Taking the inverted yield curve literally, not seriously

Become a Patron!Last month, a funny thing happened: the yield on a 10-year US Treasury obligation dropped below the yield on a 3-month Treasury obligation. This bizarre financial market event attracted a lot of attention, even in the mainstream press, because such "yield curve inversions" have historically been correlated with economic recessions. Given the length of the current economic expansion and the reckless mismanagement of the economy, many people leapt on the inversion of the yield curve to predict that our next recession is visible on the horizon.Gambling is fun, so if you want to gamble some money on the ability of the yield curve's shape to predict economic growth, you have my blessing, not that you need it. But due to my unfortunate literal tendency, I have a different take.

An inverted yield curve means you're not rewarded for patience

A US Treasury obligation's yield (bills, notes, and bonds) is traditionally decomposed into several pieces: the real interest rate, expected inflation, and what's often called a "duration," "maturity," or "term" premium. That last component reflects the fact that if you buy a long-term bond at a given interest rate and economy-wide interest rates rise, the price of your bond will fall so that its interest rate matches the economy-wide interest rate for comparable bonds. To compensate for those price fluctuations, long-term bonds should offer higher interest rates than short-term bills; otherwise people would only buy short-term debt, knowing they can always reinvest their principal at maturity at the prevailing interest rate.One reason an inverted yield curve is interpreted as a predictor of a recession is that it implies falling inflation or falling real interest rates, which most often occur during recessions when firms experience downward price pressure and the Federal Reserve cuts interest rates in order to stimulate the economy. If markets predict lower real interest rates or lower inflation, then they'll be unwilling to lock in today's nominal interest rates for longer periods, believing they'll be able to buy the same nominal return at a lower price in 3, 6, or 12 months.I do not know what is going to happen to interest rates, inflation, or economic growth, and have no opinion whatsoever on the ability of the yield curve's shape to predict those values. My view is much simpler: if you are not being paid to take on the risk of investing in long-term securities, don't take the risk of investing in long-term securities!

If you're not being paid to be patient, then get impatient

I mostly don't believe in investing in individual stocks and bonds (unless you're gambling which, as mentioned above, is extremely fun and 100% fine by me), but you can glance at a list of Vanguard mutual funds and get a decent sense of what kind of return you can expect over the ultra-short-, short-, medium-, and long-terms. As of April 9, 2019, these Vanguard funds earned the following SEC yields:

• Prime Money Market: 2.45%
• Short-Term Treasury: 2.33%
• Intermediate-Term Treasury: 2.32%
• Long-Term Treasury: 2.81%

These are the objective facts. The question is, given these facts, do you have any alternative investment opportunities that will yield more over the relevant timeframes? I think you probably do. My go-to resource for these things is DepositAccounts.com. They're owned by lendingtree, which is a loan origination affiliate company, but so far DepositAccounts doesn't seem to be corrupted, as long as you ignore their "sponsored" account suggestions.For short-term savings, you can take advantage of Consumers Credit Union, Orion FCU, and One America Bank, which have certain deposit and transaction requirements but earn between 3.5% and 5.09% APY.For intermediate-term savings, you have a range of options: Andrews FCU is offering 3.05% and 3.45% APY on 55-month and 84-month certificates, respectively; Sallie Mae, Freedom CU, and WebBank have competitive interest rates on other terms. These products allow you to lock in those higher rates even if rewards checking accounts radically drop their interest rates in the face of a new recession or interest rate environment.But for longer-term savings, you have a real problem. Investing in long-term securities exposes you to all the risk of rising interest rates, but pays you a negligible amount for the privilege.

How do you invest for the long term in a world without a term premium?

There are, I think, three ways to realize above-average long-term returns on your savings in a world where long-term savings don't yield above-average returns.

• Reduce your exposure to long-term debt. If an inverted yield curve is telling you that long-term debt is too expensive, then sell it while it's expensive. Whether you move to cash, equities, or anything else, when the market is screaming that your assets can fetch more than they're worth, take the market's word for it and walk away.
• Pay down debt. I have a somewhat different take on debt than many folks in the travel and finance hacking community, since I love negative-interest-rate loans, but it's indisputably true that if you have a mortgage or other long-term debt with an interest rate above what you can earn on debt with a comparable term structure, paying down the debt is likely the highest and best use of your savings. In other words, if you're paying 5% on a 30-year mortgage and the potential to earn 3% on a 30-year Treasury bond, you've got a pretty easy decision to make.
• Start a business. Remember, the reason the Federal Reserve has kept interest rates at such low levels for so long is for the simple reason that the Board of Governors wants your public sector investments to earn as little as possible, so that you will sell everything and start a business. That window is still open, as I've tried to explain in this post, but it's rapidly closing.

Conclusion

These are not predictions. I have no idea what it "means" that the yield curve is inverted, except that it means long-term debt is not offering a term premium over short-term debt. As far as I know, the yield curve might stay inverted for the next 500 years. But what I do know is that while the yield curve is inverted, long-term debt is at a rare disadvantage compared to short-term debt, accelerated debt repayment, and business investment. This isn't a theory or a coincidence: it's the definition of a situation where the Federal Reserve would strongly prefer you do literally anything else with your money than buy long-term government securities.So, take the hint!Become a Patron!

Bill Cassidy has the worst paid parental leave plan yet

Become a Patron!This morning I hauled myself out of bed early to go down to the American Enterprise Institute and listen to Bill Cassidy discuss the outlines of his plan for paid parental leave. The dervishes at AEI already uploaded the video, so you can take a look for yourself, if you can stand to listen to politicians speak for more than 30 seconds at a time. Bonus: if you hear someone guffawing off-screen a few minutes in, that's me laughing at the idea anyone is going to fall for his schtick.

The problem with existing Republican paid leave plans

I've written at length about this before, so won't belabor the point here, but the existing Republican proposals for a national paid leave program are based on forcing new parents to choose between the financial support they need to take time off work and the financial support they need to retire with dignity. It's a cruel choice to force anyone to make: do you turn down paid parental leave and return to work a few days or weeks after giving birth or adopting a child, or do you accept paid parental leave and suffer from a permanently lower income in retirement?

Cassidy's plan is designed to become as unpopular as possible as quickly as possible

If you watch past Cassidy's Hee Haw routine with Aparna Mathur (who has also graced these digital pages before), you can enjoy the much more interesting follow-up discussion between several panelists from several points on the political spectrum. The panelists over-generously described Cassidy's plan as a work in progress, the specifics of which they didn't dare speculate about. This is incorrect: a carefully trained ear allows you to clearly identify the core tenants of Cassidy's plan. Since I have such an ear, I can tell you: folks, it's not great.The first question any paid leave plan has to answer is, who is the beneficiary of the program? This might sound like a weird question, but the answer matters a great deal. In traditional paid leave programs, the beneficiaries are thought to be the workers. This allows you to apply the same logic across the board: workers are entitled to a certain number of days or weeks of paid (or in the United States, unpaid) leave to deal with a serious illness, to care for a relative, or to bond with a new child. Cassidy's plan answers the question differently: the baby is the beneficiary of the program. Why does this matter? Because it means his plan provides paid parental leave exclusively to one parent. Cassidy is a homophobe, but not an idiot, so he allows that "under some circumstances" a child's father could take the leave instead, but it's clear despite his hemming and hawing that his plan will only cover one parent. This is not parental leave, it's maternity leave, and there's a reason virtually every other social democracy has abandoned it in favor of parental leave: it reinforces gender stereotypes in the home, it penalizes the employers of women and subsidizes the employers of men, and at the most basic level it keeps fathers apart from their children during a critical early bonding period.The second question is, who is eligible for the program? Is the program universal, or is the program exclusively for those with earned income? How recent must the earned income be? Is the triggering event the birth of a child, or is the triggering event leaving work to care for a newborn child? Are you still eligible if you continue to work while caring for your child? This question has been answered in a variety of ways in a variety of contexts, and I have made clear to the relevant organs that it's one of the objections I have to the most important Democratic proposal for paid family leave: I would prefer a universal allowance detached from work history, rather than a benefit exclusively for those with work histories and tied to their earnings record. But Cassidy's plan goes the other direction: only mothers making less than $70,000 a year will be eligible for his benefit. My readers are no dummies, so they're already asking: how will income be measured? Is it based on an individual earning record, a joint earning record, or on tax returns? Can you game the system by having children at particular times of year before taxes are filed? Can you game the system by getting married — or by getting divorced? The issue is not that these are unanswerable questions. The issue is that people should not have to ask them!Having spent half an hour in a room with him, I can confirm that Bill Cassidy is a dumbass. But however little firepower he's working with under the hood, I absolutely do not believe any of this is accidental. This plan is designed, top to bottom, to generate as much animosity and antagonism towards the welfare state as possible, at the lowest possible cost. If a paid maternity leave plan like this were passed, it would be used as a cudgel by employers against workers ("if I give you a raise you won't be eligible for maternity leave"), workers against workers ("can you believe our janitors get paid maternity leave and we don't?"), and fathers against mothers ("really you can't afford to keep working since you're entitled to maternity leave").

Conclusion: this plan won't pass, but that doesn't let Republicans off the hook

There is one realistic plan for comprehensive paid family and medical leave on offer: the FAMILY Act. That's not to say it's perfect. I think the benefit should be fixed, universal, and unlinked from earnings history. But I've lost that fight, and the fact is, if you want a near-universal benefit that includes paid medical leave, caregiving leave, and parental leave, financed with a small payroll tax, you have to support the FAMILY Act, because it's the only game in town.None of the Republican efforts to destroy retirement security and worker solidarity will pass, but they weren't written to pass. They were written to serve as vehicles for Republicans to say that they, too, care about providing the paid time off American workers desperately need. But it's just not true. If they did, there would be 100 Senate votes for the FAMILY Act. Instead, there are 47 votes in favor of paid family and medical leave, and 53 votes against it.You know what to do.Become a Patron!

So you've decided to invest in real estate!

Become a Patron!Last week over at Travel is Free Drew wrote a very thoughtful post about his experience taking out long-term residential leases and then subletting them for short-term stays through a variety of platforms. The post has a lot of details on the various expenses and complications he encountered and is worth a close read if you're considering doing the same.He concludes that while this temporal arbitrage is a potentially profitable business, he wouldn't rent to arbitrage again, in the future planning to buy properties for short-term rentals instead. This ultimately led to a long, branching, fruitless Twitter argument about what kinds of risks this kind of strategy entails. At the instigation of reader calwatch, I'll make a few general observations about residential real estate in general and short-term rentals in particular.

Cash flow, basis, and return

One of the most dramatic claims Drew made on Twitter was that "the actual cash on cash return is near infinite." As ludicrous as it sounds, this is actually a fairly common claim made by real estate investors, which Drew spelled out more explicitly a few tweets later, when he said "if you buy at 80% value and refinance, then your $0 in. So all cash at that point is profit."The mechanics of what Drew is talking about here are simple enough to describe in a few words: if you buy a piece of residential real estate with a 20% down payment and an 80% mortgage, then you have 20% equity in your home. If you can then take out another loan (or refinance the existing loan) against your equity stake in the property, and you'll end up having purchased the property entirely with borrowed money.At that point you have a simple calculation: does the property produce more money than it costs, on an appropriate time scale, for example quarterly or annually? Many people make a big deal out of one real estate expense or another, but that's totally unnecessary for this calculation. Just add up all your costs: your mortgage payments, utilities, insurance, maintenance and repairs, lawyer fees, furniture, linen, dishes, housekeeping, landscaping, and everything else you can think of. Even add an additional safety buffer if you like. Then add up all the revenue the property produces. If your income is higher than your costs, you arrive at Drew's "near infinite" cash on cash return: you didn't put any of your own money into buying the property, so your return is on a basis of $0 (until your mortgage payments begin to rebuild your equity).Of course, eagle-eyed readers will have noticed the necessary corollary: if your revenue is less than your costs, then your rate of return is near-infinitely negative. You're pouring money into a hole without receiving anything of value in return, especially since traditional mortgages apply payments overwhelmingly to the loan's interest, rather than principal, for much of the loan's term.The rest of this post is not about disproving or challenging anything above, since everything above is true: if you are able to secure the necessary loans, you can achieve near-infinite positive or negative returns by purchasing real estate entirely with other people's money. Rather, I want to explain why nothing about this is "risk-free."

There's nothing special about real estate

One of the most common claims by real estate enthusiasts is that real estate is "different." Drew made this precise argument when he tweeted, "Real estate is the only investment I know of where you can benefit from appreciation (while claiming depreciation on taxes) without putting your own cash."But this is false. I've never added it up, but I probably have around $200,000 in unsecured credit available to me on my credit cards, and many of those lenders mail me checks every few weeks I can use to buy anything I want. It's true the interest rates are high, but they're not in the stratospheric, payday-loan territory. Instead, they typically top out around 30-35%. My guess is it would take me about 5 days to deposit that $200,000 into my checking account, transfer it to my Vanguard account, and then buy any mutual fund or ETF I pleased with it.And this would put me in precisely the same position as Drew's real estate investor:

• Exactly like the real estate investor, I would be making my purchase entirely with other people's money.
• Exactly like the real estate investor, I would have a near-infinite rate of return if the dividends and appreciation of my investments exceeded my cost of financing.
• Exactly like the real estate investor, if I had to sell investments to meet those financing expenses I would be able to deduct those losses against my ordinary income (the equivalent of Drew's "depreciation").

Now, you might rightly point out the difference is that my financing expenses are 30% and Drew's are 5%. That's all well and good, but as Churchill apocryphally told the society Lady, now we're just negotiating over the price. If you have an investment idea that you believe will generate more revenue than your cost of finance, you should consider pursuing it.Of course it's true real estate has some special treatment in the tax code. I've written about it before. But so does horse-breeding! The principle is the same in both cases: as long as you are calculating your total cash flow properly, i.e. including any tax benefits and penalties, then all you have to do is compare it to your equity to derive your return, whether it's on real estate, stocks, bonds, or horses.With that out of the way, let's turn to some idiosyncratic risks of investing in real estate, in particular for short-term rentals.

Regulatory risk

Regulatory risk is what I call changes in government regulations and the effect they have on your cash flow.This can happen when a community bans short-term rentals, passes new regulations, or begins enforcing its existing regulations. Importantly, this can easily affect your expenses, your revenue, the value of your property, or all three.If a community bans short-term rentals, you may still be able to rent out your property to long-term tenants, but at a lower rate. Keeping monthly expenses fixed at $1,000, moving from $6,000 in income to $800 in income is the difference between earning near-infinite profit and incurring near-infinite losses on your near-$0 equity.On the flip side, if a community passes new regulations or begins enforcing existing regulations, for example by forcing landlords to acquire hospitality licenses, pay for annual inspections, and pay hospitality taxes, then your expenses may overcome your revenue even if your revenue remains unchanged.And finally, in a real estate market where prices are driven by demand for short-term rentals, either of those changes can affect the value of your property, meaning your expenses can rise, your revenue can fall, and you can end up with a property worth less than you owe on it.

Regional risk

More than any other kind of investment, real estate is tied to the land, which creates regional risk: Drew's most profitable months were during Austin's South by Southwest festival, when demand for hotel rooms swamps the city's capacity and many people turn to expensive short-term rentals. Those profits can make up for less-profitable or even unprofitable months — as long as South by Southwest continues to drive visitors to Austin. But tastes change, fads come and go, and who knows if South by Southwest will still be a phenomenon in 5, 10, or 15 years? Relying on a few profitable months really means relying on things staying more or less the same — things you have no control over.

Secular risk

In the aftermath of the global financial crisis, Larry Summers re-popularized the idea of "secular stagnation," one version of which says that the stubborn slowness of the economic recovery was the result of long-term, economy-wide forces, not just bad short-term public policy. In other words, the best that the government could do was manage stagnation and decline, not spur accelerated catch-up growth. Larry Summers was wrong about that, but it's a useful framework to think about long-term, economy-wide changes.If Americans overall travel less, if more business is done through long-distance conference calls or virtual reality, if new technology makes it fast and cheap to build new structures, then the overall rental real estate landscape might be completely changed. Your revenue might dry up and your land and structure might become near-worthless, not because of anything you did or didn't do, but because of changes in the overall economy.

Platform risk

One fascinating element of Drew's post was the sheer number of different services he mentioned as part of his short-term rental empire: AirBnB, Homeaway, PayPal, Venmo, InstaCart, Favor, Walmart Delivery, Craigslist, TurnoverBnB, Your Porter, BeyondPricing, PriceLabs, plus a few I'm certain I missed.That's not to say he uses all these services: some of them were mentioned specifically because he tried and didn't like them. The point, rather, is that a big part of the short-term rental economy is powered by these third-party services, and the more dependent you become on them, the more vulnerable you are to platform risk: losing access to a service, either because you're (rightly or wrongly) accused of a violation, or because the service itself goes out of business.Since my expectation is that in the next downturn all the unprofitable service business platforms will go out of business, this exposes you to a kind of compound risk: just when occupancy rates are falling, you'll also lose access to your main booking channel.I'm particularly sensitive to platform risk because of my own personal experience with it, when the business PayPal account I used to collect monthly reader subscriptions was closed and I had to beg readers to create new subscriptions on my new subscription platform. Most of them migrated over, much to my surprise and pleasure, but it was still a harrowing couple months.Platform risk can be mitigated, of course: you can build your own booking channels, diversify into as many booking channels as possible, maintain multiple backup accounts, etc. But mitigating platform risk creates its own costs, and its own drag on your total cash flow.

Volatility risk

The risk that real estate investors least understand is price volatility, and no wonder: stock investors can see the price of their assets fluctuate second-by-second, which may even lead them to believe stocks are more volatile than they actually are (if you don't believe me, just turn on CNBC after the S&P 500 drops 0.5%). Meanwhile, real estate investors tend to anchor the value of their property on what they paid for it, and can only guess within broad ranges what it's worth on any given day.The other risks I mentioned revolve around factors that might permanently reduce your income, raise your costs, or lower the value of your property. Volatility risk is different: it's the risk that your property will be worth less, or worthless, at the moment when you happen to need the money.This is true whether or not you believe, as Drew does, that real estate "consistently goes up." Many people describe real estate as a kind of savings vehicle: you borrow money, and the payments on that loan slowly build up equity, which you then own and can "withdraw" through a sale or refinance. But while it may be a savings vehicle, real estate is not a savings account. A savings account has a known, federally-insured value. But even if you are certain the value of your real estate will increase over 5-year, 10-year, and 20-year time horizons, that tells you nothing about its value over any of the intermediate periods!

Conclusion

None of this is intended in any way to discourage people from investing in real estate. To me, it sound like a phenomenal amount of work, but as I always say, if you do what you love you'll never work a day in your life. I like writing, Drew likes buying and managing rental properties, it takes all kinds to make the world go 'round.But this post is intended to make it emphatically, entirely, and conclusively clear that real estate is not special, it is not risk-free and it is not even particularly low-risk, although many of the risks are unusually well-hidden. Like all investing, it can be done with your own money and it can be done with other people's money. It can be done well and it can be done poorly. It can be profitable and it can be loss-making.So if you do decide to invest in real estate, do yourself a favor and do it with both eyes wide open.Become a Patron!

The Indy Finance guide to why, where, and how to seek higher education

Become a Patron!I've written many times before about higher education, mainly from the perspective of financing it. Thanks to Aunt Becky, for the last few weeks the national spotlight has focused on much more fundamental questions: what is post-secondary education for? Who should pursue it, and why? What should they study, and where?Fortunately, the definitive answers to all these questions and more are below.

True credentialing

It has become a cliche to say that the middle class obsession with higher education is an example of "credentialism," whereby people go to college "just to collect a piece of paper." Evidence for this typically includes the fact that many jobs which required a high school diploma 25 years ago require a bachelor's degree today. I want to distinguish that process, which we can call false credentialing, from true credentialing.True credentialing describes the fact that, for a variety of historical reasons, certain work can only be performed by people who have specific credentials. If you want to become a nurse, you can't just hang out around nurses until you pick up the tricks of the trade. If you want to become a doctor, you can't just read a bunch of medical textbooks. If you want to become an architect, you can't just practice drawing blueprints until you get really good at it.In many states, everyone from hairdressers to ear piercers need a credential of some kind. Depending on the line of work you desire, you should look into what credentials are required to pursue that profession.Now, it's also true that these credentials can be very difficult and expensive to acquire, and many people who start off wanting to become nurses, doctors, and architects fail to complete the required credentials, either because they discover the work is worse than they hoped (blood, gore, sawdust), or they lack the interest or ability to finish.This is an important reason to pay as little as possible for higher education, and to maintain a very high willingness to drop out. People who complete their medical, dental, or engineering education do not usually struggle to pay their higher education expenses. But since you don't know in advance whether you will succeed at acquiring a credential or not, you should always prefer to pay less rather than more. If you succeed, there's no harm done in having below-average educational debt, and if you fail there's an enormous advantage to having below-average educational debt!

High-wage employment

Another good reason to get a post-secondary degree is if you are interested in pursuing high-wage employment. I've had enough jobs over the years that I don't particularly recommend it, but if you're the kind of person who wants to work for someone else, it's almost always better to be paid more rather than less, and better-paid jobs typically require some kind of post-secondary education, whether it's a formal degree, a vocational diploma, or even something as simple as a commercial driver's license.Note that I am distinguishing high-wage employment from having a high income. If you want a high income, you should figure out something you're good at, then charge people to do it for them. If you're not good at anything, you should get good at something, then charge people to do it for them.It might cost a few thousand dollars in art supplies to get good at screen-printing, or a few thousand dollars in gym memberships to get good at weight lifting, or a few thousand dollars in running shoes to get good at training for marathons, but if you want to work for yourself, you don't need a degree. You don't even need a resume (as long as you promise not to ask for it).This is a good time to mention a common misunderstanding people have about higher education. It's become a cliche to say that so-called "STEM" fields pay well, so students should be encouraged to study science, technology, engineering, and math in college. But this advice is only relevant if you want to seek wage employment. You do not need a college degree to own a tree nursery ("science"), Apple doesn't ask you to upload a resume before submitting apps to the App Store ("technology"), Chinese factories don't ask to see your degree before shipping you drone parts ("engineering"), and anybody can upload mathematical proofs to the internet (although I don't think there's very much money in that one).In other words, acquiring a degree in a STEM field may make sense if you want to turn your degree into high-wage employment; it's totally unnecessary if you want to work for yourself.

An advanced education

Another important reason you might pursue post-secondary education is to achieve a more comprehensive understanding of one or more subjects. Fortunately, this can usually be done for very little cost if you're able to do any planning at all. The key insight is that the cost of American higher education has a horseshoe shape: tuition at community colleges and in-state public universities is extremely cheap or free, mid-tier private universities and out-of-state public universities are extremely expensive, and tuition at elite private universities is again cheap or free due to large endowments and generous financial aid (ignore the sticker price; nobody pays that except aging 90's TV stars).Here you might object that "thanks to the Internet," information is free. Why would you pay anything to sit in a classroom and listen to a lecture when you can watch thousands of hours of lectures on any topic from the comfort of your own home.The answer, of course, is that regardless of what information costs, information is different than an education. Out of curiosity, I pulled up the requirements for an undergraduate degree in history at Yale University. Eyeballing it, students need to take about 10 classes in the Department of History to meet the degree requirements. Here's a description of a semester-long, freshman class selected at random from the Yale Spring semester course catalog:

"This course introduces students to the myth-making processes involved in the creation of nation-states in the post-Ottoman Middle East, including Iraq, Palestine, Israel, Lebanon, Turkey, as well as in Iran and Egypt. It explores the ways in which national identities and nation-states formed—in ways both organic and forced—around certain myths and ideologies. It examines the impact of these national/nationalist myths on revolutions and uprisings in the late Ottoman and post-Ottoman Middle East. The course readings, sources, and discussions examine the relationship between myths of national origin, revolution, and state-making. The class also addresses the ways in which the control over the creation of myths of origin and ethnic, racial, national, and religious identity shaped society and politics in nation-states, republics, and monarchies especially after 1918. The course focuses partly on the theoretical underpinnings of national myth-making and ideologies of nationalism in order to offer historical understandings as to how states, majority and minority groups, and different national movements in post-Ottoman society created and re-made ‘imagined communities’ of nationals and citizens, sometimes through violence. The course surveys the ways in which new identities became manifested in a number of often-revolutionary ideologies including pan-Arab nationalism, Zionism, Kemalism, Phoenicianism, Baathist socialism, and various anti-imperial and anti-colonial movements."

By contrast, Khan Academy, the most famous of the "free online universities," appears to have about an hour of video explaining the history of the Middle East in the 20th century. PragerU, the creepy conservative alternative education site, has four videos about the Middle East, including the 5-minute-long, iconic video starring the dead-eyed master of ceremonies, Dennis Prager himself: "The Middle East Problem."Look: I love Wikipedia as much as anybody, but even at its best, Wikipedia can only provide you with information, not an education.

Post-secondary education advice roundup

We're going a little bit long here, so I want to add a bunch of quick hits that will be available in the same place:

• Whenever you move between states, immediately change your voter registration, apply for a new state ID or driver's license, and file taxes in the new state (even if you don't owe any state taxes). State residency for tuition purposes is seen by amateurs as an intrinsic fact about your identity, but this is false. It's a composite of what you can and can't prove. The more facts you can prove about your presence in the state, the more likely you are to receive in-state tuition.
• If you decide to go the elite-private-school route, do not take any post-secondary classes after the summer after you graduate high school. At most elite private universities, if you take any classes after that summer, you will not be eligible for "freshman" admission, and you'll be required to meet the much stricter "transfer" admission requirements.
• On the other hand, if you decide to go the in-state public university route, you should aim to meet as many of your general education or distribution requirements as possible before enrolling, so you can focus on getting as specialized a university education as possible. The way this works is that "lower-division" courses are typically large lectures, often taught by over-worked lecturers and offering little or no personal attention, while "upper-division" courses are more often smaller classes taught by tenure-track professors. The more you can tilt your course load towards the latter, the more bang for the buck you'll get.
• Many people say the only way to gain fluency in a foreign language is to live for an extended period in a country where that language is spoken. This is false. The only way to gain fluency in a foreign language is to attend the Middlebury Language School for that language.
• Never pay for non-professional graduate school. I don't think you should pay for professional graduate school either, but I understand the world needs doctors, so I'm not going to fight that battle here. But if you are considering attending a graduate program in the humanities or sciences, only enroll if you are provided health insurance, a tuition waiver and a stipend. Do not borrow money for non-professional graduate school. Do not pay for non-professional graduate school. If you can't get admitted to a program that provides a tuition waiver and a living stipend, go do something else and apply again the next year.

Conclusion

I think college is terrific. That (and a certain global financial crisis) is why I spent a decade floating around between institutions of higher learning before I found my calling. But it's also a system that in many ways preys upon people who are, by design, too young and ignorant to know what they're doing.If there's somebody like that in your life, send them this post!Become a Patron! 

Why can't financial journalists give financial advice?

Become a Patron!I started this blog because the more I learned about the personal finance industry, the more I saw the same problems that are pervasive in my other line of work in the travel hacking community: people are either paid to lie, or too ignorant to know if what they're saying is true or not. So, I figured I'd start a blog where I could tell people the truth.One difference between personal finance and travel hacking is that personal finance has an unusual number of people who are not being paid to lie, but for one reason or another are also incapable of telling the truth.

Jason Zweig and the amazing disappearing advice

I started thinking about this last week while researching some recent Wall Street Journal columns by Jason Zweig. At least as early as February, he started writing about the fact that by shopping around you could earn more interest on your savings that the rate offered by the big national banks and on mutual fund settlement accounts offered by brokerage houses. This is true.But this is a meaningless observation if it does not rise to the level of advice. Consider the following passage:

"Many money-market mutual funds are paying 2% and up. Although they aren’t backed by the government, they hold short-term securities whose value tends to hold steady. (A money fund yielding much more than 2.5%, however, is probably taking excessive risk.)"At Vanguard Group this week, taxable money-market funds were yielding between 2.31% and 2.48%, and tax-exempt money funds yielded 1.19% to 1.32%. Fidelity Investments and Charles Schwab Corp., among other firms, also offer money-market funds with attractive yields."

This looks very close to advice, but the more closely you read it, the more you find it slipping through your fingers. It is true that Vanguard taxable money-market funds were yielding "between 2.31% and 2.48%." But this is an absurd way of framing the situation. Vanguard only offers two taxable money-market funds! They are:

• Federal Money Market (VMFXX), yielding 2.34% as of March 19, 2019.
• Prime Money Market (VMMXX), yielding 2.45% as of March 19, 2019.

What is the point of describing this situation as a "range" between yields on Vanguard money-market funds? If you are saving cash in a Vanguard account, and can meet the $3,000 minimum investment requirement, you should put it in the Prime Money Market fund. If not, you can use the Federal Money Market fund (which is also the settlement account for Vanguard brokerage accounts, so it's not like you have a choice). If your current brokerage offers less than that on your cash, you should move your cash to Vanguard.Zweig then turns to online savings accounts, and mentions Goldman Sachs's "Marcus" online savings product: "Savings accounts at Marcus, the online bank operated by Goldman Sachs Group Inc., are paying 2.25%, with no minimum investment required. It takes only a few minutes to open an account; U.S. deposits at Marcus grew in 2018 by 65%, to more than $28 billion."Again this at first appears to rhyme with advice. Why would he mention Marcus if he isn't advising readers to use Marcus? But 2.25% isn't the highest interest rate you can earn on an online account: All America Bank offers 2.5% on up to $50,000 in their Mega Money Market Checking accounts!

Education may be valuable, but most people need (good) advice, not education

Let's turn from the Wall Street Journal to that other bastion of financial erudition, Bloomberg Opinion. Barry Ritholtz, the namesake of extremely-online financial advisory Ritholtz Wealth Management, last week expressed his anxiety over the extremely poor protections enshrined in law for participants in retirement plans offered by non-profit organizations and state and local governments, so-called 403(b) plans (which I've had occasion to write about before).These extremely inadequate protections are no doubt a matter of serious concern. But a teacher searching the internet for information about her 403(b) account does not need to lobby Congress to extend ERISA protections to 403(b) accounts. She needs advice about what to do with her 403(b). And just in the case of Jason Zweig, you can begin to see the glimmer of advice in Ritholtz's article. He writes:

"403(b) plans tend to invest way too much money in annuities — 76 percent on average. Annuities have much higher costs than typical mutual funds."

And:

"If an employer and 401(k) plan sponsor put a high-cost, tax-deferred annuity into a tax deferred 401(k), they would be warned by counsel to expect litigation."And they’d probably lose, because paying a high fee to put a tax-deferred component into a tax-deferred account is pointless."

Now, if you squint at these statements closely enough you might be able to guess that Ritholtz is saying "don't put a high-cost, tax-deferred annuity into your 403(b)," and "invest less than 76% of your 403(b) account in an annuity."But why should it be that people are left guessing in the first place?

People who provide information don't provide advice, and people who provide advice don't provide information

This is the fundamental pattern I see over and over again in the world of personal finance. Take, for example, my favorite resource for mostly-up-to-date interest rate information, DepositAccounts. This is an excellent resource I use constantly to check on interest rates on rewards checking accounts, online savings accounts, CD's, and money market accounts. Go ahead and bookmark it, if you haven't already.But this is what the top of their "Savings Accounts" page looks like (in my ZIP code):Now, this is obviously absurd: why would anyone prefer an account with a $10,000 minimum paying 2.35% over an account with a $1,000 minimum paying 2.45%? But DepositAccounts found a couple banks willing to pay them for preferred placement, presumably because those banks, rightly or wrongly, calculated that preferred placement would attract deposits in excess of their account's objective appeal.

Conclusion: always look for what's not being said

It would be awfully odd to end a post like this without offering some concrete advice. Indeed, I'd be guilty of exactly what I accused Ritholtz of: educating without advising.So let me sum up my advice in the most concrete way possible:

• When you are reading a piece of financial journalism, pay close attention to what is not being said. If someone says you "can" increase the interest rate on your savings, or you "can" reduce the expenses you pay on your investments, check whether they also say you "should" increase the interest rate on your savings, or you "should" save money on management expenses. If not, why not? Does the publication have relationships with investment managers they don't want to jeopardize?
• When you're reading a source of information like DepositAccounts, the same rule applies. If a particular account is "sponsored," or a partner is "preferred," or a bank is "recommended," are you given any reason why that account is superior to any other account? Are there other, better accounts that are excluded because they are unwilling to pay for placement, or don't pay a commission to the site?

I've written elsewhere that many people make a grave mistake when compensating for conflicts of interest. They think, "now that I'm aware of the conflict of interest, I'll discount it by an appropriate amount." But this is incorrect. The correct response to a conflict of interest is to discount the advice given by 100%. If possible, you should even discount conflicted advice by slightly more than 100% (this is not always possible, for example in insurance sales where some kind of commission is typically unavoidable).The United States has some of the most vigorous protections for free speech in the world. It also has some of the most strict restrictions on professional speech, and a national media almost entirely in the control of a few powerful corporations and individuals. This curious contradiction often makes it difficult or impossible to know whose voice you're hearing at any one time: when is Jason Zweig speaking for Jason Zweig, when is he speaking for the Wall Street Journal, and when is his voice filtered through the Journal's legal department? But it is still possible, and necessary, to figure out when, for whatever reason, you're not getting the whole story and to try to put the pieces together for yourself.

Beware Republicans bearing robust debate and compromise

Aparna Mathur is a Resident Scholar, Economic Policy, at the American Enterprise Institute, a libertarian think tank with an excellent kitchen that I periodically visit when I want to save money on lunch or cocktails. If you're ever in DC I strongly recommend visiting their events page to see if you can enjoy one of their catered meals or open bars.Scholar Mathur has recently focused her residency on the question of paid parental leave in the United States, as in a recent blog post, "The Birth of a Compromise on Paid Parental Leave" (get it, "birth?").As she and her co-authors write, "history shows that when both sides express a willingness to compromise, great policies can emerge. Our elected officials are now facing one such historic opportunity. It is time for them to pass legislation that creates a national paid parental leave program."The question, as Napoleon famously asked about the pope, is "how many divisions does the AEI-Brookings Paid Leave Working group have?" More to the point, how many votes do they have?

Ted Cruz and the amazing vanishing immigration vote

The year was 2013, and after years of gridlock, Democratic and Republican moderates in the Senate had hammered out an immigration compromise that included border enforcement, changes to future immigrant flows, and legal status for long-time US residents. The bill quickly ran into a problem: the Texas Senator, and Canada native, Rafael Edward "Ted" Cruz.Cruz, the son of Cuban revolutionary Rafael Bienvenido Cruz y Díaz, was concerned that the bill as drafted would allow long-time undocumented residents of the United States to receive permanent resident status and, eventually, US citizenship like his and his father's (n.b.: his mother was born in Delaware, so while he immigrated to the US from Canada at a young age he enjoyed US citizenship from birth).What followed was a grueling rearguard action as Cruz moved heaven and earth to try to block newly normalized permanent residents from any so-called "path to citizenship." Unable to sway his colleagues, he was forced to vote, more in sadness than in anger, against final passage of the "Border Security, Economic Opportunity, and Immigration Modernization Act."At least until the 2016 primaries came around, when Ted 2.0 was launched, and much to the surprise of his colleagues and constituents, it turned out he had been opposed to the law all along, whether or not it included a path to citizenship. Incredulous reporters went back and checked the tapes, and found out Cruz had masterfully outplayed them in 2013: it turned out Cruz had never made his vote conditional on removing a path to citizenship from the bill. Indeed, it soon became clear his vote was never in play.To take one of literally hundreds of examples, on May 21 Cruz introduced an amendment to remove the path to citizenship, saying, "I don’t want immigration reform to fail. I want immigration reform to pass. And so I would urge people of good faith on both sides of the aisle, if the objective is to pass common-sense immigration reform that secures the borders, that improves legal immigration, and that allows those who are here illegally to come in out of the shadows, then we should look for areas of bipartisan agreement and compromise to come together. And this amendment—I believe if this amendment were to pass, the chances of this bill passing into law would increase dramatically" (emphasis mine).Now, you or I might look at this statement and conclude that Ted Cruz, someone who says they want immigration reform to pass, but who can't vote for a bill that includes a path to citizenship, and is proposing an amendment to remove a path to citizenship, is saying that he will vote for the bill if the amendment passes.But Ted Cruz never said that. In 2016, the trap was sprung: Cruz revealed that he had been opposed to immigration reform all along, and that his amendments were intended solely to reduce the bill's chance of passing, and to weaken it in case it did.

Olympia Snowe and the amazing vanishing healthcare vote

If you'll step into my time machine yet again, let's return to 2009, when Democrats held a filibuster-proof majority in the United States Senate. Max Baucus, Democrat of Montana and chair of the Senate Finance Committee, had been holding months of hearings and closed-door sessions in an effort to get three Finance Republicans on board with healthcare reform: Mike Enzi, Chuck Grassley, and Olympia Snowe.After months of wrangling, the death of Senator Ted Kennedy, the seating of Al Franken, and Arlen Specter's frantic last-minute party switch, all three Republicans voted against cloture and against final passage of the Affordable Care Act.

Paul Ryan and the amazing vanishing Earned Income Credit expansion

Before he decided to retire to spend more time with the Koch brothers' money, Paul Ryan reinvented himself in office one last time: as an anti-poverty champion. The so-called "Better Way" Republican agenda, launched in the summer of 2016, included an anti-poverty program (available for now at the Internet Archive). That document contains the following enigmatic paragraph:

"The Earned Income Tax Credit is another potential solution. The EITC is a refundable credit available to low-income workers with dependent children as well as certain low-income workers without children. It can help with the transition because it increases the financial rewards of work. Increasing the EITC would help smooth the glide path from welfare to work."

Fortunately, on other occasions Paul Ryan has written more extensively about his support for Earned Income Credit expansion. In a 2014 "discussion draft" for the House Budget Committee, he wrote:

"there’s a growing consensus to expand the EITC for childless workers...Given the EITC’s success in boosting work among families with children, a larger EITC should have a similar effect on childless workers. Given these troubling trends for young workers, there is a real need to consider lowering the age of eligibility for the EITC, which currently does not serve this population...Because the EITC helps low-income households while encouraging work, this proposal would expand the credit for childless workers. Specifically, it would double the maximum credit, phase-in, and phase-out rates for childless adults, and it would lower the eligibility age for workers from 25 to 21, assuming they are not a dependent or qualifying child for another taxpayer."

If you knew nothing else about Paul Ryan, you might conclude from this evidence that he supports an expansion of the Earned Income Credit for childless workers.But since you are reading this today, you know that would be wrong. When offered the opportunity to pass changes to the tax code that could increase the deficit by a total of up to $1.5 trillion over the 10-year budget window, i.e., the changes did not have to be paid for as long as they were not scored as increasing the deficit by more than that amount in that period, Paul Ryan did not lower the eligibility age for the Earned Income Credit. He did not double the maximum credit, nor the phase-in, nor the phase-out rates for childless adults. He did not expand the Earned Income Credit at all.That is because Paul Ryan does not, and never did, in fact support an expansion of the Earned Income Credit. Paul Ryan was lying.In a roundabout way, this brings us all the way back to Aparna Mathur, whom I asked on Twitter earlier this year, "why do you think Paul Ryan refused to expand the EIC after making it the cornerstone of his woke Republican anti-poverty agenda?." Aparna Mathur didn't have me muted back then, so she saw my question and even replied to it:"I wish we could move forward with an EITC expansion. I have no idea why a policy that has so much support doesn't make it through Congress..it would be so helpful."She. Has. No. Idea. Which tells you almost everything you need to know about Aparna Mathur.

The Republican Party and the amazing vanishing national paid family leave program

Aparna Mathur thinks that the time has come for a national paid parental leave program. I also think the time has come for a national paid parental leave program. The proposal with the most widespread support in Congress today is the FAMILY Act (don't ask what it stands for), which would create a small additional payroll tax and use those funds to pay for wage replacement for workers who need to take time off to care for a new child or in case of serious illness or injury. It currently has 35 Democratic co-sponsors in the Senate and 178 Democratic co-sponsors in the House of Representatives, and widespread support among Democratic members of Congress.Unfortunately, Aparna Mathur doesn't much care for the FAMILY Act. Without meticulous documentation, I can boil down her objections as follows:

• It's too long. While the FAMILY Act entitles workers to 12 weeks of paid leave, that's a little bit excessive. Isn't 8 weeks of leave a bit more realistic?
• It's too generous. While the FAMILY Act entitles workers to 66% of their weekly pay up to $1,000 per week, that seems like an awful lot of money to give to new parents. Why not limit it to $600?
• It covers too many life events. While new parents surely need some time to bond with their children, there's no need to pile family and medical leave into the same law. Why not restrict the paid leave benefit to birth and adoption events only?

I think these objections are ridiculous, but this post isn't about what I do or don't consider ridiculous. That's a judgment you have to make for yourself.This post is about the fact that Aparna Mathur, AEI, and the Brookings Institution don't have the votes. If Aparna Mathur could come up with 13 Republican Senators willing to vote for a motion to bypass Senate Majority Leader Mitch McConnell and bring this pared-down version of paid parental leave to the floor of the Senate, it would get 47 Democratic votes, and it would pass the House with a comfortable Democratic majority.But there aren't 13 Republican Senate votes for a pared-down paid family leave law. There isn't one Republican vote for a pared-down paid family leave law. There are, currently, maybe 3 votes for a Rubio-style "mortgage your retirement to spend a few weeks with your kids" bill, but there are zero Democratic votes for that idea because it's terrible.The point is, there's no secret backdoor workaround to find Republican votes for compromises, hacks, or kludges. If, like Aparna Mathur, you think "It is time for them to pass legislation that creates a national paid parental leave program," then you have to support the FAMILY Act. You have to contact your representatives in Congress and demand they support the FAMILY Act. If they refuse, you have to vote against them in your congressional primary, and vote for Democrats in general elections, until you are represented by someone who does support the FAMILY Act.That's the entire show. While Aparna Mathur and her colleagues at AEI and Brookings furiously workshop compromises, the one thing they can't do is provide the votes necessary to pass national paid family leave into law. For that, you need Democrats — and you need a lot of them. Get cracking!

That's not how any of this works, Amazon edition

The recent debacle in New York over Amazon's plan to open an office there under the hilarious marketing slogan of "HQ2" (or maybe HQ1.5, or maybe HQ2.14159?) gave finance journalists, who I've long insisted are the laziest people on earth, the opportunity to cluck their tongues about the poor state of "financial literacy," and gives me the opportunity to debunk a few of the more absurd claims that are consistently trotted out when cities and states, and now even the federal government, offer tax incentives to attract business activity to particular areas.

Yes, economic development subsidies are a "real" cost

State and local economic development programs typically have three components:

1. the government undertakes a massive buildout of infrastructure in order to make the site suitable for development. Sometimes this also includes regulatory waivers, like the environmental and labor regulation exemptions around the Wisconsin Foxconn plant (which, as a reminder, will never open). In the case of the Amazon office complex, "rather than going through the city’s extensive land use review process, known as ULURP, the state will take the lead and override local regulations on the lot, currently zoned for manufacturing space."
2. the target of the economic incentives then usually (but not always!) uses its own money to build out the commercial use of the site.
3. finally, once the site is operational, the costs of the subsidies are supposed to be eventually "recouped" through payroll, income, and sales taxes generated by the new economic activity.

A lazy financial journalist looks at these three components and says, "economic development subsidies do not have a real cost, and stopping them does not save money, because they are provided against economic activity that does not currently exist and would not exist without the subsidies."But Indy Finance readers aren't lazy financial journalists, so they ask some obvious follow-up questions:

• If a massive buildout of infrastructure is required in order to make a site suitable for development, why hasn't it been done yet? If an area of one of the richest cities in the world does not have adequate water, sewage, or transportation connections to make it possible for businesses to open in that area, it represents a serious failure of governance that has nothing to do with any individual business's willingness to operate there. An enormous number of people are eager to live and work in New York City, so leaving areas of the city underserved by public services is an active, ongoing harm that should be eliminated as quickly and efficiently as possible.
• If zoning and environmental regulations are preventing businesses from opening in an area, then they should be carefully considered to make sure the regulations are achieving their goals and are not needlessly obstructing development with little or no public benefit. This is true, obviously, regardless of whether any individual business is interested in operating there. After review, bad policies should be repealed and good policies should be retained.
• Once appropriate infrastructure is in place, and once appropriate zoning and environmental regulations have been decided on, why should policymakers care what (legal) businesses operate in the area? This is sometimes, wrongly, split into the idea of "good" (well-paid, college-educated, predominantly white) jobs and "bad" (poorly-paid, high-school educated, minority) jobs but this is not a distinction that makes any sense from the point of view of the government or the economy. Well-paid workers are well-paid because their employer finds it worthwhile to pay them well, poorly-paid workers are poorly-paid because employers can get away with paying them poorly. If an area supports well-paid jobs, the employees will be well-paid, and if it supports only poorly-paid jobs, the employees will be poorly paid.

At this point it becomes clear why economic development subsidies are a "real" cost. With or without economic development subsidies, the government can pay for a massive infrastructure buildout. With or without economic development subsidies, the government can right-size environmental and zoning regulations. But in one case, businesses choose to open in the area based on the commercial appeal of the area and pay their taxes in full, while in the other case, one or more subsidized businesses opens in the area based on the subsidies provided and pays just a fraction of the taxes they'd otherwise owe.The difference between the "taxes-in-full" regime and the "subsidized taxes" regime is the real-world cost to the public of the economic subsidies, and it's a real, budgetary cost that has to be paid with higher taxes, reduced public services, or increased debt.But finally, and I know you saw this coming, the "subsidized taxes" regime serves as an additional tax on all the businesses that would love to operate in Long Island City but don't get Amazon's sweetheart deal. It doesn't matter whether you're a dry cleaner, a livery cab operator, a restauranteur, or a venture capitalist: New York wanted to set aside the land it had prepared, at taxpayer expense, for commercial use for a single business it had decided upon in advance. Everyone else who wants to open a business in Long Island City would have to pay their taxes in full, and compete for workers and resources against a $2.988 billion head start.

Conclusion

If New York City's infrastructure is too bad, improve it. If New York City's zoning regulations are too strict, loosen them. If New York City's taxes are too high, cut them. But don't tell me you can get a free lunch by subsidizing a single business promising to hire 25,000 people, when millions of people around the country and the world are dying to move to New York to live, work, start businesses — and pay their taxes in full.

There's no such thing as an "American retirement model"

There's no cliche more beloved by the financial press than the "changing American retirement model."The beauty of the changing American retirement model is that you can use it to prove any point you want:

• if you want to cut Social Security old age benefits by raising the full retirement age, the changing American retirement model is that people are living and working longer;
• if, on the contrary, you want to increase Social Security benefits, the changing American retirement model is that fewer employers offer defined benefit pension plans so the government needs to step in to supplement retirees' income;
• if you want to increase the contribution limits to tax-sheltered retirement accounts, the changing American retirement model is that retiree health care and housing expenses are increasing faster than consumer price inflation.

The problem with these arguments, some of which I'm sympathetic to and some of which I detest with every fiber of my being, is that there is no American retirement model, and there never has been. There are at least 3 different ways to illustrate this, and I think each one has value.

People who die young don't get to retire

In the 2015 United States life table, you can see that of 99,065 infants surviving to age 18, only 86,915 survive to age 62, the earliest age they'd be eligible for Social Security old age benefits, a survival rate of 87.7%. The American retirement model for the other 12.3% of the population is to die.The reason I bring this up is that arguments based on life expectancy only apply to people who survive to retirement. There are two moving pieces here. First, the number of mortalities per age rises steadily, which means for each year you raise the retirement age by, you exclude an increasingly number of people from ever being able to retire. Second, increasing longevity is concentrated in high-income, low-impact white collar professions — people who have other resources to draw on in order to meet their retirement needs in the case of a higher retirement age.No wonder higher retirement ages are so popular among the wealthy.

No one saves anything for retirement, and no one ever has

Vanguard reported in 2017 (page 45) that their average 2016 401(k) account balance was $178,963 for participants between the ages of 55 and 64, while the median balance for those participants was $66,643. I don't want to argue about whether Vanguard assets are "representative" or not, so apply as wide a margin of error to that figure as you like; maybe Vanguard participants are particularly savvy, and maybe they're particular slouches.The point is, using a primitive 4% withdrawal rule, $67,000 can produce about $2,680 in safe withdrawals per year in retirement. While the average is pulled up by what Vanguard calls "a small number of very large accounts that significantly raises the average above the median," even the average account balance can only produce $7,160 in "safe" withdrawals per year.

Defined benefit pension coverage has not changed

The third piece of the "American retirement model" puzzle is defined benefit pension plans, which have been said to be steadily shrinking for at least as long as I've been alive.In a 2018 Bureau of Labor Statistics report, 26% of civilian workers had access to defined benefit pension plans. Sounds low, right? The third leg of the American retirement model has been plucked from its fitting!The trouble is, most workers never had access to defined benefit pension plans. There are two reasons this is so confusing to people. First, defined benefit pensions are typically reported as a percentage of total retirement plans, as in this Vox.com article: "as of 1983, defined-benefit plans were the majority of retirement plans in the US. By 2004, most were defined-contribution."You can find an even more extreme claim in this report: "At one time, 88 percent of private sector workers, who had a workplace retirement plan, had a pension" (emphasis mine).But that doesn't tell you anything about the number of defined benefit pensions in existence in 1983 or at any other time — the entire effect could have been (and indeed was) created by increasing the number of defined contribution plans at employers that never offered defined benefit plans!Second, the decline in defined benefit plans is concentrated almost entirely in the private sector. According to a 2017 Congressional Research Service report, 85% of state and local government workers still have access to defined-benefit pensions today.Have I kept you in suspense long enough? Today's 26% access rate to defined benefits pension plans has fallen from a 1989 access rate of...32%. That's it. 30 years — almost my entire lifetime! — of being lectured by neoliberal think tanks about the collapse of the American retirement model, about the need to work longer, harder, re-skill, up-skill, trans-skill, and the defined benefit pension access rate has fallen, in total, by a little under 19%. Another way of thinking about it is that the total number of workers covered by defined benefit plans has risen, from 32% of the 1989 workforce to 26% of the much larger 2018 workforce.

Stop over-thinking: the suffering of the elderly is the problem and Social Security is the solution

There is no problem under our young sun that the neoliberal mainstream of our politics doesn't think can be solved with three-legged stools, with success sequences, with means-testing, and with personal responsibility.But it's not true. Elder poverty is a problem with a single cause: under our version of market capitalism, people who work get paid, and people who don't work don't get paid. If people insist on living longer than they're able to work, then they either starve or receive money from those who are still able to work. This has nothing to do with life expectancy, it has nothing to do with retirement savings, and it has nothing to do with defined benefit pension coverage.Either we transfer money from workers to retirees, or retirees die hungry and helpless. Fortunately, we already have a solution in place: monthly cash transfers to retirees through Social Security's old age benefit. Unfortunately, rather than finding a consensus to expand that system to ensure none of our elders are left in poverty, that system is under attack by people who want to reduce those benefits.We have an economy that's more than capable of providing for children, workers, retirees, and those unable to work. All we need is a politics that's up to the task.

The least-understood benefit of the 529 scam

I have written a lot about 529 college savings plans, the grotesque transfer of millions of dollars of additional wealth to the richest people in the country, which were expanded and made even more valuable in the Smash-and-Grab Tax Act of 2017 when qualified "higher education" expenses were expanded to include up to $10,000 per year in tuition at private elementary and secondary schools.In an exchange with reader calwatch in the comments to an earlier post, I touched on one of the most misunderstood elements of 529 plans, and realized it really deserved its own post.

The difference between tax-free and penalty-free withdrawals

I've gone over the basic conceit of 529 plans many times before: contributions are made with after-tax income (although some states allow tax deductions if you contribute to the plan in your state of residence), compound internally tax-free, and can be withdrawn tax-free for qualified "higher education" expenses (now including up to $10,000 in private elementary and secondary school tuition, as I mentioned above).It's essential to understand three types of withdrawals that can be made from a 529 plan:

• withdrawals for qualified higher education expenses paid out of pocket or with student loans are completely tax-free;
• withdrawals for qualified higher education expenses covered by grants and scholarships are penalty-free, but subject to income tax on the earnings portion of the withdrawal;
• and withdrawals for non-qualified higher education expenses are subject to income tax on the earnings portion of the withdrawal and a 10% penalty on the earnings portion of the withdrawal.

The key difference between tax-free and penalty-free withdrawals is this: tax-free withdrawals must be made in the year the qualified educational expenses are paid (or billed), while penalty-free withdrawals can be made at any time and "attributed" retroactively to the grant or scholarship.For folks who choose to enroll in high-deductible health plans eligible for tax-free health savings accounts, this should sound familiar: withdrawals from HSA's must be "attributed" to a qualified health expense, but they don't have to be made in the same year the health expense is incurred. Indeed, they can be made years or decades later, as long as you keep good records.

A well-timed penalty-free withdrawal is a tax-free withdrawal

What this allows you to do is time penalty-free, taxable withdrawals for years when you have low taxable income, for example if you stop working before age 70 but want to take advantage of the Social Security magic trick. During years in which you don't earn any ordinary income, you can "fill up" the bucket of your $12,000 or $24,000 standard deduction with 529 plan withdrawals attributed to decades-earlier grants and scholarships, and then meet any additional income needs with withdrawals from Roth accounts or taxable capital gains in the separate 0% capital gains tax bracket for those transactions.

Conclusion: yes, I'm trying to kill this loophole

Tax-advantaged programs like 529 accounts, while offering hilariously small benefits to the middle class and no benefits at all to the poor and working classes (who for obvious reasons are not saving anything at all) offer preposterous tax incentives to the rich, the very rich, and the ultra-rich.The answer is waiting for us whenever we're ready for it: shut down the 529 scam once and for all.

Let's all go to the movies

When Ronald Reagan needed to explain to the American people the outlandish claims of his voodoo economists, he would often reach back into his remaining intact memories of his first career, as a Hollywood star. Who could forget such iconic roles as "The Gipper," "The Gipper: Tokyo Drift," and of course "2 Gipper 2 Furious?"Reagan patiently explained to his lead-damaged voters that high marginal income tax rates on actors meant that after getting paid for two films per year, leading men and women would take the rest of the year off, knowing that each additional movie would be worth just pennies on the dollar to them.The logic is airtight: if a blockbuster takes 2 weeks to film, an actor considers two weeks of work worth $200,000, and their studio considers the actor's work worth $400,000, then at 50% tax rates the actor is willing to work but at 70% tax rates they'd rather chase starlets around the pool at the Chateau Marmont.Between 1981 and 1987, Reagan got his wish, unleashing unimagined productivity in the acting industry by reducing the marginal tax rate on top incomes from 70% to 38.5%. Or did he?

Methodology

Due to my unfortunate literal tendency, I got to wondering: if 70% marginal tax rates were keeping actors from taking on a third film each year, did lowering top marginal tax rates to 38.5% increase the number of films top actors were willing to take on?Since tax rates fluctuated wildly between 1981 and 1986, this gives us a natural disjuncture point. For each of the 25 years ending in 1980, and the 25 years beginning in 1987, I looked at the top-billed and second-billed actor in the highest-grossing film of the year, and asked a simple question: how many films did that actor appear in? There are a few obvious problems with this methodology: if actors are paid the year principle photography occurs, but the film is released in a different year, the wrong actors might be selected for a given year. Additionally, surprise hits, particularly independent films, might have high box-office receipts but not have needed to compensate their actors correspondingly. I don't think these problems should matter much, but if you do, you can do your own analysis.

Results

Having put all this data together (you can check it out for yourself), I wanted a way to easily visualize it. In each charts the number of total film credits by the top-billed actor in the highest-grossing film of that year is shown in blue, with the number of total film credits by the second-billed actor in the highest-grossing film stacked on top in red.Here are the 25 pre-reform years:And here are the 25 post-reform years:Another approach is to look at some statistical values. Pre-reform, the average number of films by both top-billed and second-bill actors was 1.8, with a range of 1 to 5 (props to Gene Wilder in 1974) and standard deviation of 0.65 and 1 for top-billed and second-billed actors, respectively.Post-reform, the average number of films dropped slightly, to 1.72 (top-billed) and 1.68 (second-billed), with a range of 1 to 4 (Sam Neill in 1993 and Billy Bob Thornton in 1998). The standard deviation rose slightly for top-billed actors to 0.94 and fell slightly to 0.85 for second-billed actors.Using the sum of both top-billed and second-billed actors, as I did in the charts above, yields a fall in the mean from 3.6 to 3 films per year, and a slight rise in the standard deviation from 1.26 to 1.29 films per year. Using the combined data, the median and modal number of films by each year's pair of actors is identical pre-reform and post-reform, as is the range, with 2-7 films being made by each year's pair, with 3 films per year remaining the most common total value.

Why did the Reagan tax reforms fail?

From the perspective of encouraging our highest paid actors and actresses to produce more films for our entertainment and enrichment, the verdict is clear: the Reagan reductions in top marginal tax rates were an abject failure. A tax reform that reduced revenue by roughly 1.1% of GDP in order to incentivize increased economic activity at the highest end of the income scale instead left that activity slightly lower than it was pre-reform!One key to understanding why is the interaction of what we can call "wealth effects" and "income effects." To clarify the difference, consider a simple case of interest rates on plain-vanilla savings accounts. If interest rates are currently at 10%, what happens if they fall to 9%?On the one hand, this will make saving marginally less attractive. You may be willing to deposit $1,000 if it will earn you $100 in interest per year, but if it only earns you $90 per year, you may prefer to spend all or part of the $1,000 instead. This is the income effect: the less net income you receive from an activity, the less incentive you have to do it. It's also the effect voodoo economists choose to emphasize.But a second effect is working in the opposite direction: the wealth effect. If your goal is to accumulate a total of $2,000, then a reduction in interest rates from 10% to 9% will not lead you to save less, but instead cause you to save more, since your previous savings will no longer let you achieve your goal in the same time frame.Likewise, the wealth effect of a higher interest rate is not increased thriftiness, but the opposite: you need to save less money to achieve your wealth goals at an 11% interest rate than at a 10% interest rate, leaving you more money to spend rather than save.Once you understand the income and wealth effects, you can see one reason why Reagan's efforts were doomed. The income effect means that post-1987, actors got to keep a far higher share of their income, increasing their incentive to work as much as possible, but the wealth effect means that it took far fewer films to accumulate the kind of wealth that puts you comfortably among the rich and famous. Not every actor struck the same balance, but a glance at the data shows that for highly-paid actors on the whole, the two effects almost perfectly canceled each other out.

Conclusion: wage slavery or capital strike?

This exercise, and generally taking income and wealth effects seriously, isn't supposed to suddenly grant you some special insight into the correct marginal tax rate on high incomes. Instead, it's meant as an invitation to think about what, exactly, we want our tax policy to achieve, and how.To give a simple example, if we believe that investment banking is a good and worthy activity that improves the peace and prosperity of the world in one way or another (allocating capital, hedging commodity prices, whatever), then should we prefer to have a large number of investment bankers working reasonable hours and making reasonable incomes or a small number of investment bankers working inhuman hours and making preposterous incomes?In the one case, high marginal income tax rates might reduce the willingness of investment bankers to work long hours in order to earn higher and higher incomes, forcing firms to hire more of them at more reasonable wages and hours. If investment banking is, instead, as specialized an activity as Guild Navigator, then perhaps lower tax rates are necessary to encourage the very highest specimens to achieve their full potential.But as The Gipper made clear, it's not enough to say that we'll "let the market decide," for the simple reason that "the market" is a product, not an input, of public policy.

The more unrealistic your goals are, the more of them you need

I got to thinking the other day, as I so often do, after seeing somebody toss off a joke on Twitter. The gag is an asset manager being told by a prospective client, "I need real, net of fee returns of 8%, so I don’t think you are a fit." The asset manager drily replies in .gif form, "Correct." My immediate response was not to the "realistic" or "unrealistic" element of an 8% return, net of fees. My response was to the idea of "needing" one return or another.

What return do you need?

If you want to operate a private space program like Jeff Bezos or Elon Musk, you need many billions of dollars. For the sake of argument, let's say ten billion of them. Now, ten billion dollars sounds like a lot of money, but it's not an impossibly large amount of money. According to Forbes's (always-suspect) list, there are about 150 people in the world with fortunes that large. The formula is simple: you start a company (or, like Eduardo Saverin, be roommates with someone who starts a company, sue him, renounce your US citizenship, and move to Singapore), hire some competent managers, wait for the stock market to get frothy, go public, and presto, you're worth $10 billion.The trouble is, there's no point in operating half a space program. That means if your managers are a little less competent or the stock market is a little less frothy, you might only walk away with $5 billion — not nearly enough to land a man on Mars. If you don't want to strand Matt Damon halfway there, then you need a different goal. For example, the University of California system budgeted the collection of $3.15 billion in tuition and fees in 2016-2017, meaning with $5 billion you could pay the tuition and fees for every student in the University of California system for a year (and still hang on to almost $2 billion).The point is not that financing public education in California is a less worthy goal than sending Matt Damon to Mars. The point is that you can't afford to send Matt Damon to Mars, so you need a backup goal.And indeed, this is a perfectly common situation to find oneself in. On a visit to a steakhouse you might prefer the $150 cut of meat to the $45 cut, but choose the $45 piece anyway because you can't afford the $150 option. It doesn't make your choice "less authentic" or "worse" in any meaningful way; it simply means you've arrived at a particular balance of your preferences and your constraints.

Your goals don't need to be realistic if you have enough of them

At this point you might object that there's a big difference between a $150 steak and a reusable rocket that can land on a platform floating at sea. But I don't see any difference at all: to afford the steak you need another $105, to afford the rocket you need another $9,999,999,955. In both cases, your ability to meet your goal depends on your starting assets, your income, your savings rate, and the return on your investments.Personal finance advice often ends up eliding this by saying the only goal worth thinking about is to acquire "as much as possible." Traditionally, that's been used to mean as much money as possible. "The Millionaire Next Door" became a classic of the genre by observing that even a middle-class income allows healthy white people to accumulate millions of dollars if they live frugally enough. In our own time, the FIRE community turns this logic on its head and says the goal is to acquire as much freedom as possible, i.e. working the least possible amount of time required to liberate oneself from the drudgery of work.If "as much (money, freedom, whatever) as possible" is the only way you know how to think about your goals, then you end up with more or less identical advice: earn as much money as possible, spend as little money as possible, and invest in the most aggressive portfolio you will be able to stick with through market volatility.But acquiring "as much as possible" is obviously not the only way to set goals. Most significantly, it takes all potential goals that decrease your net worth off the table. Giving away a million dollars may feel good for a moment, but it also reduces your net worth by a million dollars, which makes it theoretically indistinguishable from buying a new car, renovating your kitchen, buying organic groceries, or sending your kids to private schools.

Have enough goals to accommodate reality

Fortunately for them, but much to the consternation of personal financial columnists and bloggers, in the real world people seem to have no trouble organizing their lives around multiple goals. People do buy organic groceries, even though they could invest the difference in price. People do renovate their kitchens, even if the renovations cost more than any higher final sale price of their house. People even send their kids to private schools, unfortunately.While I find people are in general extremely effective at forming and executing goals within their means, they don't pay nearly enough attention to "upside risk:" the possibility that their income, savings, and return on investments will dramatically outpace their goals. Of course, setting unrealistic goals is, by definition, unrealistic. You don't want to commit to donating $1 million in 10 years, only to discover that a job loss, unexpected medical expenses, or global financial crisis leaves you with just $250,000.But you also don't want to commit to donating $250,000 and find that your investment has swollen to $1 million, leaving you with $750,000 you can't fathom what to do with. Is that a better problem to have than the reverse? Of course. But there's no such thing as a good problem, and if you find yourself suddenly on the spot trying to figure out what to do with $750,000, you're vulnerable to two serious errors.First, you might simply spend the money foolishly, or not at all. If you check your brokerage statement the same day you get a mail or phone solicitation from the Wounded Warrior Project, you might ship the money off to them to be spent on their lavish headquarters and advertising budget. Worse in its own way is simply choosing not to spend it and passing the problem on to the next generation.But the second problem is one I consider almost as dire: a big part of the pleasure of setting goals is working towards them, and experiencing satisfaction and disappointment as you draw nearer and farther away from them. In my other career as a travel hacker, I see my loyalty program balances rise towards the values I need to book the trips I want to take. Money's not entirely like that: there will always be things to spend as much or as little money as you like on. But the principle is the same: working towards a goal has a satisfaction independent of actually achieving it.

Conclusion: set unrealistic goals!

Most people have a sense of what they will do if their investments end up returning 5% instead of 8%. They'll move to a smaller house, they'll replace the car less often, they'll take fewer vacations, they'll leave less money to their children. But fewer people know what they'll do if their investments end up returning 11%, or 20%, or 100%, instead of 8%. Thinking about that problem sooner, rather than later, gives you more time to formulate the right goals and more time to relish getting closer to them, whether or not you ever end up getting Matt Damon to Mars. 

Reminder: the buyback debate is about taxes, not corporate finance

Long-time readers know that the way to tell if a financier is lying about stock buybacks is to check if their mouth is moving.But since buybacks are back in the news, meaning lies about buybacks are back in the news, I thought I'd offer a quick refresher.

If buybacks and dividends are identical, why do buybacks at all?

The lie about buybacks always starts the same way: "from a corporate finance perspective, share buybacks and dividends are identical." This concept of identity is extremely important to people lying about share buybacks.The logic goes that a firm with more cash than it is able to productively invest in operations should return some or all of that cash to its shareholders. Since a single share contains the value of the firm's productive capacity and any cash and marketable securities it has on its books, minus debt, buying back shares (increasing the proportional ownership of the firm's productive capacity for the remaining shareholders) and issuing dividends (moving cash from the books of the company to the individual accounts of shareholders) should have the same effect as buybacks on the company (less cash) and the shareholders (more cash for the shareholders who participate in a buyback, or a greater ownership stake in the operating business for the shareholders who don't). Hence, the identity that's so important to people lying about buybacks.So if this identity holds, if share buybacks are absolutely identical in every way to dividend distributions, why all the fury around banning them?

Stock buybacks are about managing individual shareholder tax liability

The fury is because dividends and share buybacks aren't identical: when held in taxable accounts, dividends are taxed in full in the year they're distributed, while only people who participate in share buybacks incur a tax liability, and only if their shares have increased in value since purchase.That means dividends create a "blended" tax rate across all shareholders (a 0% rate for tax-free institutions and individuals, a 23.8% rate for high-income individuals), while share buybacks allow shareholders to determine their own tax liability.In a stylized example, a firm issuing a $1 per share dividend on 1,000,000 shares is virtually guaranteed to distribute some of it to untaxed institutions or individuals in the 0% capital gains tax bracket, some to individuals in the 15% tax bracket, some to individuals in the 20% tax bracket, and some to individuals in the 23.8% tax bracket, while a firm buying back $1,000,000 worth of shares might not create any individual tax liability at all, if only untaxed institutional shareholders participate in the buyback.

Should wealthy shareholders decide for themselves whether to pay taxes?

This is the whole ballgame. Since only the very wealthy hold shares in taxable accounts at all (as opposed to workplace retirement, IRA, or HSA accounts), the entire propaganda operation around share buybacks is focused on allowing them to manage their individual tax liability. A lifetime of carefully selecting companies that maximize their share buybacks and minimize their dividends leaves a multi-millionaire paying virtually nothing in taxes, then passing along greatly appreciated shares with a stepped-up basis to their heirs.As I explained in my earlier post, 364 days a year financiers have no trouble explaining this in fine detail to their wealthy clients. But on the 365th day they begin to rant and rave about how there's absolutely no difference between dividends and buybacks.But the debate over share buybacks has never been about corporate finance. The debate is about whether the wealthiest people in the country should get to decide for themselves if they'll ever owe taxes on their investment returns, or whether those returns will be passed from generation to generation tax-free.

Book Review: "Stubborn Attachments," Growth, and Welfare

One of my favorite libertarian economists is the director of the Koch-financed Mercatus Center, and Bloomberg columnist, Tyler Cowen. He's a truly inspired troll in the model of an Ayn Rand or a Milton Friedman, constantly asking important questions like "what if the things you think are good are actually bad?" and "what if the things you think are bad are actually good?"Recent gems include:

• Calling people who are worth billions of dollars "billionaires" is dehumanizing
• The poor need to save more money 
• Freddie Gray's death proves Baltimore needs more police

He also has an excellent interview podcast where he asks guests bizarre leading questions and they often answer, "I have no idea what you're talking about." But more relevant to today's post, he has also been on tour lately promoting his latest book, "Stubborn Attachments." I listened to enough interviews to pique my interest, so when I discovered my local library didn't have a copy, I bought one to review and donate. In Stubborn Attachments, Cowen makes 3 basic arguments:

• Wealth matters;
• The future matters;
• Therefore our principal moral duty is to take actions that lead to the highest possible level of future wealth, all of which happen to align with Cowen's prior political intuitions.

Let's look at each of these in turn.

Does wealth matter?

Since Cowen prides himself on his empiricism, this banal argument is the one where he recognizes himself to be on the shakiest ground. You see, there's a problem an empiricist runs into when arguing that human welfare requires maximizing economic output: in one of the most consistent social science findings, above certain levels of wealth, people do not report statistically significant higher levels of happiness, except in certain relative status situations (you are likely to be happier as the richest person in a poor neighborhood than the poorest person in a rich neighborhood). If you took this research at face value, you would conclude that the happiness-maximizing economic policy would be a moderately high level of per capita wealth (sufficient to maximize average happiness), distributed relatively equally (to avoid relative status effects).But since Cowen is a libertarian economist, he needs to find reasons why unequal distributions of wealth are good, rather than bad, even if they leave some people much less happy than others. Since all the empirical research contradicts this view, he resorts to speculation about reasons why he's right and the empirical research is wrong.

• Language is a poor gauge of absolute happiness. If people calibrate their use of language around their lived experience, then they might be answering a different question than researchers are trying to ask. A researcher may want to know "on a scale of 1 to 10 of conceivable levels of human happiness, with 1 being the least happy a person is capable of being, and 10 being the happiest a person is capable of being, how happy are you?" But a subject might be answering a different question: "all things considered, how happy are you?" If you've just lost a beloved parent, partner, or child, you might owe the researcher a "1" on their ideal scale, but if you're holding up better than your neighbor who experienced the same tragedy you might in fact answer a "6" based on your own internal scale. If this were the case, people might in fact be happier under conditions of higher wealth than lower wealth, even if we cannot produce survey instruments that accurately detect this, in the same way we can be confident even very small objects produce gravitational fields, despite not having instruments sensitive enough to detect them.
• Fleeting moments of extreme happiness may not show up on surveys (because people forget about them or don't take them into account when measuring their overall happiness), but morally should still be considered, and fleeting moments of extreme happiness are more likely to occur under conditions of higher wealth than lower wealth.

I don't think these are very convincing arguments, not because they are false, but because they're irrelevant: I don't think human happiness is a particularly interesting or instructive moral value. The moral problem with Flint's poisoned water supply is not that drinking poison makes people "unhappy," the moral problem is that it kills them. The moral problem of doctors telling people that smoking is a safe and healthy habit is not that smoking makes people "unhappy," the moral problem is that doctors have a duty to protect the health of their patients.Cowen cleverly tries to address this issue by saying what he's really interested in isn't wealth, per se, but wealth "properly measured," which he refers to as "Wealth Plus." Wealth Plus starts with economic activity, but adjusts it to include "measures of leisure time, household production, and environmental amenities, as summed up in a relevant measure of wealth." The problem with this trick is that it doesn't resolve any moral questions; instead it begs them. If I place a high moral value on biodiversity ("environmental amenities") and Cowen places a low moral value on it, then we're going to start with vastly different estimates of our current wealth. But what's worse, in a book concerned with growth, is that over time our estimates will grow further and further apart! My high weighting of environmental amenities means that my value of Wealth Plus might stagnate or fall while his happily compounds over the centuries, until our descendants are standing on a barren rock hooked up to coal-powered happiness engines. To me this is a nightmare, to Cowen a triumph of moral reasoning.In other words, rather than his policy views naturally following from a proper focus on Wealth Plus, he's simply moved the moral argument backwards from "what policies are moral?" to "what is the moral method of calculating Wealth Plus?"

Does the future matter?

Speaking of our descendants, the middle part of Stubborn Attachments is a lively discussion of a problem that has long vexed both economists and moral philosophers: how much weight should we give to the well-being of people in the future, including the very distant future? The technical term for this is the "discount rate," which is derived from the idea in economics that a dollar in the future is worth less than a dollar today, because a dollar today can be invested to grow into more than a dollar in the future.By analogy, moral philosophers ask how we should discount the effects of our actions on future beings. A very high discount rate would imply that we should have very little concern for the well-being of people in the future, and almost no concern for people in the distant future (the same way a dollar today is worth many thousands of times the value of a dollar in 500 years), while a low discount rate implies we should consider the welfare of people in the future very close in value to the welfare of people living today, and even people in the distant future should be seriously considered.Cowen summarizes the debate neatly, and argues that the correct discount rate is very low or zero: we should consider the well-being of people in the very distant future to have virtually the same moral weight as people living today.I found this section lively and interesting, and for what it's worth, I agree with Cowen that zero or near-zero discount rates are the most appropriate.

If Wealth (Plus) matters, and the future matters, what should be done?

Cowen sets up his argument to neatly lead into his preferred policy outcomes:

• Economy activity is a principal input into Wealth Plus, an inclusive measure of human well-being;
• The future should be given moral weight equal or near-equal to the present;
• Therefore we should very strongly prefer policies and actions that will put the world on the highest sustainable path of economic growth, subject to the constraint of near-absolute human rights (I didn't discuss his view of human rights because it's uneventful, you just need to know he thinks they should be treated as near-absolute).

Fortunately, Cowen isn't coy about what he thinks those policies and actions should be:

• "We should redistribute wealth only up to the point that it maximizes the rate of sustainable economic growth."
• "An overly generous level of wealth transfer harms economic growth. Many people end up working less, or working less hard, and the associated higher tax rates discourage entrepreneurship and can lead to economic stasis."
• "Excess or poorly conceived welfare expenditures may create urban cultures of dependency and crime" (yikes).
• "Non-infrastructure government spending is correlated positively with lower growth rates."
• "Excess transfers...make it harder to absorb high numbers of immigrants from poorer countries...too high a level of benefits is likely to mean...a lower level of migration."
• "Rather than redistributing most wealth, we can do better for the world by investing in high-return activities like supporting immigration and producing new technologies with global reach."
• "Utilitarianism may support the transfer of resources from the poor to the rich. A talented entrepreneur...can probably earn a higher rate of return on invested resources than can a disabled great-grandmother. Indeed, a common complaint in the literature on inequality is that the rich get richer while the poor get poorer, or at least more or less stay put. If this portrait is to be believed, then the rich earn higher returns on their accumulated wealth" (emphasis mine).

What does Cowen think we are doing when we argue over politics?

I think it is fine and good for Tyler Cowen to write down for his superfans and for posterity his thoughts on wealth, happiness, growth, and policy. I also enjoy writing down my thoughts on those subjects. Cowen's mistake, however, is in thinking that he has an unusually clear-eyed, unusually empirical, unusually ethical answer to these questions. Instead, he appears to me to have an unusually dull and muddied view.Take, for example, the current political debate over whether the United States should adopt a single-payer healthcare system, where people stay on the same federal health insurance plan from pre-natal care to cradle to grave. Such a plan would have a number of positive and negative effects. On the one hand, over the long term federal taxes would likely need to be somewhat higher to finance the increased federal expenditures on health care, and those higher taxes might have a negative effect on long-term economic growth if they discourage work and investment. On the other hand, the increased ease of switching between employment, independent contracting, and self-employment might have a positive effect on entrepreneurship and matching between employers and employees, and lead to increased economic growth. Moreover, reducing the share of the workforce, office space, and financial capital dedicated to unproductive private health insurance activities, and increasing the share dedicated to productive activities, might have an additional positive impact on economic growth. Finally, providing consistent lifetime healthcare to the entire population, including the currently uninsured, might increase the overall health and productivity of the population, another positive impact on economic growth.My point is not that the benefits of universal national health insurance will outweigh the costs, although it should come as no surprise that I think they will. My point is that everyone involved in the debate knows that we are already arguing about whether the benefits will outweigh the costs! That is, to a first approximation, what it means to say a policy is "good" or "bad," that you support it or oppose it.Consider as another example the recent controversy over the construction of the Dakota Access Pipeline. Proponents argue that the construction of the pipeline is a productive investment that might be expected to increase long-term economic growth. Opponents of the pipeline argue that on the contrary, easing the extraction and combustion of fossil fuels will accelerate the warming of the climate, reducing the long-term quantity and quality of "environmental amenities" and actually reducing "Wealth Plus." Moreover, the native residents of the area assert a "near-absolute" rights claim that they don't want to expose their ancestral waters to the risk of environmental catastrophe. These are complicated arguments, but they are arguments that we are already having. Tyler Cowen contributes nothing to the argument except insisting that the moral stakes are very high that we make the right choice instead of the wrong choice.But we already know the moral stakes are very high — that's what the fight is about!

Means-testing and Appalachian roots

In October, 2017, the Washington Post published a very strange series of articles about the recipients of disability benefits in the United States. The entire series is worth reading for various reasons, but I want to direct your attention to one particular entry: After the check is gone.The principal character in the article, Donna Jean Dempsey, collects aluminum cans and hunts for wild roots towards the end of each month when her disability and SNAP benefits run out. The article refers to this as "the underground American economy, where researchers know some people receiving disability benefits are forced to work illegally."This is flatly false, and it's repugnant, but it's not surprising. The problem is not a dumb Washington Post reporter. The problem is an economy-wide revulsion towards self-employment.

"To work illegally" is a nonsense phrase

In the United States, our laws rest uneasily alongside our intuitions. Most people, most of their lives, work for large employers who mostly run competent "human resources" departments that mostly follow the law.That creates the enormously convenient presumption that whatever your employer is doing is probably legal. You won't always be right, but periodic high-profile class action lawsuits serve as a kind of warning signal to large employers to stick close enough to the law not to be caught out and become the next sacrificial lamb.Nonetheless, the fact is that it's virtually impossible for a worker to violate employment law.Instead, when people say a worker is "working illegally," they typically have one or more of three totally distinct ideas in mind:

• The worker is engaged in an illegal activity. For example, many forms of drug trafficking are illegal, so if your job is to traffic drugs, you might be "working illegally" in the sense of receiving pay for illegal activities, but the laws you're violating aren't employment laws, they're laws against drug trafficking.
• The worker is employed in violation of employment law. It is illegal to hire some categories of workers, like certain non-resident aliens and minors below a certain age for certain types of work. It's illegal to pay less than the applicable minimum wage. It's illegal not to report your employees' income. But it is not illegal for minors to work; it's not illegal to accept less than the minimum wage. These are crimes committed by employers, not by workers, and penalties are levied against employers for the benefit of the injured workers.
• Finally, there's a third sense which seems to be what our intrepid Washington Post reporter had in mind: a worker might have reporting requirements about the sources of outside income they receive, for example if a benefit program has restrictions on the amount of work they can do while continuing to receive benefits. But even in this case, it is still not employment law that is being violated; the work is not illegal, rather it is being reported improperly.

There's nothing that says these categories can't overlap: a non-resident alien (whose immigration status prohibits them from working in the United States) might engage in drug trafficking (illegal activity) and fail to report their income to the IRS (reporting violation). But none of these are violations of employment law: they're violations of immigration laws, drug trafficking laws, and tax laws, and knowing the difference between them is essential to thinking clearly about these issues.

Donna Jean Dempsey is not working illegally

Now let's return to the unfortunate case of Donna Jean Dempsey and Mallory, West Virginia. First, let's agree that there's nothing "illegal" about any of the work taking place:

• Donna Jean collects cans in order to sell them to a local recycling company. The recycling company does not appear to be violating any labor laws, and indeed operates a lively Facebook page so doesn't seem to be trying to operate "under the radar" in any way. It's possible there are tax reporting violations, for example if the owner deliberately declines to issue 1099-MISC forms where they're required, but nothing like that is alleged in the article.
• Donna Jean collects wild roots from the nearby mountains and sells them to the same recycling company. Again, you can imagine circumstances where this might be illegal, if she was collecting and selling bald eagle feathers for instance, but I don't know of any reason why Appalachian ginseng, Solomon’s seal, or bloodroot would be protected by any state or federal laws, and sure enough, that's not alleged anywhere in the article.

What is clearly true is that Dempsey is not properly reporting her aluminum-can-and-wild-root scavenging income.

14 easy steps to get right with the law

What would it take for Ms. Dempsey to bring herself into full compliance with the state? Here's a quick guide:

1. Apply for a West Virginia State Business Registration. This registration is required for "all purposeful revenue-generating activity engaged in or caused to be engaged in with the object of gain or economic benefit, either direct or indirect," so Donna Jean clearly qualifies.
2. Apply for an Employer Identification Number from the IRS. While not strictly required, this is going to make it easier for Donna Jean to file the state and federal taxes for her business.
3. Open a Free File Fillable Forms accounts.
4. Attach Schedules 1, 4, C, and SE to form 1040.
5. Begin with Schedule C, and add up all her income on line 1. Fortunately, since she's scavenging her inventory she doesn't need to deduct the cost of goods sold on lines 4 and 42.
6. In Part II of Schedule C, she'll want to deduct any expenses she incurred for the business, for example the "pruners for digging roots" she purchased, as well as any mileage costs she incurred driving to and from the mountain and the recycling facility. That means completing Part IV, "Information on Your Vehicle." She'll want to be especially careful keeping records of these expenses since vehicle deductions are a common target of IRS audits. Maintaining a paper log of her vehicle miles traveled is likely sufficient, but she should consider buying an app that allows her to track her vehicle travel more precisely in case of an audit. After completing Schedule C, she'll copy her net profit or loss over to Schedule 1, line 12, and Schedule SE, line 2.
7. At that point, she'll want to move over to Schedule SE and calculate her self-employment taxes. Thankfully she can probably use the "short" form of Schedule SE and use the Free File Fillable Forms "Do the Math" feature to calculate her self-employment tax, and then copy over her self-employment tax to Schedule 4, line 57, and half her self-employment tax to Schedule 1, line 27.
8. She can then complete Schedule 1 by copying line 12 to line 22 and line 27 to line 36.
9. Moving back over to Form 1040, she'll copy the numbers from Schedule 1, line 22, to Form 1040, line 6, and Schedule 1, line 36, to Form 1040, line 7.
10. Next, she'll subtract Schedule 1, line 36, from Schedule 1, line 22, multiple that number by 0.2, and write the result down on Form 1040, line 9.
11. Moving to Schedule 4, she'll copy the amount from line 57 to line 64, then copy that number back to Form 1040, line 14.
12. Now she'll subtract Schedule SE, line 6 from line 3, open up the Form 1040 instructions and turn to page 53, find the row corresponding to that number, and copy the figure on that line back to Form 1040, line 17a.
13. At this point she should be able to allow Free File Fillable Forms to complete the rest of the calculations, and print and mail or electronically submit her return.
14. Then do the whole thing over again for West Virginia.

Means-testing is a tax on those least able to pay it

At this point, you may have gotten the mistaken impression that I'm being sarcastic. After all, no one reasonably expects a disabled person with lifelong cognitive difficulties to file state and federal taxes in order to report $500 in income from salvaged roots and cans.But you're wrong. It may be unreasonable, but expecting sick and disabled people to report trivial amounts of self-employment income is exactly what's implied when a journalist drops in and reports uncritically that people are "working illegally." The statement is precisely that in addition to any health challenges they face, in addition to the grueling manual labor they perform, they should also meticulously report their income in order to avoid accidentally "stealing" benefits they're not entitled to.If that sounds insane to you, it's because it is. But it's not an exaggeration to say that's how our means-tested benefit system is designed to work.

Means-testing turns everyone into criminals and cops

There are two problems inextricably tied up in means-tested anti-poverty programs:

• program design is so arbitrary and absurd that people are encouraged to lie in order to game qualification requirements;
• program design is so arbitrary and absurd that non-beneficiaries rightly assume beneficiaries are gaming qualification requirements.

Gaming qualification requirements is easy. If your hours fluctuate week-to-week, nothing could be easier than applying for Medicaid or SNAP with a paystub from one of your "low" weeks, since benefit administration offices mechanically calculate your annual income from your weekly or biweekly paychecks. You're "supposed" to submit updated paystubs if your income rises, but obviously no one does if it will reduce their monthly benefit or disqualify them from Medicaid. Poor people can't afford to be that stupid.But gaming qualification requirements is so easy that non-beneficiaries are also aware of how easy it is. And that's how you end up with folks quoted saying things like:

"'I think it’s a joke,' his cousin, Nathan Vance, who applied for disability earlier this year, told him one night after seeing a man on disability sell Vance a bundle of roots for $12.50. 'People I know of run the mountains all the time. . . . And yet they’re on SSI. Beating the system.'" (emphasis mine)

This creates the absurd situation wherein beneficiaries are being encouraged to game the system through terrible program design, while non-beneficiaries are encouraged to judge and ridicule beneficiaries for gaming the system!And indeed, this is precisely the pattern you see in the real world.

Pay for universal benefits with progressive income taxes

There's no secret program design, no special form with particularly well-designed fields, no worksheet with particularly cunning flowcharts, no particularly well-trained administrators that can solve this problem. Naming the problem is itself naming the solution: provide universal benefits to everyone, then pay for them with a straightforward progressive income tax.No more phase-ins, no more phase-outs, no more checking in at the welfare office, no more continually reporting income to case officers. No more case officers at all. No more cheating, and no more accusing people of cheating.I do not say that this is particularly likely to occur in the next 5, 10, or 15 years, or even in my lifetime. But it doesn't ever have to happen at the federal level, or the state level: now that you know how our anti-poverty programs are broken, and how to fix them, you have the power to tell your friends to knock it the hell off when they accuse desperately poor people of "gaming" the system they're forced to live with as it actually exists.

Learning to love Baumol's cost disease

Baumol's cost disease is one of the simplest ideas in economic theory, but I experience it as a kind of brain worm: once you know about it, you see evidence of it virtually everywhere. You can read the Wikipedia page as well as I can, but this is how I think about Baumol's cost disease:If productivity is increasing economy-wide, labor costs have to rise in sectors where productivity is rising more slowly in order to maintain the same quality and quantity of production in those sectors.Consider an economy with only two industries: pizza production and hamburger production, both of which employ high school graduates for $1 per day. If the productivity of the hamburger industry were to double (say some new grinding technology or patty-pressing machine is developed), some combination of three things has to happen: hamburger factory owners charge lower prices, pay higher wages, or collect more profit. But to the extent that higher productivity is passed along to hamburger factory workers in the form of higher wages, it also has to raise the wages of pizza factory workers, since all pizza factory workers are qualified to work at hamburger factories and, all else being equal, would prefer to make more money rather than less money.The pizza factory owners now also have to arrive at a combination of three options: accept lower profits (or, if necessary, go out of business), accept lower quality (hiring high school dropouts instead of graduates, for instance), or laying off some of their workers and reducing the quantity of pizza they manufacture.Economy-wide, this process plays out constantly and with little fanfare, although of course in hindsight the effects can be dramatic. Motorized cab operators could serve many more customers per hour than horse cab operators, which put upward pressure on the price of horse cabs to the point that today they are only available at great expense to go in circles around Central Park. Industrial furniture manufacturing made the small amount of furniture still produced by hand in the United States a pricey luxury good.

Baumol's cost disease makes the same quantity and quality of labor-intensive services more expensive

The key problem, Baumol's namesake "disease," arises when productivity is flat or only slowly rising in a sector where people refuse to compromise on quality or quantity. Childcare is a straightforward example: say one well-trained childcare provider can adequately care for a maximum of 6 infants at a time. In this case, an economy-wide rise in productivity leaves parents with the same options as the pizza factory owner: they can accept lower quality (hiring poorly-trained or untrained childcare providers or accept more crowded childcare facilities), pay higher wages to match the economy-wise rise in productivity, or go out of business (care for their own children or remain childless). If the parents demand the same quantity and quality of childcare, they're forced to "share" the economy-wide rise in productivity they participate in with childcare providers whose productivity has not increased.The exact same problem arises in the provision of public-sector services. If a fully-qualified teacher can provide quality instruction to a maximum of 30 high school students at a time, then an economy-wide rise in productivity mean either raising teacher salaries or lowering the quality or quantity of instruction. If a well-trained IRS phone agent can provide quality answers to a maximum of 30 callers per day, then an economy-wide rise in productivity requires either raising IRS phone agent pay or reducing the quality or quantity of IRS phone services.Baumol's cost disease is often invoked in the public sector, but as the example of childcare (which is largely provided privately in the United States) shows, it has nothing directly to do with who is responsible for providing a service. Rather, the question is how fast or slow productivity rises in a sector compared with the economy as a whole, and how willing people are to accept lower quantity or quality of service provision.The point is that if productivity in a sector is flat or rising slowly compared to the rest of the economy, and consumers are unwilling to compromise on quality or quantity, they must "share" some of the economy-wide productivity growth with workers in less-productive industries.

Baumol's cost disease is a moral foundation of calls for redistribution

The most important ideological movement today is the movement for redistribution. The Affordable Care Act was at its core a redistribution of medical services from those with stable, long-term employment to freelancers, the self-employed, and low-income workers. "Free college" is a demand for the redistribution of educational services from the children of well-off professionals to the children of workers, immigrants, and the poor. The teacher strikes we've seen over the past few years are a call for all students to receive the quality education the most privileged students already receive.Baumol's cost disease makes the problem clear: wealth and income inequality mean that most private sector workers don't have enough to "share" with workers in less-productive industries; low-income workers send their kids to public schools with 45 kids in a classroom while high-income professionals send their kids to private schools with 25 students per classroom. The question is not whether low-income workers are willing to compromise on the quality or quantity of education their children receive. It's that they don't have a choice: there's not enough leftover to "share."To the extent that people are unwilling to compromise on demanding high-quality childcare, healthcare, and education, increases in economy-wide productivity require increased redistribution. The flip side is that increases in economy-wide productivity mean there is plenty to go around.Calls for redistribution are simply demands that the plenty actually does go around.

Quick hit: use Kanopy to stream films for free

I just found out about this service and thought I'd pass it along in case readers weren't aware of it.

Kanopy lets you stream 6 movies per calendar month for free

Setting up an account is straightforward:

• Navigate to https://www.kanopy.com/ and click "Watch Now"
• Search for your local public or university library
• Create an account and connect your library card or university ID

Once your account is confirmed, you receive 6 "play credits." Each play credit can be redeemed to watch any movie in the system as many times as you wish for 3 days. Your play credits reset at the beginning of each calendar month.Not all libraries and universities participate — the DC Public Library does, the Madison Public Library doesn't — but many do, so hopefully if you've accumulated library memberships over the years as I have you'll find you have at least one that works.Finally, it seems you can add multiple library memberships to a single Kanopy account, which may allow you to receive more than 6 play credits per month. I'm not sure simply because I wasn't able to find a second participating library where I'm a member. And of course if you have multiple people in your household you can get a library card and Kanopy account for each person.

Why Kanopy?

Kanopy isn't the be all and end all of streaming services, but if you use Amazon, Hulu, or Netflix you know the selection on each platform is limited. In that sense, Kanopy simply gives you a fourth place to check before you resort to pirating the movie you want to watch.On the other hand, Kanopy seems to have a simple, functional interface, and it doesn't autoplay previews when you move the cursor over a title, so you may end up preferring it to the ever-more-cumbersome interfaces of the other services.In any case, for now it's totally free, so you may as well check it out if you're interested.

Why have capitalists lost faith in capitalism?

I've been following with interest the evolving crisis over the United Kingdom's exit from the European Union, not because it affects me in any way but because it's less depressing than the American political system which I still have to rely on for my health insurance, retirement security, food safety, and environmental hygiene.However, the Brexit crisis has led me to ponder a question that's just as relevant here as it is over there: why do capitalists have such little faith in capitalism? To be clear, I don't think capitalists are wrong to have given up on capitalism, but I'm not a capitalist, so I don't have to explain myself. What has come to baffle me is when avowedly capitalist institutions admit that capitalism doesn't work, yet soldier on nonetheless staring straight ahead into the void.

Why should Brexit be a "crisis" at all?

As the cradle of the industrial revolution, the United Kingdom is the country enjoying either the first or second most sophisticated financial system in the world (the City of London would no doubt say the first, Wall Street's denizens would surely insist the second).In Walter Bagehot's "Lombard Street," a slender volume from 1873 that I would recommend to anyone interested in the development of financial capitalism, the author describes what is already a remarkably sophisticated system for the allocation of capital. As he tells the story, wealthy landowners in the South of England invested their agricultural profits in the North's growing manufacturies by literally buying industry's future receipts at a discount. This remarkable technique allowed money to flow to more productive regions and industries from relatively stagnant ones, and served as a key engine of the industrial revolution.But if you read about the United Kingdom's planning for Brexit, there's simply no glimmer of capitalism to be found. If the United Kingdom currently relies on agricultural imports from Europe for its food supply, then you would expect money to be flowing into the UK's agricultural sector to compensate for slower, more cumbersome, more expensive imports from the EU. If the UK relies on Europe's pharmaceutical sector for its drugs, you would expect money to be flowing into the UK's pharmaceutical sector in order to earn an outsized profit from the looming shortage of European medicines.After all, England voted to leave the EU over 2 years ago: we're not talking about an overnight decision or a sudden supply shock like the OPEC embargo of the 1970's. There has been plenty of time to turn fields over from crops destined for export to the EU and into the ones needed by the domestic UK market, plenty of time to convert abandoned warehouses into generic medicine factories, plenty of time to retrain biology researchers to work as quality controllers, financiers to work as customs inspectors, etc.Note that a "successful" reorientation of the British economy towards domestic production and away from trade would still leave the UK much worse off: global just-in-time supply chains, unified regulations with the UK's biggest trading partners, and the free flow of labor have made the UK much richer, and losing them will make the UK much poorer.But in 2017 the CIA World Factbook estimated the United Kingdom's per capita gross domestic product at $44,300, the world's 39th highest. If Brexit fully halved that to $22,150, the UK would fall to #87, just ahead of Bulgaria, a middle-income country that does not, to the best of my knowledge, suffer from shortages of medicine or food. If Brexit merely lower the UK's per capita GDP 25% to $33,225, it would be slightly poorer than the Czech Republic, but somewhat richer than Czechia's neighbor and former bandmate Slovakia, two lovely countries that, again, do not face serious shortages of food or medicine.All of which is to say, capitalism isn't some kind of magic spell that's destined to make a country rich: there are rich capitalist countries and poor capitalist countries. The only thing capitalism is supposed to do is allocate capital efficiently, and it isn't showing up to work in the UK or in the United States.So that's the question that I've been focused on more and more lately: what happened? Why can't capitalism do the one thing it's supposed to be best at, the one thing we rely on it for above all else: rapidly allocating capital to the industries where it's most needed? And, most strangely of all, how have capitalists come to agree that they can't be trusted to allocate capital?I think there are three overlapping — but not entirely satisfying — answers.

Concentrated capital needs to make bigger bets to move the needle the same amount

The situation Bagehot describes in late 19th century England is a straightforward matching problem: landowners in the rich agricultural districts earned somewhat more money than they needed to finance their gambling and garden addictions, and the small workshops and factories in the North of England needed small, short-term loans in order to bring their products to market. Since all the land was already spoken for, and there were no great agricultural investments to make, landowners had no alternative if they wanted to earn a return on their profit than to lend it out to industry. Since industry was small and fractured, that meant making lots of individual loans through the "bill brokers" Bagehot describes.But a simple mechanical problem arises when the overall level of wealth increases, and is exacerbated when that wealth is concentrated in fewer hands. There's a very important, very boring difference between investing $1,000 and needing to earn $100 per year in profit, and investing $1,000,000 and needing to earn $100,000 per year in profit. To do the former, you need to be right on a small scale exactly once. Hell, you can earn $100 on $1,000 once a month by just keeping track of the best bank account signup bonuses.But to do the latter, you can either be right on a small scale 1,000 times, or right on a massive scale once. If being right on a small scale doesn't become easier, then it takes 1,000 times as long to be right 1,000 times than it does to be right once.And that is, in fact, the exact pattern we see today: wealthier countries have much more capital to invest, but the skill and number of people charged with finding places to invest it hasn't grown proportionally. Perhaps the most iconic case is that of Japan's SoftBank, which has an unlimited amount of money to invest, all of which flows through a single person who has not, to the best of my knowledge, found a way to extend the day beyond 24 hours.In other words, a more concentrated distribution of wealth worsens the allocation of capital purely mechanically by reducing the number of people working to allocate it, and vice versa. Reorienting British production to serve British customers isn't impossible, nor even particularly difficult. Reorienting British investment to serve British customers is totally unfathomable due to the concentration of financial capital is so few hands.

Concentrated capital makes government intervention a more attractive investment

I've written before about "Opportunity Zones," one of the handouts included in the Smash-and-Grab Tax Heist of 2017. Opportunity Zones are intended to spur economic activity in "marginal" census tracts: not those so poor that investment is hopeless, but also not those prosperous enough that additional investment would crowd out existing businesses.Whatever you think about the merits of splitting up the country into "hopeless," "marginal," and "prosperous" areas, Opportunity Zones have an obvious defect: the unlimited tax benefit the federal government provides is available only to financial capital, and not to operating businesses. In order to qualify, all Opportunity Zone investments have to be made through "Opportunity Funds," which means operating businesses within the Zones have to compete for workers, supplies, and profits with investors who begin with a preposterous head start.My point is not whether Opportunity Zones are good or bad industrial policy. If I haven't convinced you they're bad policy by now, then you're beyond hope. My question is, how did an idea as bad as Opportunity Zones even become possible? How did financial capital, which is supposed to exist in order to allocate money to operating businesses, secure more favorable tax treatment than the operating businesses themselves?The answer is obvious: as concentrated financial capital struggles to find sufficiently large business opportunities to invest in, manipulating after-tax investment returns becomes more and more attractive. This has nothing to do with the availability of business opportunities in general: ten individuals might find ten investments that can yield a 10% return on $100,000 each without a single individual finding an investment that can yield a 10% return on $1,000,000. Meanwhile, the concentrated wealth of the single individual means lobbying for targeted tax benefits has an outsized return: $10,000 spent on government intervention would be the entire profit of each of the ten individual businesspeople, but just 10% of the return of the single investor.Importantly, this is not an argument about the "influence of money on politics." Rather, the point is that under any system of political influence, concentrated wealth will have concentrated, united interests and diffuse wealth will have diffuse, conflicting interests. The less likely individuals are to secure favorable government intervention due to conflicts with other stakeholders, the less likely they are to waste money lobbying for it. The more certain they are to achieve government intervention, the more likely they are to lobby for it and the more likely it becomes.

Business formation and the reserve army of labor

If the concentration of capital mechanically requires investors to seek out larger investments, and mechanically increases the ability of investors to create regulatory environments that put small businesses at a disadvantage, there's a third factor that might be best described as cultural. By "cultural" I don't mean "subjective" as opposed to "objective." Rather, I mean the way people integrate things like laws, expectations, customs, and norms into their lived experience.For example, the way the US federal tax code discourages business formation is not "subjective;" on the contrary, it's as clear as day. Transitioning from employee to self-employed requires relearning how to file your taxes from scratch. Transitioning from self-employed to employer is many times more difficult than that. The gritty 2018 tax code reboot will make both even more difficult.What that has effectively done in the United States is create a cultural expectation of employment (or failing that, unemployment), rather than business formation, an expectation that is even stronger in other Western countries. While it's not yet illegal to start a small business, everyone understands perfectly well that it's discouraged.I know of no better example than Trade Adjustment Assistance, a set of programs designed to compensate the domestic "losers" from reduced barriers to foreign trade. Workers unemployed due to changes in trade policy can receive "retraining" to get a better job. They can receive increased unemployment benefits during their "retraining." They can receive wage supplements if their new job pays less than their old job. But under no conditions can they receive assistance in starting a business to replace the one that closed and led to their unemployment in the first place!In other words, when the federal government reduces the number of firms, and reduces the number of jobs, it will retrain workers to better compete for the remaining jobs, but will do nothing to increase the number of jobs available or to reduce the number of workers who need to find work by starting their own businesses. Whether you think this is good policy or bad policy, there's no question that it objectively privileges employment over business formation.The materialist reasons for this have been known since at least the 1840's so I won't go into them here, but I think the consequences, in conjunction with the other two factors I described, are devastating and explain much of the current crises of capitalism in the UK and the United States.

Socializing growing losses and privatizing shrinking profits

What do you get when you have concentrated financial capital placing fewer, larger bets; public policy manipulated to ensure outsized returns on those bets; and a declining rate of small business formation?My suggestion is you get precisely what we see today: large businesses relying more and more on governments, because government is the only game left in town — capitalists losing faith in capitalism.When Governor Scott Walker of Wisconsin wanted to spur economic development, he offered the Taiwanese company Foxconn $230,000 in state subsidies per job created at a new plant in Racine County (fortunately, the plant will never open). When Amazon decided to open an office park in Long Island City, New York promised them $3 billion in subsidies.Whether or not you think state and local governments should be bidding against each other to attract employers, one alternative is so flagrantly absurd it was never even on the table: using state subsidies to encourage employees to form new businesses. State support is for the big businesses that know best; workers simply can't be trusted with that kind of responsibility.I am not a capitalist, and my preference would be for our largest industries to be explicitly socialized one by one as each collapses under its grotesque weight in turn, instead of bailed out and quietly re-privatized until the next crisis comes along and the pattern repeats. But if you do think capitalism is the ideal form of economic organization you should, perhaps ironically, be even more committed than I am to reducing the size, concentration, and influence of financial capital while removing obstacles to small business formation. The alternative, as we're seeing today, is messier, bloodier, and poorer.

Robinhood 3-year anniversary review: I love it, but it's terrible

I just glanced at my Robinhood app and realized that I joined on January 8, 2016, which made yesterday my third anniversary of using the app. That seems like as good an opportunity as ever to take stock and share my overall impressions so far.

The company seems perfectly scrupulous

Robinhood attracted a lot of damaging, well-deserved publicity last month for the botched launch of their "checking and savings" product, but it's worth pointing out the product never launched and they never accepted any money from anyone under false pretenses (or any pretenses at all). No one got "ripped off," although some wags have speculated it may have been a deliberate stunt to acquire customer data on the cheap. If so, that would be a shame, but hardly unprecedented in the world of venture capital.Besides that hiccup, after 3 years using the app I'm constantly impressed by how well their technology works, in a field as bespoke and arcane as securities. To give a simple example: back in November, 2016, I owned three shares of EWU (the iShares MSCI United Kingdom Index Fund), which underwent a 2-1 reverse stock split. I suddenly saw my shares drop from 3 to 1, and shot them a note asking how the odd share would be handled. They replied a few hours later saying the odd share would be paid out in cash in 2-4 weeks, and it was. This is not a difficult or complicated transaction — it happens millions of times every year. But it was a transaction that Robinhood had thought of and had a system for dealing with.To give a slightly more complicated example, in 2016 I owned 20 shares of Seagate Technologies. As is my custom, I placed a limit sell order to take advantage of any price spikes. My limit order happened to be at $26.13. But when the markets opened on July 12, 2016, the price didn't just spike, it leapt. Since Robinhood knew my limit price, they could have picked off my order and then immediately sold it at the higher opening price. This would have been illegal, but so is falsifying mortgage documents and that's never stopped anyone. Instead, Robinhood executed my order at the opening price of $27.47, 5% higher than the price they knew I was willing to sell at.Operating in a scrupulous way may sound like a low bar, but it's a bar much larger, more profitable firms fail to clear on a daily basis, so the fact Robinhood meets that standard shouldn't be shrugged off.

Robinhood did two and a half innovative things no one talks about

Robinhood gets a lot of credit for their commission-free trades — everyone knows about that. What fewer people mention are two genuine innovations (plus one expensive gimmick) they introduced with little or no fanfare:

• real-time quotes. Those of you young enough to remember looking at early implementations of online brokerages no doubt remember that publicly available quotes were always accompanied by the stern admonition that "prices may be delayed by 15 minutes." My primitive understanding is that the delay on the public feeds allowed exchanges to sell real-time information to those willing to pay for them. Robinhood simply made real-time prices available to everyone, whether or not they actually invested money with Robinhood.
• commission-free options trading. Unlike real-time prices, this is genuinely unique to the best of my knowledge. I've never traded options, and I don't think you should trade options unless you have some inside knowledge it would be illegal to trade on, but if you do have some reason to want to trade options, being able to make those trades without paying a commission is obviously superior to the alternative.
• fixed-cost margin loans. Robinhood also made margin trading more widely available by offering fixed-cost margin loans. These loans are not a good deal if you're a professional trader because lower rates are available at other brokerages, but like Robinhood's  commission-free options trades, if you have some kind of trading edge you may be interested in borrowing money at relatively low rates in order to maximize your upside.

Robinhood cannot be your primary brokerage

As all the foregoing should attest, I love Robinhood, I use Robinhood every day, and I'm glad it exists. But it does not and cannot play any significant role in the brokerage space until they fix some fundamental flaws.First, they don't support retirement accounts. There is no logical reason why anyone should be investing in taxable stocks or ETF's until their workplace retirement accounts and Individual Retirement Accounts have had their contributions maximized. In this sense, Robinhood puts the cart before the horse, allowing individual investors to make small investments in individual stocks and bonds they could also make through a tax-advantaged retirement account (Vanguard now allows most ETF's to be traded commission free).Second, they don't support mutual funds. ETF's are great for taxable accounts under certain circumstances, but even if you want to make taxable investments, it doesn't make any sense to completely exclude mutual funds from your universe of investible securities. That means any mutual funds you want to hold need to be purchased in a different account with a different brokerage. That's not an insurmountable obstacle, it just means you need to continue to use other brokerage accounts alongside your Robinhood account.Finally, until Robinhood implements three changes, it will never be anything more than a stunt, as much fun as it is:

• allow specific identification of shares for sale;
• track unrealized and realized gains;
• and integrate a sensible way of tracking running gains and losses.

A brief note on the third point. When I open my Robinhood app, I see that since I joined the service 3 years ago, I've earned a return of $264.37, or 220.22%. My problem is that I have no idea what that means, and it's not explained anywhere inside the app. Is it the current balance in my account divided by the initial balance in my account, which would have no connection to the performance of any of my investments? Does it take dividends into account? Does it take into account both realized and unrealized gains, only the first, or only the second?When it comes to tax documents, I'm sure Robinhood prepares them as scrupulously as it handles all its other operations. But I don't want to consult my tax documents. I want to consult the app I use to do my gambling, and Robinhood has simply decided to make that information as difficult as possible to access and use. Compare that to Vanguard's super-primitive website and app, which nevertheless allow you to break down your account balance by contribution/withdrawal, investment income, and capital gains. 

Conclusion

Among a certain breed of venture capitalists, Robinhood is considered an exciting new business that is going to revolutionize the investment landscape. It may revolutionize the landscape, but it will never make a lasting impression as long as it's offering something for free that costs money to provide. That doesn't mean it won't be around in 10, 50, or 100 years. It may well be purchased as the investment interface for Bank of America, Chase, Fidelity, or Charles Schwab.But as scrupulous as the company has proven to be so far, the American investment landscape is too firmly shaped by the tax treatment of investment returns for a firm that offers only taxable brokerage accounts to be of much interest to anyone but gamblers. If Robinhood was intended as a proof of concept, the concept has been proven and they should look for a buyer. If it's intended to operate as an independent brokerage for the foreseeable future, they need to get their act together, and implement the kind of concrete improvements I described here as soon as possible so they can attract the amount of capital it will require to start earning a profit.Finally, let me be clear, I don't have a horse in this race: I like Robinhood, I'll use Robinhood as long as it exists, and if it goes out of business I'll stop using it. After all, I've got checking, savings, brokerage, and retirement accounts all over the place. But since Robinhood is so bad at explaining its own operations, I felt the least I could do is give new users the lay of the land: if you want to invest with Robinhood, think of it as the dessert you earn after you've already eaten the vegetables of low-cost, tax-advantaged retirement savings accounts.

Human Genetic Engineering Can't Work

At least not the way you want it to.

I've been thinking a lot lately about two related stories that recently crossed my desk. In one, our top Chinese scientists are apparently genetically engineering babies "with the goal of making the babies resistant to infection with H.I.V." The second is simply headlined, "Deformities Alarm Scientists Racing to Rewrite Animal DNA."

Now, you can split the difference between these perspectives in any number of ways. Is genetic engineering a medical treatment that people who are sick or at risk of becoming sick have a right to? If it's a medical treatment, how should we weigh the benefits and risks of treatment? Should we take into account the risk of modified genes being passed on to future generations in unknown ways? All good, interesting questions.

But at the end of these articles, journalists always feel compelled to throw in what I call the Gattaca question: "Ever since scientists created the powerful gene editing technique Crispr, they have braced apprehensively for the day when it would be used to create a genetically altered human being. Many nations banned such work, fearing it could be misused to alter everything from eye color to I.Q." [emphasis mine].

Genetic engineering won't work and we'll never know if it does

There are three key problems when it comes to genetically modifying embryos to produce desired outcomes in adults:

1. identifying the genes that are responsible for the desired traits in existing adults;
2. modifying those genes;
3. and assigning future adult outcomes to those modifications.

The technology associated with the second item has advanced by leaps and bounds in the last few decades, and there's no reason to believe it won't continue to advance. In 50 years we'll no doubt be able to target and edit individual genes with much greater precision than we can today.

But the technology related to the first and third items is infinitely more complex than merely editing strings of alleles.

When it comes to identifying the correct genes to modify we run into an immediate problem: we can only base our genetic guesses on the outcomes we observe in adult humans, and adult humans are subject to both social and environmental inputs. This is most often parsed through the lens of race in the United States, but the larger point has nothing to do with race and nothing to do with the United States.

I always like to look at statistics from abroad wherever possible in order to remove my own national and regional biases, so let's glance at Oxford University in England. An exemplary institution of higher education, no doubt applying the most rigorous possible screening process to make sure each and every admitted student is of the highest possible caliber. But if we were to collect our genetic samples from the student body of Oxford University, we'd find ourselves with a sample composed overwhelmingly of residents of Greater London!

And indeed this problem is universal. You don't need to go to an Indian Institute of Technology to get a genetic sample from a Brahmin. You don't need to go to Moscow State University to get a genetic sample from an ethnic Russian. You don't need to go to Hebrew University to get a genetic sample from an Israeli Jew. Just find the most privileged group in a society and each and every time you'll also find the "smartest," "most ambitious," "most charismatic," "most successful" group in the society.

But what if it turns out, after collecting all these samples, conducting rigorous double-blind randomly-controlled twin studies, and spinning more centrifuges than an Iranian nuclear plant, that all the most successful individuals in every society really do have some distinct set of genes in common (besides the 99% of genes we all have in common)?

Well, then you spend millions of dollars modifying your children's genes in order to make sure they have the "success gene." And once you've sunk a few million into the embryo, you may as well feed them a healthy diet, enroll them in good schools, pull some strings to land them their first job, buy them a nice apartment in a good neighborhood, and introduce them to the children of your wealthy friends so they can get married and have their own super-kids.

Hopefully you're starting to see the problem.

Genetic engineering is an expensive, ineffective way to produce super-soldiers

There are obvious reasons why the various branches of the world's militaries favor different kinds of candidates. An aircraft pilot has to be short enough to fit in the cockpit. A drone pilot has to have reflexes refined over years of video gameplay. A sniper has to maintain constant control over their breathing.

But why would any country try to plan the composition of its military decades in advance by genetically engineering super-soldiers? First of all, you've got to take care of the babies for years before they can even feed themselves. Then you've got to start training them, and only years later will you find out that some of them turn out to be too tall, too short, too smart, too dumb, or too lazy anyway!

When it comes to the genetic super-soldier question, I ask a simple question: what was the last war that was won because of the genetic superiority of the victors? Wars have been won and lost because of technology, because of manpower, because of patience, because of natural disaster, and a thousand other reasons. But I've never heard of a war being won or lost because of genetic superiority.

Of course, in 2038 when the People's Liberation Army occupies Washington, DC, everyone will credit the success of their super-soldier program. But if I survive the purge, I'm still going to be here expressing my doubts about the whole idea.

Everyone should have access to the federal Thrift Savings Plan, but not for you reason you think

Shortly before his humiliation and expulsion from public life, Florida Senator Marco Rubio resurrected the idea of allowing some non-government employees to invest in the Thrift Savings Plan, which is the federal equivalent of private-sector 401(k) and non-profit 403(b) plans. The proposal got some sympathetic attention from lazy personal finance journalists, and some critical responses from bloggers serving the federal workforce.

The lazy reason to support TSP-for-all: lower costs

The narrow reason financial journalists latch onto in support of TSP-for-all is administrative costs, and it's true that TSP charges less in overhead and fund management fees than virtually all private retirement schemes, between 0.032% and 0.033%, depending on the fund.

Let me be clear: costs matter, and that's a lower cost than, for example, a Vanguard mutual fund held in a Vanguard 401(k).

But, as opponents of TSP-for-all are quick to point out, those costs are subsidized in part by fees paid by employing agencies. Universal enrollment in TSP might provide some economies of scale, but would also introduce a large number of non-subsidized workers into the system, dragging up average costs even if the final cost is lower than most workers pay today.

For that reason many TSP-for-all proposals involve replicating a second pseudo-TSP for non-federal-employees, so federal employees continue to enjoy their agency subsidies and lower costs, while non-federal-employees are shunted into a parallel system with higher, unsubsidized costs.

With costs as low as they already are in the private mutual fund industry, this strikes me as the least convincing argument for TSP-for-all.

A decent reason to support TSP-for-all: simplicity and universality

An argument for TSP-for-all that I'm more sympathetic to is that decisions over the availability of tax-advantaged retirement savings shouldn't be made by employers at all. If the federal government decides it's willing to let people shield $25,000 in earnings from income tax in 2019 ($6,000 in IRA contributions and $19,000 in workplace contributions, plus catchup contributions in both), why should your boss get to decide whether you are able to take advantage of that benefit or not? It's as nuts as companies running their own private health insurance offices.

Providing everyone, with or without their employer's permission, with access to the total retirement savings benefit they're entitled to, is a commonsense measure, although as I've said in the past, my preference would be to simply eliminate workplace retirement savings plans entirely and increase and universalize the contribution limits for individual retirement accounts (which isn't mutually exclusive with TSP-for-all).

TSP-for-all is also sometimes praised on the grounds of simplicity, and here the argument is fair enough as far as it goes. It's somewhat shocking even to me, but the "best retirement plan in the country" has just 5 investment options (plus "Lifecycle" funds that blend the 5 in different proportions): US large-cap, US small-cap, US bonds, international developed stocks, and the TSP's proprietary "G fund."

The first four are fairly standard low-cost market-capitalization-weighted index funds, while the G fund is unique in that it offers interest income based on intermediate-term US treasury rates, but with the principle guaranteed so that the fund can't lose money when interest rates rise. A neat trick!

I think between them these are excellent components in a retirement savings portfolio, and wouldn't have any serious objection if they were the only options available in a TSP-for-all plan. But there are perfectly reasonable objections to this fund lineup as well: emerging markets are completely absent, as are international bonds. Do those asset classes have a role in every portfolio? Of course not. Should they be categorically excluded from investments? That depends on the trade-off you want to make between simplicity, versatility, and diversification.

The best reason to support TSP-for-all: a simple national supplemental annuity

The primary source of retirement income for Americans is not traditional defined-benefit pensions, and it's not defined-contribution retirement plans like 401(k)'s and 403(b)'s. It's Social Security's old-age benefit, a federal program that guarantees retirement income based on your recorded earnings paid into the program during your working lifetime.

One problem with our current jerry-rigged retirement system is that under our laws, annuities are not investments at all: they're insurance contracts, sold on a commissioned basis by state-licensed agents and state-regulated for-profit companies.

If, instead, we want voluntary savings to accumulate and supplement workers' Social Security income in retirement, then there's no better solution than a federally-guaranteed annuity, available nationwide, based on a worker's balance in the federal Thrift Savings Plan.

The Thrift Savings Plan already offers a free calculator showing how your retirement savings can be converted into a single lifetime, joint lifetime, or inflation-indexed annuity (and even a few more exotic options related to non-spouse beneficiaries), and I haven't been able to find another company offering better terms. However, those annuities are still technically issued by the private MetLife corporation, and subject to state law (and bankruptcy court).

But since the federal government already runs a guaranteed income program for retirees, the greatest promise of TSP-for-all is the ability to convert accumulated savings into a supplemental Social Security benefit, guaranteed by the federal government to last as long as you do.

What do we want from our retirement system?

Nothing could be simpler than our retirement system as it exists today: the rich do what they can, while the poor suffer what they must. But this rule is not written in the stars, it's the product of very specific decisions made in the development of our retirement policy:

• Employers are allowed to decide the retirement savings options available to their employees, so low-wage employees have less access to tax-advantaged savings vehicles than high-wage employees;
• Social Security contributions are capped so high-income workers have more disposable income to contribute to tax-advantaged plans than low-income workers do;
• Low-income workers who are able to save in individual retirement accounts can be lied to by financial advisors who are not required to act in their best interests.

A simple, cheap, universal, federal Thrift Savings Plan won't solve every problem in the world. But no one defending the current system is even pretending that it's doing an adequate job providing for income security in retirement.

So how about we try something different?