Friday, November 18, 2011

“Middleman” Businesses, Job Creators or Price Inflators?

Throughout history you can find “middleman” businesses, in fact almost any retail business is in essence, a middleman business.  However, the concept of the “middleman” business has evolved over the years, and even more rapidly so over recent years.  The advent of the internet was supposed to eliminate the middle man, but the need to understand regulations, handle insurance concerns, and segment processes for the sake of cost has drastically increased their popularity and frequency, and rapidly expanded their role in ways no one could have seen coming.

A few years ago I got a call from a small business owner.  He needed me to look over their books and work up some financial statements.  When I got there-as with every new client-I sat down with him for a few minutes so he could explain how his business worked so I could be more effective in helping him.  He began by saying that they were a maintenance contracting company.  Not really knowing what this meant, I said "Okay, so you maintain buildings?"  This made sense to me, he had a crew of janitors that maintained office buildings and such in the area right?  No.  It turns out that his business was as follows:

Let's say a toilet gets clogged at a local department store.  Not clogged like it needs a plunger, but clogged like it needs a plumber.  Or maybe a door breaks, lighting goes out, whatever it is, something breaks.  Well the store manager calls a store hotline, a 1-800 number that goes to a national center for that department store.  They file what is essentially a work order on the telephone with that conversation.  When they get off the phone the operator they were just on with calls a maintenance division.  That maintenance division then refers to a list based upon your location, and calls a maintenance company like my new client's that covers that region.  This maintenance company then turns around and finds a plumber local to the department store-or carpenter, or handyman, or whatever is needed-negotiate a rate based upon the rate they were given.

My head almost spun as he was wrapping up this explanation.  What had once been as simple as picking up the phone and finding "Joe the Plumber" in the yellow pages, had apparently turned into at least four phone calls that involved call centers all across the country and put at least three people between the person who had the problem, and the person who was going to fix the problem.  Take 20 years off the participants in this process and they'd just be a bunch of kids sitting around playing a game of "telephone", which is what the process basically became, as the number of plumbers, electricians, or carpenters that eventually showed up often showed up with eh wrong tools, or a complete misunderstanding of the problem they were about to fix.  Additionally, there was no real way for the maintenance company to meet the contractors they hired, so there was little way for them to qualify the worker, or the work itself.  Often in fact, you'd find that the stores this particular maintenance management company covered were in parts of the country that the company wasn't.  For instance this store represented primarily stores in the southeast and Texas.

Add in the mark-up of 10% at every step along the way, and ultimately the department store is paying an additional 30---40% for a service that is often performed with less efficiency and effectiveness than if they'd simply had the store manager call a local guy he or someone else at the store knew to snake the toilet.  And do you think these stores just eat those costs?  No, they pass them on to you and I, the consumers, jacking up prices on us.  Now this sort of thing is almost entirely set up for insurance, fraud, or legal reasons, and are a great example of the real costs of regulations on businesses.

This practice of hiring businesses to streamline simple processes like snaking a drain or fixing a door handle are mind boggling to say the least.  They almost spur one to wonder if companies like this department store hire these services specifically to create jobs, or if regulations are set up in such a way to encourage the creation of jobs such as this.  Either way the concept of the middle man business has morphed into one that is more of a destructive force in our economy, raising prices on the consumers while in many cases producing no actual benefit.

Sunday, November 13, 2011

The United States is Really Just a Troubled Teenager

In light of the Republican candidates' debate last night regarding foreign policy, I thought I'd switch gears off economics for today and towards foreign policy.  I figured I'd explain how US foreign policy as a whole is really very easy to understand.  In fact all you need to do is have gone through grade school at some point in your life.  This is because as I'll explain, the US is really just a troubled teenager on the playground that is our planet.

You see many years ago as a small child the United States was abused by their step father (England).  One day they decided they'd had enough, found his gun in the box in his closet, and scared him off.  America felt great about this, and learning that there was strength in their unity, dedicated themselves to forming the most perfect union of people in history.  This is where our troubled boy learns about violence and finds his own strength.

Before long however, the U.S. figured out that the great feeling they had, was more about beating someone up than it was about founding freedom.  The freedom was great, but dominating people felt even better to America.  Fortunately, they had an entire race to almost completely exterminate in the Native Americans, so settlers went to work at their own version of genocide, driving the natives to small reservations and wiping out most of the population.  This was the stage of the troubled boy terrorizing small neighborhood animals.  Lighting cats on fire, etc.  When the natives weren't enough, Americans shipped in slaves.  This is like the boy cruising craig's list for free cats of his own to light on fire.

As America grew, he works to find himself, to figure out who he is.  The Civil War happens, the labor movement and women's suffrage, and America begins to meet their neighbors, and make new friends at school, on the playground of planet Earth.  They made friends, and they made enemies, but they soon grew bored, and entertained themselves by nearly wiping the Filipino race from the planet, ravaging the Phillipines at the turn of the century.  You see, at some point that young boy figures out he's bigger than the other kids on the playground.  He thinks "maybe it would be more fun than picking on small animals, to pick on other kids" and he tests out his war machine on the smallest kid he knows.

Over the next 60 years or so, America involved himself in every fight he could find on the playground.  Two royal rumble "World Wars", fights against the Koreans and Vietnamese-no matter how ill advised-and generally establishing his place on the playground.  He goes through this through about the sixth grade, and then he's off to a middle school for 7th and 8th graders before high school.  At his new school are many of his old acquaintances, but there are new people as well.  One of those new people is another kid almost as big as America-Russia.  The two biggest kids on the playground finally meet.

For several decades the two bullies roamed the school, aware of each other's presence and occasionally passing in the hallways, but primarily doing their work against each other in a covert manner.  For this to work America learned they needed friends, and so they found them, in kids like Israel, England, and France.  They made friends much more rapidly than Russia, who was a kid that was large and tough-but not very personable, and from the "wrong side of the tracks".  The few friends Russia could find were from the same family, the large and sometimes considered crazy "Stan" family.

Eventually the two bullies meet, have a brief fight, and America wins.  In truth, Russia's bad habits have essentially destroyed him prior to the fight (he was drunk on vodka when he showed up, so that didn't help either) but a win is a win, and Russia collapses.  His friends and helpers suffer as well, as America learns about keeping a country down without declaring war.  They perfect this new method of fighting, demolishing a kid by passing rumors about their mother, stealing from their house, and making sure you have plenty of alibi's available when people want to know where you were at the moment of the crime.  As they perfect this new method, they turn it on the coke dealers from the neighborhood of "the Middle East".

For a long time America has been hooked on this brand of cocaine known as "oil".  It thrives on the drug, and the drug lords in the Middle East sell it at outrageous prices, yet have very little defense against a kid like America, who could easily strike the rich dealers down should it choose to.  America picks the least extreme (and richest) of the three dealers-Saudi Arabia-to be friends with, and only occasionally does business with the other dealers-Iraq and Iran.  You see America has a dream of building his own pipeline of cocaine.  It's found naturally in several parts of him-Texas and Alaska primarily-so his hopes are not a pipedream, so he dreams about his own pipeline.

Throughout the years the US makes significant progress from it's days in Panama/Nicaragua, or the Platt Amendment in Cuba.  While what they do today is based on actions like those-taken more than 100 years ago-it's even more perfect, even more "blameless" and cloaked in even more bullshit.  You see today America wanders through the hallways of the school looking for kids with stuff in their locker that they want. America has an in with the principal these days (NATO-they pay for him) and so they know they can get away with what they want.  They act under the cloak of "spreading democracy", threatening other kids with their previous acts, breaking them down mentally and rebuilding them in America's mold-as America's convert, their submissive.  You may think this is hard to swallow, but I'd advise you to Google "Platt Amendment" before you berate me.  Then go ahead and berate away, lol.

The US currently wanders the playground of the world with a figurative pack of gum in one hand and a long stick in the other.  They hand out sticks of gum to kids willing to be their friends, and hit the others with the stick until they want to be like us.  The problem is-we're running out of gum.  For years we've been borrowing money from this new kid (China) to buy more gum, to make sure we keep the friends we already have because they can barely stand us, they're just in it for the gum at this point.  What happens when we run out of gum and the new kid doesn't want to lend us any more money?  This is how simple our foreign policy is these days.  I look forward to your thoughts.

Wednesday, November 2, 2011

Retirement at 65? Not At Our Expense!

Recently a lot of local political discussion has been had regarding pensions and retirement.  For years a subject in DC has been Social Security and what to do about what is becoming the biggest and most dangerous Ponzi scheme in the history of the world.

Social Security as a Ponzi scheme?

Make no mistake, Social Security really is a Ponzi scheme, I mean it's completely built on the same concept isn't it?  A Ponzi scheme for those that aren't up on the details is basically a scheme in which old investors are paid off with the funds new investors put in.  So for instance, if I go to Bill and say I need some money for a business, he gives me ten grand.  I then use that ten grand to purchase some things that make it look like I'm doing great, and go to John and say "Hey, I need $25,000".   He gives me that $25,000.  I then pay Bill back say, $15,000 and he's so impressed with the turnaround he tells  his friends, who invest and then I pay John back $30,000 who tells his friends who invest and so forth.

Many will tell you Social Security is not a Ponzi scheme at all.  The NY Times recently posted an entire debate on the subject, allowing readers to answer with their thoughts.  I could go through the argument and give my view of each point, but that's for another day.  Today let's just talk about the retirement age, and whether or not it's appropriate where it is, at age 65 over most of the developed world.  (In the undeveloped world they don't call you "retired" if you live to age 65, they call you "lucky".)

The Origin of 65 as a Retirement Age, and of Social Security

As this page outlines, the origin of age 65 being the age of retirement dates back to the 1800's, when Otto Von Bismark introduced a social security system to Germany.  A little "light at the end of the tunnel" to the common man, never really intended to cost very much as at the time very few Germans-or anyone-survived until the age of 65.  You see back then, "developed" countries were very much like "undeveloped" countries are now in that if you reached age 65 they called you "lucky", not one of the many receiving Social Security, but one of the few to live that long, work that hard, and earn what was essentially your pension.

Basically it was the equivalent of setting the age of retirement at 100 today.  You see in 1880, life expectancy worldwide was roughly 40 years of age.  So in order to earn social security in the days it was created, you had to outlive your co-workers, friends, and relatives by about 25 years-more than half the length of the average life at the time.  You could translate this several ways to today's day and age in America, here are a few equivalents to what age 65 meant back then.

Today life expectancy is about 77.5 years.  Add 25 years to that, you could receive social security at age 102.5.

25 years is 62.5% of what a typical life lasted in 1880.  So, add 62.5% of life onto our current life expectancy and you'd start receiving social security at the ripe old age of 125!

Look, I don't think either of these ages are the appropriate age to start receiving social security or to consider yourself retired.  They're clearly way too old, and given that the concept was introduced basically as an unattainable carrot for the average worker, to use it as a base from which to determine what an appropriate age would be now would be...well, inappropriate.  However, the age of 65 is clearly killing our country's finances.  That fact is undeniable.

Social Security's Current and Projected Costs and Increases in Cost

Social Security accounted for roughly $701 billion in spending in 2010, and projects to account for almost $800 billion in 2011, as outlined here and here.  This is more in spending than any other portion of the federal budget other than Medicare/Medicaid.  The amount even leaves in the dust the amount spent on defense (roughly $689 billion).  With the money spent on Medicare, Medicaid, and Social Security alone you could literally set up two fully functioning governments (at least).  It's insane, and as the "baby-boomer" generation begins to collect  it's only going to get worse.

Some estimates have the number of "baby-boomers" at about 75 million-or roughly 25% of the current population (based upon 2010 census information).  With another 24% of the population under the age of 18, and another 13% over the age of 65 that leaves about 38% (roughly 117 million) of the population holding the bill as baby-boomers begin to retire and collect.  They were born at a clip of about 4 million per year, and they'll retire at roughly the same clip (as a point of reference, 2 million retired last year), doubling the current annual totals of retirees and bringing our country to it's knees financially.

At a cost of roughly $13,000 per retiree each year, that means on top of the $701 billion we already spent last year, we'll be adding almost $51 billion annually.  The net effect (total added less total subtracted due to deaths) will probably be somewhere in the $25-30  billion a year range (estimating a 2 million annual death rate amongst those 65+).  This doesn't adjust for inflation.  We simply cannot afford this any longer.

So What Do We Do?

The clear answer is three fold-raise the age of retirement, raise the social security contributions, and cut back on increases in benefits.  These things are all easier said than done, but they're necessary.  As the Social Security Administration outlines itself, an increase in age of recipient to age 70 would result in a savings of over $67 billion annually by the year 2040 (bear in mind as it's currently structured Social Security WILL go bankrupt in the year 2037).  An even more minor increase in age to 67 according to the same report would result in annual savings of more than $23 billion by the year 2022.  Carrying that annual savings forward the 15 years to 2037 when Social Security would otherwise go bankrupt would result in a total savings between then and now of roughly $350 billion.  Sure that's only half of what we currently spend annually, but combine that with minor increases in contributions and decreases in payouts and you're in business.

What Else Do We Do?

I know just as well as anyone else with half a brain that's ever paid rent, gone shopping, or eaten, that one simply cannot live off of $13,000 per year.  However, at some point one has to be charged with looking out for their own interests.  Doing something as simple as setting aside $50 per week if you start out as a 22 year old graduate could mean a world of difference when the time comes for retirement.  We have to become a country of people capable of and interested in looking out for ourselves, not simply dependent upon the government to fund our lives because medicine as it currently exists allows us to live longer.

Tuesday, November 1, 2011

The 47% People Don't Like to Talk or Hear About

Wow, so this daily writing hasn't gone as I'd planned.  Between work, child, wife, and the thousands of other things I'm constantly trying to do or keep up on, writing in this blog seems to be the one that slips through the cracks most days.  I will however consciously work to change that, this I pledge to you, oh loyal reader.

Today I'd like to talk about the 47% of Americans that don't pay income taxes.  Recently a great deal of attention has been paid to the 99% of Americans that represent most of the population, but very little of the income and wealth, particularly in comparison to the 1% they've recently declared war on.  However, much less attention seems to be paid to the fact that 47% of the people in this country PAY ZERO FEDERAL INCOME TAXES.

Look, this may not be popular-mostly because it indicts almost half the population-but it's fact.  Is it a sad fact as it highlights the other fact that this means that 47% of Americans don't make enough money to pay income taxes?  Absolutely.  Does that make it any less "fact"?  Nope, you see in the real world just because something's sad doesn't mean it isn't happening or isn't fact.  Additionally, just because something is sad doesn't make it right.  Pulling at your heart strings is not a legitimate substitute for logic, it just isn't-although it's often used as one.

I recently saw a clip of a man-a rich man, one who claims to be part of the 1% a great deal of America is currently railing against-who went down to Zuccotti Park with his own sign.  That sign read "I am the 1%, Let's talk".  He proceeded to engage many demonstrators regarding many of their issues, particularly his income and how much they deserved of it (in higher taxes on millionaires) as well as capitalism in general.  At any rate, his visit to the park intrigued me because it forced protesters to justify their talking points, their lines, their generalized positions.

The 99% like to go on about what's fair and what isn't fair.  However I have yet to hear why it's fair that this 1% should pay a higher percentage of taxes than the 99% whether they can afford it or not.  Look, there are some things that aren't right, there are times when the 99% movement are very right, but this point is not one of them.  While those in Zuccotti Park will argue that things aren't fair, let me tell you what's not fair:

47% of people DO NOT PAY FEDERAL INCOME TAXES.  Very simply put.  They don't.  In fact many get kick-backs in the form of earned income credit.  So people that pay nothing and get earned income credit which is enabled by the taxes the rich pay are complaining that the rich don't pay enough?  I mean really?  Look, I know the argument here is "people pay payroll taxes, they pay local taxes, they pay state taxes" and yes, these things are true.  What people arguing those points conveniently leave out is that employers MATCH those taxes, and on top of that pay their own taxes, and on top of that investors and owners pay their own personal taxes-in some cases twice!

Only in America-a place that is becoming a country of whiners-is it okay for someone who pays nothing to complain that those who have aren't paying enough.  A guy like Peter Schiff, he worked his you know what off to get where he is.  He started his company in a one bedroom apartment working 20 hour days-and that's after doing the same thing to work his way through an Ivy league school.  He worked that hard only to get to the top and find out what?  It's his job to completely support the slacker who dropped out of school in 9th grade?  The guy who partied throughout college, earned a 2.0 gpa, and could only get an hourly paying job as a result?

America is the country of opportunity-at least that's what we'd like to be known as-but that doesn't mean that once you work hard to get ahead, finally get ahead, that you're to be dragged back down.  That doesn't mean unequal effort should earn you equal rewards.  That most certainly doesn't mean that a guy who worked hard to get ahead should be penalized for it with a higher tax rate.  It simply doesn't-at least it shouldn't-and it isn't right if you ask me.

Furthermore, the entire concept is detrimental to America and our success both as a whole, and individually. Do you think for a moment that in this day and age if you start taxing the 1% at a 70% rate (yes I heard that rate quoted by people in Zuccotti Park) that they'll continue working?  Or that they'll continue working here?  Let's over-simplify it for a second to drive my point home: A millionaire makes a million a year.  He currently pays 35% of that to the government.  He makes this money as a partner in a business, he has 9 other partners, so total they make $10 million a year, and pay $3.5 million in taxes.  Now let's say the proposition on the table is to start taxing them at 70%, bringing that total to $7 million annually.  Let's also say (again this is for simplicity's sake) that moving their business overseas would cost them an additional 5% in logistics, plus an initial start up cost of putting factories or offices in, etc, etc.  Let's say that initial cost is...I don't know, $50 million.  While these costs are negatives, let's say the country they're aiming for is...Mexico, where the tax rate for the top earners is 28%, and they're still close enough to America to enjoy visits.

If America has instilled a 70% tax rate on the top earners they'd be paying $7 million in taxes here, vs. a collective $2.8 million in Mexico.  Sure the costs of moving would be tough, but amortize that over the life of the factory (let's say...25 years) and you're talking about a savings of $2.2 million annually by this fictitious group of businessmen.  Now maybe they won't starve to death on $300,000 a year in take home income each, but they'll do a hell of a lot better on $720,000.

These numbers are far from exact and are inventions of my own, but they illustrate a fact-if you continue to push tax rates up on businesses and the wealthiest individuals in the world, what's to keep them from leaving for greener pastures?  Particular in this day and age of travel and globalization?  It's not like moving would keep them from selling to the US if they chose to.  Hell, the US isn't even the biggest consumer anymore-or at least we soon won't be-with the industrial emergence of both China and India and their billions of people. Couldn't the US cut itself completely out of the picture with policies jacking up tax rates that are already among the highest in the world?

I'd like to hear any one of you justify the concept of a "progressive" tax system (one that taxes the wealthiest few a higher percentage than others) without using the words "because they can afford it" or any variation.  I'd also love to hear any defense for the 47% (that's 75 million households) that don't pay a dime to live in what we think of as the greatest country on earth.  Because if we charged even just $1 a day (that's less than most individuals spend on coffee daily) to each household (not person, but entire household) to stay here, that's another almost $30 billion in tax income.  That's enough to fund a lot of things in this country; 2/3 of homeland security, a good portion of veteran's benefits, many  social programs.  Think about all the things the 99% go on about, programs that should be instituted but aren't.  Then think, $365 a year from you, just $1 a day from your entire household could change some of that.  That's not even $1 a person.  Let's say you make $30,000 a year with 1-2 kids and therefore don't really pay any income taxes.  That's 1.2% of your income that could make some significant change-and you're "shaming" people for not paying 70%?  I say, shame on you.

I look forward to your replies.