Chrees' world

The less we say about it the better

2007-01-23T17:28:00.000-08:00

Make it up as we go along

I want to thank everyone in the personal finance world for all the information and inspiration they have given me. Due to several things currently taking place, I’m going to pull the plug on this endeavor for now. I just don’t have the time or the heart to dedicate to making this what it could be.

Again, thanks to all and best wishes on obtaining your goals. And don't forget to smile!

2010 isn't that far away, either

2007-01-22T09:34:00.000-08:00

Between the dread of having to listen to almost 2 years worth of presidential campaign bs and reading about Oprah's (and his parents') abuse of Shawn Hornbeck for her audience’s voyeuristic pleasure, I think our TV may stay off a little bit more over the next few years.

Totally useless, but that's the point

2007-01-17T08:57:00.000-08:00

Office Playground has all sorts of toys for around the office. However, if you have ever had to buy prizes to hand out at company/department/training get-togethers, this could prove a valuable resource. One-stop shopping for all your useless needs.

And Jack Bauer still didn't talk

2007-01-16T11:58:00.000-08:00

There is a Jack Bauer action figure finally hitting the market later this year. You may be wondering why it took so long when the show has been a hit for several years now. Or not. But I was, and finally found a good explanation:

(T)he mini-Jack Bauer should have hit shelves much earlier. (Kiefer) Sutherland explains, "They tried to come out with one a couple of years ago and they had sent me the doll for my approval... We took the doll out for a night to have some fun and we'd had some drinks. We sat it on the corner of the table. "We started torturing him around 11 o'clock at night, and, by two o'clock in the morning, we had set him on fire in the parking lot. "We got up the next day and there was just this puddle of wax. His clothes didn't burn, which I thought was pretty cool... and then I got a call the next day saying, 'Did you like the doll?' I said, 'Yeah, it was great.' And they said, 'Well, OK, good, you gotta send it back to us because that was the prototype... It took that guy a year to make it.'

I suddenly feel much better about business opportunities I haven't capitalized on...

Be careful what you wish for

2007-01-15T13:08:00.000-08:00

Or in this case, legislate.

It's no laughing matter – icicles are in the orange groves, people are in shelters, and even birds are huddling together for warmth, in temperatures so cold California's governor has declared an emergency.

California's weather lurched from beach to ski in less than a week as an arctic blast delivered rare snowfalls in low-lying southern cities and put the state's $1 billion citrus industry on alert. ...

Friday, Gov. Arnold Schwarzenegger issued an emergency proclamation that made more state funds available to counties coping with cold weather.

Maybe it's just because the weather is being a good citizen?

Joined by national and international dignitaries who have been leaders in the fight against global climate change, Gov. Schwarzenegger signed AB 32 by Assembly Speaker Fabian Nunez (D-Los Angeles), California's landmark bill that establishes a first-in-the-world comprehensive program of regulatory and market mechanisms to achieve real, quantifiable, cost-effective reductions of greenhouse gases.

"When I campaigned for governor three years ago, I said I wanted to make California No. 1 in the fight against global warming."

Consider it a freakin' success.

Red tide

2007-01-15T08:41:00.000-08:00

Occasionally, the (harmful) algae grow very fast or "bloom" and accumulate into dense, visible patches near the surface of the water. "Red Tide" is a common name for such a phenomenon where certain phytoplankton species contain reddish pigments and "bloom" such that the water appears to be colored red. The term "red tide" is thus a misnomer because they are not associated with tides; they are usually not harmful; and those species that are harmful may never reach the densities required to discolor the water. Unfortunately, a small number of species produce potent neurotoxins that can be transfered through the food web where they affect and even kill the higher forms of life such as zooplankton, shellfish, fish, birds, marine mammals, and even humans that feed either directly or indirectly on them. -- Source: Woods Hole Oceanographic Institution webpage

Nick Saban's $4 million-a-year contract to become Alabama's football coach is good news for other top coaches negotiating new contracts. But some college athletics administrators fear that Saban's windfall will trigger others, and that continuing increases in coaches' salaries may result in congressional scrutiny.

Saban will become the highest-paid coach in college football by a wide margin, according to a USA TODAY study of head coaches' contracts. This year's leader was Oklahoma's Bob Stoops, at $3.45 million, not including benefits or the value of other perks. Iowa's Kirk Ferentz will clear the $3 million threshold in 2007. Both coaches in Monday night's Bowl Championship Series title game have contract provisions that could soon result in renegotiations. Florida's Urban Meyer already is making more than $1.5 million and Ohio State's Jim Tressel more than $2 million.

"I'm concerned … about the finances and how it will affect the rest of us in the years to come," said LSU athletics director Skip Bertman. "Congress is already talking about 'What can we do?' And presidents are saying 'What can we do?' This will not just fuel the fire. This will set off all the alarms."

Question to college presidents—who is in charge here? Everyone seems eager to pay top dollar but then they beg for someone to save them from themselves. Reminds me of pro baseball owners.

And I love the “not including benefits of the value of other perks” clause. Speaking fees, lavish expense accounts, product endorsements/apparel deals, TV shows—it’s amazing how many different places the income can be delivered. While I think schools like Alabama are crazy for what they are doing (disclaimer—I went there), it’s their money to waste. The funds are coming out of their athletic department’s income. But for many other schools the salaries are paid from the general fund—tax dollars, in other words. The quickest way to screw it up for colleges and fans is to have Congress look at it. Any action Congress takes is sure to mess things up forever except for those that can take advantage of the loopholes sure to be available.

The economics of college sports is extremely interesting. For the top schools, college football is a license to print money. For most everyone else, it is a pride or vanity thing, hemorrhaging a school’s money at the expense of other programs. Be sure and check out the database of coaches’ salaries and other sources of income also provided by USA Today.

Colorful castle, long history, fixer-upper, only $78 million!

2007-01-11T14:15:00.000-08:00

"Blood stains have been removed." The Bran Castle in Romania, which had ties to "Vlad the Impaler," is up for sale. Vlad was part of the inspiration for Bram Stoker "Dracula" and the local council is looking into buying the castle to preserve it as a tourist site.

"After the restitution, concerns were raised that the family could sell the castle to a hotel chain and that the site could end up being the centerpiece of a Dracula theme park that would blight the surrounding, pristine countryside some 105 miles north of Bucharest." It's interesting to see the discussion on how much to pay for the castle. Keep in mind 400,000 people visit it each year (!).

Also check out the Bran Castle Museum site, with lots of interesting photos of the castle, architecture, and inhabitants over the years.

Security, that's all I want from you

2007-01-11T10:08:00.000-08:00

Talkin' bout security, yeah, yeah
And a little love that'll be true
Right now
(Etta James)

I’ve spent the better part of this week in San Francisco being deposed or prepped for the deposition. The things that struck me, besides the tedium of the deposition itself, was the security in the office building. Since 9/11 it has been standard practice at the San Francisco office buildings I’ve visited to have to check in at the front desk before they let you proceed to the elevators. The office building I visited this week had a combination of several security steps I’ve seen individually elsewhere, including checking in at the front desk, comparing to the company’s visitor log, security having to swipe a card key and punch the elevator floor for me, and a few other procedures. I was a little taken aback at the heightened level of security present.

Of course the physical probing was just a warm-up for the mental prodding I got from the lawyers (nothing was found in either approach). On to other types of security…

I’m increasingly concerned about my mother-in-law. Her husband had done a wonderful job of providing financial security, but I’m watching him take on debt (after getting close to having no debt, mortgage or credit card) while trying to start a new business and also contributing lavishly to an organization he belongs to. I’m crossing my fingers that the business succeeds. I watched my father lose almost everything in the early 1980’s when his partnership was bought out—it had been worth a lot more for a long time but had to be put on the market in a fire sale if the partners were going to realize anything. I don’t wish having to start over in your 50’s or 60’s on anyone. Thank goodness my parents were able to make a decent go of it—there is something about that generation that experienced both the Depression and World War II.

Compounding my concern about my mother-in-law is her husband’s health. While he looks fine on the outside, recent doctors’ visits don’t bode well for long-term health unless he changes certain habits (which I know he won’t do). Oh well…some things you can do for others, and other things you can’t.

Recent pleasures

2007-01-05T16:37:00.000-08:00

Given how things are going lately, this topic should yield a very short post from me. But there are a few things I’m happy to relay:

I don’t know how many Trader Joe’s are carrying the 2005 Amaicha Torrontes from Argentina for $1.99 a bottle, but it is an extremely nice wine easily worth several times the price. Tasting much like a gewürztraminer with some additional riesling notes, it is an extremely floral and fruity white wine. Look for it if you’re near a TJ’s.

And I’ve been drinking some of it while watching the first season of HBO’s Rome. My wife got me the DVD set for Christmas and I am hooked already. I try to avoid watching series on TV due to time constraints, but there are some very good ones out there. If I continue to like the remaining episodes, I’ll probably have to make an exception for the second season of Rome which starts on the 14th. Overall historically accurate with obvious embellishment, with superb writing, directing, sets, and just about everything else. I haven’t begun to enjoy the extras in the DVD set yet, but this started as a guilty pleasure that quickly lost the guilt.

Finally, it’s good to see Marty McSorley again. Fitzgerald didn’t live long enough to see that there are now multiple acts for many American lives. Currently the on-air color commentator for Fox Sports Net West covering the San Jose Sharks games, it has been about 6 years since his assault of Donald Brashear and the resulting suspension and court case. Having spent two years as a minor-league coach and last year in the color role for FSN in L.A. covering Kings and Ducks games, he has been a nice addition to the broadcasts (even though I liked Drew Remenda). McSorley still has some rough edges to polish, but shows a lot of promise. Plus I’m looking forward to the February 21st game that the Sharks will play in Washington. Brashear is with the Capitals now and FSN will be broadcasting the game. (I’m sure McSorley has already had those moments last year while working in L.A.) Anyway, for some reason I’m happy to see his bouncing back from a very unfortunate incident.

Incoherent mumblings about stock grants

2007-01-04T09:00:00.000-08:00

Yesterday was the first vesting date for my company’s deferred stock program. I’m now the proud owner of 38 shares of stock. Woo hoo. It would have been 62 shares if I had bothered to come up with the money to pay the payroll taxes associated with the grant, which I really should have done. But I let my attitude toward my job and my company influence my decision. Instead I let them use some of the shares to settle the tax liability. Don’t make my mistake if you think your company’s stock will go up—I have given up potential upside on a few shares in order to satisfy the tax bill today.

If I thought the stock would inrease significantly over the next few years I probably would have ponied up the money for taxes. I guess the paltry amount of the grant influenced my decision as well. The company did away with granting stock options two years ago and began the deferred stock program. I can see where having several years’ worth of grants vesting can make this a nice little annuity-like program. Next January, for instance, I would have over 200 shares vesting since it would be from two years worth of grants.

So I guess I should be grateful, but looking at the numbers right now it is hard to get excited. Especially when compared to the numbers of stock options: right now I have 4,000 options, but half of them are so far under water they need a bathyscaphe to keep from getting crushed. I was fortunate to exercise the options I did when the stock was climbing, which I did in order to get a sizeable down payment on our house.

Sorry if the post comes off as unappreciative, as the company has been very good to me for the time I’ve been here. They don’t have to have the program, although it would be hard to be competitive for personnel in this environment without something of the sort.

I just don’t see the wealth-building potential from the deferred stock program that I experienced from the option grants, and a large part of my dissatisfaction comes from the change in programs (thanks FASB and Congress!). Also the fact that vesting is now a taxable event, which was not the case with options. So my net worth went up about $600 yesterday (after tax) and I’ll count that.

Resolutions 2007, updated

2007-01-03T11:53:00.000-08:00

From the desk of Donald Trump:

11. File divorce papers NOW!!! The bitch will not humiliate me and get away with it. Make sure lawyers find a judge that doesn't like her nude photos...

Reminiscences of a Stock Operator

2007-01-03T08:35:00.000-08:00

Thanks to The Big Picture for giving the link to Michael Covel's post on Jesse Livermore's thinly disguised biography Reminiscences of a Stock Operator. The book has just entered the public domain, so the link at Covel's post takes you to a full .pdf file of the short work.

Originally published in 1923, the work is a must-read for anyone investing or speculating in stocks. I can't recommend the book enough--download it and read at your leisure. While waiting for the download, you can read some comments on the book at Amazon.com.

2007 Resolutions

2007-01-02T09:36:00.000-08:00

From the desk of Donald Trump:

1. Change the name of the Miss USA pageant to Miss Girl Gone Wild (have legal lean on Joe Francis for a piece of the action, so to speak).

2. Make sure Timothy O'Brien never prints another book. Look up the word ‘malicious.’

3. Take Rosie O’Donnell to court and “reach into her fat-ass pockets and take some of her money.” Get Barbara to lean on the bitch—she owes me big time. Also, have someone look into what the O’ people have against me.

4. Sue AOL and everyone that voted in their “Most Annoying Money Personality” poll.

5. Hire extra lawyers for the legal department.

6. Give my hairdresser a raise—no one notices what she's doing with my hair.

7. Line up some towers to be built in Topeka, Des Moines, and Oklahoma City so those rubes can respect the Donald.

8. Place towers in Topeka, Des Moines, and Oklahoma City in bankruptcy so we don’t pay for their construction.

9. Start looking for wife #4. Mealania has added a few pounds since that kid was born.

10. Find out who this Chrees person is and have him fired.

Happy New Year!

2007-01-01T11:28:00.000-08:00

(self portrait with cell phone)

I didn't mean to take a week off from posting, but things have been busy at home while family was visiting. I finally have a few seconds and wanted to wish all a healthy and wealthy new year!

Did I miss any news?

2006-12-22T14:40:00.000-08:00

Busy week with work and sick kids. Did I miss anything of importance in the news?

I read a little bit about the Miss USA contest turning into Girls Gone Wild, but I didn't care very much about it until Donald Trump and Rosie O'Donnell decided to mimic a fight scene from a monster movie. I suggest a cage match--two men enter, no one leaves.

Other than that, everything OK with your world?

The myth of the big bad drug companies

2006-12-22T11:37:00.000-08:00

Thanks to Richard Epstein for stating the obvious. Are things in the pharma world perfect? Far from it, but the cures some people would like to put in place would make things much worse. But then you get lots of political mileage from painting horns and a tail on someone easy to hate.

Critics like Angell and Kassirer are absolutely wrong to portray the nation's big drug companies as heartless, avaricious behemoths that act in whatever manner they choose and always get their way. The truth is, the pharmaceutical industry is too heavily regulated. Its big problem today is not that it's free to run roughshod over the needs of consumers, but that it operates in a hostile and excessive regulatory environment that frustrates sound business decision-making and keeps down pharmaceutical company share prices in the stock market. ...

All these developments spell higher costs for the companies. Simultaneously, regulatory attacks on the industry's pricing model, including recent proposals to have the government negotiate rates for all senior citizens covered under Medicare Part D, threaten its revenue stream. The pharmaceutical industry operates in a high-fixed-cost and low-margin environment. It costs, on average, more than a billion dollars to get the first pill to market. All subsequent pills, however, can be made and marketed for only a few additional dollars or cents. Of course, no user ever wants to pay the big bill for that first pill. Instead, each fervently hopes to pay as close to marginal cost for the subsequent pills.

The problem with that is that unless someone pays for developing that first pill, there's no second pill to take. The central challenge to drug pricing is to figure out, quite literally, who swallows (and in what proportions) that huge front-end cost. Unfortunately, no company has a precise method to fairly, reasonably and palatably allocate the cost of drug development among the varied classes of subsequent consumers — large HMOs, hospitals, full-service pharmacies and Medicaid for starters. Each buyer has a strong incentive to push as many of those costs as possible onto someone else.

The upshot is a rough-and-tumble bargaining game in which drug prices vary substantially across different market segments. But the corner drugstore doesn't have the same leverage to play one drug manufacturer off against another, so it usually pays higher prices for its wares than a large HMO. The resulting confusion leads to loud calls for equitable, industrywide price controls. But price controls would have the same dire consequences as they would in any other industry. Investment dollars will quickly move elsewhere if the regulatory system does not allow manufacturers to maximize their revenues over the useful life of the drug (which, incidentally, never exceeds the 11 or so years of patent protection).

Repeated studies, both domestic and foreign, have shown that price controls dull the incentives of pharmaceutical companies to develop new drugs. Even talk of price controls depresses investment.

Because of its high-fixed, low-variable cost structure, the drug industry will never reach perfect competitive equilibrium. But in our second-best world, ponder carefully the different consequences of two strategies. The first seeks to expand supply by avoiding regulation and encouraging the entry of new companies into the business. The second seeks to hold down prices by direct controls.

The second approach leads to low prices today but systematic shortages tomorrow, while the first leads to greater innovation today and greater choice tomorrow. We must be careful not to mistake price controls for a cure when they are in fact a disease. Let our new reformist Congress beware.

For those that were decrying the lack of vaccines last year, they need to review their history of how we got in this mess and re-read what the second approach gets you.

Another sad commentary for what passes as celebrity today

2006-12-18T12:52:00.000-08:00

His cell phone rings, and he snaps into business mode. "How much am I getting?" he says. He pauses, then says, incredulous, "$10,000 and one PlayStation 3?" He turns the cell to his face so he can talk right into the mouthpiece without having to hear. "Tell that nigga," he snarls, "I want three PlayStation 3s and $15,000, or fuck off." He angrily snaps the phone shut. But Snoop's mood changes quickly when a man comes in with a beautiful brunette on each arm. "Snoop," he says, "I want you to meet these two fifteen-year-old girls." Snoop immediately breaks into song. "I don't see nuttin' wrong," he sings like R. Kelly, "with a little bump n' grind . . ." and everyone laughs again.

Not that long ago the Wall Street Journal had a cover article on Calvin Broadus’ (Snoop Dogg) ability to reinvent himself. Whether the previous gangsta rap persona was real or not, he now shows up in mainstream ads for Chrysler and cheesy movie roles. I wonder what Lee Iacocca would think if he were to read the recent Rolling Stone cover article:

"I was flexin' my pimp muscle and lettin' people see how real pimps do it," he says. "If you really a pimp, you should be able to get two bitches to walk on a leash with you down the red carpet and be yo ho's for the night. And when I did it, it really was pimpin'." I had thought it was all for show, metaphorical pimpin', but Snoop says it really was pimpin' with so much feeling, I can't help but think that he was a professional pimp. Indeed, for two years, he was. "I wouldn't even say a real pimp," he says. "I'd just say I had it like that. See, that shit was my natural calling and once I got involved with it, it became fun. It was like shootin' layups for me. I was makin' 'em every time. 'Cause pimpin' ain't a job, it's a sport. I had a bitch on every exit from the 10 freeway to the 101 freeway, 'cause bitches would recruit for me.

So I guess it wasn’t just “research” for a movie role. I rarely am amazed at the mainstreaming of anything, and more power to him if people are willing to overlook his misogyny and violence to shovel money his way. The amusing part to me was the fawning nature of the article, yet a truly revolting picture shows through at every turn.

I think they're selling something, Part 2

2006-12-18T08:40:00.000-08:00

The very first videoblog by Amanda Congdon has been posted at ABC News. I'm pretty sure it will be a hit.

Here's to ABC News for figuring out what sells on the internet is the same as everywhere else. Who knew I would be so interested in virtual snowflakes?

Extrasensory perplexity

2006-12-15T13:57:00.000-08:00

Jeane Dixon, well known astrologer and psychic, died approximately 10 years ago (January 26, 1997). As we wind down the current year, I thought it might be helpful to see what her last predictions were. While we here at Chrees’ World don’t believe in the paranormal, trying to glimpse the future is an art practiced by both pyschics and financial planners.

Child star Emmanuel Lewis (“Webster”) will not only have a growth spurt but will star in the NBA.
Result: nobody watches the NBA anymore so we’re not sure.

The divorce earlier this year of the Prince and Princess of Wales will not hurt the status of either party.
Result: Charles could be playing in the NBA for all we’ve heard of him in the past 10 years. Diana, despite mental instability but because of an untimely death, was nominated for and granted sainthood.

Rap music will die with Tupac Shakur.
Result: The morphing of rap into many different directions in the past 10 years can be easily seen, including the Pope giving his blessing to the new hiphop mass. Tupac’s career soared after his death: 750 billion albums sold, four books on the best-sellers list simultaneously, and starring in at least 13 movies. While rap didn’t die, many rap recording artists did.

The murderer of JonBenét Ramsey will be quickly found and sentenced.
Result: media circus, police incompetence, and the need to take a shower every time John Mark Karr is shown on TV.

The upcoming comet Hale-Bopp will usher in a worldwide drive for peace and understanding.
Result: 39 Heaven’s Gate cult members commit suicide in order to ride on the spaceship trailing the comet. Many incidents threatening world peace have occurred since then, including Adam Sandler’s career.

A new religious leader will be born this year whose followers will surpass all current organized religions.
Result: the first Harry Potter book was published in June 1997, and is the only media force to outsell Tupac. Some organized religions, like the Episcopal Church, decide to commit suicide instead.

Civility, manners and clean language will make a comeback this year.
Result: South Park premiers on Comedy Central in August 1997. 1998 is formerly renamed “The year of the blow job.” 1999...well, the less said about what happened in Suite 238 at the Super Bowl, the better.

One last birth prediction for 1997—a baby will be born this year that will shake up Hollywood.
Result: the fourth Mrs. Tom Cruise was born on April 23, 1997.

I think they are selling something

2006-12-14T10:42:00.000-08:00

But I could be mistaken.

The message that buying Louis Vuitton leaves you so broke you can't afford clothes is probably not what they intended. Or that anonymous men will ply you with drinks, ice and tongs simply because you drink Campari (regardless of what you look like) could lead to some serious self-esteem issues. Or maybe they are saying the only way I have a chance with someone that looks like Salma is by getting her ripped.

Nice to see that advertisers are moving away from using sex to sell things and becoming more upfront with reality.

The politically correct yet factually incorrect claim ... appears to fill a psychological rather than logical need

2006-12-14T08:54:00.000-08:00

Class warriors love to make claims that upon scrutiny usually don't hold up to the point they try to make. There is a great article (subscription only) in today's Wall Street Journal that demolishes the "recent income inequality" arguments. Sorry if I'm breaking all the rules here, but the entire article must be read. Like most things trying to uncover the truth, a pithy quote or short excerpt will not do it justice.

COMMENTARY
The Top 1% . . . of What?

By ALAN REYNOLDS
December 14, 2006; Page A20

As many others have done, Virginia's Democratic Senator-elect Jim Webb recently complained on this page of an "ever-widening divide" in America, claiming "the top 1% now takes in an astounding 16% of national income, up from 8% in 1980." Those same figures have been repeatedly echoed in all major newspapers, including this one. Yet the statement is clearly false. The top 1% of households never received anything remotely approaching 16% of personal income (national income includes corporate profits). The top 1% of tax returns accounted for 10.6% of personal income in 2004. But that number too is problematic.

The architects of these estimates, Thomas Piketty of École Normale Supérieure in Paris and Emmanuel Saez of the University of California at Berkeley, did not refer to shares of total income but to shares of income reported on individual income tax returns -- a very different thing. They estimate that the top 1% (1.3 million) of taxpayers accounted for 16.1% of reported income in 2004. But they explicitly exclude Social Security and other transfer payments, which make up a large and growing share of total income: 14.7% of personal income in 2004, up from 9.3% in 1980. Besides, not everyone files a tax return, not all income is taxable (e.g., municipal bonds), and not every taxpayer tells the complete truth about his or her income.

For such reasons, personal income in 2004 was $3.3 trillion, or 34.4%, larger than the amount included in the denominator of the Piketty-Saez ratio of top incomes to total incomes. Because that gap has widened from 30.5% in 1988, the increasingly gigantic understatement of total income contributes to an illusory increase in the top 1%'s exaggerated share.

The same problems affect Piketty-Saez estimates of share of the top 5%, which contradict those from the Census Bureau (which also exclude transfer payments). Messrs. Piketty and Saez figure the top 5%'s share rose to 31% in 2004 from 27% in 1993. Census Bureau estimates, by contrast, show the top 5%'s share of family income fluctuating insignificantly from 20% to 21% since 1993. The top 5%'s share has been virtually flat since 1988, aside from a meaningless one-time jump in 1993 when, as the Economic Policy Institute noted, "a change in survey methodology led to a sharp rise in measured inequality."

Unlike the Census Bureau, Messrs. Piketty and Saez measure income per tax unit rather than per family or household. They maintain that income per tax unit is 28% smaller than income per household, on average. But because there are many more two-earner couples sharing a joint tax return among high-income households, estimating income per tax return exaggerates inequality per worker.

The lower line in the graph shows that the amount of income Messrs. Piketty and Saez attribute to the top 1% accounted for 10.6% of personal income in 2004. That 10.6% figure looks much higher than it was in 1980. Yet most of that increase was, as they explained, "concentrated in two years, 1987 and 1988, just after the Tax Reform Act of 1986." As Mr. Saez added, "It seems clear that the sharp, and unprecedented, increase in incomes from 1986 to 1988 is related to the large decrease in marginal tax rates that happened exactly during those years."

That 1986-88 surge of reported high income was no surprise to economists who study taxes. All leading studies of "taxable income elasticity," including two by Mr. Saez, agree that the amount of income reported by high-income taxpayers is extremely sensitive to the marginal tax rate. When the top tax rate goes way down, the amount reported on tax returns goes way up. Those capable of earning high incomes had more incentive to do so when the top U.S. tax rate dropped to 28% in 1988 from 50% in 1986. They also had less incentive to maximize tax deductions and perks, and more incentive to arrange to be paid in forms taxed as salary rather than as capital gains or corporate profits.

The top line in the graph shows how much of the top 1%'s income came from business profits. In 1981, only 7.8% of the income attributed to the top 1% came from business, because, as Mr. Saez explained, "the standard C-corporation form was more advantageous for high-income individual owners because the top individual tax rate was much higher than the corporate tax rate and taxes on capital gains were relatively low." More businesses began to file under the individual tax when individual tax rates came down in 1983. This trend became a stampede in 1987-1988 when the business share of top percentile income suddenly increased by 10 percentage points. The business share increased again in recent years, accounting for 28.4% of the top 1%'s income in 2004.

As was well-documented years ago by economists Roger Gordon and Joel Slemrod, a great deal of the apparent increase in reported high incomes has been due to "tax shifting." That is, lower individual tax rates induced thousands of businesses to shift from filing under the corporate tax system to filing under the individual tax system, often as limited liability companies or Subchapter S corporations.

IRS economist Kelly Luttrell explained that, "The long-term growth of S-corporation returns was encouraged by four legislative acts: the Tax Reform Act of 1986, the Revenue Reconciliation Act of 1990, the Revenue Reconciliation Act of 1993, and the Small Business Protection Act of 1996. Filings of S-corporation returns have increased at an annual rate of nearly 9.0% since the enactment of the Tax Reform Act of 1986."

Switching income from corporate tax returns to individual returns did not make the rich any richer. Yet it caused a growing share of business owners' income to be newly recorded as "individual income" in the Piketty-Saez and Congressional Budget Office studies that rely on a sample of individual income tax returns. Aside from business income, the top 1%'s share of personal income from 2002 to 2004 was just 7.2% -- the same as it was in 1988.

In short, income shifting has exaggerated the growth of top incomes, while excluding a third of personal income (including transfer payments) has exaggerated the top groups' income share.

There are other serious problems with comparing income reported on tax returns before and after the 1986 Tax Reform. When the tax rate on top salaries came down after 1988, for example, corporate executives switched from accepting stock or incentive stock options taxed as capital gains (which are excluded from the basic Piketty-Saez estimates) to nonqualified stock options reported as W-2 salary income (which are included in the Piketty-Saez estimates). This largely explains why the top 1%'s share rises with the stock boom of 1997-2000 then falls with the stock market in 2001-2003.

In recent years, an increasingly huge share of the investment income of middle-income savers is accruing inside 401(k), IRA and 529 college-savings plans and is therefore invisible in tax return data. In the 1970s, by contrast, such investment income was usually taxable, so it appears in the Piketty-Saez estimates for those years. Comparing tax returns between the 1970s and recent years greatly understates the actual gain in middle incomes, and thereby contributes to the exaggeration of top income shares.

In a forthcoming Cato Institute paper I survey a wide range of official and academic statistics, finding no clear trend toward increased inequality after 1988 in the distribution of disposable income, consumption, wages or wealth. The incessantly repeated claim that income inequality has widened dramatically over the past 20 years is founded entirely on these seriously flawed and greatly misunderstood estimates of the top 1%'s alleged share of something-or-other.

The politically correct yet factually incorrect claim that the top 1% earns 16% of personal income appears to fill a psychological rather than logical need. Some economists seem ready and willing to supply whatever is demanded. And there is an endless political demand for those able to fabricate problems for which higher taxes are, of course, the preferred solution. In Washington higher taxes are always the solution; only the problems change.

When the 'K" in 401(k) means "Kiss it goodbye"

2006-12-11T12:43:00.000-08:00

Is your 401(k) plan safe? Recommended reading for those that work for small companies:

By law, all assets in 401(k) plans must be covered by private insurance policies known as fidelity bonds. But the bonds are required to cover just 10% of the retirement plan's assets or $1 million, whichever is less. ...
At companies with fewer than 100 employees — such as Elliott's company — the plans are not subject to annual independent audits that could deter embezzlement. An estimated 9 million Americans have their savings in 401(k) and profit-sharing plans small enough to be exempt from the annual audit requirement. That's about 20% of the people in defined-contribution retirement plans.

The Elliott referred to in the quote is Jim Elliott, 55, who watched $230,000 of savings in his 401(k) plan disappear. The president of the company was also the plan's sole trustee, and seemed to view the company's retirement fund as a source of keeping the company afloat.

In addition to the tips listed at the end of the article, if you find yourself working for a company exempt from an annual independent audit, find out who the trustee(s) is/are and how they intend to let everyone know their savings are safe.

Udderly rediculous

2006-12-11T11:11:00.000-08:00

I had read about Hein Hettinga’s run-in with the dairy powers-that-be, but this is one of the better summaries I’ve seen. For working outside the system and saving consumers money, he’s rewarded by having a law specifically aimed at him to pay money to his competition. It’s nice to see some of the lawmakers named who received plenty of "contributions" for further rigging a rigged system (a pox on all their houses—Republicans and Democrats alike).

Laws passed in the 1930s cost consumers at least $1.5 billion per year on dairy products and anything containing dairy products. Having known someone that was responsible for buying dairy products, I got an education on how screwed up the system is. Reading the arguments from other producers, it boils down to avoiding competition in the marketplace. Your government--making sure you pay the highest price for less.

One bright spot for the year

2006-12-08T15:02:00.000-08:00

There have been a lot of things that have been challenging this year, but one bright spot has been my 401K. I will be unable to achieve many of my 2006 goals, but my retirements accounts will be about $20,000 over where I had hoped they would be at the end of the year. I mentioned that all my retirement accounts went over $150,000 in an earlier post, and thanks to a good market they continue to grow.

Here is a simple snapshot of the 401K for the year:

That’s assuming a quiet rest of the year for the market. I did a quick back of the envelope calculation assuming slightly less contribution/match for the next 10 years, followed by 10 years of contributing half of that will easily give me one of my long-term goals of having over $1 million in my retirement accounts. All that’s needed is an average return over the next 20 years of around 7% per year—not even a stretch goal given market history.

The company handling our 401K plan recently changed the format of their quarterly statements. In one section they show the source of the money coming into the account, and I was surprised to be reminded that when I started here 10 years ago I only had $9,000 to roll over from my previous company’s plan. I have done everything wrong a person can do when it comes to funding my retirement, and to somehow be in what I view as a favorable position is an incredible relief.

My sins? Got the rest of the day for me to list them? I’ll keep it relatively short:

- First job out of college was with a company that did not have a retirement plan. The good news was that I did actually open an IRA in my mid-20s. The bad news was I barely funded it.
- Next job: the company had a pension plan that vested after 5 years with the company. They did begin offering a 401K halfway through my stay there, but since the employee match was much less than at my wife’s company we increased her 401K contribution amount instead. Which didn’t help me very much when we got divorced. Oh, and length of stay at the company? 4 years, 11 months.
- Next couple of jobs: started contributing to a 401K, but usually limited my contributions to the amount my employer would match.
- Current job: stopped contributing for at least a year shortly after my divorce because I “needed the money.” You can guess what I would do with the ‘extra’ money—frivolously spend it (yeah, I enjoyed every minute of it).

So in posting this I’m hoping it gives encouragement to anyone looking at their retirement statements and wondering when “the payoff” for saving will come. Quicker than you think...

Kids respond to their parents addictions

2006-12-08T10:48:00.000-08:00

An article in today's Wall Street Journal that is rather funny, if you can get past how sad it is, regarding kids' reactions to their parent's Blackberry addictions:

As hand-held email devices proliferate, they are having an unexpected impact on family dynamics: Parents and their children are swapping roles. Like a bunch of teenagers, some parents are routinely lying to their kids, sneaking around the house to covertly check their emails and disobeying house rules established to minimize compulsive typing. The refusal of parents to follow a few simple rules is pushing some children to the brink. They are fearful that parents will be distracted by emails while driving, concerned about Mom and Dad's shortening attention spans and exasperated by their parents' obsession with their gadgets. Bob Ledbetter III, a third-grader in Rome, Ga., says he tries to tell his father to put the BlackBerry down, but can't even get his attention. "Sometimes I think he's deaf," says the 9-year-old.

Yeah, we've heard it all before. But the most inane comment comes from Jim Balsillie, the chairman of Research In Motion, who says children should ask themselves, "Would you rather have your parents 20% not there or 100% not there?" Uhhh, there's no such thing as "20% not there." You're there or you are not. Kids know the difference.