How Can We Improve Living Standards?

Amidst the continuing economic malaise, politics and economics are now inextricably linked, which has profound social implications.  Nowadays, many proponents of income and wealth redistribution constantly demonize the upper echelon to induce class warfare.  While opponents point out that high-income earners statistically possess more collegiate and advanced degrees, and work longer hours than the general population, these facts alone do not alleviate the genuine plight of the middle class.

It is important to note that income inequality is not inherently bad.  If every strata of the income distribution experiences real income growth, with the top decile growing faster, income inequality would increase but the entire population would experience a higher standard of living than before.

However, the situation we currently face is different, and involves the middle class getting squeezed and hollowed out.  Globalization has challenged American industry to improve and innovate, but a great deal of low- to moderate-skilled labor has been outsourced.  The United States still offers tremendous opportunities for highly skilled workers, and those employees can command premium salaries.  Because of increased global competition for other jobs, however, wage growth has flatlined in many sectors.

With most workers experiencing stagnant wages, living standards are determinant on expenditures.  Unfortunately, living costs have increased relative to income for most workers, thereby making most people feel poorer.  This effect is increased exponentially, of course, for the tens of millions of unemployed and underemployed.

Globalization is not going away, and American society needs to adjust to this reality.  To preserve and enhance living standards, we must take a multifaceted approach to boost income and reduce expenditures.  Robust economic growth is also the country’s only chance in tackling the ungodly amount of debt that has incurred and will incur in the future.

With these considerations in mind, it is imperative to rethink certain educational priorities.  The modern economy revolves around a workforce that is adaptable to new systems and technologies, and places a premium on critical thinking skills.  These traits, rather than rote memorization, should be emphasized as much as possible in many disciplines.  Moreover, students who would be unlikely to pursue a college education should gain more exposure at an early age to mechanical trades and vocational skills that are not outsourceable.  By age 22, many of these individuals could have 4-5 years of tangible, marketable work experience under their belts, and not incur the suffocating student loan debt that college may entail.

As part of a holistic solution, immigration policy also must be examined more closely.  While the labor market within different industries varies, generally speaking, illegal immigration has helped undercut wages and reduce employment for a significant portion of the U.S. citizens.  Conversely, there is a shortage of visas for highly skilled foreign workers whose contributions would greatly benefit the American economy.  The United States is a land of opportunity that attracts people from all over the world, and better harnessing this quality would yield benefits for all of us.

Living standards can also be enhanced by gradually, but steadfastly, reducing the scope of government in our economy.  This is not an ad hominem attack on regulation; instead, it is an acknowledgment that through intended and unintended consequences, the government has aggrandized its own power by fostering a culture of dependency from businesses and individuals.  Every pay stub reminds you of the taxes withheld from your paycheck by the federal, state, and perhaps local government.  Recognize also that owning a home, driving to work, watching television, dining out, calling a friend, heating your home, and shopping for groceries are all activities where the government depletes your wealth through taxation, surcharges, and fees.  In light of the staggering $3,819 billion the federal government alone spent last year, extricating it from certain areas of the economy would lead to more efficiency and self-reliance, and less confusion, dependency, and crony capitalism.

As just one example, the fact that gasoline costs well over $3 per gallon during the winter amidst a struggling economy is an absurdity.  Through government policies, the United States is handicapping itself by not tapping more domestic oil and natural gas resources.  Developing economical energy alternatives can remain a priority, but utilizing more of our own resources would help buy time for the discovery and implementation of any energy breakthroughs.  We could be less dependent on foreign oil and thereby funnel less money to countries who are hardly our allies.

Overall, increasing domestic energy production would not only reduce energy costs but also spur economic and job growth.  With more disposable income, consumers would pare down debt and increase discretionary spending.  In addition, because energy prices are fundamentally tied to costs associated with production and transportation, a more sensible energy policy would boost living standards as goods and services would become less expensive.

The United States will surely face very demanding socioeconomic challenges in the years and decades ahead, but the country will emerge stronger if it transcends partisanship and embarks on a reasonable and intelligent course of action to confront them.

Source:  http://www.ayearfromoakcottage.org/2009/08/kitchen-table.html

Will You Receive a Tax Refund Soon?

Millions of Americans will file income tax returns over the next several months, and the term “refund” is often misunderstood.

Federal, state, and local governments employ a wide range of levies to raise revenue.  They come in the form of sales taxes, property taxes, payroll taxes, excise taxes, surcharges on businesses that get passed to consumers, and income taxes, among others.  Assuming the best in politicians’ motives and the need to boost government coffers, each type of tax can easily be justified.  Sales taxes discourage profligate consumption, property taxes fund education, “sin taxes” discourage vices that have adverse social and health consequences, etc.

While most taxes are applied uniformly – any two Milwaukee residents would pay the same sales tax for identical television sets and the same excise tax on a pack of cigarettes – income taxes greatly diverge from this notion.

Most income taxes are applied using a progressive scale.  Someone making $20,000 a year may experience a federal marginal tax rate of 15%, whereas the rates for $50,000 and $200,000 of income are 25% and 33%, respectively.  Much of the current political discourse revolves around different conceptions of “fairness,” with lawmakers balancing marginal utility with the distortion of incentives and resulting economic inefficiencies.

In recent years, however, progressivity has taken on new meaning with some people incurring zero or even negative income tax liability.  Traditionally, individuals and families sought to maximize tax deductions to help reduce the amount of income subject to taxation.  Recently, tax credits have become more prevalent, where taxes themselves (not just income subject to taxes) get reduced directly.

As a simple example, let’s say someone makes $5,000 and has a 10% federal income tax rate.  Here is how a $500 deduction vs. a $500 credit would impact him or her:

Deduction

Taxes = (Income - Deduction) * Tax Rate

Taxes = ($5,000 - $500) * 10%

Taxes = $4,500 * 10%

Taxes = $450

$450 is 9% of Income

Credit

Taxes = (Income * Tax Rate) - Credit

Taxes = ($5,000 * 10%) - $500

Taxes = $500 - $500

Taxes = $0

$0 is 0% of Income

As you can see, credits affect income tax liability more than deductions affect it.

This brings us to the notion of refundable vs. non-refundable tax credits. Non-refundable credits cannot reduce overall tax liability to less than $0, whereas refundable credits can.  Using the above example, let’s look at how a $1,000 tax credit would affect the taxpayer:

Non-Refundable Tax Credit

Taxes = (Income * Tax Rate) - Eligible Credit

Taxes = ($5,000 * 10%) - Eligible Credit

Taxes = $500 - Eligible Credit

Eligible Credit à Tax liability cannot be negative

Eligible Credit = $500

Taxes = $0

Refundable Tax Credit

Taxes = (Income * Tax Rate) - Entire Credit

Taxes = ($5,000 * 10%) - $1,000

Taxes = $500 - $1,000

Taxes = –$500

In the latter example, the refundable tax credit not only nullifies any tax liability, but the government will actually make a transfer payment to this individual.  Keep in mind, of course, that the government is a behemoth middleman taking money from someone else and distributing it to this person.  In effect, this example is nothing more than glorified welfare, where Washington uses the tax code to engage in direct wealth redistribution. Therefore, transferring money to someone who contributes $0 in income taxes and calling it an “income tax credit” or “income tax refund” is a complete and purposeful misnomer.

A tax refund is simply the money that was over-withheld from your paychecks that the government has been able to borrow at a 0% interest rate. In contrast, the assertion that someone who pays no income taxes and receives additional payments from taxpayers has received a “tax refund” is a logical fallacy.  Try going to a store and demanding a refund for something you didn’t pay for in the first place.

Keep these terms in mind when filing your own tax return, and hopefully this post cleared up any misconceptions.

Source:  http://media.lansingcurrent.com/img/photos/2011/07/08/IRS_Logo_t640.jpg

Length of Golf Courses

Previously I discussed the benefits of constructing 12-hole golf courses.  Here is another suggestion to improve the sport:

Increase distance between tee boxes

Distance is an integral part of golf and an important measure of skill.  That being said, numerous golfers lack the strength and flexibility to effectively play many courses.  With a change in thinking from golf course designers and players, literally millions of people would enjoy the game more.

Each course currently has about four tee boxes on average.  Here is the standard tee arrangement at many venues:

Championship – black/blue

Amateur – white

Senior – gold

Ladies – red

Source:  http://media-cdn.tripadvisor.com/media/photo-s/01/f7/db/e8/picturesque-6th-tee-box.jpg

The way many courses are designed, I contend that a significant percentage of golfers playing the white tees should in fact be playing not even the gold tees, but the red ones.

Here is a simple test – if a golfer can hit his/her best drive and best second shot and still not reach a par 4 green in two shots (regulation), they are playing from an inappropriate tee box.  If this occurs more than once or twice a round, they are not playing the course as it was meant to be played.

For a case study, think of a 400 yard hole with a hazard (bunker or water) in front of the green.  For a highly skilled player, the hole could be played with a driver – 9 iron or driver – wedge.  Having a short club for the 2^nd shot makes the hazard far easier to negotiate than would be the case with a longer club.  The hazard poses a challenge for the skilled player, but it is reasonable given the shorter length of the hole.

Now suppose that a golfer hits solid shots but lacks the strength to drive it past 200 yards.  That golfer should have a similar opportunity to hit driver – 9 iron, since the hole was designed that way.  An appropriate yardage for the hole would be about 300 yards, assuming a 200 yard drive and 100 yard 9-iron shot.

Keep in mind this represents a 100-yard difference to appropriately accommodate the two players.  Currently, many courses have tees that would only differ by about 40 yards for these two players.  If the hole is 400 yards from the Championship tee and 360 yards from the Senior tee, a player driving it 200 yards would face a daunting 160 yard 2^nd shot over a hazard.  The shot would need to be played with a fairway wood, an extremely tall order given the hazard guarding the front of the green.  Despite this golfer’s ability to hit quality shots, an inappropriate tee box dooms the player’s chances before beginning the hole.

In summary, tee boxes should be designed so that different players hitting good shots can hit similar clubs into the green.  The game would be so much more fun for folks who could have many birdie opportunities instead of perpetually struggling to reach greens in regulation.

This table illustrates what appropriate yardages would be for three golfers who typically drive the ball 270, 225, and 180 yards:

Tee Box	Driver – Wedge	Driver – 7 iron	Driver – 4 iron
Championship	380 yards	435 yards	470 yards
Amateur	325 yards	370 yards	395 yards
Senior	270 yards	305 yards	320 yards

Most courses have tees that are far closer together, making the sport excessively difficult and frustrating for so many.

In order for people to embrace my concept, folks would need to set their egos aside to play from the proper tee.  It would help psychologically to use different colors than what is currently standard, to remove any stigmas.  Most courses would benefit from adding a new forward tee box ahead of the current red tees, and then have a scorecard that recommends the appropriate tees for people to play based on a combination of average driving distance and overall skill as measured by handicap.

The golf industry is struggling right now, and with the massive Baby Boomer population entering retirement, it is critical that the game remains fun for them despite losing distance.  Changing people’s mindsets about what tees they should play from, which is a psychological exercise but one that courses need to accommodate as well, would make the game less difficult – resulting in better scores, faster pace of play, and more enjoyable rounds.  If this gets accomplished, people will not only experience courses as they were designed, but they will play more often and help sustain this great game.

Has Your Food Budget Soared?

For anyone who has recently shopped for groceries, you may have noticed meaningful price increases.  If you haven’t, perhaps the prices themselves have not jumped, but the packaging has shrunk:

http://www.nytimes.com/2011/03/29/business/29shrink.html

With a tight job market keeping wages relatively flat, food manufacturers are reluctant to raise prices on cost-conscious consumers.  However, their input costs have risen enough where those firms need to generate extra revenue to stay profitable.

Consequently, the quantity of food in a standard package can decline while the price remains the same.  At first glance, a 14-ounce package may not seem all that different from a 16-ounce one.  Buying a 14-ounce can of fruit for the same price you used to pay for a 16-ounce can seem more palatable than having the price increase by 10% one day.

In actuality, a 10% price increase is better for the consumer than the 16 à 14 ounce reduction.

You need to consider unit prices, where measurement is in the denominator.  If the can of fruit remains at $2.00, it used to cost 12.5 cents per ounce [$2.00 / 16 oz].  Now the fruit costs 14.3 cents per ounce [$2.00 / 14 oz].  This 1.8 cent per ounce price increase equates to a 14.3% jump in fruit prices.

Most Americans will be lucky to receive a 2-3% increase in wages and benefits this year, so meaningful food inflation will reduce their discretionary income which supports other economic sectors.  Reductions in food quantity are especially insidious, as many consumers don’t internalize just how much more they are paying for items.

This phenomenon exemplifies the inflation you and I face every day, much of which can be attributed to the Federal Reserve’s “easy money” policies discussed in this previous post.

Source:  http://www.extension.org/mediawiki/files/2/2f/15oz_cheerios.jpg

Campaign Finance Reform

This issue has been a hot-button topic for years and will continue to be.  To alleviate a screaming conflict of interest, I offer a modest proposal for campaign finance reform.  Public sector unions should not be able to direct mandatory union dues to political candidates, and there is ample logic behind this statement.

·         You and I are taxpayers.

·         Government workers are paid by taxpayers.

·         Many government workers are required to join a union and pay union dues.

Therefore, union dues are paid by taxpayers.

·         Unions contribute money to political candidates.

Therefore, unions influence politicians to give them favorable terms when negotiating compensation and collective bargaining rights.

·         The overwhelming majority of union political contributions are allocated to one political party.

Therefore, money is taken from you and me to support political candidates we may agree, or disagree, with.

Setting one’s personal politics aside, this situation is blatantly unfair.

There are two simple ways to make this more equitable, and either one would suffice:

1.       Prohibit public unions from contributing to political candidates

Workers are required by law to pay taxes, and via compulsory union representation and dues, taxpayer money gets directed to finance certain politicians.  These politicians are empowered by unions, so the politicians effectively negotiate on the union’s behalf against their employer (government / taxpayers).

In essence, taxpayers literally pay money so that a group can more effectively negotiate against taxpayers!

2.       Union dues that are allocated to campaign contributions become voluntary

Currently, millions of government workers personally support opponents of union-backed political candidates, yet their union dues are directed against their interests.

Union members should voluntarily contribute to union-backed candidates or have the ability to opt out.

Campaign finance reform is riddled with complexity, but here is an eminently fair, reasonable, and logical approach to protect taxpayers and to better align the preferences of government workers with the unions representing them.

Has the CARD Act Helped You?

For years, members of Congress have named bills with flowery language to increase support for them.  After all, who wants to run a re-election campaign with an opponent blasting you for voting against the Clean Water Act, the PATRIOT Act, or the American Recovery and Reinvestment Act?  By implication, voting against this legislation could brand you as being against clean water, unpatriotic, and against economic recovery.

Another such example was H.R. 627, the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act).  During the midst of the credit crisis and bank bailouts, few politicians wanted to take sides with unpopular credit card companies.  And how could one be against accountability, responsibility, and disclosure?  The bill passed with flying colors:  279-147 in the House, 90-5 in the Senate, and was signed by the President.

By any objective measure, this vote was politically popular, but does that make the CARD Act good law?

Unlike mortgages which have secured collateral in the form of a home, credit card loans are unsecured.  Credit card loans are therefore riskier, so a lender needs to compensate for that risk by charging a higher interest rate.

Additionally, we must accept that some borrowers are much riskier to lend to than others.  Pretend that you are a lender for a moment – what are some important factors that will help you decide whether to lend someone money and on what terms?

·      Credit history à people with poor credit and younger folks with little to no credit history are riskier to lend to

·      Income à people with lower incomes are generally riskier

·      Other debts à if substantial income is needed to service existing debts, this increases a borrower’s risk profile

Source:  http://www.sparkhid.com/CreditCardLOGOSforwebsite!.jpg

Keeping this in mind, you need to be mindful of changing circumstances in order to accurately price for risk.  If a consumer is more than 30 days late on a payment due for student loans or a different credit card account, that consumer certainly becomes more likely to miss interest payments on the credit you have extended to him or her.  To accurately price for the increased risk, it is only natural to raise rates.

However, the CARD Act greatly curtailed a lender’s ability to do just that.  At first glance, this may sound good from a consumer’s standpoint, but it is imperative to dig deeper and examine the bill’s true consequences.  Without chronicling dozens of provisions in the legislation, here is a big-picture summary:

·      Many consumer advocates were heartened by the CARD Act, believing it would stifle what it deemed to be “abusive” and “predatory” practices by the credit card industry

While this approach sounds good in theory, I contend that virtually all consumers were actually hurt by this legislation.

·      Lenders were curtailed in their ability to entice customers with attractive offers, and later modify interest rates if a borrower’s financial situation and creditworthiness worsened.  In effect, people with poor credit histories and financial circumstances would pay enough in fees to help make the industry profitable while it offered more favorable terms for lower risk borrowers and also loyal customers.

Some legislators may have been well-intentioned to help protect struggling constituents who experienced interest rate increases on their credit cards at the first sign of trouble.  It is extremely commonplace, however, for legislation rooted in good intentions to produce a series of adverse and unintended consequences.

Here have been the primary effects of the legislation over the past two years:

1.     Credit card lenders reduced the availability of credit to solid and marginal customers alike.  Recent college graduates are often denied credit, and the ones lucky enough to receive credit have very limited borrowing capacity.  This development is particularly troubling for responsible borrowers with steady income and employment, as building a successful credit history becomes critical later when people obtain mortgages to purchase a house or apartment.

While borrowers with spotty credit histories would purportedly benefit from the CARD Act, it now makes little to no economic sense for lenders to offer credit if they are denied mechanisms to price appropriately.  As a result, many subprime borrowers who have experienced financial hardship and seek to make ends meet no longer have access to credit cards.  Many are instead resorting to payday loans that carry far more exorbitant interest rates than what credit card companies would charge, which only exacerbates the situation.

2.     Interest rates have risen across the board.  With the CARD Act provisions taking effect months after the legislation was signed into law, lenders sought to re-price for risk ahead of time.  Instead of re-pricing on select accounts depending on more individual circumstances, they raised rates on nearly everyone to help offset their future inability to do the former in a timely fashion.  Moreover, many of the fixed rate credit offers were converted to floating rate ones, which will prove significant when interest rates eventually rise.

If you take a hypothetical family with an exemplary credit history but is tight on cash, let’s suppose they had $8,000 in credit card debt at a fixed interest rate of 7%.  Following the legislation’s passage, an account like this would have likely been adjusted to a floating rate, with an interest rate equal to prime + 12% for instance.  Despite there being no change in the family’s own credit profile, it now costs hundreds of after-tax dollars more per year to service their existing credit card debt, which could represent a significant portion of discretionary income that would otherwise be used to boost the economy.

3.     Rewards programs have been curtailed for more stable customers.  At first glance, people who carry a small balance or no balance are not ideal credit card customers because they don’t pay what the firms would consider to be an optimal interest rate.  However, fees are assessed on these transactions, and the low-risk borrowers provide stable cash flows for lenders.  Many of these customers could easily pay in cash for any purchases but instead choose credit cards for convenience and programs that reward customer loyalty.  These rewards programs may include cash-back, hotels, airfare, and merchandise.

To offset a revenue decline from the CARD Act, many lenders scaled back on such programs to help stabilize their bottom line.

In summary, this legislation produced a cascade of bad consequences which affected borrowers across the economic spectrum.  Many of the most vulnerable people became unable to obtain lines of credit, forcing them to seek alternative financing sources that were more expensive than anything they experienced while having access to credit cards.  Customers with good credit histories but tight budgets had their rates preemptively raised ahead of the legislation’s effective date, and they are incurring more financing charges than was previously the case.  The most responsible and creditworthy consumers who valued rewards programs experienced their own economic loss as well from these developments.

Important lessons from the CARD Act should be learned and applied elsewhere.  Politically popular legislation hardly guarantees that it is good legislation that will benefit the country.  It is healthy to apply some skepticism to proposals that sound too good to be true, and there must be recognition of behavioral changes by individuals and companies that could undermine a law’s stated intent.

Source:  http://www.destination360.com/north-america/us/washington-dc/images/s/washington-dc-us-capitol-s.jpg

Golf Course Design Ideas

Despite the immense popularity of Tiger Woods during his prime, the number of American golfers has remained static over the past 15 years.  The sharp economic downturn has certainly harmed the sport, as cash-strapped Americans cut back on nonessential spending.  Golf costs more to play than most sports, making it prohibitively expensive for many aspiring junior players who need to play often to improve their skills.

I don't pretend to have all the answers to solve these dilemmas, but do have some ideas.  Here is one place to start:

Build courses with 12 holes

Golf is a game rooted in history and tradition, and few courses are willing to deviate from the 18-hole standard.  For a humorous take on golf's invention, check out this priceless (warning: expletive-laced) Robin Williams clip:

http://www.youtube.com/watch?v=8qPrR49qsDc

The sport has changed, however.  Holes used to be considerably shorter before equipment advances forced designers to construct longer holes.  Courses used to be 5,500 – 6,000 yards, but numerous venues now exceed 7,000 yards.  It simply takes longer to navigate 18 holes than it used to.
 

Source: http://www.golfclubatlas.com/

My idea of having a 12-hole course offers some distinct advantages:

·      New courses only require 2/3 of the acreage as before, reducing startup costs

·      If 18 holes take 4 ½ hours to complete, 12 holes would take 3 hours.  Those 90 minutes of savings makes the game more accessible.  People with tight schedules, or folks who simply prefer not to play golf for 4 ½ hours, would now enjoy the game more frequently.

·      With shorter rounds, more people can play on a busy day, adding to a course’s revenue

·      Numerous golfers I have come across like to play more than 9 holes, but definitely fewer than 18 if given the option.  Problem solved.

Anecdotally, I often hear complaints that the game takes too long to play.  Despite playing competitively for many years, I frankly agree with this assertion.  For most people in most situations, the marginal benefit of playing holes 13-18 is quite low.  It is easy to get tired and lose focus, resulting in poor play that detracts from the experience.
 

Logistically, the 6^th, 9^th, and 12^th holes should all finish near the clubhouse to provide maximum flexibility for the golfers.

Due to lower maintenance costs, courses could charge less and attract more golfers than before.  Overall, I believe this setup would be an improvement from the status quo for millions of golfers out there.  Also, some future posts will be devoted to other ways the sport can be improved.