Month: August 2004

Everything You Need To Know About Social Security “Reform”

The parade of Republicans has begun on CNBC, and one of the bells they were ringing was “Social Security Reform” dogma. Before things get too deep in New York City, there are important things you need to know.

Social Security is not now, nor has it ever been, a savings plan. Remind yourself of this anytime anybody starts talking about the “return” on your payroll taxes. There is no return, because the dollars you pay in today go directly to your grandparents, who in turn paid years ago to support their elders. Yes, there is currently a surplus, but that will vanish in a few years (the exact number of years depends on which analyst is speaking and the nature of his/her agenda).

Social Security has worked for this long because more people are working than are retired, but that is changing. Before, say, 1964 this was always true. There were always more able-bodied working people than retired people. The baby boom and subsequent advances in contraception changed this. Now experts say there will come a time when Social Security taxes collected from Generation X and younger will simply not cover Social Security payments to the Baby Boomers and The Greatest Generation.

When somebody like Alan Greenspan talks about Social Security Reform he means raising the retirement age, raising the Social Security tax paid by younger workers, and/or lowering benefits to be paid to retirees. Greenspan has been singing this tune on and off for over 20 years now, and many people either agree with him, or think he’s painting the picture as too rosy.

When today’s Conservatives talk about Social Security Reform they are talking about something completely different. They are talking about allowing Personal Retirement Accounts which would allow workers to “control” and “own” their retirement funds. The idea is that workers would be able to take some of the money that would have gone into the Social Security Trust Fund, put it into a special brokerage account, and invest in stocks and bonds.

When Conservatives say “own” and “control” they mean “pay for” and “be responsible for.” Of course “owning” and “paying for” have always gone together, but it is important to remember this point. Simply put, this system will mean that any returns you generate on your PRA will be yours and yours alone, a sort of “eat what you kill” system.

There are at least two problems with this approach.

Most people are really lousy at investing. That’s one of the reasons Social Security was put together the way it was in the first place. People didn’t have much in the way of savings, let alone investments, and what investments there were blew up in the Great Depression. As for the modern day, look real closely at your IRA and 401k statements and be honest with yourself. If you are like the overwhelming majority of Americans, you haven’t done as well as you would like. Even if you invested in nice, well managed mutual funds. Even if you took the Motley Fool’s long term advice of using index funds. Frankly, I can’t understand how anybody can look at a 5 year chart of the S&P 500 or the NASDAQ and really think investing in stocks is going to save Social Security.

If the problem is that there will not be enough money for retirees, taking in less money does not solve the problem. There is no way around this. If people are investing their money instead of sending it to the Social Security Trust Fund, there will be no money whatsoever for existing retirees. You can’t have it both ways. That is why we are hearing very few specifics about this program. If we were to hear the specifics, everyone would recognize that things do not add up at all.

Leave 12.9 Million Children Behind

Poverty isn’t new. But it is new for 1.3 million Americans — including 800,000 children — that entered the ranks of the poor in 2003. Here’s coverage from The Associated Press, CNN, and Reuters. Oh, and here’s the Official Census Bureau Highlights, and the Census Bureau Press Release.

The short version: there are 35.9 million poor people in the United States, 12.9 million of them children; that works out to 12.5% of the general population and 17.6% of children; it is the third annual increase in a row and the highest level since 1998; even more people — 45 million, or 15.6% — had no health insurance. Although this data is usually not released until September, it has been put out a little earlier. Some people already see this as part of a political agenda to bury the data, as the last week of August is typically a slow news, Wall-Street-on-vacation, Congress out of session sort of time.

I realize some of you are saying “Tell me something I don’t know,” and others are saying “So what? There’s been poverty as long as there’s been civilization.” This is more serious than you might think. And not merely because it is evidence that “Compassionate Conservative” measures are not working. Believe it or not, this is a public health issue.

When more than one out of every 8 Americans does not have health insurance — and by extension does not have adequate access to timely medical care — that is a public health issue. Particularly if you throw communicable diseases into the mix. Or maybe the possibility of a flu pandemic, three of which have occurred in the last century.

For a variety of reasons, poor people and people without health insurance have a tendency to use Hospital Emergency Departments. This is particularly true when there are not public health clinics — and such clinics have long been squeezed between a rising population that needs them and shrinking funds with which to provide treatment. The result is that Emergency Departments are under great pressure, causing some to close, which in turn creates pressure on other hospitals (Here’s the No Registration Required version).

The answer to “What does this have to do with me?” is provided by a county official: “Whether you have insurance or not, if there’s not a bed for you, you’re not going to get in.” If the ER is clogged with people for whatever reason, if the hospital is full of people whose upper respiratory infection turned into pneumonia, your medical emergency is going to have to wait. And if those people can’t pay, you will eventually pay in the form of higher taxes, higher insurance premiums, or fewer hospitals.

Give it a few weeks

I have done everything I could. I wrote my Congressional Representatives.* I wrote essays. I posted to online forums. I told anybody who would listen to me. It is now officially too late to prevent new overtime rules from going into effect.

There is a lot of disagreement over the number of people who would gain or lose overtime eligibility. The Labor Department and the Bush Administration both insist that more people would gain than lose, and that as pure bonus there would be fewer lawsuits. Pretty much everybody else says the opposite. Some states already have laws which supersede the Department of Labor guidelines.

Most regular readers know my opinion: that such rules will mean fewer people get overtime because the administration is unashamedly pro-business (there is no reason to suppose this proposal is a departure); that under these rules there is disincentive to create new jobs because it is cheaper to work existing employees harder than to hire more people; and that most people are not in a financial position to protest beyond a letter to Congress or a passive-aggressive “sick day”.

One thing is for sure. In a few weeks everyone will get paychecks reflecting implementation of the new rules. Look at your pay-stubs carefully before voting on November 2, 2004. Better yet, send away for your absentee ballot today. Not only will your vote have a paper trail, but you won’t have to worry about getting out of the office early enough to make it to your polling place.

One reply:

Thank you for contacting me regarding the Bush Administration’s overtime proposal. I am pleased to inform you that on Tuesday, May 4, the Senate approved an amendment by Senator Harkin that would block the Department of Labor from implementing any rule that would disqualify workers from overtime pay who are currently eligible under current law. At the same time, the amendment allows the implementation of new rules that would increase the number of low-wage workers who would be eligible for overtime pay.

Another reply:

I am strongly opposed to the Department of Labor’s roposed rule changes. These rules will drastically reduce the number of workers who are eligible for overtime and compensatory time. I am outraged that the Administration is willing to cut overtime pay for nearly 8 million Americans, many of whom depend on it to make ends meet. This includes nurses, emergency medical technicians, police officers, firefighters, secretaries, sales representatives, surveyors, journalists, paralegals, retail managers, dental hygienists, and many others. I am leading the fight in the Senate against these mean-spirited changes.

The Case of Action Jackson and the Framed Scientist

In a story already making international headlines, United States District Court Judge Thomas Penfield Jackson has held five reporters in contempt of court for refusing to reveal sources in the news coverage of now-cleared scientist Wen Ho Lee. Here’s the Associated Press version, here’s Reuters. If that’s not enough, here’s Washington Post, L. A. Times, The International Herald Times as adapted from the New York Times, and Reporters Without Borders. Nor is this the first time this month that a judge has ordered reporters to cough up the names of sources. This is a bigger story than the fact that, as I write, Google has begun trading, and is around $100 per share.

Does the judge’s name sound familiar to you? You probably remember him as the Judge in the Microsoft Trial, where his Findings of Fact included the “Fact” that Microsoft is a monopoly, and web clients are not operating systems. Alright, the guy is already controversial.

Pro: these reporters did — we must assume inadvertently — contribute to a media storm of inaccurate, libelous information being disseminated against one scientist. Wen Ho Lee is going to have to explain himself on every job interview he gets for the rest of his life. He spent time in a jail cell in solitary confinement despite the fact that he had been convicted of nothing. He did plead guilty to one count of “improper handling” of data. His case was so egregious that he got an apology from the President of the United States. You cannot blame Mr. Lee for being unhappy. Frankly, these reporters should be unhappy they were told lies and manipulated into regurgitating them.

Con: these reporters gave their solemn word that sources would be confidential. If they go back on that, they can kiss credibility and future confidential sources goodbye. This is true both personally and for reporters in general. That means fewer whistle-blowers will come forward in general, which in turn will make it harder to get information out of any company or government entity beyond the prepared press statements. This is bad for democracy, and bad for free markets.

Make your own opinion.

A Picture Worth a Thousand Words

John Edwards has been talking about how there are “Two Americas” for almost a year now. But talk is cheap. Let me show you a picture. When Lyndon B. Johnson was President, the top quintile mean household income was $81,883 and the bottom quintile was $7419; in 2002 the top quintile mean household income was $143,743 and the bottom quintile was $9990.

Of course, this chart is meant to show you that the richest Americans made 11 times what the poorest did in 1967, yet 14 times more today. Better yet, you are supposed to notice how the little brown bar for the lowest quintile appears almost unchanged next to the big beige bar soaring above it for the top quintile.

To me one of the most striking features of this data is that the households in the bottom 20% rose a mere $2600. True, that’s a rise of 35%, but we are still talking about less additional money over the course of 35 years than you might spend on a major appliance or a computer. Minimum wage in 1967, where our data begins, was $1.40 per hour. Our theoretical LBJ era full-time minimum wager earned $2912 annually, much higher than the poverty line of $2168 (family of two, any age). Now, minimum wage is $5.15 nationally, with some exceptions. A theoretical modern minimum wage full time employee would earn $10,712, which is 7% more than the average for the bottom quintile, and lower than the poverty line of $11,756. Because this chart expresses everything in “2002 dollars,” the effect of inflation is removed, and the effect of rises in minimum wage are lessened.

In the meantime, inflation keeps prices rising. So far this year, the core rate of inflation is 2.4%.

What does this tell us about the minimum wage? It tells us that raising the minimum wage is not going to cure poverty. Indeed, it seems clear that on average, the lowest earning 20% of households are not even making a full-time minimum wage salary. Whether this is because they are working part-time, or because they are “contractors” doing per-job work ($20 per lawn you mow, $30 per house you clean) does not matter: there are no benefits. Such jobs are of the Don’t Work, Don’t Eat variety.

The point remains that back in the late 60s, a family in the lowest income group could manage to get by. They certainly did not have a luxurious life, and they didn’t have cable TV or internet access — mainly because there was no such thing — but they managed. I can’t honestly say how a family making $9990 manages, particularly once childcare comes into the picture. Tax rhetoric isn’t going to fix that. We can’t honestly put all the blame on the President for this situation, but we can hold him accountable for making it worse while claiming to make it better.

May You Live in “Interesting” Times

You probably didn’t need a newspaper article to tell you that Americans, individually and collectively, owe more money than ever before. And it’s not because housing costs more, although that is a factor.

The biggest culprit is credit cards. With credit card debt at record highs, and credit card companies doing everything they can to keep it that way, it’s no wonder lenders want bankruptcy reform: if enough cardholders were to file for bankruptcy, it could cause serious banking carnage. And that’s only problem one with this situation.

Credit cards are not evil. Like any tool, they can help or hurt you depending how you use them. In this day and age, credit cards are almost a necessity for adults; just try renting a car, getting a hotel room, or buying airplane tickets without one. College Students are especially vulnerable to the siren call of plastic money, graduating with an estimated $2000-5000 in credit card debt on top of student loans. Nor are students the only people who spend credit they have instead of income they don’t have.

If people living on the edge — or anywhere near it — have already maxed out their credit cards, they have no cushion against the bad things that can happen. They haven’t got savings (if they had, they would have put it towards debts) for emergencies like job loss or illness, let alone for certainties like the day they will no longer be able to work. And what will happen then? Either we will pay charities to take care of it, or we’ll pay taxes so they can receive government assistance. Oh, or they can turn to a life of crime. In any event, it will be expensive for everyone. That’s problem two.

Some experts warn that, with the Fed raising short term interest rates, a rise in credit card rates is almost certainly coming. The same rise in short term interest rates is likely to raise mortgage rates, which means that a home equity line is not the credit problem solver those television commercials would have you believe. Even if you own a house, and have actual equity. The short version is that people are going to feel a credit crunch –more money has to go to Visa and MasterCard on things they bought months ago, leaving less money to spend now — and that means consumer confidence and spending will both be headed down. That will directly effect the economy as a whole. Problem three.

So what can you do about this? Here’s some starter advice on credit. Or here’s a more comprehensive version. Pay off the cards. Keep them paid off. It’s one thing to use a credit card to pay a major expense over the course of six months, preferably interest free. Or to put everything on the card and just write one big check instead of twenty little ones. It’s another thing to spend money you may never have. Oh yeah, and if you have the occasion to tell somebody this advice, do it.

Everything you need to know about a “Federal Sales Tax”

It might be my imagination that every four years or so — liberally mixed with campaign rhetoric — we hear talk about the possibility of a Federal Sales Tax. This time the lead instigator is Speaker of the House Dennis Hastert. It is of course coincidental that his new book has been released during campaign season. Nice trick, getting people to buy a hard-bound campaign ad. But the interesting thing is that the President has been quoted as saying “You know, I’m not exactly sure how big the national sales tax is going to have to be, but it’s the kind of interesting idea that we ought to explore seriously.”

The loudest perennial voice in favor of such a tax is American for Fair Taxation, the “FairTax” people. A long explanation of the pros and cons of such a plan — really pretty well balanced — can be found over at About.com.

Once you look through the information, it becomes clear that we are talking about a tax of 23-30%, depending whether you calculate it before or after the price-tag goes on. No exemptions, no exceptions, send roughly a quarter to every dollar spent to the feds.

The advantages, in a nutshell, are that it is very simple and transparent. Better yet, it encourages savings, because after all you don’t pay tax on money you don’t spend. In even encourages productivity, because there won’t be tax consequences to working overtime — no, I never understood looking at the taxes before deciding whether or not to do my job.

Oh yeah, and the IRS could be dissolved, throwing the entire agency and a legion of accountants and tax attorneys out of jobs. Whether or not that is an advantage or a disadvantage depends on what you do for a living.

The disadvantages are, first and foremost, that it would add roughly a quarter to every single dollar you spend. At least most state sales taxes exempt things like food. This tax would be on everything, from Tiffany jewelry to store-brand macaroni and cheese, from healthcare to housing. Even with the expected deletion of Federal Income Tax — and that is no sure thing — it will feel like a one-time burst of inflation. Furthermore, it is regressive. “Increased incentive to save” only works if there is money left over after all the absolute necessities are paid. People who spend all their income will pay a greater percentage of their earnings in taxes than those who do not. Furthermore, people who are in a position to spend their money outside the United States will do so. Border towns and overseas mail order houses stand to benefit. United States tourism will likely be down, since Americans who can will vacation overseas, and foreign nationals will find other destinations.

All this being said, if there is only one thing you remember about the idea of a Federal Sales Tax it is this: it will require a Constitutional Amendment. The Sixteenth Amendment, the one that allows income tax in the first place, very specifically says “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”

It’s not going to happen.

Cheap, Legal Corporate Espionage

Today, allow me to present two sides of one coin. Heads, we have corporations using blogs to find out what people really think about their products. Tails, executives using blogs as a corporate soapbox, an place where three-letter types can speak their minds without being interrupted, and yet in a more personal way than a press release. Both stories are a boon for anybody seeking information.

Let’s say, for example, that you work for an automobile manufacturer. You’ve got a new vehicle you are trying to launch. The first thing you want to do is find out what your competitors are up to. However, if you limit yourself to sources like MotorTrend or the Detroit Newspapers, you are missing the most important data. Car critics can only buy so many cars; in the end you will have to sell cars to living, breathing people. So it isn’t enough to find out what a bunch of paid reviewers think are the strengths and weaknesses of your product. You need to find out what Joe and Jane Average think.

How do you tell that? Well, sites like Edmunds have some consumer reviews. However, most of them are rather short, and tend towards rants or raves. Furthermore, you might be missing important data by relying on your opinion — or Edmund’s opinion — of what your product’s competition really is. Here is where blogs — and judicious Googling — come into play. Wheat and chaff must be carefully separated, but you might just find out really important details about yourself and the competition. You might discover which features really matter, or what petty annoyances they have, or what they think of the price, or that they find your ads so obnoxious they won’t even go see your product, or that they have a completely different idea of what your product is all about. People can be really blunt in their blogs, but you are rarely left wondering what they really think.

You can’t pay for this kind of information. No focus group or survey will ever get you this data. Most people are simply too polite to tell you this stuff if they think you will ever know. Oh, and the article linked above touches ever-so-gently on the idea that letting a prominent blogger preview your product can result in free advertising.

On the other side, you can find out a lot about your competition by paying attention to what they do and say. Sure, read the press releases and any news coverage that might be out there, but nothing tells you what’s going on like reading what the people at the top think. It’s unvarnished, free from outside editing, free from outside spin. You are guaranteed to find out what he wants people to know about his product or company. You might find something insightful. You might find something insightfully stupid — young CEOs are particularly adept at inserting foot into mouth in a way that would benefit the competition if they were paying attention.

For that matter, you might find out what your bosses are thinking if you can get a look at their blogs.

Use both approaches on any company or product, and you will almost certainly know more about it than someone who limits himself to traditional news sources and a stack of traditionally prepared market research reports.

As an aside, why did Greenspan raise interest rates today? Because “We’ve turned the corner. Because with oil at record high prices, and that means almost certain inflation. If you believe any of these things, rates had to go up, and they may need to continue going up. Despite this, my theory is — unproven and with no degree in economics to back it up — that the dirty secret of interest rates is beyond a certain threshold, low rates do not stimulate economic development. This is because despite the low cost of borrowing money, there is also low incentive to lend on the part of financial institutions. I think in the end, this will be the lesson we learn from Japan.

It worked in the cartoon…

This morning, I thought the big news was that the economy added 32,000 jobs in July, over 200,000 fewer than expected, a whopping average of 640 per state. And according to the people who are paid to research these things, more layoffs are coming. Add to this the fact that even the IRS admits Americans are making less money, the fact that record oil prices make inflation likely, and strangely enough you might get the idea that the economy isn’t very good for most Americans.

However, then I was sidetracked by two biometric passport stories. Here in the states, we are moving forward with a system whose failure rate can be as high as 50%. “Across the pond,” British passport applicants are being asked not to smile for their passport pictures, as it interferes with the accuracy of the biometric picture readers.

Pardon me, but a system with a failure rate of half is worse than useless — fingerprint scans have a failure rate of more like 2% (one in 50), and even that is overwhelming when you are doing thousands of scans daily. A system that can be foiled by a smile is likewise, worse than useless. None of us want to be detained over a biometric reader deciding that our passport pictures don’t look enough like us. If a simple smile can throw it off, I can only imagine what sleeping on an airplane seat might do to it. This is over and above a new pair of glasses, a little thinner hair, botox, or any of a dozen other innocent things that might change about your appearance between getting a passport photo and going overseas. The even greater risk is that, because the failure rate is so high, security officials will simply ignore the warnings of the device, allowing even obvious mismatches to pass. It is a waste of both taxpayer’s time and taxpayer’s money.

This is the real life equivalent of Elmer Fudd asking what is obviously Bugs Bunny in a pair of sunglasses “Have you seen a little gray rabbit about your size, with long ears like yours, and a little cotton tail like yours?”

News Flash: the Rules Apply to You

I get really tired of people who think that rules are for other people. It’s alright for them to turn right on red without stopping or signaling. It’s ok for them to have a full cart in the supermarket express line. Their dogs don’t need leashes. They don’t understand how the homeowner’s association can tell them to mow the lawn, or what kind of shingles they can put on the roof, or that they can’t put disabled vehicles in the yard. Ironically, these people are usually the loudest to scream when somebody else does something discourteous in traffic, or takes too long to write a check at the cash register. They are outraged if someone leaves dog doo in their yard. They will howl about property values should a neighbor choose an “endearing” purple and lavender paint scheme.

These discourteous souls I can dismiss with a deep breath. The thing that really peeves me is when business owners pull such stunts. Some choose to break the law, willfully or through ignorance: “I didn’t know I needed a license to run a mutual fund”; “I won’t rent my property to an unmarried couple because of my religion”; “The ventilation system the city requires is too expensive”. Others simply whine about the law, demanding an exception for themselves alone: “I need a bigger sign than the law allows”; “I hire so many people in this town I deserve a tax break”. Some businesses even do both, breaking the law while lobbying for special treatment.

Make no mistake. If you run a business, it is your duty to read, understand, and follow all the laws that apply to your business. Failure to do so can result in personal injury, lawsuits, fines, getting arrested, or being put out of business. I have no sympathy for a business that chooses to ignore zoning rules, signage regulations, safety requirements, licensing issues, or any special rules that may apply to specific types of businesses. I frankly have less sympathy for businesses who “didn’t know” about these things.

Many people will protest that some laws are unreasonable if not just plain dumb. Whenever I see a “dumb” law I remind myself that somebody thought it was important enough to make law. Someone had to write it out; some legislators or city council members had to vote on it; somebody had to sign it. Any person or business owner who feels that a law is genuinely unreasonable is hereby encouraged to lobby for its repeal. This is different than trying to get exempted from the law, because repealing bad law benefits everyone.

If you don’t want to follow the law, nobody is forcing you to run a business.