Tag Archives: finance

Surprise, surprise.

The Supercommittee’s failure is the least surprising news in a long time. Don’t believe me? Check the Treasury bond yields. Interest rates on government debt actually went down a little, which means nobody buying bonds thought this was a big surprise. And said yields are at historical lows, which means that investors around the world still thing U.S. government bonds are the safest investment around.

And yes, I prefer to think of Supercommittee as one word. I like the irony of structuring the word Supercommittee like Superman.

It’s time to bring back http://slowclapforcongress.com/


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My personal federal income tax: a true, short story

Does everybody know how progressive federal income taxes work? Married couples filing jointly pay 10% on the first $17,000, and then 15% on the next $52,000, then 25% on the next $70,000, etc… Wherever you stop, that’s your “marginal tax rate,” or the tax rate that applies to the next dollar you could make. There’s a pretty easy to read set of tables here. By the way, if you and your spouse make the $69,000 it takes to get into that third bracket (the first $17,000 plus the next $52,000), then you’re doing better than over 2/3rds of the country, according to Wikipedia.

A couple like Amy and I who are in the third bracket, with a marginal tax rate of 25%, are supposed to pay the federal government 10% of the first $17,000 (=$1,700) plus 15% on the next $52,000 (=$7,800) plus 25% on the rest.

However our effective tax rate, which what we actually paid the U.S. government in 2010 divided by our total income, was less than 10%. Less than 10%, my friends, is not being taxed to death. Of course, this doesn’t include state and local and sales taxes.

How did we go from the formula I gave you above, which would have taxed just our first dollars at 10%, and the rest at higher rates? Exemptions, deductions… AKA, loopholes. Mortgage interest and property tax deductions, charitable deductions, student loan interest deductions, etc, etc, etc…

Next time you hear somebody complaining about being taxed at 35%, you should know that they are spinning the data. AKA, lying.


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Robert M. Solow’s review of How Markets Fail, by John Cassidy

Robert M. Solow famously worked out model of how labor and capital are combined with technological advances and other factors for productive output, which demonstrates that a huge part of economic growth comes from those technological advances or other factors exogenous to an individual or firm’s control. The model is a staple of macroeconomics and international comparative economics. He won the Nobel Prize in Economics in 1987. The guy about as famous as economists get without publishing pop-econ books.

Solow has now reviewed a new pop-econ book by New Yorker staff writer John Cassidy, entitled How Markets Fail: The Logic of Economic Calamities. I don’t know if How Markets Fail is going to make my reading list very soon; Cassidy is a smart journalist, and I’ve recommended his work before, but I’m pretty time-constrained. However, Solow is a legend, and his review is extremely cogent, balanced, and educating. You should read it.

Most writing on economics found in the mainstream and business press is ideologically motivated and intentionally pugilistic…

IN THIS CORNER, weighing in at a lean 1 trillion dollars market capitalization*, counting on a knock-out from the Invisible Hand, the defending champion, lately spending a lot of time on the ropes: Neo-Classical Free Market Economics!

IN THE OPPOSITE CORNER, riding on a wave of populist outrage and checking their hair in the reflection of Paul Krugman’s shiny new Nobel medalKeynesian/Interventionist Economics!

Unfortunately and predictably, nothing gets solved this way. Journalists and pundits and bloggers and think tanks just provide fuel to their respective power brokers, whether politicians or business leaders. While there are plenty of highly respected economists, testing theory against empirical observation, writing excellent academic papers and blog entries, and teaching insightful courses, they are rarely found making comprehensible observations in an arena of high visibility to the general public.

This makes me very gratified to read Solow’s review of Cassidy’s book, in the New Republic. Forget about the book for a second; Solow provides a very sensible set of observations on the limitations of free market economics, but doesn’t throw the baby out with the bathwater. This levelheadedness won’t be found in the bitter mudslinging between Paul Krugman and John Cochrane (NOTE: don’t read those links unless you have a lot of time on your hands and find it entertaining to see respected professors take pot shots at eachother).

While Solow is condensing an awful lot of information into a few pages, requiring a slow and careful read, it is all apprehensible. And, best of all, his focus is not on proving a theory wrong or right. He doesn’t talk at all about the Solow growth model, labor vs. capital, or total factor productivity. He just wants to discuss how markets fail, without taking an ideological stand on it. He does, however, bring up questions that he thinks Cassidy missed, for example:

Why, in the marketplace (sic!) of ideas, have the evangelists for the unrestricted market attracted so much attention and the “realists” so little? [Cassidy] argues, fairly convincingly, that the truth does not lie predominantly on that side of the issue. So is it that believers always make more effective advocates than skeptics do? Are we for some reason more receptive to simple answers than to complex ones?

That’s a really, really good question. Let’s ask ourselves why we believe what we believe, even in the face of contrary evidence. We all do this, but we can still try to intentionally question our assumptions.

Then he mildly echoes Paul Volcker, who recently told finance execs that the only valuable financial innovation of the last 25 years has been the ATM. Solow’s approach to this issue is less entertaining, and more Socratic:

It is nice that Cassidy is able to use the story of the financial crisis to exemplify some of the systematic sources of egregious market failure. But there is a deeper, or at least prior, question that he does not take up. Is all this financial activity socially useful, even in the absence of breakdown? It is worth a moment’s thought.

So, here in one book review, you get more balanced economic wisdom than you are likely to find in any other mainstream media source. Read it.


*It’s a joke. Don’t take it too seriously.

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One of many battles to come over minutae of the new healthcare law

This entry was originally posted on Monday, March 29, at 11:30pm.  I’ve UPDATED it at the end with a glance at the financial impact of this news on AT&T, Caterpillar, 3M, and Deere & Company.

So, I read this article and fully understand why people prefer phrasemongering. This shit is dull. But really, if you want to figure out whether healthcare is good or bad for people and employers, you’ve got to pay attention to this stuff. And, unfortunately, you sometimes might still need an interpreter. I’ll do my best to drop some MBA larnin on ya. Please feel free to comment if I get something wrong, or it isn’t clear.

As part of Medicare Part D, which provides supplemental drug insurance to seniors, companies that provide their retirees with their own prescription drug benefits get both a subsidy and a tax credit for providing the coverage. They get a tax credit, even though they aren’t paying the full cost of the benefit, because the government wanted to give them an incentive to keep seniors on private plans, off of Medicare Part D.

Starting in 2013, the subsidy to help companies pay for retiree prescription drug benefits will continue. But the tax credit will go away. So, yes, it will cost companies something in the form of higher taxes. It won’t cost them anything in cash until then.

But, accounting rules require that when there is a regulatory change like this, you have to estimate the total future cost and post it to your financial statements. Now. (Not the full dollar amount forever into the future; it gets discounted because it is cheaper to pay somebody a dollar in a year from now than it is to pay a dollar now–paying that dollar another year later makes it worth less, etc…) So what will be a cash cost in 2013 and later needs to be recorded as an expense today, but discounted because dollars in the future are worth less than dollars today. Got it?

So the companies need to reduce their paper profits today. That is what they are complaining about. Yes, even though we are only talking about paper profits, this is still cause for complaint, because it will eventually cost them some cash money in higher taxes.

But. How much it will cost them is very difficult for anybody to calculate. Actuaries calculate this, and it is important to understand that actuaries have to make assumptions about the future in their calculations. For one thing, they have to make an estimate, a highly educated guess, about when retirees will die.

A retiree’s lifespan will obviously have an impact on how long a company is paying the benefit, so a guess about when they will die is relevant. And there are other assumptions to make, too. The actuary’s job is to make assumptions with the best statistics and as little bias as possible, but in real life it doesn’t work that way. A chief financial officer might look at the actuary’s estimate, decide it is too low or too high, and ask the actuary to change the assumptions in order to tweak the outcome. And, since the CFO pays the actuary, how much do you think the actuary will fight the CFO? A little, for the sake of professionalism, but not enough to risk losing the CFO as a paying client.

So yes, these numbers that AT&T and Caterpillar are complaining about can be manipulated… or tweaked, to use a nicer word. Not only that, good financial analysts and smart investors (admittedly a small group, and I don’t include myself in it) automatically assume these calculations were manipulated. The manipulation can make the numbers look better or worse, depending on what the company needs to report that quarter.

And the fact that they have the numbers ready to go so fast means they were prepared ahead of time to drop this news at a calculated moment. If they really want this section of the healthcare law repealed, it is obvious that they will want to make this impact look really bad.

So will it really cost them what they say it will cost them? We don’t know, but I have my doubts. At the very least, these numbers reflect worst case assumptions. The timing of these announcements outs them as politically motivated. This isn’t automatically a bad thing. If I weren’t politically motivated, I wouldn’t be writing this blog! But just remember that you have to take these estimates on the future cost of healthcare policy change with several grains of salt. If we keep in mind their incentives to make it look worse than it is, and if we recognize that they have the ability to make it look worse than it is, we can be much better critical thinkers.

–UPDATE follows–

The point of my post above is that managers are not going to give us an objective read on the effect of politically charged policy changes. So, what about investors? Investors lack the depth of information that managers have, but they are motivated to make money. Their political views are usually not reflected in the bid-ask spread for a security. I’m certainly not saying that investors are unbiased. But their biases are going to be different.

AT&T (ATT): Stock price closed 0.11% higher on Friday, Mar 26, than it opened on Monday, Mar 22. That’s basically flat. AT&T’s market capitalization is $1.21B. I couldn’t make out the timing of AT&T’s announcement on Google Finance.

Caterpillar (CAT): It was a big week for CAT; the stock price climbed 5.17% (mostly on Monday and Tuesday, along with many other industrials on the basis of economic recovery optimism).  They made their healthcare tax cost announcement on Wednesday, March 24, and the market, apparently, said “meh.” No significant losses.

3M (MMM): 3M posted non-trivial losses  of 1.17% last week. Most of those losses were incurred on Thursday. The biggest Thursday news from 3M was that their CEO’s pay increased 21% in 2009 (all in bonus and options), and they spent $440,000 in lobbying in the Q4. Their announcement about healthcare charges was widely reported at the end of the day on Friday. The company said the tax change cost them 12 cents/share, which is a lot. The market didn’t seem to agree.

Deere & Company (DE): Deere gained 2.66% over the week. They made their healthcare charge announcement on Thursday, at the beginning of the day. They lost some ground at the end of the day. If those losses were related to healthcare charges, this was an uncharacteristically slow reaction in the market.

What to make of the effects of the tax change on these companies? Here’s a general recap from Market Watch. It makes sense.


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“Chicago School” economists on the crash

If you have some time, here is something worthy of it. http://freakonomics.blogs.nytimes.com/2010/01/20/chicago-economists-on-the-crisis/

I did my MBA at the University of Chicago, and I concentrated in economics and finance. But the econ you get in the MBA curriculum is really Chicago School Lite. So, I am no expert.  But I did take classes from three of the guys interviewed for this series, one neo-classicist (Murphy), one cautious pragmatist (Rajan), and one behaviorist (Thaler). They were all brilliant, but I think for advice in a financial crisis, I’d go with Rajan.

Whatever you might think about the Chicago School, know this. The current economics and finance faculty at the U of C is a very diverse group. You can see that in these interviews.

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