Economy

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Planet Money’s Kickstarter Project: How to make a T-shirt

My wife and I’s favorite podcast is Planet Money. When Planet Money announced that they had formed a Kickstarter project to not only make a T shirt but to tell the whole story of how it was created, we had to participate. We are now officially one of the over 11,000 backers. They went over their $50,000 goal several days ago so the big question is whether they can get over $400,000 with only six days left.

[iframe src=”http://www.kickstarter.com/projects/planetmoney/planet-money-t-shirt/widget/video.html” height=”360″ width=”480″ frameborder=”0″]

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Sorry, The Stock Market Is Still Divorced From Reality

The New Deal Democrat aka Hale Stewart from The Bonddad Blog posted this graph on the Business Insider as part of his post, Sorry, Doomers: The Stock Market Isn’t Divorced From Reality and I immediately realized that I had created a similar graph in the Why There is Wealth Inequality post that included a few more lines.

cp-sp500

So I went back to my old graph , added a line for corporate profits, adjusted it for inflation using the GDP deflator, and got the graph below. Since the Real GDP uses the GDP deflator(GDPDEF) as the inflation adjustment, I adjusted the other lines using the GDP deflator as the inflation adjustment. Maybe its just me but it sure looks like the blue line for corporate profits is following the green line for Federal Debt: Total Public Debt (GFDEBTN) since 2000. 

When you look at my graph it sure looks like the current profitability is the result of the willingness of the federal government to issue debt. If businesses profits were primarily due to increases in sales then the corporate profits would be following the red line for the S&P 500. In this case it is above both the S&P 500 and the black line for the GDP. If we focus on the last 13 years we can see that corporate profitability trend line is more closely aligned with the debt line. Oops, there goes the narrative that the corporate profits are up because wages just hit an all time low! The corporate profit increase over the last 13 years was debt driven! Since several economists have described this recovery as a balance sheet recovery, it is no surprise that wage growth has been stagnant. Corporate profit increases without wage growth are inevitably fake profits and that explains the lack luster enthusiasm in the S&P 500 stocks. When your accountant is generating more earnings than the guy or gal working down on the floor, you have a troubled business. This is not complicated. Debt fueled corporate profits were fun but now we have the same tough job ahead of us. If we want higher wages and a growing S&P 500, then we must have real sales growth coupled with productivity increases. This quest is as American as baseball and apple pie. If higher wages and an increasing S&P 500 price is our goal, then our reliance on debt is a distraction and a hindrance. When we fail to create real corporate profits and rising wages it is because we took our eyes off of the ball.

A couple days after writing this post I was pondering the question of where did the corporate profits go and why the rising corporate profits were not lifting all ships. Rising corporate profits usually result in high factory utilization rates and labor shortages. This situation typically resolves itself with rising wages, strikes, and sometimes both. Without seeing rising wages in this recovery it seems like the rise in corporate profits was the result of a shell game rather than real economic gain. Then I saw the article written by Jeffrey Tucker on the Daily Reckoning, This Car Won’t Move. The cartoon I included below from his post explains both the corporate profitability and why we have not see rising wages problems quite well. It may be hard to see but if you look closely you will see the wage earners are out there swimming with the sharks.

050313_lft

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The Irony of Gun Control and the Stock Market is …

The irony of gun control and the stock market is that they are both divorced from reality. At one time our professors taught us that the stock market was a leading indicator for the economy. I doubt Mike O’Rourke is alone in his sentiment that “ The Market Has Dropped Any Pretense Of Being Connected To Economic Reality”. The stock market is not relevant to the average man and woman and its tenuous relationship to the economy is severed. Now we have Senator Manchin saying he is going to bring up failed gun control legislation that adds additional regulations on honest people and does very little to restrict access to guns by criminals or the mentally insane. This bill failed because the average man and woman were not fooled with the political rhetoric and the shelf life for this dumb law has passed. Somebody should tell Senator Manchin that it is a sign of insanity to keep doing the same thing and expect different results. Stupid is as stupid does. Eventually common sense wins, our stock market starts responding to real economic gains and failures, and our legislators start spending their time focused on how to make the average person’s life easier and better. Someday the decisions we make will matter.

“Alice came to a fork in the road. ‘Which road do I take?’ she asked.
‘Where do you want to go?’ responded the Cheshire Cat.
‘I don’t know,’ Alice answered.
‘Then,’ said the Cat, ‘it doesn’t matter.”
”• Lewis Carroll, Alice in Wonderland

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The Basic Problem With Reinhart And Rogoff is …

The Business Insider highlighted a tweet from @larry_kudlow:

Trouble w/ Reinhart/Rogoff debate not stats. It’s this: Growth solves debt, not other way around.Reform taxes, spending, regs,money.

I agree with Mr. Kudlow that growth solves debt but disagree with him about his subsequent statement debt and growth. The basic Reinhart and Rogoff premise is unchanged regardless of whether you look at the original or the revised numbers, GDP growth rate goes down as you increase debt load. The revised GDP number goes down less severely than the original GDP number but it still goes down compared to lower debt levels. I think where Mr. Kudlow and I disagree is our assumptions about the potential economic growth and whether debt is relevant to potential GDP growth. He assumes that the US economy has a higher potential than it is presently showing and that a little additional stimulus will result in increased consumer spending and higher GDP growth. This is the traditional Keynesian fix for the economy. In his scenario the increased debt is not relevant because the marginal gains from trying to reach this higher economic potential are so great. My assumption is that that the economic potential is lower. Reinhart and Rogoff have shown that a higher debt level is correlated with lower growth so it is logical to conclude that the economic potential is lower, too. A country’s high debt load is not the cause of lower growth but it is a symptom that shows that lower growth factors have been in place for many years just like high blood pressure can be a symptom of heart disease. As an example let us assume that GDP growth over the last thirty years is a combination of increased consumer spending via debt and good demographics from the baby boom generation in their peak spending years. Let us further assume that the economy peaked in 2000 and we have been struggling to jump start the economy with economic bubbles and more debt. Under this scenario it is easy to see a future with maxed out consumers, young people straddled with college loans, and a baby boomer generation that is retiring. This scenario looks like a high cost, slow growth economy that is unresponsive to government efforts to stimulate spending just like the last ten years. In the last ten years we attempted to stimulate the economy into overdrive with spending on fighting two wars,  a big tax cut, and a large stimulus spending package focused on infrastructure and unemployment. It did not work. With these economic results to guide us, additional debt may alleviate the short term pain but is harmful to the economy in the long term. We tried every trick in the Keynesian stimulus book and we failed to increase the prospect for long term growth in the economy and employment. In contrast to the Keynesian stimulus solution where they encourage families to buy more more stuff they don’t need now, our economy needs the government to do no harm so that family spending can expand naturally and let the markets pick the winners and losers with less political interference. Stimulus spending by definition is designed to interfere with natural family spending decisions and get them to spend their money on something they do not want to buy now. In this context it is difficult to see the difference between an economic stimulus and a financial bubble. If a family with limited income growth is responsible for their creating their own wealth, it is natural that they will assume a more traditional viewpoint concerning debt and reject the decision making that comes from financial bubble/economic stimulus spending. Yes, families are smarter than the government when it comes to spending their money. For most of them it is a back to the basics economy in which to increase their wealth they need to do more with less. We tried to accumulate wealth with increasing amounts of debt and found out that it does not work. Now we are going back to the way my middle class parents accumulated their wealth. It worked!

So let us start down the list of cost cutting opportunities and some of the problems. Our electrical bills should be going down since we have record low prices for natural gas and coal. It appears the savings are going everywhere but to the customer. It is interesting that the administration has stated that they would like carbon based electricity to go up in price to make solar and wind generation more affordable. Are we “tilting at windmills” in our battle against carbon dioxide? A similar argument can be made for gasoline and its relationship with ethanol. Why are we letting the price of gasoline get whipped about by ethanol? Another big ticket item for the family budget is the cost of health care. Every healthy family agrees that we are overpaying for our health care and Obamacare is a failure at controlling costs. If Obamacare is not helping healthy people get more affordable health care, it is a failure. You cannot completely ignore the needs of the majority. It was silly to expect a politics ridden organization using a command and control organizational structure to be effective at controlling costs. If this was true then Russia would have an economy greater than the United States. There is nothing like a stack of 20,000 pages and a long list of exceptions to Obamacare regulations to remind us that this was the wrong organizational structure to fix our health care problems. This recipe for disaster did not work for Tennessee and is a questionable success in Massachusetts. On one hand Massachusetts expanded health care and on the other hand they have one of the highest cost health care costs in the country. Any idiot can expand health care coverage without paying for it. The trick is making the system sustainable and that is where Massachusetts is struggling. It all comes back to cutting costs. Trying to promote the Massachusetts experience to the national level is an example of the Peter Principle in action. Since we do not have a tradition of cost effective, sustainable government services, what we probably need is a modern day Rockefeller or Carnegie to work with and against the health care institutions and insurance companies to reform our health care system into a more cost efficient system from the ground up. I was reminded that in a lecture recently that these two men achieved their success by using research and development to aggressively cut costs so that they could sell their products at lower costs. They also were very flexible to market conditions. A real health care reform is not much different than our present system but with a greater emphasis on cost control and a different management style. We tried to ignore costs and failed. Steven Brill’s 22,000 word article in TIME reminded us that health care cost accounting is a nightmare that is not going away. It is amusing to try and think what Rockefeller would say about our health care cost accounting. We tried the big political solutions to health care like Obamacare and failed. Throwing more politics and money at health care does not fix the rising health care cost problem. Maybe if we want a smaller, less political solution like the Cleveland Clinic to work on a national scale we have to encourage each community figure out how they can replicate the best hospital practices and get out of the way. I have a lot more faith in a local hospital trying to compete with the Cleveland Clinic that anything coming from the federal government. If a successful company like Proctor and Gamble can make effective decisions using the one page memo principle, maybe our government needs to embrace a more strategic management style rather than a micro managing style. The “I’m from the government and I am here to help” management style used by Obamacare is creating a bigger health care problem by breaking the health care system faster than doing nothing at all. Since all health care is local health care, all health care solutions are by definition local solutions. If we want a solution to our health care problems, we should look no further than our local health care providers.

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The Biggest Problem with the Middle Class Is?

If we believe this video that went viral on the internet, Wealth Inequality in America, the problem with the middle class is that a CEO make about 380 times more money than the average worker. This video is based primarily on the charts created by the Mother Jones article, It’s the Inequality, Stupid. The Mother Jones charts make it pretty obvious that they think the problem with the middle class is that the rich are paid too much. Their fix for the middle class is some  income adjustment on the wealthy.

Paul Caron argues that raising the Estate Tax will curb wealth inequality and spur economic growth, Using the Estate Tax to Curb Inequality and Spur Economic Growth. In his analysis the problem with the middle class is a wealth problem. The rich have too much wealth and redistributing their wealth via estate taxes is the most equitable way to fixing the middle class.

So lets see if I understand this problem correctly. The rich are paid too much and have too much wealth. For this privilege they pay the government a disproportionate share of all the income taxes collected. Okay, I get it that everyone is in favor of taking another million dollars from Warren Buffett or Bill Gates but what does that have to do with middle class wealth and income problems? Just maybe, the problem with the middle class is not the rich. It is not the poor. The problem with the middle class is the middle class. The problem with the middle class is they made bad life style decisions. Instead of saving and investing like the rich folks, the middle class took the easy way out and used long term mortgages, permanent credit card balances, and student loans to avoid or postpone tough decisions. The results are not surprising since debt seems to encourage bad decision making. If you accept the argument that this bad decision making has been going on for at least the last thirty years, then it is logical to conclude that the primary reason the rich are so rich is because the middle class has been so dumb with their money. Ploys to increase consumer spending and bubbles seem to be the favorite tools used by policy makers to extract wealth from the middle class and give it to the rich. When these ploys inevitably do not work, the follow-up strategy is to claw back some of the success of the rich. It is a never ending circle until the middle class has no more to borrow. It is the microeconomic solution to the unintended consequences of misguided macroeconomic policies. Increased consumer spending is the solution until … it isn’t!Nowadays we call it the Dave Ramsey strategy. It requires both sacrifices and tough decisions to work up the wealth and income ladder. The goals are simple, too. It is hard for a middle class family to live beneath their means but it is necessary if a family wants to pay down their debt. It is hard for a family to pay down its debt but it is necessary if they want to save the money for retirement and their kid’s college education. With a clear vision of where you are going, the hard work translates into results the middle class can see in their bank account. It does not depend on how much we tax the rich or cut the benefits for the poor and elderly. It depends on the middle class living beneath their means, making good spending decisions, and saving for the future. For those middle class folks whose parents lived through the Great Depression, they are embracing the financial strategies of their parents.

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Why There is Wealth Inequality

There is a lot of talk about fairness and income inequality in the media as they try to make wealth redistribution policies more palatable to the public. Don’t get me wrong, I do not have a problem with taking more taxes from Warren Buffet or Bill Gates. The problem starts when they start taking money away from me and I do not believe this is helping anything! When they take money away from me, I have to cut expenses elsewhere. In my case I cut my savings rate. The extra money taken from my paycheck reduces my retirement money and more dependent on social security. It is that simple!

As a country we have long since passed the point where we have a balance between spending and saving. Our defined pension plans and 401K plans are woefully underfunded and our social security system is a sham. The problem with the middle class is not income inequality or fairness. We are stupid! We make dumb decisions with our money and how we save. You hear this all the time if you listen to Dave Ramsey. Here is a quote from a John Goodman post, Why There is Wealth Inequality.

The greatest inequality of wealth holdings is among the elderly and the primary reason for that inequality is the different saving rates of people when they are young. Here is Noah Smith:

If you do the math, you discover that in the long run, income levels and initial wealth…are not the main determinants of wealth. They are dwarfed by…savings rates and rates of return. The most potent way to get more wealth to the poor and middle-class is to get these people to save more of their income, and to invest in assets with higher average rates of return.

Pointer from Arnold Kling.

Unfortunately the key idea we get from Keynesian economics is that increased spending is good for the economy and deficits are not important. Although I am skeptical that this plan ever worked, we can see that since 2000 this plan has definitely not worked. Here is the chart I created a couple months ago to show that relationship. For those unfamiliar with Mitchell’s Golden Rule, “the private sector should grow faster than the government”. I still prefer the stronger form which states the private sector should grow faster than the growth in government debt if we want to grow out of our mess. As a country if our economic policies are working, the green line would be lower than both the red and blue lines. If we look at the country as an individual investor, we need a greater return on our investment and this dependence on debt is not working!

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Social Security Trust Fund and the Money Supply

Bruce Krasting wrote a nice article for Business Insider about a discussion on Social Security between Senator Ron Johnson and Paul Krugman. That triggered a few questions in me about the Social Security Trust Fund and the money supply. Is the Social Security Trust Fund already part of our money supply and how will the government monetize the financial obligation? Here is the explanation from the Wikipedia Social Security Trust Fund page. Obviously this is a completely different funding mechanism than most pension funds and is an almost polar opposite of the funding style used for the Post Office employees in which they are required to prefund the pension plan for the next 75 years!

It is instructive to note that the $2.5 trillion Social Security Trust Fund has value, not as a tangible economic asset, but because it is a claim on behalf of beneficiaries on the goods and services produced by the working population. This claim will be enforced by the United States Government although the precise monetary mechanism of enforcement is yet to be determined. In order to repay the Trust Fund, the United States government has three options, which may all be pursued to varying degrees.

(1) The government may issue debt by selling treasuries. Thus, $1 in debt to the Social Security Trust fund is replaced with $1 in debt to a different lender. This scenario would increase the tax burden on future generations if the interest rate is higher on the new debt. If the new debt is more expensive and government revenues do not increase sufficiently either through taxes of economic growth, the government would be forced to cut spending on other programs (such as Defense, Education, Research) or else default on all or part of the debt.

(2) The government may raise taxes. If taxes are raised across the board, ironically, by reducing take home pay for workers, the government could make it harder for the younger, working generations to invest and save for retirement. However, if taxes are raised only on those whose earlier tax cuts were partially offset by these excess FICA contributions, namely those taxpayers whose marginal rates were reduced from 74% to as little as 28% during the Reagan Administration, the younger, working generations will not lose any ability to save or invest.

(3) The government may monetize trust fund obligations by transferring the treasuries held by the Trust Fund onto the Federal Reserve balance sheet. In such a transaction, the bonds would become "assets" on the Fed’s balance sheet, and the Fed would create money "out of thin air" to purchase the bonds from the government. Under such a scenario, the bonds are converted into cash, which would then be used by the government to cover social security payments. This scenario would likely lead to increased inflation, as it would inflate the money supply without directly increasing the amount of goods and services produced by the economy as a whole.

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Why are we not seeing more inflation?

I got my latest Duke Energy bill and added to my spreadsheet to analyze the cost increases. In 2013 we spent an additional $338 compared to last year. Some of the cost increase can be attributed to 18% more heating days than last year but about $200 of this increase is a result of higher electrical distribution costs. So far 2013 I have seen higher home and health insurance costs, higher income taxes, and higher electrical costs. Although my health insurance is more expensive, the costs are still covered by my HRA at work. I have not seen any costs that have come in lower than last year. Hmm…

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Is Walmart’s quarter atrocious?

From Yahoo Finance we get a story that calls Walmart’s quarter atrocious. When I heard Bloomberg’s discussion on the report this morning, they had a more positive view on the report. Here is what Yahoo Finance says.

Walmart is seeing what’s called a pronounced pay check cycle. That means store traffic spikes twice monthly when most people get paid. That speaks to a strapped consumer that lacks the confidence to spend unless they literally have cash in their pocket. Living paycheck to paycheck isn’t something you typically see in the fourth year of an economic recovery.There’s a limited pool of winners from Walmart’s weakness but they do exist. Sozzi thinks Amazon (AMZN) and Best Buy (BBY) of all companies may have picked up some of the sales Walmart didn’t get, but that’s not a ton of comfort.

"The big theme: they can’t get any margin, they have no pricing power and the consumer is not going to the store as much as they used to," says Sozzi.

Although the small business I work for has not seen the pay check cycle in our orders, we have seen in February that both the number of orders and the average order amount is smaller than last year. After several months of slightly positive year to year comparisons in February we swung to a slightly negative comparison. It is not pretty but it is not the end of world either. Walmart is confirming our somewhat pessimistic view of the retail market for 2013.

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My State Of The Union

Chris LoCurto asked the following questions in his post, State Of The Union.

If you didn’t watch, what do you think anyway. How is your “State of the Union” as you or your business stands right now? I don’t care which side of the aisle you’re on, I would like to hear your thoughts, and your comments.

I have a long tradition of not watching State of the Union addresses. I disregard this event regardless of the party in power. This week was no different. Like most people who responded to this post we have a much greater interest in our own assessments of our “State of the Union.”

This year my wife and I will have been married thirty years. Like most married couples we had our rough times but for the most part we have been happy. Although I am not looking to growing old in this brave new world she makes my day a little brighter. I cannot imagine doing it without her.

My job and by extension the business I work at are in a more precarious situation. Although my skills as a web developer are in demand, my specific skills with ASP and SQL have a more limited appeal. Although I do not expect a pay raise this year our family finances are strong with a good savings record. Since most of our basic necessities have gone up in price, the challenge for us is how to cut costs elsewhere. An expanded and more productive garden is one of the more attractive areas of opportunity. Each year I have expanded the garden and improved my skills. At this stage of our life our financial plan is focused on saving for retirement and a significant part of the plan for saving for retirement is to stay healthy. Hospitalization or extended illness could easily extinguish our savings. With our continued good health and affordable health insurance, we can continue and possibly accelerate our savings for retirement. So far the Affordable Care Act and the Individual Mandate has not caused the dramatic increase in insurance premiums in the individual insurance market that many have predicted.

The bad news is that the business I work at  has declined significantly from four years ago. The good news is that the decline stopped last year and we showed a small increase over the previous year. Our sales seem to follow national retail sales figures so our sales forecast for next year is for small gains. In this scenario our business will be playing a zero-sum game with our competitors. The market is not big enough to afford marketing or inventory mistakes. Although we are a small business who competes with Amazon, Walmart, Home Depot, and Lowes on some products I do not expect much of change. It probably is not profitable segment for them and it will take a lot of work to expand their modest efforts.  Price, product selection, and having the “right” inventory in stock always separates the men from the boys. Our strong financial condition combined with better better marketing and inventory management in our market niche should allow us to take market share from our competitors who are not up to the task. You snooze, you lose!