverage when sales start to bounce back. Long-run, companies are will be better positioned to compete.

The downside: there’s little realistic hope for a quick turnaround in unemployment. Companies will be slow to add back to their payrolls — especially given the increased political risk from government intervention, wage controls, and health care taxes and penalties.

If 10% unemployment is the 2010 over/under, I’m taking over.

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Excerpted from WSJ: Cost Cuts Lift Profits But Hinder Economy, Oct. 13, 2009

Corporate America is showing better-than-expected profits, but the accompanying optimism belies deep worries among company executives about the strength of the economic recovery.

In an ominous sign for the economy, much of the profit is being eked out through cost cuts. Executives say they are hesitant to reinvest such profits into their businesses. With large portions of their factories, fleets and warehouses sitting idle, some say they probably won’t see reason to do so for a year or more.

That means job growth and any significant rise in business spending could be a long time coming.

That creates a chicken-and-egg problem at a time when the unemployment rate is already nearly 10%: Without more jobs, U.S. consumers will have a hard time increasing their spending; but without that spending, businesses might see little reason to start hiring.

Already, the economy is being starved of investment it needs to spark growth. Net private investment, which includes spending on everything from machine tools to new houses, minus depreciation, fell to … the lowest level since at least 1947.

“Things have stabilized, but we’re trying to be extremely cautious and not anticipate the recovery before it occurs …we’re looking to cut back as much as possible.”

And while companies are finding the credit-market thaw is making it easier to borrow money they would need to expand, many are stashing these funds rather than spending them. Of the 100 largest bond issues globally this year, only seven listed expansion, investment, capital expenditures or research and development as the purpose of the money-raising.

In industries ranging from apparel to heavy machinery, executives say they don’t yet have enough faith in the recovery to take significant risks.

One big obstacle: Many industries have excess capacity that, even if the economy perks up, will take many months to absorb.

The cautious mood is reflected in companies’ new orders for nondefense capital goods such as computers, trucks and office furniture, which in August were down … about 20% from the same month a year earlier.

“The politicians want people to think things are getting better, because a better mood feeds a turnaround. Things are getting better, but compared to what.”

Full article:
http://online.wsj.com/article/SB125539122868481389.html?mod=WSJ_hps_LEFTWhatsNews

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Posted in Economics, Employment - Jobs | Leave a Comment »

“Synchronous Lateral Excitation” … risky, but not what you’re thinking.

October 7, 2009

TakeAway: In finance, actions can be both individually prudent and collectively disastrous. It’s called “synchronous lateral excitation”, and it explains the credit crunch of 2008 – 2009.

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Excerpted from New Yorker: Rational Irrationality – The real reason that capitalism is so crash-prone, John Cassidy, October 5, 2009

On June 10, 2000, Queen Elizabeth II opened the high-tech Millennium Bridge, which traverses the River Thames from the Tate Modern to St. Paul’s Cathedral.

Thousands of people lined up to walk across the new structure, which consisted of a narrow aluminum footbridge surrounded by steel balustrades projecting out at obtuse angles. Within minutes of the official opening, the footway started to tilt and sway alarmingly, forcing some of the pedestrians to cling to the side rails. Some reported feeling seasick.

The authorities shut the bridge, claiming that too many people were using it. The next day, the bridge reopened with strict limits on the number of pedestrians, but it began to shake again. Two days after it had opened, with the source of the wobble still a mystery, the bridge was closed for an indefinite period.

Some commentators suspected the bridge’s foundations, others an unusual air pattern.

The real problem was that the designers of the bridge, who included the architect Sir Norman Foster and the engineering firm Ove Arup, had not taken into account how the footway would react to all the pedestrians walking on it. When a person walks, lifting and dropping each foot in turn, he or she produces a slight sideways force.

If hundreds of people are walking in a confined space, and some happen to walk in step, they can generate enough lateral momentum to move a footbridge—just a little. Once the footway starts swaying, however subtly, more and more pedestrians adjust their gait to get comfortable, stepping to and fro in synch. As a positive-feedback loop develops between the bridge’s swing and the pedestrians’ stride, the sideways forces can increase dramatically and the bridge can lurch violently.

The investigating engineers termed this process “synchronous lateral excitation,” and came up with a mathematical formula to describe it.

What does all this have to do with financial markets? Quite a lot.

Most of the time, financial markets are pretty calm, trading is orderly, and participants can buy and sell in large quantities.

Whenever a crisis hits, however, the biggest players—banks, investment banks, hedge funds—rush to reduce their exposure, buyers disappear, and liquidity dries up.

Where previously there were diverse views, now there is unanimity: everybody’s moving in lockstep.

“The pedestrians on the bridge are like banks adjusting their stance and the movements of the bridge itself are like price changes,” Shin wrote. And the process is self-reinforcing: once liquidity falls below a certain threshold, “all the elements that formed a virtuous circle to promote stability now will conspire to undermine it.” The financial markets can become highly unstable.

This is essentially what happened in the lead-up to the Great Crunch of 2008.

http://www.newyorker.com/reporting/2009/10/05/091005fa_fact_cassidy?printable=true

Posted in Economics, Financial Crisis | 2 Comments »

Boost employment by raising the minimum wage … has anybody in Washington taken Econ 101 ?

July 13, 2009

The unemployment rate is 9.5%’ including discouraged folks who have stopped looking for work, and it’s approaching 20%; for teenagers, it’s almost 25%, for black teens, it’s almost 40%

The unemployment rate in June for American teenagers was 24%, for black teens it was 38%

With that as backdrop, Congress has scheduled an increase in the minimum wage later this month, taking the minimum wage up over 10% – from $6.55 to $7.25 an hour. The predictable impact: employers are certain to cut back at the low-end – laying off existing workers and not hiring new ones. It’s simple economics.

“Studies that focus on the least-skilled groups [i.e., teens, and welfare moms] provide relatively overwhelming evidence of stronger disemployment effects.”

Proponents argue that millions of workers will benefit from the bigger paychecks, but those who lose their jobs or who never get a job in the first place get a minimum wage of $0.

Economists estimate that the 70-cent per-hour minimum wage hike this month will kill about 300,000 jobs for those between the ages of 16-24.

“But the union economic model that now dominates Washington holds that wages only matter for those who already have jobs. The jobs that are (lost or) never created don’t count.”

Source articles:
http://online.wsj.com/article/SB124657739768489217.html
http://online.wsj.com/article/SB124743988386729701.html#mod=djemEditorialPage

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I ask again, has anybody in Washington taken Econ 101 ?

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Posted in Economics, Employment - Jobs | 1 Comment »

Jumping over the limbo bar …

June 11, 2009

Back on Feb. 16, I suggested a stake in the ground for measuring the success of Team Obama’s stimulus spending –- namely, the 8% to 8.5% unemployment rate that economists were predicting under a “do nothing” scenario.

Well, now that unemployment has blown past 9%, the “saved or created” math is getting pretty creative to say the least … and the shaky argument “it would have been even worse” is taking center stage.

Below is a reprise of the original post.

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Obama’s team sets the stimulus bar at limbo level …”,

Obama says the trillion dollar pork-laden, faux stimulative program will “save or create up to 4 million jobs”.

Last week, I pointed out that “up to” provides mucho definitional cover by itself, but that the serious wiggle room comes from “jobs saved” — a comparison against some fabricated “what if” number.

Well, the fabricated “what if” number is already being planted:

Austan Goolsbee, one of Obama’s chief economic advisers, says he’ll consider the effort successful if the worst scenarios don’t come to pass, “if by the end of 2009 we aren’t looking at GDP numbers that are huge negatives, if unemployment rises to the 8% range rather than the 11% that some are predicting.”

I can’t find any non-Obama paid economist saying 11%. Most economists are saying that the unemployment rate will peak in the range of 8 to 8.5% if we do nothing. Apparently, Team Obama is prepared to declare success (i.e. claim millions of jobs saved) is the stimulus plan does about as well as doing nothing. The jobs saved will be calculated against a disaster scenario that they’ll specify, thank you.

In other words, a victory party is guaranteed …

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Reference for Goolsbee quote:
http://money.cnn.com/2009/02/13/news/economy/easton_economicteam.fortune/index.htm?postversion=2009021310

Original post:
https://kenhoma.wordpress.com/2009/02/16/obamas-team-sets-the-stimulus-bar-at-limbo-level/

Posted in Economics, Financial Crisis, Obama - Promises Made & Kept, Obama Administration | Leave a Comment »

Over-Supply and Under-Demand-: A Tough Equation to Balance

March 25, 2009

Excerpted from BusinessWeek, “What Falling Prices Are Telling Us”, by Peter Coy, February 4, 2009

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Consumer prices in the U.S. fell at an annual rate of nearly 13% in the last three months of 2008. Prices plummeted for all sorts of goods, ranging from clothing to TVs to furniture.

But deflation missed big chunks of the economy. For all of 2008, college tuition and fees increased by 5.8%, followed closely by price increases for hospitals and legal services. Even fees for preparing tax returns are going up.

This inconsistency in prices casts doubt on the usual explanation for the recession, which is that it’s mainly due to the credit crunch and the resulting squeeze on demand. It also hints at why government efforts to fight the downturn have been ineffective so far.

Here’s the big idea: If the lack of demand that the Obama Administration is fighting were the only problem, you’d expect prices to fall across the board. Instead, it appears that supply—that is, oversupply—is at least as important a factor. The sectors in which prices are falling are those plagued by an excess of factories and ways to get goods to consumers, often because of huge investment in plants in China and other developing nations. Most services, in contrast, are not in severe oversupply and have domestic labor as their main ingredient. Consider this: Prices of goods fell 4.1% last year; prices of services rose 3%.

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The government’s deflation-fighting weapons—low interest rates, financial bailouts, and spending packages—can boost demand but do little to deal with oversupply. The world’s productive capacity is simply too big. That means prices need to fall further, or more factories need to close in the U.S. and abroad, or some combination of the two.

A stimulus can ameliorate the downturn, but not prevent continued contractions in the sectors of the economy where global overcapacity is the most extreme. The world is able to make 90 million vehicles a year, but at the current rate of production, it’s making only about 66 million.

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“Pricing power is now deteriorating,” says a Morgan Stanley economist , describing a “vicious circle” of declining output, prices, and profits.

In many goods sectors, prices still aren’t low enough to bring forth enough buyers. There will have to be some combination of falling prices and destruction of productive capacity before supply and demand come back into balance.

Edit by DAF

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Full article:
http://www.businessweek.com/magazine/content/09_07/b4119000357826.htm?chan=top+news_top+news+index+-+temp_top+story

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Posted in Economics, Financial Crisis | 2 Comments »

The “wealth effect” … err, make that the “drop in wealth effect”

March 19, 2009

Excerpted from IBD, ” Wealth Connection”, March 13, 2009

Economy: The Federal Reserve last week announced that Americans’ net worth took an $11.2 trillion hit in 2008 — the biggest on record.

Net worth — basically, the value of everything you own minus the debt you took on to buy it — plunged 9% from 2007’s $64.4 trillion to $51.5 trillion last year. In the fourth quarter alone, Americans lost $5.1 trillion in wealth. Both are records.

This is more than just a paper reduction in wealth. Such a big shift affects our behavior, making us less prone to take risks, less able to borrow, less able to spend and more anxious about the economy.

This is known as the “wealth effect.” When wealth rises, we spend more; when it falls, we spend less. For each $1 change in wealth, spending changes by 5 cents or so, economists say.

Across the economy, such impacts can be enormous. An $11.2 trillion drop in national wealth, for instance, translates into a $560 billion drop in spending — about $1,963 for every American.

This is why economists worry about net worth. If we don’t do something about stemming the decline in wealth and encouraging wealth accumulation, our economy will continue to struggle.

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Full article:
http://www.ibdeditorials.com/IBDArticles.aspx?id=321837955855701

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Uh-oh … Obama & Geithner get failing grades from economists

March 12, 2009

Ken’s Take: Pres. Obama frequently cites broadscale support from economists. Let’s see if that line keeps rolling off the teleprompter.

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Excerpted from WSJ, ” Obama & Geithner Get Low Grades From Economists”, March 12, 2009

In stark contrast with Pres. Obama’s popularity with the public, he and Treasury Secretary Geithner received failing grades for their efforts to revive the economy from participants in the latest WSJ survey.

A majority of the economists polled said they were dissatisfied with the administration’s economic policies.

On average, they gave the president a grade of 59 out of 100, and 42% of respondents rated Mr. Obama below 60.

Mr. Geithner received an average grade of 51. Federal Reserve Chairman Ben Bernanke scored better, with an average 71.

Economists’ main criticism of the Obama team centered on delays in enacting key parts of plans to rescue banks. “They overpromised and underdelivered … The uncertainty is hanging over everyone’s head.”

The economists’ negative ratings mark a turnaround in opinion. In December, before Mr. Obama took office, three-quarters of respondents said the incoming administration’s economic team was better than the departing Bush team. However, Mr. Geithner’s latest marks are lower than the average grade of 57 that former Treasury Secretary Henry Paulson received in January.

Despite the growing criticism elsewhere, the respondents were broadly supportive of the Fed. More than 85% of the economists agreed that the central bank’s proliferating lending programs are well-designed, well-executed and helping the economy. And while grades for Mr. Bernanke remain off of their 2007 highs, the average has stabilized after falling as low as 69 in the November survey.

Amid all the gloom, there is a bright spot: Four-fifths of the economists said now is a good time to buy equities, especially if the investor has a long-term view.

Full article and source data:
http://online.wsj.com/article/SB123671107124286261.html#mod=testMod

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The case for (some) economic optimism …

February 9, 2009

Ken’s Take: With the stock market down and politicos running around saying that the sky is falling, it’s easy to tailspin into pessimism. While everybody feels some worry about job security and older folks fret about retirement … the fact is that more than 9 of 10 folks are still doing pretty well, and there are some signs that things have bottomed out.

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Excerpted from Rasmussen Reports, “Jobs Down, Stocks Up?”, Lawrence Kudlow, Saturday, February 07, 2009

Broad stock indexes are up 15 percent to 20 percent from their November lows. How can this be? Well, the stock market is telling us that the economy’s future is a lot brighter than its past.

For the 92.4 percent, or 135 million workers, still employed, wages now stand nearly 4 percent higher than a year ago. With zero inflation, that’s a real increase in worker purchasing power

The Federal Reserve has pumped almost $600 billion to the money supply to offset credit and asset deflation … a 20 percent annual rate of increase. Increases in the money supply historically kick in (to help the economy) somewhere between six and 12 months. Money growth could well produce the biggest economic surprise this year.

And while the quantity of money is rising significantly, the quality of credit is improving, too. All the credit-fear indicators — from LIBOR all the way out to corporate-bond spreads — have declined substantially.

And, there’s the simple fact that marginal tax rates will not be raised. Obama seems to have shelved that notion — at least for 2009.

So cheaper energy, bundles of new money creation, zero inflation and no tax hikes could very well combine to produce a stronger economy as the year progresses — to the great surprise of the majority of economic pundits.

Full article:
http://www.rasmussenreports.com/public_content/political_commentary/commentary_by_lawrence_kudlow/jobs_down_stocks_up

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Posted in Economics, Financial Crisis | 1 Comment »

The economics that Barack-O inherited … (and other presidents before him)

January 22, 2009

Nice recap by the WSJ. Summary data is below.

For more a clearer image and very cool interactive graphics:
http://online.wsj.com/article/SB123249848926800519.html?mod=testMod#project%3DINHERIT09%26articleTabs%3Dinteractive

click for bigger image

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Feeling pinched these days? Here’s why …

December 16, 2008

Economists estimate households will have lost more than $5 trillion in net worth since the summer of 2007 because of falling home equity and stock prices.

In recent years, households have used their big multiyear wealth gains as a means to afford more debt and as a surrogate form of savings, instead of socking away more of their pay. But by the end of 2008, They are now more dependent on income growth to finance their spending and saving and less so on credit and wealth.

Source: Business Week
http://www.businessweek.com/magazine/content/08_51/b4113010266237.htm

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Ken’s Take: On average, that works out to be about $40,000 per household — or about 80% of median annual household income — i.e. the rough equivalent of an average person being laid of for about a year. Ouch.

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Where McCain & Obama stand on economic issues

November 3, 2008

Source: CNNMoney.com , Oct. 31, 2008
http://finance.yahoo.com/banking-budgeting/article/106069/Your-Money:-McCain-vs.-Obama#1

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The best recap I’ve found — gives Obama some ‘benefits of doubt’, but is generally a factual and balanced presentation of the candidates’ positions. It’s long, but it’s required reading for responsible voters

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Budget Deficit

Now that the government has committed over $1 trillion to stabilize the financial system and economic growth is expected to slow, the country’s growing deficits aren’t something the next president can ignore. Yet neither candidate has adequately addressed what changes he would make to accommodate the new fiscal reality. Both men speak of the need to restore fiscal responsibility while in the same breath promising more tax cuts and proposing spending cuts that are hard to achieve.

Obama

• Enforce budget rules that would require that new spending be paid for by cuts to other programs or new revenue.
• Reduce spending on earmarks to no greater than 2001 levels and require more transparency on such spending.
• Help pay for new proposals by drawing down troops in Iraq war, raising taxes on high-income filers and cutting certain corporate loopholes.
“Once we get through this economic crisis … we’re not going to be able to go back to our profligate ways. We’re going to have to embrace a culture and an ethic of responsibility, all of us, corporations, the federal government, and individuals out there who may be living beyond their means.”

McCain

• Originally pledged to balance budget by 2013. But McCain adviser now says it will take longer.
• Slow growth in Social Security, Medicare and Medicaid spending.
• Eliminate funds for pet projects, known as earmarks.
• Help pay for tax cuts by creating new jobs in the clean energy sector and developing new automotive technologies, which in turn will boost economic growth.
“Government spending has gone completely out of control; $10 trillion dollar debt we’re giving to our kids, a half-a-trillion dollars we owe China. I know how to save billions of dollars in defense spending. I know how to eliminate programs.”

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Economic Crisis Response

Both candidates have proposed measures to help Americans cope with the economic downturn and stock market collapse. McCain’s proposals focus on helping seniors and investors. Obama wants to let savers tap into the retirement plans without early-withdrawal penalties.

Obama

• Temporarily allow penalty-free early withdrawals from IRAs and 401(k)s of up to 15% of the balance but not more than $10,000.
• Temporarily suspend rule that seniors age 70 1/2 take required annual distribution from retirement account.
• Give temporary tax credit of $3,000 in 2009 and 2010 to companies for each new full-time employee it hires in the United States.
• Temporarily eliminate taxes on unemployment benefits.
• Require financial institutions participating in bailout to put a 90-day moratorium on foreclosures for homeowners “acting in good faith.”
• Let federal government lend to state and municipal governments to help counter the budget crunch faced by states due to the mortgage crisis.
“We must move forward, quickly and aggressively, with a middle-class rescue plan that will create jobs, provide relief to families, help homeowners and restore our financial system.”

McCain

• Temporarily suspend rule that seniors age 70 1/2 take required annual distribution from retirement account.
• Tax withdrawals of up to $50,000 from IRAs and 401(k)s at 10% in 2008 and 2009.
• Reduce capital gains tax to 7.5% from 15% for two years.
• Increase amount of capital losses that may be used to offset ordinary income to $15,000 from $3,000 for 2008 and 2009.
• Temporarily eliminate taxes on unemployment benefits.
• Buy bad mortgages and renegotiate loan terms based on current value of home.
• Convert failing mortgages into low-interest, FHA-insured loans.
“…I will help to create jobs for Americans in the most effective way a president can do this — with tax cuts that are directed specifically to create jobs, and protect your life savings.”

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Wall Street

In the wake of the credit crisis, both candidates have stressed the need for greater transparency and imposing capital requirements on financial institutions.

Obama

• Impose liquidity and capital requirements on investment banks.
• Streamline regulatory framework of the financial services sector.
• Create an oversight commission that would advise the president, Congress and regulators on the health of and risks facing financial markets.
• Give Federal Reserve supervisory power over any bank that borrows from it.
“Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform…”

McCain

• Increase capital requirements on financial institutions.
• Remove some of the regulatory, accounting and tax impediments to raising capital.
• Examine how banks and other firms value assets that exacerbated the credit crunch.
• Increase transparency of complex financial instruments.
“Capital markets work best when there is both accountability and transparency. In the case of our current [credit] crisis, both were lacking.”

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Mortgage Giant Rescue

Both candidates supported the federal government takeover of the mortgage insurance giants since they’re central to the housing market.

Obama

• Wants to void any inappropriate windfall payments to outgoing CEOs and senior management.
• Says shareholders should not benefit in takeover.
• Had said companies should either operate as goverment agencies or as private businesses.
“I recognize that intervention is necessary to maintain liquidity for the housing market so that homeowners can continue to get affordable mortgages and homes can be bought and sold in neighborhoods across the country.”

McCain

• Called for reform of corruption at Fannie Mae and Freddie Mac two years ago.
• Wants to clarify and unify regulatory authority of financial institutions, including the mortgage insurers.
“These quasi-public corporations lead our housing system down a path where quick profit was placed before sound finance…And now, as ever, the American taxpayers are left to pay the price for Washington’s failure.

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Mortgage Fraud

Both candidates say they want to go after predatory lenders. Obama introduced the STOP FRAUD Act in the Senate and now it’s a part of his platform. McCain called for creating a task force to investigate criminal wrongdoing in the mortgage lending and securitization industry.

Obama

• Boost funding for law enforcement programs aimed at housing fraud by $40 million.
• Establish new federal criminal penalties for mortgage professionals found guilty of fraud.
• Require lending professionals to report suspicious or fraudulent activity.
• Establish a database of censured or debarred mortgage professionals, so borrowers can easily check the credentials of lenders.
• Establish a standardized estimate of the total annualized cost of a mortgage loan to make it easier for borrowers to compare different loans.
“We must establish stiff penalties to deter fraud and protect consumers against abusive lending practices.”

McCain

• Create a Justice Department task force that punishes individuals or firms that defrauded innocent homeowners or forged loan application documents.
• Task force would also assist state attorneys general investigating abusive lending practices.
• Improve transparency in the lending process so that borrowers know exactly what they are agreeing to.
“Lenders who initiate loans should be held accountable for the quality and performance of those loans and strict standards should be required in the lending process.”

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Jobs and Wages

McCain’s plan for turning around the economy focuses on corporate tax policy, while Obama would take a more activist role that includes increasing wages and spending on public works.

Obama

• Fund federal workforce training programs and direct these programs to incorporate “green” technologies training.
• Raise minimum wage to $9.50 an hour by 2011 and tie future rises to inflation.
• Double federal funding for basic research and make R&D tax credit permanent.
• Set up $60 billion infrastructure investment bank to help fund public works. Also, create a $25 billion emergency Jobs and Growth Fund to fund other infrastructure projects.
• Establish tax credit for companies that maintain or increase the number of full-time workers in America relative to those outside the U.S.
• Give a temporary tax credit of $3,000 in 2009 and 2010 to companies for each new full-time employee it hires in the United States.
• Temporarily eliminate taxes on unemployment benefits.
• Advocate for stronger unionization.
“We will provide incentives to businesses and consumers to save energy and make buildings more efficient. That’s how we’re going to create jobs that pay well and can’t be outsourced.”

McCain

• Spur economy and job growth by cutting corporate tax rate and temporarily lowering current rates on dividends and capital gains.
• Leave minimum wage at $7.25 an hour, which is where current law will take it to by 2009. Opposed to tying future hikes to inflation rate.
• Create tax credit equal to 10% of wages spent on R&D.
• Consolidate federal unemployment programs and reform training programs for job seekers.
• Temporarily eliminate taxes on unemployment benefits.
“We will build a new system, using the unemployment-insurance taxes to build for each worker a buffer account against a sudden loss of income — so that in times of need they’re not just told to fill out forms and take a number.”

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Savings

Obama wants the government to augment low- and middle-income workers’ savings. McCain would help retirees keep their savings.

Obama

• Require employers that don’t offer retirement plans to set up IRA-type accounts.
• Require companies to automatically enroll their employees in 401(k)s or IRAs.
• Provide a federally funded match on retirement savings for families earning below $75,000.
• Temporarily suspend mandatory withdrawals from retirements accounts for senior citizens age 70 1/2 and older.
“Personal saving is at an all-time low. A part of the American dream is at risk.”

McCain

• Require companies to automatically enroll their employees in retirement plans they offer.
• Encourage saving by keeping investment taxes low.
• Temporarily suspend mandatory withdrawals from retirements accounts for senior citizens age 70 1/2 and older.
“As president, I intend to act quickly and decisively to promote growth and opportunity. I intend to keep the current low income and investment tax rates.”

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Driving

Both candidates want to make every gallon count. Government prizes are pivotal to McCain’s plan, while Obama wants to place more stringent requirements on automakers.

Obama

• Double fuel economy standards within 18 years while maintaining current flexibility.
• Offer $7,000 tax credit to buyers of plug-in hybrids.
• Mandate all new cars be flex-fuel capable.
• Provide $4 billion in retooling credits and loans to help domestic manufacturers switch to more fuel-efficient cars.
• Aim to get 1 million 150 mile-per-gallon plug-in hybrids on the roads within six years.
• Support creation of more transit-friendly communities and level employer commuting assistance for driving and public transit.
“I have a plan to raise the fuel standards in our cars and trucks with technology we have on the shelf today — technology that will make sure we get more miles to the gallon.”

McCain

• Raise penalties car companies pay for violating Corporate Average Fuel Economy (CAFE) standards.
• Offer $5,000 tax credit for every customer who buys a zero-emission car.
• Speed introduction of “flex-fuel vehicles” that can run on ethanol blends and gasoline.
• Remove or reduce tariffs on imported ethanol.
• Award $300 million prize to the company that can produce a plug-in hybrid battery technology at 30% of current costs, allowing commercial development of plug-in hybrid cars.
“…Our government has thrown around enough money subsidizing special interests and excusing failure. From now on, we will encourage heroic efforts in engineering, and we will reward the greatest success.”

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Gas Prices

The candidates agree that consumers need help with sky-high fuel bills, but they have different plans for offering relief.

Obama

• Keep gas tax in place.
• Keep ethanol tariff to protect domestic industry.
• Tax oil profits and use the money to help fund $1,000 rebate checks for consumers hit by high energy costs.
• Eliminate oil and gas loopholes.
“I realize that gimmicks like the gas tax holiday and offshore drilling might poll well these days. But I’m not running for president to do what polls well…”

McCain

• Repeal the 54-cents-a-gallon tariff on imported ethanol.
• Eliminate a current tax break for oil companies, but lower corporate taxes across the board.
“The effect [of a gas tax holiday] will be an immediate economic stimulus — taking a few dollars off the price of a tank of gas every time a family, a farmer, or trucker stops to fill up.”

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Fighting Foreclosure

Obama wants the government to step in to help homeowners facing foreclosure. McCain unveiled rescue plan in October debate.

Obama

• Allow troubled homeowners to refinance to a loan insured by the Federal Housing Administration.
• Require any financial institution participating in Treasury’s Troubled Asset Relief Program to put a 90-day moratorium on foreclosures for homeowners “acting in good faith.”
• Create a 10% tax credit for homeowners who do not itemize their taxes.
• Create a $10 billion fund to help victims of predatory loans.
• Create a separate $10 billion fund to help state and local governments maintain critical infrastructure.
• Authorize bankruptcy judges to reduce mortgage principal.
“…If the government can bail out investment banks on Wall Street, then we can extend a hand to folks who are struggling on Main Street.”

McCain

• Buy bad mortgages and renegotiate loan terms based on current value of home. Convert failing mortgages into low-interest, FHA-insured loans.
• Offer of financial assistance to borrowers contingent upon lending reform.
• Provide more funding for community development groups so they can expand their home rescue efforts.
“The United States government will support the refinancing of distressed mortgages for homeowners and replace them with manageable mortgages.”

* * * * *

Personal Taxes

Both candidates favor keeping some or all of the Bush tax cuts in place. Wealthy taxpayers win out under McCain’s plan, while lower-income earners benefit more under Obama’s proposals.

Obama

• Leave all tax cuts in place for everyone except couples making more than $250,000 and single filers making more than $200,000. Those high-income groups would see their top two income tax rates revert to 36% and 39.6% from 33% and 35% respectively.
• Provide $1,000 tax cut for working couples making less than $250,000.
• Introduce other tax breaks for lower and middle-income households.
“We shouldn’t be distorting our tax code to benefit a few powerful interests — we should be insisting that everyone pays their fair share, and when I’m president, they will.”

McCain

• Make 2001 and 2003 tax cuts permanent for everyone.
• Permanently repeal the Alternative Minimum Tax, the so-called “wealth tax” that threatens the middle class.
“I will…propose…a middle-class tax cut — a phase-out of the Alternative Minimum Tax to save more than 25 million middle-class families as much as $2,000 in a single year.”

* * * * *

Taxing Wealth

McCain would apply a lighter hand to taxes paid by the wealthy than would Obama, who wants to make the tax code more progressive.

Obama

• Tax carried interest as ordinary income rather than as an investment gain, thereby subjecting it to much higher tax rates than 15%.
• Freeze the exemption amount of estates free from the estate tax at $3.5 million — where it will be in 2009.
• Freeze top estate tax rate at 45%.
• Raise capital gains and dividend tax rates to 20% from 15% for couples making more than $250,000 and singles making more than $200,000.
“We’ve lost the balance between work and wealth. I will close the carried interest loophole, and adjust the top dividends and capital gains rate…”

McCain

• Preserve the 15% tax rate on carried interest – the cut that private equity and hedge fund managers take when the funds they manage make a profit.
• Increase the amount of money exempt from the estate tax to $5 million.
• Reduce the top estate tax rate to 15% from 55% – where it otherwise will be in 2011 under current law.
• Reduce long-term capital gains rate to 7.5% for 2009 and 2010. Keep short-term capital gains and dividend tax rates where they are.
• Increase the amount of capital losses which can be used in tax years 2008 and 2009 to offset ordinary income from $3,000 to $15,000.
“Sharply raising taxes on investment is a step in the wrong direction for the competitiveness of U.S. capital markets.”

* * * * *

Taxing Business

McCain is generally considered to be more friendly to Corporate America than is Obama, who wants to increase some companies’ tax bite in a few ways.

Obama

• Consider reducing the corporate tax rate in conjunction with closing corporate tax loopholes.
• Make R&D credit permanent.
• Impose windfall profits tax on oil and gas companies.
• Exempt investors from the capital gains tax on their investments in small businesses and startups if they made their investment when a small company was valued below a certain threshold. That threshold has yet to be defined.
• Make renewable production credit permanent.
• Require companies to verify transactions that have benefits other than their tax benefits.
“…We can’t just focus on preserving existing industries. We have to be in the business of encouraging new ones — and that means science, research and technology.”

McCain

• Reduce corporate tax rate to 25% from 35%.
• Make R&D credit permanent, but change formula.
• Repeal several oil company tax breaks.
• Accelerate business expense deductions.
• Broaden corporate base.
“Serious reform is needed to help American companies compete in international markets. I have proposed a reduction in the corporate tax rate from the second highest in the world to one on par with our trading partners.”

* * * * *

Small Business

While both candidates promise to help entrepreneurs with friendly tax policies, they differ sharply on how much of the tab for employees’ health insurance and other benefits they expect fledgling businesses to pick up.

Obama

• Expand the SBA’s direct-lending Disaster Loan Program to extend loans to companies affected by the economic downturn and credit crunch.
• Temporarily eliminate fees and increase the amount guaranteed by the government through the SBA’s 7(a) and 504 programs, which insure lenders against defaults on small business loans.
• Extend the stimulus act’s Section 179 tax deduction, which increased the amount businesses can write off on their taxes for capital investments in new equipment, through 2009.
• Exempt investors from the capital gains tax on their investments in small businesses and startups if they made their investment when a small company was valued below a certain threshold. That threshold has yet to be defined.
• Offer a 50% refundable credit for employee health insurance premiums paid by the employer.
• Freeze estate tax rate at 45% and increase exemption to $3.5 million.
“We’ll work, at every juncture, to remove bureaucratic barriers for small and startup businesses.”

McCain

• Allow small businesses first-year expensing of new equipment and technology purchases.
• Establish a permanent tax credit equal to 10% of what a business spends on wages for research and development.
• Issue tax credits to allow individuals to purchase personal, portable health insurance that can move with them from job to job.
• Reduce the corporate income tax rate to 25% from 35%.
• Cut estate tax rate to 15% and increase exemption to $5 million.
“…I will pursue tax reform that supports the wage-earners and job creators who make this economy run, and help them to succeed in a global economy.”

* * * * *

Free Trade

Both McCain and Obama say they are in favor of free trade. McCain has been a stronger defender of free trade agreements, while Obama has been a more vocal critic.

Obama

• Work to renegotiate NAFTA, the free trade agreement with Canada and Mexico.
• Opposes the free trade agreements with South Korea and Colombia.
• Use trade agreements to spread good labor and environmental standards around the world.
• Supports steep tariffs on imports from China if the Chinese keep their currency from rising.
• Increase and expand assistance offered to workers who lose jobs due to trade and create flexible education accounts to help workers retrain.
“Allowing subsidized and unfairly traded products to flood our markets is not free trade and it’s not fair. We cannot let foreign regulatory policies exclude American products. We cannot let enforcement of existing trade agreements take a backseat to the negotiation of new ones.”

McCain

• Back additional trade agreements and engage in multilateral, regional and bilateral efforts to reduce barriers to trade.
• Supports the free trade agreements negotiated with South Korea and Colombia which are now awaiting Senate approval.
• Would not threaten to impose tariffs on Chinese imports here if China does not allow the value of its currency, the yuan, to rise against the dollar.
• Improve efforts to provide retraining for those who lose their jobs due to imports.
“If I am elected president, this country will honor its international agreements, including NAFTA, and we will expect the same of others. And in a time of uncertainty for American workers, we will not undo the gains of years in trade agreements now awaiting final approval.”

* * * **

Energy Security

The candidates agree on the need to reduce dependence on foreign oil and cut greenhouse gases. Both support a carbon “cap-and-trade” system where companies either pay to pollute or invest in cleaner technology.

Obama

• Work to reduce carbon emissions 80% below 1990 levels by 2050.
• Invest $150 billion in renewable energy over the next 10 years.
• Allow limited amount of offshore drilling.
• Require that 10% of nation’s energy comes from renewable sources by 2013.
• Aim to reduce nation’s demand for electricity 15% by 2020.
“To bring about real change, we’re going to have to make long-term investments in clean energy and energy efficiency.”

McCain

• Work to reduce carbon emissions 60% below 1990 levels by 2050.
• Use mix of free market, government incentives and a lower corporate tax rate to foster renewable energy.
• Lift ban on offshore drilling.
• Commit $2 billion annually to advance clean coal technologies.
• Construct 45 new reactors by 2030 as part of a push to expand nuclear power production.
“…When it comes to energy, what we really need is to produce more, use less, and find new sources of power.”

* * * * *

Health Care

McCain would rely most heavily on individuals and the free market to lower costs, while Obama would rely more on government and mandates to make coverage affordable.

Obama

• Coverage would be mandatory for children.
• Offer an income-based federal subsidy for people who don’t get insurance from an employer or qualify for government plans like Medicaid.
• Create a national network of public and private plans for those without other access to insurance.
• Require employers to either offer a plan, help pay for employee costs or pay into a national health care network.
“…We need to pass a plan that lowers every family’s premiums, and gives every uninsured American the same kind of coverage that members of Congress give themselves.”

McCain

• Coverage would not be mandatory for anyone.
• Change how health care subsidies are taxed.
• Offer refundable tax credit for anyone who buys health insurance.
• Create a federally subsidized state-administered program to offer coverage for low-income people.
“I’ve made it very clear that what I want is for families to make decisions about their health care, not government…”

* * * * *

Medicare

Rising health care costs are pushing Medicare toward an unsustainable long-term deficit nearly 5 times that of Social Security. Both candidates say their efforts to reduce health care costs will help stabilize Medicare. What few Medicare proposals they’ve made aren’t sufficient to address the shortfall, health care experts say.

Obama

• Would let government negotiate for Part D drug prices.
• Would increase use of generic drugs in Medicare.
• Wants to close the coverage gap known as the “doughnut” hole in Part D for reimbursement of prescription drugs.
• Favors eliminating subsidies paid to private Medicare Advantage plans.
• Wants to legalize importation of some prescription drugs.
“As president, I will reduce costs in the Medicare program by enacting reforms to lower the price of prescription drugs, ending the subsidies for private insurers in the Medicare Advantage program and focusing resources on prevention and effective chronic disease management.”

McCain

• Wants wealthy people who are enrolled in the Part D drug coverage program to pay more.
• Wants to reform the payment system so health care providers don’t get paid when medical errors or mismanagement occurs.
• Favors importing low-cost prescription drugs from Canada.
“People like Bill Gates and Warren Buffett don’t need their prescriptions underwritten by taxpayers. Those who can afford to buy their own prescription drugs should be expected to do so.”

* * * * *

Social Security

To help shore up the system, McCain favors individual accounts and reducing benefit growth. Obama prefers to raise taxes.

Obama

• Opposes individual investment accounts.
• Against raising retirement age.
• Favors increasing the amount that workers making $250,000 or more pay into the system. Considering plan to tax income over $250,000 at between 2% and 4% – half of which would be paid for by the employee and half by the employer.
“We will not privatize Social Security, we will not raise the retirement age, and we will save Social Security for future generations by asking the wealthiest Americans to pay their fair share.”

McCain

• Supplement Social Security benefits with individual investment accounts.
• Prefers slowing the growth in benefits to raising taxes.
“…You have to go to the American people and say…we won’t raise your taxes. We need personal savings accounts, but we [have] got to fix this system.”

* * * * *

Bankruptcy

Obama wants to reform the bankruptcy process and has proposed changes to help those in financial distress. As a Senator, McCain voted in favor of legislation aimed at curbing the growing number of bankruptcy filings.

Obama

• Fast-track bankruptcy process for military families.
• Help seniors facing bankruptcy keep their home.
• Put pension promises higher on list of debts a bankrupt employer must pay.
• Amend bankruptcy laws to protect people trapped in predatory home loans.
“I fought against a bankruptcy reform bill in the Senate that did more to protect credit card companies and banks than to help working people. I’ll continue the fight for good bankruptcy laws as President.”

McCain

• Backed 2005 legislation that imposed new costs on those seeking bankruptcy protection.
The law, which Obama opposed, passed the Senate with Democratic support in 2005.

* * * * *

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The runaway train and other musings …

October 31, 2008

Some things to think about ….

* * * * *

“Whoever is elected Tuesday, his freedom in office will be limited. Mr. Obama is out of money and Mr. McCain is out of army, so what might be assumed to be the worst impulses of each — big spender, big scrapper — will be circumscribed by reality.”

“For Mr. Obama, whose mind tends, as intellectuals’ minds do, toward the abstract, it all seems so . . . abstract. And cold. And rather suggestive of radical departures.”

From WSJ, Obama and the Runaway Train, Oct. 31, 2008
http://online.wsj.com/article/SB122539802263585317.html

* * * * *

“Bush’s failure should not be counted as a failure of markets or capitalism. And even if it were, history shows us that the failures of capitalism are a lot more fun than the absence of capitalism.”

“You know, once upon a time, the stated purpose of taxation was to fund public needs — such as schools and roads — assist those who could not help themselves, defend our security and freedom, and yes, occasionally offer bailouts to sleazy fat cats.

Obama is the first major presidential candidate in memory to assert that taxation’s principal purpose should be redistribution.

The proposition that government should take one group’s lawfully earned profits and hand them to another group — not a collection of destitute or impaired Americans, mind you, but a still-vibrant middle class — is the foundational premise of Obama’s fiscal policy.”

From “If It Redistributes Like a Duck…”, David Harsanyi,
October 31, 2008
http://www.realclearpolitics.com/articles/2008/10/if_it_redistributes_like_a_duc.html

* * * * *

“McCain wants to free up health insurance by beginning to sever its debilitating connection to employment — a ruinous accident of history (arising from World War II wage and price controls) that increases the terror of job loss, inhibits labor mobility and saddles American industry with costs that are driving it (see: Detroit) into insolvency.”

From McCain for President, Part II, Charles Krauthammer, October 31, 2008
http://www.realclearpolitics.com/articles/2008/10/neither_candidate_an_economic.html

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Is that a bullseye on the back of investors ?

October 31, 2008

Excerpted from US News & World Report, Why Democrats Will Target the Investor Class in 2009, James Pethokoukis, October 30, 2008

* * * * *
There are at least two pretty effective ways to turn someone into a Republican: (1) get them married with kids and (2) get them to invest in the stock market.

That’s why (there) may well bring a concerted and all-out effort by the Obama administration and a Democratically dominated Congress to turn the generally pro-Republican Investor Class into an endangered class by, among other tactics, raising investment taxes and ending the tax preferences for 401(k)’s, IRAs, and other retirement accounts.

Here is the emerging battle plan for Operation Investor Class Rollback:

1) Hike Investment Taxes. Obama wants to raise capital gains taxes even though he has kinda, sorta admitted that it might be bad for the economy and might actually decrease tax revenue to the government. For now, he’s talking about raising the highest cap gains rate by one third to 20 percent, though earlier in the campaign, he floated pushing it as high as 28 percent, a near doubling. With the next administration facing a trillion dollar budget deficit—maybe more—there will certainly be pressure to raise taxes to higher levels than now being suggested.

2) Eliminate 401(k)’s, IRAs, and other retirement plans. Democrats in the House are now talking openly about the longtime liberal dream of repealing the tax advantages of putting money into a 401(k) plan or other tax-advantaged retirement account. In place of 401(k) plans, they would have workers transfer their dough into government-created “guaranteed retirement accounts” with a 3 percent real return.

Not only would removing the preferential tax treatment of these vehicles raise investment taxes by $100 billion a year and affect Americans making less than $100,000, it would surely prompt many Americans, already shell-shocked by the market’s recent losses, to flee stocks. All this ignores the fact that there are trillions of dollars in American retirement accounts, and abandoning the higher-returning stock market at a probable bottom is classic financial foolishness.

3) Replace private capital with public capital. But wouldn’t a weak stock market hurt the economy by making it tougher to raise investment capital and lessen the return on risk? Surely, it would. But Obama is planning hundreds of billions of dollars of government “investment” in cutting-edge technology, particularly in the energy and healthcare sectors. Now, the private VC industry is already pouring billions into alternative energy, but Obama thinks that’s not enough and wants Uncle Sam to get in on the action at taxpayer expense.

* * * * *

Bottom line: All this makes smart political sense for Democrats. See, since the mid-1960s, stock ownership in the United States has risen from 10 percent of households to around 50 percent. And that growing Investor Class, a term coined and popularized by CNBC commentator and host Lawrence Kudlow, has helped nudge America evermore to the right.

But now if the Democrats control both the White House and Capitol Hill, look for them to move hard in the other direction, from an Ownership Society to a Government Owns It Society that would perhaps nudge America back to the left.

* * * * *
Full article:
http://www.usnews.com/blogs/capital-commerce/2008/10/30/why-democrats-will-target-the-investor-class-in-2009.html?s_cid=rss:capital-commerce:why-democrats-will-target-the-investor-class-in-2009

* * * * *

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AMS: Prius Prices Jacked Up … Surprised?

October 30, 2008

Encore presentation: Originally posted July 31, 2008.

* * * * *

Excerpted from the WSJ :”Patience Pays When Shopping for a Hybrid” July 30, 2008;

When gasoline prices hit $4 a gallon … demand for smaller cars — hybrids and Priuses in particular — soared … the wait for the popular hybrid has grown to roughly three months since May, and prices have climbed steeply, too.

The Prius’s gas mileage averages in the 45-miles-per-gallon range; that’s impressive, but the base price, following a $400 increase in May and a $500 jump that goes into effect Friday, is fairly steep … if your main goal is to save money by buying less gasoline.

Next month, the basic Prius will start at $22,720. That’s more than … other reasonably fuel-efficient sedans, like the Toyota Camry, Honda Civic, Toyota Corolla, Nissan Altima or Ford Focus.

The (dealer) price has shot up, too … the average Prius now sells for $1,000 to $2,000 above the manufacturer’s suggested retail price.

It’s worth calculating your fuel savings to see how long it will take to make up the price difference. [See earlier post Hybrid Cars – Tough Sell]

Toyota … sold about 175,000 of the cars to the U.S. last year … and expects to offer about the same number this year, largely because it can’t get enough batteries and other components to boost production.

For full article:
http://online.wsj.com/article/SB121738122995795557.html

* * * * *

Thanks to MSB MBA alum Justin Bates for the heads-up

* * * * *

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This administration and Congress will be remembered like Herbert Hoover …

October 29, 2008

So says Art Laffer (of Laffer Curve fame) in the WSJ: The Age of Prosperity Is Over , Art Laffer, Oct.27, 2008.

Here are some snippets. Full article (link below) is worth browsing.

* * * * *
Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent.

* * * * *

When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

* * * * *
Taxpayers had nothing to do with either side of (toxic) mortgage transactions. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers.

* * * * *

Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

* * * * *
The government doesn’t create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

* * * * *
Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP.

* * * * *

The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP.

* * * * *
Giving more money to people when they fail and taking more money away from people when they work doesn’t increase work.

* * * * *
An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output.

Just look at the era beginning with President Reagan’s tax cuts, Paul Volcker’s sound money, and all the other pro-growth, supply-side policies.

Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the “retirement test” for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined).

* * * * *

Whenever people make decisions when they are panicked, the consequences are rarely pretty.

For example, Jimmy Carter’s emergency energy plan, included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump. The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market.

* * * * *
Full article:
http://online.wsj.com/article/SB122506830024970697.html

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Reprise: Under Obama, Tax Payers Will be a Minority !

October 28, 2008

Note: This analysis was originally posted on July 31, 2008. It’s the post that has gotten the most hits, and the topic is ‘hot’ this week on the talk shows. So, here’s a flashback .
..

* * * * *

Despite the drumbeat of warnings from various sources, the prospects that a minority of voting age Americans will be paying Federal income taxes under the Obama tax plan doesn’t seem to arouse much visible public anxiety.

Why?

First, for those in the emerging majority that won’t pay any income taxes – or may even be getting government checks for tax credits due – the deal is almost too good to be true. To them, Obama’s plan must make perfect sense. So, why rock the boat?

Second, some people argue that low-earning people who don’t pay income taxes shoulder a regressive payroll tax burden to cover Medicare and Social Security. Yeah, but these programs – which are most akin to insurance or forced savings plans — offer specific individual benefits that are directly linked to each wage earner’s contributions.and the benefits phase down quickly as qualifying income increases. That is, they’re not as regressive as many people argue.

Third, most of the energetic criticism of Obama’s plan has centered on its redistribution intent — taking over $130 billion of “excess” income from undeserving rich people, and giving it directly to those who earn less and need it more.

Fourth, most folks just don’t believe that the numbers will really shift enough to create a voting majority of citizens who don’t pay income taxes. They’re wrong. Very wrong.

Here are the numbers … and why they should bother you.

* * * * *

Today, 41% of voting age adults don’t pay Federal income taxes

Based on the most recent IRS data, slightly more than 200 million out of 225 million voting age Americans filed tax returns. That means that 25 million adults – presumably low income ones – didn’t file returns and, of course, didn’t pay any income taxes. See notes [1] to [4] below

Of the 200 million voting age filers, approximately 68 million (33% of total filers) owed zero income taxes or qualified for refundable tax credits (i.e. paid negative income taxes). [5]

Add those 68 million to the 25 million non-filers, and non-payers already total 93 million – 41% of voting age adults.

* * * * *

Obama’s Estimates – Make that 49%
Not Paying Federal Income Taxes

Obama says (on his web site) that he will give tax credits up of $1,000 per family ($500 per individual) that will “completely eliminate income taxes for 10 million Americans”. And, he says that he will “eliminate income taxes for 7 million seniors making less than $50,000 per year.” [6]

Taking Obama’s estimates at face value, the incremental 17 million that he intends to take off the income tax rolls will push the percentage of non-payers close to 49% of voting age Americans — within rounding distance to a majority. [7]

* * * * *

And, Obama’s estimates are probably low,
so make the number 55% (or higher)

Since Obama’s basic proposal is for tax credits ($500 per person or $1,000 per family) – not simply deductions from Adjusted Gross Income (AGI) — they will have a multiplier impact on the amount of AGI that tax filers can report and still owe no taxes.

For example, a childless married couple that files a joint return can currently report about $17,500 in Adjusted Gross Income (AGI) and owe no income taxes. [8]

Under the Obama Plan, that couple’s zero-tax AGI is bumped up to $27,500 since their new $1,000 tax credit covers the 10% tax liability on an additional $10,000 of AGI. And, married couples filing jointly can keep adding about $10,000 to their zero-tax AGI for each qualifying dependent child that they claim. [9]

click table to make it bigger

Based on the 2006 IRS data, approximately 25 million tax returns were filed that reported AGI less than $27,500 (the post-Obama zero-tax AGI) and required that some income taxes be paid. [10]

Assuming that 45% of those were for couples filing jointly, they represent over 22 million adults. For sure, these 22 million will come off the tax rolls — and they alone will be enough to create a non-taxpayer majority (51% of voting age adults),

click to make table bigger

And, there are more folks being pushed off the tax rolls. About 4.7 million childless individuals earn less than $13,750 (the post-Obama zero-tax AGI for childless individuals), and currently pay some Federal income taxes. This group will shift to non-payer status.

So would several million joint filers who can take advantage of the Child Tax Credit to report more than $27,500 and not pay Federal income taxes.

And, some portion of the 7 million Seniors that Obama says will have their taxes eliminated — that is the Seniors couples earning more than $27,500 (but less than $50,000) — and Senior individuals earning more than $13,750 (but less than $50,000).

So, post-Obama, the percentage of non-taxpayers will easily exceed 55% of voting age adults — a solid majority. It won’t even be close.

* * * * *

The Bottom Line – Why You Should Worry

An income tax paying minority of voting age adults isn’t just a possibility. Under Obama’s plan, it’s a virtual certainty. Based on the hard numbers, Obama’s plan will create a new majority — a powerful voting block: non-tax payers. UH-OH.

Again, for those in the emerging majority that won’t pay any income taxes – or may even be getting government checks for tax credits due – the deal is almost too good to be true. To them, Obama’s plan must make perfect sense. Count on their perpetual support for the plan.

But for those in the new minority, watch out if the new majority decides that more government services are needed, or that $131 billion in income redistribution isn’t enough to balance the scales.

The Tax Foundation — a nonpartisan tax research group – has repeatedly warned that “While some may applaud the fact that millions of low- and middle-income families pay no income taxes, there is a threat to the fabric of our democracy when so many Americans are not only disconnected from the costs of government but are net consumers of government benefits. The conditions are ripe for social conflict if these voters begin to demand more government benefits because they know others will bear the costs.” http://www.taxfoundation.org/research/show/1111.html

* * * * *

Sources & Notes

[1] The Census Bureau reported 217.8 million people age 18 and over; as of July 1, 2003.
http://www.census.gov/Press-Release/www/releases/archives/population/001703.html
http://www.census.gov/popest/national/files/NST-EST2007-alldata.csv

[2] The IRS reported 138.4 million personal tax returns filed in 2006.
http://www.irs.gov/pub/irs-soi/06in11si.xls

[3] The IRS reported that in 2006, approximately 45% of filed returns were by married couples filing jointly (i.e. 2 adults per return); 55% for individual filers (including ‘married filing separately’ and ‘head of household’). http://www.irs.gov/pub/irs-soi/06in36tr.xls

[4] Calculation: 138.4 million returns times 1.45 (adults per return) equals 200.7 million adults represented on filed returns

[5] http://www.irs.gov/pub/irs-soi/06in01fg.xls http://ftp.irs.gov/pub/irs-soi/06inplim.pdf

[6] http://www.barackobama.com/issues/economy/#tax-relief

[7] Analytical note: 93 million plus 17 million equals 110 million divided by 225 million equals 49%.

[8] Analytical note: $17,500 less a $10,700 standard deduction, less 2 exemptions at $3,400 each, equals taxable income of zero – so no federal income taxes are due.

[9] Analytical note: $27,500 less a $10,700 standard deduction, less 2 exemptions at $3,400 each, equals taxable income of $10,000, which at a 10% rate is a $1,000 tax liability that gets offset by the $1,000 Obama credit, reducing the tax liability to zero.

[10] http://www.irs.gov/pub/irs-soi/06in11si.xls

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MUST READ: The NY Times called the mortgage crisis … September 30, 1999

September 29, 2008

Excerpted from NY Times: “Fannie Mae Eases Credit To Aid Mortgage Lending”, Steven Holmes, September 30, 1999

* * * * *

September 30, 1999

In a move that could help increase home ownership rates among minorities and low-income consumers, Fannie Mae is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action … will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans.

These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates — anywhere from three to four percentage points higher than conventional loans.

* * * * *

Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

”Fannie Mae has expanded home ownership for millions of families in the 1990’s by reducing down payment requirements,” said Franklin D. Raines, Fannie Mae’s chairman and chief executive officer. ”Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

* * * * *

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.

”From the perspective of many people, including me, this is another thrift industry growing up around us,” said Peter Wallison a resident fellow at the American Enterprise Institute. ”If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

* * * * *

Fannie Mae, the nation’s biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

* * * * *

Full article:
http://query.nytimes.com/gst/fullpage.html?res=9C0DE7DB153EF933A0575AC0A96F958260&sec=&spon=&pagewanted=1

* * * * *

Thanks to Chris Wargo, MSB MBA ’05 for the heads-up

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Where do the poor live ?

September 26, 2008

Interesting info from the Census Department :

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"Paulson’s Folly" or Greatest Deal since "Seward’s Folly") ?

September 25, 2008

* * * * *

Ken’s POV: I never underestimate the government’s core incompetence — its bungling inefficiency — and, philosophically, I hate to see anything get nationalized or socialized. Nonetheless, I’m becoming a believer in the favorable economics of the Paulson Plan. This article is the crux of the reason why.

* * * * *

Excerpted from WSJ: “The Paulson Plan Will Make Money For Taxpayers”, Andy Kessler, Sept 25, 2008

Mr. Kessler, a former hedge-fund manager, is the author of “How We Got Here” (Collins, 2005).

* * * * *

There is a saying on Wall Street that goes, “The market can stay irrational longer than you can stay solvent.”

* * * * *

Warren Buffett is now hoping to make big money on Goldman Sachs.

My analysis suggests that Treasury Secretary Henry Paulson (a former investment banker, no less, not a trader) may pull off the mother of all trades, which could net a trillion dollars and maybe as much as $2.2 trillionfor the United States Treasury.

* * * * *

Wall Street’s bread-and-butter business of investment banking and trading stocks stopped making much money years ago. So investment banks took their enormous capital and at first packaged yield-enhanced, subprime mortgage loans into complex derivatives such as collateralized debt obligations (CDOs). Eventually and stupidly, these institutions owned them for themselves — lots of them, often at 30-to-1 leverage. The financial products were made “safe” by insurance products known as credit default swaps, a credit derivative from companies such as AIG. When housing turned down, the mortgages and derivatives were worth a lot less and no one would lend Wall Street money anymore.

Then the piling on started. Hedge funds could short financial stocks and then bid down the prices of CDOs stuck on Wall Street’s balance sheets. This was pretty easy to do in an illiquid market. Because of the Federal Accounting Standards Board’s mark-to-market 157 rule, Wall Street had to write off the lower value of these securities and raise more capital, diluting shareholders. So the stock prices would drop, which is what the shorts wanted in the first place. It was all legit.

* * * * *

In a weird twist, it’s the government that is set up to win the prize.

Here’s how: As short-term financing dried up, Fannie Mae and Freddie Mac’s deteriorating financials threatened to trigger some $1.4 trillion in credit default swap payments that no one, including giant insurer AIG, had the capital to make good on. So Treasury Secretary Henry Paulson put Fannie and Freddie into conservatorship. This removed any short-term financing hassle. He also put up $85 billion in loan guarantees to AIG in exchange for 80% of the company.

Taxpayers will get their money back on AIG. Fannie and Freddie are a gold mine. For $2 billion in cash up front and some $200 billion in loan guarantees so far, the U.S. government now controls $5.4 trillion in mortgages and mortgage guarantees.

Fannie and Freddie each own around $800 million in mortgage loans, some of them already at discounted values. They also guarantee the credit-worthiness of another $2.2 trillion and $1.6 trillion in mortgage-backed securities. Held to maturity, they may be worth a lot more than Mr. Paulson paid for them. They’re called distressed securities for a reason.

* * * * *

Now Mr. Paulson is pitching Congress for $700 billion or more to buy distressed loans and CDOs from the rest of Wall Street, injecting needed cash onto balance sheets so that normal loans for economic activity can be restored. The trick is what price he will pay.

Firms will haggle, but eventually cave — they need the cash. I am figuring Mr. Paulson could wind up buying more than $2 trillion in notional value loans and home equity and CDOs for $700 billion.

* * * * *

It’s not without risk, but the Feds, with lots of [“patient capital”] and levers, can and will pump capital into the U.S. economy to get it moving again.

Future heads of Treasury and the Federal Reserve will be growth advocates — in effect, “talking their book.”
A stronger U.S. economy, with its financial players having clean balance sheets, will become a safe haven for capital.
Europe is threatened by an angry Russian bear.
The Far East, especially China, has its own post-Olympic banking house of cards of non-performing loans to deal with.
Interest rates will tick up as the economy expands — a plus for the dollar.
A stronger economy driven by industry instead of financials means more jobs, less foreclosures and higher held-to-maturity payouts on this Fed loan portfolio.

* * * * *

My calculations, which assume 50% impairment on subprime loans, suggest it is possible, all in, for this portfolio to generate between $1 trillion and $2.2 trillion — the greatest trade ever.

The next president gets a heck of a windfall. In the spirit of Secretary of State William Seward’s purchase of Alaska for $7 million in 1867, this week may be remembered as Paulson’s Folly.

Full article:
http://online.wsj.com/article/SB122230704116773989.html

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The Fallacy of 'Green Jobs'

September 23, 2008

Excerpted fro”The Fallacy of ‘Green Jobs'”, by John Stossel,
September 10, 2008

Obama has a great twofer pitch: “green jobs.” … In one fell swoop he can promise to end unemployment and fix and save the planet from climate change.

“I’ll invest $150 billion over the next decade in affordable, renewable sources of energy — wind power and solar power and the next generation of biofuels; an investment that will lead to new industries and five million new jobs that pay well and can’t ever be outsourced,” (http://tinyurl.com/64szf7).

Politicians always promise that their programs will create jobs. The fallacy is the same in every case: Even if the program creates jobs building bridges or windmills, it necessarily prevents other jobs from being created. This is because government spending merely diverts money from private projects to government projects.

Governments create no wealth. They only move it around while taking a cut for their trouble. Overlooking this fact is known as the broken-window fallacy (http://tinyurl.com/ydasa2). The French economist Frederic Bastiat pointed out that a broken shop window will create work for a glassmaker, but that work comes only at the expense of the cook or tailor the shopkeeper would have patronized if he didn’t have to replace the window.

Creating jobs is not difficult for government officials. Pharaohs created thousands of jobs by building pyramids. Our government could create jobs by paying people to dig holes and then fill them up. Would actual wealth be created? Of course not. It would be destroyed. It’s like arguing the hurricanes create jobs. After all, the destruction is followed by rebuilding. But does anyone seriously believe that replacing destroyed buildings creates wealth?

* * * * *

According to his web site:”Obama will strategically invest $150 billion over 10 years”

Note that word “strategically.” It is there to suggest that Obama knows how best to “invest” the $150 billion. (Of course it is not his money, and he’ll have none of his own at risk, so from his perspective, it won’t really be investment.) But how does he know that the things he names ought to get the money?

Politicians have a lousy record trying to make “strategic investments.” Jimmy Carter’s Synthetic Fuels Corporation cost taxpayers at least $19 billion but failed to give us alternative fuels (http://tinyurl.com/5ex7v5).

Investing is about predicting the future, and the future is always uncertain … People who have their own money at risk — who face a profit-and-loss test and possible bankruptcy — are much better predictors than people who play with other people’s money. Just compare North and South Korea.

Mistakes are inevitable. Some investments will be errors. Mistakes in the competitive market tend to be on a comparatively small scale. If one company invests in plug-in hybrids and it goes bust, only a relatively few people suffer. The assets of the bankrupt firm pass into more capable hands.

When government makes a mistake, the bureaucracy can’t go bankrupt. Instead, failure twill justify increased appropriations.

If “green jobs” make so much sense, the market will create them. They will be created by private entrepreneurs and venture capitalists. The best ideas will rise to the top, and green energy will gradually replace coal and oil.

If politicians were serious about creating jobs and cleaner technologies, they would step aside and let the free market go to work.

* * * * *

Full article:
http://www.realclearpolitics.com/articles/2008/09/green_jobs.html
Copyright 2008, Creators Syndicate Inc.

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Referenced web site worth browsing:
Foundation for Economic Educatiob
http://www.fee.org/

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Who is walking the talk ?

September 23, 2008

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Note: Last Friday, BHO was making a big point of the fact that women get paid less than men for comparable jobs. An injustice, for sure. But, guess what …

* * * * *

Excerpted from DickMorris.com

7 of Barack Obama’s top 20 Senate staff positions are filled by women — they are paid — on average — 83 cents for each dollar his male staffers are paid

John McCain has 13 women among his top 20 staffers — they are paid — on average — $1.04 for each dollar he pays to his men.

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Note: I haven’t verified this info.

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Some Simple Arithmetic – Unemployment

September 19, 2008

The “soaring” unemployment rate is about 6%.

There are roughly 225 million adult citizens in the U.S.

So, about 210 million are employed; 15 million aren’t

Frequent reports: 10 to 20 million illegal aliens in the country.

Coincidence?

* * * * *

I know, I know: they’re in crummy jobs that citizens don’t want.

So, 15 million would rather be unemployed ? Hmmm.

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Lessons from the financial crisis

September 17, 2008

Excerpted from WSJ: “We Need Better-Capitalized Institutions”, Sept. 17, 2008

* * * * *

That which does not kill us makes us stronger. Nietzsche may not have been aware of credit default swaps and subprime mortgages when he formulated that worldview, but so it will be with the current crisis. Like the 12 steps of recovery, the financial system is now purging itself of years of excess. How sad that it should have to come at such enormous human and institutional cost.

* * * * *
Important Lessons

First, these losses were foremost a consequence of poor investment decisions. These decisions, driven by a virulent new strain of irrational exuberance, caused theoretically highly sophisticated firms to put hundreds of billions of dollars of poorly conceived and inadequately collateralized securities onto their balance sheets.

In a sense, that’s no different than other bouts of investing euphoria that ended badly, like the dot-com bubble. So for investors, this episode is an important reminder to stay true to conviction rooted in dispassionate analysis and avoid being swept along with the hype, even when it seems painful to watch others making money that you’re not.

* * * * *
Second, risk management was equally poor. These financial institutions are (or were) in many ways giant hedge funds, except that they used far more leverage than almost any hedge fund (and made worse investments).

Stunningly, even with all the warning signs, the most fragile institutions shirked from sufficiently tough medicine — taking in ample new capital, selling off divisions, even merging their firms — that might have preserved value for their shareholders.

* * * * *
Third, the systemic failure extended far beyond government oversight. Apart from experienced and highly paid in-house management, these institutions were each watched over by a flotilla of outside auditors, credit and equity analysts, and rating agencies. Virtually none of them accurately gauged the dangers.

* * * * *

The market is loudly signaling that it wants larger, better-capitalized financial institutions. Even the vaunted Goldman Sachs and the venerable Morgan Stanley may prove too small to remain independent.

For those which emerge, both management and oversight will need to be far tighter. That will be reinforced by a dramatically changed business model.

Instead of highly leveraged banks providing a commodity — money — at razor thin margins, we will have less leveraged institutions providing a scarce resource — money — at more profitable pricing.

* * * * *

Full article:
http://online.wsj.com/article/SB122161101467645853.html

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The sky is falling … or is it ?

September 17, 2008

Excerpted from Washington Post: “Quit Doling Out That Bad-Economy Line”, Donald Luskin, September 14, 2008

* * * * *

In the past two months, the Post alone has written no fewer than nine times, in news stories, columns and op-eds, that key elements of the economy are the worst they’ve been “since the Great Depression.”

That diagnosis has been applied twice to the housing “slump” and once to the housing “crisis,” to the “severe” decline in home prices, to the “spike” in mortgage foreclosures, to the “change” in the mortgage market and the “turmoil” in debt markets, and to the “crisis” or “meltdown” in financial markets.

* * * * *

Overall, the pessimists are up against an insurmountable reality: In the last reported quarter, the U.S. economy grew at an annual rate of 3.3 percent, adjusted for inflation. That’s virtually the same as the 3.4 percent average growth rate since — yes — the Great Depression.

* * * * *

Why, then, does the public appear to agree with the media? A recent Zogby poll shows that 66 percent of likely voters believe that “the entire world is either now locked in a global economic recession or soon will be.” Actually, that’s a major clue to what started this thought-contagion about everything being the worst it has been “since the Great Depression”: Politics.

* * * * *

The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today’s delinquency rate is only a little higher than the level seen in 1985.

According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure.

Moreover, MBA data show that today’s foreclosures are concentrated in that small fraction of U.S. homes financed by subprime mortgages. Such homes make up only 12 percent of all mortgages, yet account for 52 percent of foreclosures.

* * * * * *

It is flat-out wrong … that “the personal savings rate is now the lowest it’s been since the Great Depression.” The latest rate, for the second quarter of 2008, is 2.6 percent — higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton’s presidency.

* * * * *

According to the latest report from the National Association of Realtors, the median price of an existing home is up 8.5 percent from the low of last February.

And according to the U.S. Census Bureau, the median price of a new home is up 1.3 percent from the low of last December. Home prices may not be at all-time highs — and there are pockets of continuing decline in some urban areas — but overall they’ve clearly stopped going down and have started to recover.

* * * * *

According to the FDIC, there have been a total of 13 bank failures in 2007 and so far into 2008. There were 15 in 1999-2000, the climax of the celebrated era of Clintonian prosperity. And in recession-free 1988-89, there were 1,004 failures — almost an order of magnitude more than today. Since the Great Depression, the average number of bank failures each year has been 94.

* * * * *

From all-time highs last October, the S&P 500 has fallen 20 percent. But that’s nothing by historical standards. Stocks have often fallen more than that over comparable spans of time. Even the present 20-percent loss isn’t what it seems. The damage has been heavily concentrated in the financial sector — banks, investment firms and mortgage companies. If you exclude the financial sector, stocks are off 14.8 percent.

* * * * *

Whatever the political outcome this year, hopefully this will prove to be yet another instance of that iron law of economics and markets: The sentiment of the majority is always wrong at key turning points. And the majority is plenty pessimistic right now. That suggests that we’re on the brink not of recession, but of accelerating prosperity.

Full articel:
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/12/AR2008091202415_pf.html

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Median income for intact families at all time high …

September 16, 2008

Excerpted from WSJ: “New Evidence on Taxes and Income”, ARTHUR LAFFER and STEPHEN MOORE, September 15, 2008

* * * * *

The new Census Bureau data on income and poverty reveal that many of the economic trends in this country are a lot more favorable than America’s detractors seems to think.

In 2007, overall real median family income increased to $50,233, up $600 from 2006. The real median income for intact families — mother and father in the home — rose to $78,000, an all-time high.

* * * * *

Although incomes fell sharply in the U.S. after the dot-com bubble burst in 2000 (and still haven’t fully recovered), these latest statistics reflect a 25-year trend of upward economic mobility.

To be sure, there has been a massive amount of wealth created in America over the last 25 years. But tax rates were cut dramatically across the income spectrum, for rich and poor alike. The results?

When all sources of income are included — wages, salaries, realized capital gains, dividends, business income and government benefits — and taxes paid are deducted, households in the lowest income quintile saw a roughly 25% increase in their living standards from 1983 to 2005. This fact alone refutes the notion that the poor are getting poorer. They are not.

* * * * *

Income gains over the last 30 years have been systematically understated due to several factors. These include:

– Fall in people per household. The gains in household income undercount the actual gains per person, because the average number of people living in low-income households has been shrinking. On a per capita basis, the real income gain for low-income households was 44% from 1983 to 2005, about 22% from 1983 to 1992 and about 18% from 1992 to 2002. These are excellent numbers by any measure.

– Earned income tax credit effect. The Earned Income Tax Credit (EITC) is a government payment to low income people who work. Over time the EITC has multiplied the number of poor households that fill out tax forms each year and are thus counted in government income statistics. That’s because to be eligible to receive the refundable EITC, a tax return must be filed.

– We are now statistically counting more poorer families today than we used to. This is a major reason that median and poor household income gains appear to be a lot smaller than they have been in reality. Official tax return data show that in 1983, 19% of returns had zero tax liability; that percentage has climbed steadily, reaching 33% in 2005. (The Tax Policy Center estimates that in 2008 nearly 40% of filers will have no income tax liability.)

– Income mobility. In the U.S., people who had low incomes in 1983 didn’t necessarily have incomes as low a decade later. People in this country have long moved up over time, and this income mobility continues to be true. While some people do remain in the lowest income group, they are the exception.

* * * * *

What is also striking about the data is that the poor today are, in general, not the same people who were poor even a few years ago.

For example, the new Census data find that only 3% of Americans are “chronically” poor, which the Census Bureau defines as being in poverty for three years or more. Many of the people in the bottom quintile of income earners in any one year are new entrants to the labor force or those who are leaving the labor force.

* * * * *

America is still an opportunity society where talent and hard work can (almost always) overcome one’s position at birth or at any point in time. Perhaps the best piece of news in this regard is the reduction in gaps between earnings of men and women, and between blacks and whites over the last 25 years.

Census Bureau data of real income gains from 1980 to 2005 show the rise in incomes based on gender and race. White males have had the smallest gains in income (up 9%), while black females have had by far the largest increase in income (up 79%). White females were up 74% and black males were up 34%. Income gaps within groups are rising, but the gaps among groups are declining.

* * * * *

The evidence is plain that all groups across the income distribution have made solid gains during the last generation.

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Full article:
http://online.wsj.com/article_print/SB122143692536934297.html

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Econ – Social & Market Norms

September 12, 2008

Excerpted from Predictably Irrational, Dan Ariely, HarperCollins Books, 2008

“Social norms include the friendly requests that people make to one another … and reciprocity is neither immediate nor required … just because you help your neighbor move his couch doesn’t mean he has to run right over and help you move your’s. The social actions themselves provide pleasure for both the giver and the receiver.”

“Market norms are all about [valuing] benefits and making prompt payments. When you play in the domain of market norms, you get what you pay for … there’s nothing warm and fuzzy about it.”

“Money is very often the most expensive way to motivate people.” As soon as money is introduced to a transaction … any existing social contract is violated, market norms take over, and you get what you pay for,

Example: AARP

AARP asked some lawyers if they would offer simple legal services to needy retirees at low prices — something like $30 an hour. Most lawyers said no.

Then, AARP asked lawyers if they would offer the same services free of charge to needy retirees. Overwhelmingly, the lawyers said yes. A market norm was transformed into a social norm — very successfully.

Example: Late Day Care Pickups

A day care center started fining parents who arrived late to pick up their children. Counter-intuitively, the number of late pickups increased.

Why? Because a social norm — the embarrassment of showing up late to pick up your children — was replaced by a market norm — the amount of the fine. So, with the social stigma removed, parents could simply decide whether it was worth it to them to pay the fine and show up late.

Eventually the day care center stop collecting fines, and started publishing the names of late parents.

* * * * *

Bottom line: Don’t underestimate the power of social norms, or overestimate the power of market norms and monetary compensation.

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Campaign Economics – Never leave $84 million on the table …

September 11, 2008

Excerpted from Newsweek, “Was Obama Right to Opt Out of Public Financing?” Andrew Romano, September 09, 2008

* * * * *

On Sept. 16, Obama will start his evening at a 46,000 square-foot mansion in Beverly Hills, then proceed to the posh Beverly Wilshire hotel. Needless to say, Obama won’t be prospecting for votes … He’ll be mining for money.

When Obama opted out of public financing- – nlike McCain, who gladly accepted an $84.1 million check from the American taxpayers — he predicted that his efficient Web-based small-donor money machine would rake in “around or above $300 million”

The real surprise of this year’s cash chase is that it’s much more competitive than anyone expected.

Take July, for example. While Obama netted a massive $51 million–again clobbering McCain, who racked up $27 million.

The important statistic to look at is the combined amount of cash-on-hand for each candidate and his party. The totals were nearly identical: the Republicans finished the month with $96 million in the bank ($75 million for the RNC, $21 million for McCain) versus $94.3 million for the Democrats ($25.8 million for the DNC, $65.8 million for Obama). In other words, Obama & McCain-were tied.

August didn’t look any rosier for Obama. The New York Times reported that “the campaign is struggling to meet ambitious fund-raising goals it set for the campaign and the party,” collecting “in June and July far less from Senator Hillary Rodham Clinton’s donors than originally projected” and pushing donors to give more with letters characterizing their recent efforts as “extremely anemic.”

“After a year of telling donors not to contribute to 527 groups, of encouraging strategists not to form them and of suggesting that outside messaging efforts would not be welcome in Obama’s Democratic Party, Obama’s strategists” are now “hoping that Democratic allies”–i.e., 527 groups–“will come to Obama’s aid.”

In terms of cold, hard cash … Obama started September with around $90-$100 million in the bank. The McCain campaign … finished the month with more than $100 million on-hand money that it has now turned over to the RNC. Combined with McCain’s fresh infusion of $84 million in public funds and the $100 million RNC fundraisers expect to raise in September and October, that would leave the GOP with about $300 million at its disposal.

To keep up, Obama and Democrats have to rake in about $100 million a month from now until November 4. That’s $25 million more than their best combined monthly total to date.

In truth, the problem isn’t that Obama doesn’t have enough dinero. He has–and will continue to have–tons, most of which he can invest at his own discretion (unlike McCain, who’s only allowed to direct a small portion of the RNC’s disbursements). Given that Obama is bent on expanding the map — and using its own resources to do it — that’s an important distinction.

The problem is that — compared to his publicly-financed Republican rival — Obama may not have enough money to justify the costs of opting out. While McCain spends the two-month sprint to the finish wooing voters in Ohio, Michigan and Pennsylvania without stopping to replenish his coffers, Obama will have to work harder than ever to keep the cash flow coming. That means more fundraisers … in Beverly Hills or in New Jersey with Bon Jovi … and less time on the trail.

No doubt that … Obama would rather be in Ohio than Beverly Hills, listening to a working mom talk about her economic struggles instead of listening to Barbara Streisand sing. No doubt his political strategists — keenly aware of how the rest of American will interpret Streisand + mansions + Hollywood — would agree. But it isn’t quite working out that way.

* * * * *
Full article:
http://blog.newsweek.com/blogs/stumper/archive/2008/09/09/was-obama-right-to-opt-out-of-public-financing.aspx

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Econ – Ownership & the Endowment Effect

September 11, 2008

Excerpted from Predictably Irrational, Dan Ariely, HarperCollins Books, 2008

“Ownership changes perspective … . once we own something — we fall on with it — and we value it more than other people do.”.

[In technical terms, It’s called the “endowment effect” … owned items accrue “emotional equity”]

Examples:

“Social price premium“: Fans holding hot tickets to a big game often require multiples of what buyers are willing to pay to part with the tickets. In effect, owners are pricing in the social value of ownership/

“IKEA effect“: The more “sweat equity” someone puts into something, the more ownership they feel for it.

“Virtual ownership“: Online auctions make people begin to feel ownership before it’s consummated. The bidding process itself creates some sense of virtual ownership … so that bidders tend to overbid to avoid “losing” the item.

Trial periods: Companies comfortably offer 30 day money back guarantees knowing that most people will quickly develop a sense of ownership and attachment … and be reluctant to return items.

Stubbornness: People who hold deep convictions – from politics to sports teams — suffer from ownership blindness. They began to overvalue their ideas, and tend to be rigid and unyielding.

* * * * *

Bottom line: Always try to do transactions — especially big ones — is if you were a non-owner. Stay dispassionate.

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Ethics: Moral Reminders & the “Cash Effect”

September 10, 2008

Excerpted from: Predictably Irrational, Dan Ariely, HarperCollins Books, 2008

“There are two types of dishonesty. One is the type of dishonesty that evokes the image of her crooks knocking off a gas station.

Then there’s a second type of dishonesty. This is a kind committed by people who generally consider themselves honest — the men and women who have borrowed a pen from a conference site, take an extra set of soda from the soft drink dispenser, exaggerated the cost of their television on their property loss report, or falsely reported a meal with and Enid is a business expense.

In multiple experiments, when students were given leeway to cheat, they did — but only a little. [Apparently there is some upper limit to what students consider to be an acceptable level of cheating.] Even in situations where the students had virtually no chance of getting caught, they did cheat, but they didn’t become wildly dishonest.

When students are given a moral reminder before taking an exam — say, being asked to sign an honor pledge — cheating was practically eliminated altogether — even if the school didn’t really have an honor code.”

The principal: if we are reminded of morality at the moment we are tempted, and we’re much more likely to be honest. So, oaths and rules must be recalled at, or just before, the moment of temptation.

* * * * *

“Hard cash tends to make people more honest. Many people feel comfortable taking a pen from work, but few would reach into the petty cash drawer and grab a couple dollars.”

The principal: The further a person is removed from cash money, the more yielding they are to temptation. Think: expense reports, insurance claims, credit card expenditures.

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Idea – Power of Free (from Predictably Irrational)

September 9, 2008

Excerpted from: Predictably Irrational by Dan Ariely, HarperCollins Books, 2008

“Free has a certain gravitational pull – everybody likes something for nothing. Free gives such an emotional charge that people perceive what is being offered as immensely more valuable than it really is.”

Examples:

Opting for a “stripped down” free checking account over one with a nominal charge account and a plethera of services;

Buying 2 of something to get a third one free (even if you don’t need the 2nd or the 3rd ones) ;

Taking a “no closing costs” mortgage with a higher interest rate;

Hitting the buffet table for seconds, and thirds, and …

Snatching up free pens, calendars, koozies … to throw them out when you get home

Why?

“Most transactions have an upside and a downside – when something is free. people forget about the downside. … humans are intrinsically afraid of loss. The real lure of free is tied to this fear. There is no visible possibility of loss when somebody chooses something that’s free. Of course, that’s not true” … [since “free” may require a commitment of time, headaches, or disposal fees].

Example: Amazon Free Shipping

In the US, Amazon has had great success offering free shipping on orders greater than $25. Many customers started upsizing their orders (e.g ordering an additional book) just to take advantage of the free shipping offer.

In France, Amazon introduced a comparable program with a token charge for shipping (about 25 cents). While there was a small uptick in sales, it paled in comparison to the sales increase associated with the totally free shipping program.

In other words, whereas shipping for a quarter – a savings of a couple of bucks – was largely ignored by customers, free shipping generated an enthusiastic response.

“The difference between two cents and one cent is small.
The difference between one cent and zero is huge.”

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Observations:

1. The aura of “free” creates a market inefficiency – breaking buyers’ stream of rationality

2. Amazon’s free shipping is a compelling real life example.

3. Lesson: If you’re going to give something away – give it away – don’t nickel-and-dime into “no man’s land”

BTW: Based on my experience, Amzon’s free shipping is often just as fast as it’s regular shipping. Sure, the items are :”flying standby”, but there is usually space on the truck.

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Books – Predictably Irrational

September 8, 2008

Predictably Irrational: The Hidden Forces That Shape Our Decisions by Dan Ariely, HarperCollins Books, 2008

Basic Premise:

“Standard economics assumes that people are rational — that they have all the pertinent information about their decisions, that they can calculate the value of the different options they face, and that they are cognitively unhindered in weighing the ramifications of each potential choice”. That is, that people are capable of making the right decisions for themselves. But, Ariey — and other behavioral economists — observe that “people are really far less rational than standard economic theory assumes. Moreover, their irrational behaviors are neither random nor senseless. They are systematic, and often repeated, so they are predictable”. For example:

People tend to overvalue stuff that they own … it’s called the “endowment effect”.
Ownership can be real & full, or virtual & partial (e.g. bidding for items on eBay)
The sense of ownership is enhaced by “sweat equity” … the IKEA effect.
Most people will opt for a mid-priced version of a product (over the high or low priced version) … it’s called “aversion to extremes”.
A higher priced pill is perceived to relieve pain more than a lower priced pill … even when they’re the same pills — real or placebos.
People can’t resist the power of free offers … even when they’re not really free.
Many people will travel 15 minutes to save $10 on a $25 item (say, a DVD), but won’t travel 15 minutes to save the same $10 on a higher priced item (say, a car) … even though the time and savings are the same … it’s called the “relativity effect”.
Many people will do jobs (“favors”) for their friends for free — as long as the task is unrelated to their “day job”.
Many people who do favors for others are insulted if they are offered monetarycompensation, but willingly take small gifts for their efforts.
Most people wouldn’t consider taking a few bucks from the petty cash drawer, but many people think it’s ok to jack a pen from their office.
In experiments, most “tempted students cheated on tests … but there was an upper limit — they only cheated “a little bit”.
Students who sign honor pledges on exams are far less likely to cheat … even if their school doesn’t have an honor code

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The book is a quick, easy read, and the author has a cool web site:
www.predictablyirrational.com

I’ll cite a few of the book’s more interesting examples in subsequent posts.

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Number of uninsureds down … not up !

August 29, 2008

Excerpted from USA TODAY, “Census: Uninsured total shrank, incomes rose in 2007”, Aug. 28, 2008

* * * * *

The number of people without health insurance dropped 1.3 million to 45.7 million. The uninsured fell to 15.3% from 15.8%. The primary reason for decline: More people, especially children, are covered by government-sponsored insurance.

* * * * *

Median household income rose to $50,233 in 2007 after adjusting for inflation. That’s $665 more than a year earlier but still below the peak of 1999. Income in black households rose for the first time since 1999.

Democratic candidate Barack Obama said, “Today’s news confirms what America’s struggling families already know — that over the past seven years, our economy has moved backwards.”

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Full article:
http://usatoday.printthis.clickability.com/pt/cpt?action=cpt&title=Census%3A+Uninsured+total+shrank%2C+incomes+rose+in+2007+-+USATODAY.com&expire=&urlID=30607054&fb=Y&url=http%3A%2F%2Fwww.usatoday.com%2Fnews%2Fnation%2Fcensus%2F2008-08-26-census-poverty_N.htm&partnerID=1660

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Note: See post “From Clinton to Bush, median real after-tax income is up !” …. Watch for details re: uninsureds next week.

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Update: Based on data released this week, it’s official … From Clinton to Bush, after-tax household income is up !

August 29, 2008

In a prior post, I outlined an analysis that showed median real after-tax household income increased from 2000 (the last year of the Clinton presidency) to 2006 (the latest available data).

As luck would have it, the Commerce Dept released 2007 data immediately after my post. Coincidence?

Median real household income increased in 2007 — for the 3rd consecutive year — strengthening the argument.

Below is an updated summary of the analysis.

* * * * *

From Clinton to Bush, after-tax household income is up !

It’s bipartisan: all politicians use economic data selectively to make their cases.

Senator Obama has been claiming that median real household income grew under President Clinton, and fell by over $1,000 because of President Bush’s policies.

Recently reported data from the Commerce Department takes some of the wind out of Obama’s sails. Median real household income increased in 2007 – for the third consecutive year – to $50,223. That compares to an inflation-adjusted $50,553 in 2000 – the last full year of the Clinton era. So, there is, in fact, a decline — $330 or roughly ½ of 1 %. Advantage Obama.

But, median real household income is an incomplete and misleading measure of families’ economic well-being. It doesn’t include some items that contribute to household income and, most important, it doesn’t reflect the impact of income taxes.

Specifically, Obama’s selected measure of household income — technically called “money income” — doesn’t include common sources of income such as capital gains. Based on Tax Federation estimates, when capital gains are counted, the median real household income gap more than goes away.

Even more important, the median real household income measure is misleading because it is pre-tax.

Since families can only spend after-tax income, it is somewhere between disingenuous and intellectually dishonest to ignore tax benefits in year-to-year comparisons. This is particularly true in this case since the core of the Bush economic program is lower taxes.

While the Bush tax plan is often demonized as being just for the rich, it also includes substantial benefits for folks in the lowest tax brackets. For example, the low bracket marginal income tax rate was cut from 15% to 10% , the personal exemption allowance was increased from $2,900 in 2000 to $3,400 in 2007, and the standard deduction was increased from $7,350 in 2000 to $10,700 in 2007 (for joint filing married couples).

Median after-tax real household can be estimated by simply running the reported median real household income through each year’s tax tables.

In 2000, nominal median household money income — unadjusted for inflation — was $41,990. The Tax Foundation estimates that household capital gains in 2000 were $680, so nominal median household income (including capital gains) was $42,670.

There were an average of 2.6 people per household in 2000, so the estimated allowance for personal exemptions is $7,540 — 2.6 times the $2,900 allowance per personal exemption in 2000.

The standard deduction for married couples filing jointly in 2000 was $7,350 . Subtracting the personal exemptions allowance ($7,540) and the standard deduction ($7,350 ) from the median nominal household income ($42,670), nets to a taxable income of $27,780. That amount would have fallen within the 15% marginal tax bracket in 2000, so the corresponding income tax liability is $4,167 and estimated median nominal after tax income is $38,503 — $42,670 pre-tax income less $4,167 in taxes. Adjusting for inflation — that is, expressing the answer in 2007 dollars – estimated median real household after-tax income in 2000 is $46,354.

How does 2007’s median real household after-tax median income rack-up against 2000’s ?

Well, taking into account Bush’s higher personal exemption allowance, the higher standard deduction, and the lower marginal tax rate — the answer reverses.

Estimated 2007 median real after-tax household income is $47,367. So, from the end of the Clinton administration in 2000 to the latest reported data, median real after-tax household income went up over 2% – about $1,000 per household. The opposite of Senator Obama’s claim.

Some folks are already saying that 2007 data points aren’t relevant since the economy is in a slump. That argument carries less sway since recent reports that GDP grew by an estimated 3.3% second quarter of 2008.

The bottom-line: real after-tax household income went up between 2000 and 2007, and for Senator Obama’s to continue making claims to the contrary is, in the best light, deceptive.

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The Heart of the Economic Mess

August 27, 2008

A liberal view xcerpted from Former Labor Secretayrt bert Reich’s blog 07-25-08:

Most Americans can no longer maintain their standard of living. The only lasting remedy is to improve their standard of living by widening the circle of prosperity.

The basic reality is this: For most Americans, earnings have not kept up with the cost of living … they are barely higher than they were in the mid-1970s, adjusted for inflation. The income of a man in his 30s is now 12 percent below that of a man his age three decades ago.

This underlying earnings problem has been masked for years as middle- and lower-income Americans found coping mechanisms to live beyond their paychecks:

The the first coping mechanism was to send more women into paid work … to prop up family incomes. The percentage of American working mothers with school-age children has almost doubled since 1970 — to more than 70 percent.

A second way: They worked more hours. The typical American now works more than … three decades ago … putting in 350 more hours a year than the average European, more even than the notoriously industrious Japanese.

A third coping mechanism: They began to borrow … they turned their homes into piggy banks by refinancing home mortgages and taking out home-equity loans … Now, with the bursting of the housing bubble, the piggy banks are closing.

As a result, typical Americans have run out of coping mechanisms to keep up their standard of living. That means there’s not enough purhasing power in the economy to buy all the goods and services it’s producing. We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth.

The only way to keep the economy going over the long run is to increase the real earnings of middle and lower-middle class Americans. The answer is not to protect jobs through trade protection … Nor is the answer to give tax breaks to the very wealthy and to giant corporations in the hope they will trickle down to everyone else. We’ve tried that and it hasn’t worked. Nothing has trickled down.

We must … adopt (more) progressive taxes at the federal, state, and local levels. In other words, we must rebuild the American economy from the bottom up. It cannot be rebuilt from the top down.

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Economics – Five Ways to Wreck a Recovery

August 18, 2008

Excerpted from Washington Post, “Five Ways to Wreck a Recovery”, by Amity Shlaes, August 18, 2008

Perverse monetary policy was the greatest cause of the Great Depression. But five non-monetary missteps were important in making the Depression great, and the same missteps damaged the global economy as well. While many are thinking about the Depression, few seem concerned about replicating these Foolish Five today:

Giving in to protectionism.
Blaming the messenger (i.e. the stock market)
Increasing taxes in a downturn.
Assuming bigger government will bring back growth.
Ignoring the cost of change.

The proximate danger today is a repeat of the 1970s, not the 1930s. But if lawmakers don’t remember the old missteps, they might find that their new recovery legislation imperils our recovery.

Amity Shlaes is the author of “The Forgotten Man: A New History of the Great Depression” and a senior fellow at the Council on Foreign Relations.

* * * * *

For full op-ed (worth reading):
http://www.washingtonpost.com/wp-dyn/content/article/2008/08/17/AR2008081702079_pf.html

Thanks to Dave Fedlam, MBS-MBA ’09 for the heads-up

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Posted in Economics, Government & Politics, Taxes, Uncategorized | 1 Comment »

That Giant Sucking Sound – 2008

August 3, 2008

In 1992, according to then presidential candidate Ross Perot, “the giant sucking sound” was the flow of U.S. jobs to Mexico under NAFTA. Arguably, the 2008 sucking sound is the flow of capital and corporate ownership out of the U.S. The latest: InBev’s purchase of Anheuser-Busch

Excerpted from the WSJ, “This Bud’s for Belgium”, August 3, 2008

Politicians and Wall Streeters are starting to ask why the Belgian beer company InBev purchased Anheuser-Busch and not the other way around … though shareholders were the big winners here with a $50 billion-plus takeaway.

But here’s the real question: Was the takeover basically financed by the savings … from escaping America’s increasingly uncompetitive corporate tax system? … Bottom line: InBev (pays Belgium) around 20% of its profits in corporate taxes … (versus) Anheuser-Busch’s U.S. rate 38.4%.

The country will continue to see its competitive edge wither away without a corporate tax rate cut. Mr. McCain … wants to cut the corporate tax rate to 25%, close to the global average. Senator Obama is more interested in raising tax rates than cutting them.

Wall Street dealmakers tell us to expect more sales of U.S. companies to European rivals thanks to the combination of America’s higher corporate taxes and the weak dollar … the U.S. is pricing itself out of the market as a corporate headquarters. “America’s 35% corporate tax rate is … just bad economics”.

For full editorial:
http://online.wsj.com/article/SB121770579562707543.html?mod=opinion_main_review_and_outlooks

* * * * *

Observations

1. Compounding the weak dollar and high corporate tax rates is the massive transfer of wealth to the oil producing nations and their sovereign wealth funds.

2. Rhetorical question: what’s the likely impact of a windfall profits tax on U.S. based oil companies?

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Goliath vs. Goliath – Walmart vs Obama

August 3, 2008

Excerpted from the WSJ, “Wal-Mart Warns of Democratic Win”, August 1, 2008

Through almost all of its 48-year history, Wal-Mart has fought hard to keep unions out of its stores … (When) a small number of butchers (unionized) in early 2000 … the company phased out butchers in all of its stores and began stocking prepackaged meat. When a store in Canada voted to unionize … the company closed the store, saying it had been unprofitable for years.

(Now) Wal-Mart is … warning that if Democrats win power in November, they’ll likely change federal law to make it easier for workers to unionize companies.

Wal-Mart executives claim that … unionization could mean fewer jobs as … payroll and health costs (rise) for companies already being hurt by rising fuel and commodities costs and the tough economic climate.

Wal-Mart’s worries center on a piece of legislation known as the Employee Free Choice Act … the U.S. Chamber of Commerce has made defeat of the legislation a top priority.

Wal-Mart makes it clear that voting for Democratic presidential hopeful Sen. Barack Obama would be tantamount to inviting unions in (since) Sen. Obama co-sponsored the legislation … known as “card check,” … Sen. John McCain, the opposes the Employee Free Choice Act and voted against it last year.

The Employee Free Choice Act … would simplify and speed labor’s ability to unionize companies. Currently, companies can demand a secret-ballot election to determine union representation.

The proposed legislation, would let unions form if more than 50% of workers simply sign a card saying they want to join. It is far easier for unions to get workers to sign cards because the organizers can approach workers repeatedly, over a period of weeks or months, until the union garners enough support.

Employers argue that the card system could lead to workers being pressured to sign by pro-union colleagues and organizers.

Unions consider the Employee Free Choice Act as vital to the survival of the labor movement, which currently represents 7.5% of private-sector workers, half the percentage it did 25 years ago. (see chart below)

Business-backed lobbying groups are running ads … using an actor from the “Sopranos” TV series about mob life to hammer home their point.

For full article (worth reading):
http://online.wsj.com/article_print/SB121755649066303381.html

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My POV

1. I was surprised to see how low the private sector unionization rate had fallen.

2. The Sopranos ad — which was playing on news shows over the weekend — is quite effective. It plays off historical sterotyping to make a strong visceral point.

4. The argument that secret ballots are a bad thing seems to have some holes … should we eliminate the secret ballot for presidential elections, too?

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From the WSJ article:

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Econ: Hybrid Cars – Tough Sell

July 16, 2008

Summary: Hybrid vehicles offer many advantages: environmental friendliness, HOV lane access, better gas mileage. But, based strictly on economic value to the customer (EVC), it’s tough to justify buying one – especially since dealers are discounting conventional models during the current auto sales slowdown, and selling hybrids near (or above) sticker prices I know, I shopped, I bought. Here’s my story, replete with numbers.

* * * * *

OK, after 9 years and 143,500 miles — it was time to trade in my 1999 Lexus RX300 SUV. And, with gas prices north of $4 per gallon, it made sense to consider a hybrid.

Buying a hybrid would certainly be the “right” thing to do – more green, less gas, But, being an economically rational guy (think “cheap”), my decision quickly centered on the economics: would the price premium being charged for hybrids, in effect, pay for itself?

Two decisions simplified my buying process.

First, I still wanted an SUV. Sorry, but with 2 big dogs and occasional Home Depot trips, I do enough hauling to justify it psychologically.

Second, Lexus was my brand choice since the RX300 served me well for almost a decade, and since Lexus has a competitive advantage in hybrids — thanks to its accumulated experience with Prius.

Specifically, I narrowed my choice set to the Lexus RX350 (updated version of my current car) and its cousin — the Lexus RX400h – a functionally comparable hybrid version.

Before leaving the house, I pulled price and tech data from the usual car sites: Yahoo-Autos, Edmunds, Kelly Blue Book, and CarMax … and crunched some numbers.

First, I wanted to know how much I’d save on gas if I bought the hybrid.

The RX350 is government rated at 17 MPG in city driving and 22 MPG on the highway; the 400h is rated at 26 MPG city and 24 highway. I was a bit surprised that the only significant difference is on city driving – slow speeds and lots of starts & stops; highway driving is essentially a push.

I drive about 12,000 miles annually (right at the national average). I don’t keep track of my split between city & highway mileage. In fact, I’m not exactly sure what defines the distinction, e.g. is driving down Route 7 in northern Virginia at 45 MPH city or highway? Without belaboring the distinction, I simply assumed that my miles are split roughly 50 / 50 between city and highway.

Given my driving pattern and these MPG ratings, I would expect an RX400h to burn 480 gallons of gas each year (6,000 miles at 26 MPG, and 6,000 miles at 24 MPG). An RX350 would burn 622 gallons each year (6,000 miles at 17 MPG, and 6,000 miles at 22 MPG).

So, the hybrid would use about 142 fewer gallons of gas annually. At the current $4 per gallon, that’s an annual savings of about $566

Next step: compare the gas savings to the price difference in the cars.

The base price of a RX400h is $42,980; the RX350 is $39,100. So, assuming a comparable set of equally priced options, the “hybrid premium” between the cars is $3,880.

I checked for available tax incentives that might be available, and was surprised to find that the tax credits provided by the Energy Policy Act of 2005 had expired for all but a few low volume makes & models. More on that in a subsequent post.

So, it looked like I’d be staring at a $3,880 purchase price difference (over $4,000 counting sales taxes) that would take me almost 7 years to breakeven ($3,880 divided by $566 equals 6.85 years).

Note: To be technically “pure”, the future gas savings I should be discounted back to a present value. Using a 5% discount rate, the breakeven is pushed out to a little more than 8 years.

Since holding a car for 7 years is the national average, and since I’ve owned my current car for 9 years, it seemed that the hybrid would be a contender.

Reality set in when I got to the local dealer. No surprise, the lot was full of RX 350s , but there were only a couple of RX400h hybrids. The salesman volunteered that he “had room” to discount the RX350s, but that the hybrids were going “pretty close” to list price.

Sure enough. After a couple of hours of haggling, The dealer’s “hard” offer was $48,970 for a loaded RX400h hybrid (about 2% off the sticker price), and $41,500 for a comparably featured RX350 (about 10% off the sticker price).

Bottom line: The real hybrid price premium turned out to be $7,500 – an 18% price spread between the RX350 and the RX400h.

So, my nominal “pay back” period was pushed out to 13 years ($7,500 divided by $566 per year in gas savings equals 13.25 years); the NPV breakeven was pushed out to over 20 years. Said differently, gas prices would have to double to $8 per gallon (starting today), to get the payback down to average ownership life of about 7 years.

My conclusion: the RX350 had a compelling economic advantage over the RX400h — its hybrid cousin. While I admit to some guilt , I concluded that $7,500 is a lot of money and 13 years is a long time. Guess which car I drove off the lot …

* * * * *

Some observations:

1. The experience reaffirmed my view that anybody who thinks they’re pulling anything over a car dealer is fooling themselves. Man, do they know how to bob & weave with the numbers, and there is no end to the “adders” they try to throw in. Aggressive negotiating seems to only minimize the “damage”. What happens to the average guy off the street?

2. I expected even more of a fuel advantage from the hybrid – and didn’t expect the difference to be almost entirely attributable to city driving.

3. I wonder how many folks will just compare list price differentials and understate the hybrid purchase price premium. They may make the “right” decision – in part, by drawing wrong conclusions re: the economics.

4. The Prius might make sense for anybody who puts on a lot of mileage diving alone (few passengers, no gargantuan pets, no lumber),. With a price tag in the low $20s, a sizable “installed base” (no notoriety, familiar to mechanics), and gas mileage over 45 MPG — it makes both economic and environmental sense. But, even with a Prius, you’re still paying about a dime a mile for gas …

5. I expect auto companies to keep inching hybrid’s sticker prices up and for dealers to “get healthy” selling them at or above sticker prices. I wouldn’t be ahocked to start seeing “market area adjustments” added on the sticker prices.

6. I was surprised that hybrid tax credits were a thing of the past. Most of them were phased out in 2007. More on that topic in a later post.

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Economics – Shifting Risk to Ordinary Families

July 8, 2008

Working without a net: The shift of economic risk to ordinary families .

Highlights from a Los Angeles Times article

“Economic risks — the costs of being laid off, of suffering a work-stopping illness or of a catastrophe like a house fire — that were once largely borne on the broad shoulders of business and government (are) being shifted onto the backs of ordinary families, from the working poor to the reasonably rich.

Jobs, benefits, housing, health coverage, college and retirement savings, even bought-and-paid-for insurance all played crucial roles in maintaining families’ economic stability during the second half of the 20th century. But the protective value of each has been weakened over the last generation.

On average, 60% of everything we own — is accounted for by the value of our homes … over the last two decades … insurers phased out guaranteed replacement cost policies in favor of “extended replacement cost” policies … It is up to you to figure out what it would cost to rebuild your home. And it is up to you to keep your policy current.

Similar(ly) … the switch from traditional pensions to 401(k)s has left individuals largely on their own to provide for old age … the numbers have flipped. The fraction of private-sector workers relying on traditional pensions has dropped from 62% a generation ago to a mere 10% today, while the fraction depending solely on 401(k)s has jumped to 63%.

Similar changes have occurred in the way people pay for college education, where rocketing costs and the declining availability of federal grants have meant that most families can no longer pay as they go to send their kids to school, but must borrow … Twenty years ago, loans were used to pay about 15% of the tuition, room and board and fees that parents and students paid for college. Today, they account for fully one-third, according to the College Board.

Working Americans and their families are operating on an economic high wire — only one or two missteps from a steep financial fall. Little wonder people are so bleak about their prospects now that times are tough.

* * * * *

Observation: Many well intended boomers have stashed money into IRAs and 401Ks. Now, as they approach retirement, the bear market has substantially reduced the value of their nest eggs. That, in my opinion, will be the next big financial challenge in the US.

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For the full story:

http://www.latimes.com/news/opinion/la-op-gosselin6-2008jul06,0,4204915,full.story

Peter Gosselin is the author of “High Wire: The Precarious Financial Lives of American Families,”.

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Archive for the ‘Economics’ Category

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Today, 41% of voting age adults don’t pay Federal income taxes

Obama’s Estimates – Make that 49% Not Paying Federal Income Taxes

And, Obama’s estimates are probably low, so make the number 55% (or higher)

The Bottom Line – Why You Should Worry

Sources & Notes

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September 30, 1999

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From Clinton to Bush, after-tax household income is up !

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My POV

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Obama’s Estimates – Make that 49%
Not Paying Federal Income Taxes

And, Obama’s estimates are probably low,
so make the number 55% (or higher)