Month: June 2011

Listening to a government-sponsored radio news broadcast this morning, I heard Barack Obama talking about his plans for closing up the nation’s larger-than-Greece’s federal budget deficit (don’t forget that the states are also running deficits by underfunding public employee pensions) by eliminating tax breaks for corporate jet owners. I did a little research and found out that he was talking about a regulation that allows new aircraft to be depreciated more rapidly than the 7-year standard. This article explains the issue reasonably clearly. The depreciation schedule tweak was put in as a favor to aircraft manufacturers and their mostly unionized work forces. It makes new aircraft relatively more attractive than used aircraft. As U.S. companies such as Cessna and Bell lose market share to more innovative foreign manufacturers, however, many of the benefits are going to foreign or foreign-owned aircraft makers.

As I wrote in my economic recovery plan for the U.S., I’m personally in favor of allowing businesses to depreciate capital goods on whatever schedule makes sense for them. It avoids the bizarre situation of a company being cashflow-negative and still owing tax. President Obama made it sound as though the change would raise a lot of revenue for the federal government. The reality is that changing the rules wouldn’t raise an additional dime from companies that already own planes. Nor would the rule change change the total amount that a company can deduct for an aircraft used for business. Tweaking the rules means that the federal government gets tax revenue possibly a little sooner or later than it would have otherwise. With interest rates down around 1.5 percent for 5-year Treasuries, the value to the Feds of getting the money sooner is low. The final problem with Obama’s plan to raise big $$ via this rule tweak is that aircraft sales in the U.S. are very slow. Since the U.S. economy isn’t growing and aircraft last a long time, there is little practical need for a lot of new corporate jets.

Obama’s plan would help accountants and tax lawyers, but it is hard to see how it would have a significant effect on federal tax revenues. Furthermore, the way that he phrased it in his speech was misleading to citizens who would have concluded that somehow the federal government was ladling out cash for corporate jets in the same way that it does for energy efficiency, electric cars, ethanol, etc. Obama proposed to close one of the world’s largest government spending gaps by changing the depreciation schedule on a small and shrinking class of capital equipment purchases.

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I’ve been making the rounds of the ice cream shops on Martha’s Vineyard this week and my cone is usually delivered by a 20-25-year-old with a Polish accent. This did not strike me as odd a few years ago when the U.S. economy was booming. Jobs on the Vineyard are plentiful during the summer, but affordable housing is not very comfortable. It was primarily foreigners who wanted to come here, work 12 hours per day, every day, sleep in a bunkhouse and bank a lot of money before returning home at the end of the summer (there is some sort of work experience visa program that was/is commonly used for these young people; it may be that they are studying hospitality in a school back in Europe). With millions of unemployed Americans, however, it seems odd to me that the summer of 2011 would still be one in which the employers of the Vineyard would look to foreigners.

Update: I did a little more research among the managers and employees of shops in Vineyard Haven. One shop owner said that she thought that the work ethic of young Americans was, on average, inferior to that of the foreigners who were motivated to pack up and cross the ocean. The cost of the temporary foreign workers was about the same as hiring an American, but the foreigners were more effective. A couple of Russian students (from Vladivostok!) working in an ice cream shop said that they were being well paid but mostly valued the opportunity to improve their English. I also found legal workers from Turkey and a couple of recently-arrived girls from the Czech Republic who were looking for cash jobs.

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We posted an ad for a helicopter instructor to work at East Coast Aero Club here in Boston. 34 people have applied so far. As our only interest is in how effective and safety-conscious the instructor will prove to be, we didn’t ask any of the applicants to indicate their race or sex. On the other hand, just from the first names we’ve been able to infer the male/female ratio. Thus far… 33:1.

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Various experts have been saying that Greece’s problems would be mostly solved if the country had its own currency. The Greek population is just over 11 million, somewhere between that of the Chicago and Los Angeles metropolitan area populations. With its own currency, Greece could devalue its debts and pension obligations in real terms.

If that is true for Greece, why not for U.S. states with similar or larger populations? Just like Greece, U.S. states have big debt obligations and they also run massive budget deficits (though this is mostly in the form of unfunded pension obligations and therefore hidden). If Michigan devalued it would be a more attractive place to invest. Workers could continue to earn their former salaries in “Wolverine Bucks”, but the cost relative to goods and services on the world market would be much less. If California devalued, its state pension obligations would be greatly reduced. The state might owe a 51-year-old retired fire chief $241,000 per year or approximately 2410 barrels of oil, but if the state issued Grizzly Bucks instead, the obligation could be satisfied with just a few hundred barrels of oil.

Conversely, if we think it would not be helpful for a U.S. state with a population of 11 million to have its own currency, why do we think that it would be helpful for Greece?

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Unemployed Americans will be cheered to see Practice Fusion, a free Web-based electronic medical record system. Physicians who adopt the free system will get $44,000 in cash from the federal government (i.e., taxpayer funds). http://www.bls.gov/oco/ocos074.htm#earnings notes that the folks getting the free $44,000 have earnings “among the highest of any occupation” (median of $186,044 for primary care docs; $339,738 median for specialists).=

http://www.practicefusion.com/pages/HITECH_healthcare_stimulus.html explains “On February 17, 2009, President Obama signed the American Reinvestment and Recovery Act (ARRA). Under the economic stimulus plan, physicians and providers can qualify for $44,000 in Medicare incentives if they demonstrate ‘meaningful use’ of an Electronic Health Record starting in 2011.” The page goes on to explain additional $4,400 and $12,500 cash payments that are available as well as 4 percent bonuses of whatever Medicare is otherwise paying.

[You might ask how Practice Fusion gets paid for keeping their server hard drives spinning. They sell ads in the front and aggregate data out the back.]

Update (email today from a doctor friend): “I just got a letter from Medicare that I have to send them a check for $27.42 because they overpaid me for 67 patients with overpayment amounts ranging from $0.01 to $1.37 with the majority being in the $0.30 range. It’s their fault, since we bill the same for everything, and they overpaid me that penny.”

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This New Yorker article on the Galleon hedge fund insider trading prosecution is worth reading if you’re curious about how the SEC goes out about investigating Wall Street and in what percentage of American business folks can be persuaded to break the law.

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Today’s New York Times carries “Struggling to Stoke Economic Growth in Greece”, an article about how the heroic economists and politicians in Greece intend to restore economic growth. It turns out that the politicians’ answer was green energy:

“A few months after Greece was seized by its debt crisis, Prime Minister George A. Papandreou had a grand idea to revive growth: sun-drenched islands would be dotted with solar panels and wind turbines to transform the country into a ‘green economy,’ attracting badly needed investments and creating hundreds of thousands of new jobs.”

As Greece would presumably be importing all of the technology from China and Germany, it is unclear why this guy thought there would be any competitive advantage for Greece over other sunny portions of the globe.

Is it time to short a country when the politicians begin talking about how they’re going to revitalize the local economy through green energy?

[The article did make me wonder how Greece digs its way out. Given the risk of Greece being ejected from the Eurozone and a subsequent currency devaluation, anyone with money on deposit in a Greek bank should probably be thinking about moving it to France or Germany. An investor thinking about setting up a new business in Greece would have to worry about civil unrest (will a riot destroy my new enterprise?), dramatic tax hikes (the politicians can’t resist spending and nobody will lend to them anymore, so they will eventually have to establish new taxes; how can one be sure that they won’t fall heavily on the new enterprise?), and a shortage of skilled labor (as the smart young people emigrate to the more successful EU countries). Of the bigshots negotiating the latest Greek bailouts, I wonder how many of them would be willing to invest their personal funds in a new Greek business. If the answer is “none”, how do they expect the country to recover?]

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Folks:

An older relative who uses AOL dialup (their last customer?) was asking for advice on a new PC to buy. I said “Since you have Verizon FiOS and an old analog tube TV, maybe you should consider getting a Sony Internet TV and just read email and write documents on that. Then you’d have a nice HDTV and could do your computing from your easy chair.” A Sony 40-inch “Google TV” costs $800, about the same as a decent PC. It comes with a wireless keyboard. It runs the Google Chrome browser. I assume it has an Gmail app. Is it practical for reading email and doing word processing with Google Docs as well as generally surfing the Web?

I’m wondering if a big issue would be the viewing distance and consequent small size of text. Currently this dialup user is viewing a 17″ VGA screen. Text is fuzzy and there isn’t much screen space, but he is sitting at a conventional desk so is pretty close to the screen.

Or should he wait another year when he can expect to be able to surf the Web and read Gmail on a typical microwave or toaster oven?

Thanks in advance for comments.

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One issue that has come up in Wealth, War and Wisdom is the amount that Germany owed in reparations following World War I. From a quick Google search, it seems that Germany owed about 83 percent of its GDP at the time and had to pay 2.5 percent of GDP every year. Conventional history textbooks present this as an unbearably high burden that Germans could not handle and therefore they needed to vote for Adolf Hitler and the Nazis.

Attitudes toward debt must have changed considerably since the 1920s. Japan owes more than 200 percent of GDP. The U.S. governments (federal, state, and local) owe about 100 percent (flashy ource; boring source; Washington Post). The U.S. debt service as a percentage of GDP is forecast to rise to 3.1 percent (source) for federal debt alone. If we add another 2 percent for the states, which is probably too low since they pay a highest interest rate than the feds, that’s 5 percent of GDP or double what the Germans supposedly could not possibly afford. This page of 2010 data indicates that the world average for debt service was 4.6 percent of GDP.

What has changed such that 2.5 percent was considered unbearable in 1918 but 4.6 percent is normal today?

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I stopped by my favorite bike shop, ATA Cycle in Concord, Massachusetts, to pick up my ten-year-old Trek hybrid. For $250 they replaced the persistently troublesome rear derailleur and shifter (one of the things that I’ve never figured out about bicycles is why a repair or tune-up almost always costs more than an entire new bike from Walmart or Costco). The owner, Husam Sahin, a road biking enthusiast from Turkey, said “they only made that drivetrain for one year and now you know why”.

Casually leaning up against the counter was a Storck road bike. “It’s a carbon fiber frame from Germany,” Sahin explained. “All of the components are from Japan, though. I’m delivering another one just like it over there in the window.” He demonstrated the motorized Shimano derailleurs, powered by a lithium battery just underneath the back of the seat. “The battery is good for 1000 miles,” Sahin noted, “and there are eight shift buttons in different places around the handlebars.”

Was there a big market for a bicycle like that? “It’s $10,000 just for the frame and $25,000 with all of the components,” Sahin noted, “but still there is a two-month waiting list. On the other hand, I can’t sell any $500 bicycles to young people.” He arranged his hands like a teenager playing a video game with his thumbs.

[http://nbda.com/articles/industry-overview-2010-pg34.htm shows that the number of adult-sized bicycles sold in the U.S. is currently about the same as in 1986, a year in which the population was 240 million (22 percent smaller than today), the real GDP per capita was supposedly smaller, and the real cost of a bicycle was no doubt higher due to the lack of Chinese imports (the average price of a bicycle today, including kids’ bikes, is just $79 or $38 in 1986 money).]

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