Thursday, November 29, 2012

I went to the Fiscal Cliff and all I got was this lousy Sequestration T-Shirt.

The fiscal cliff really is something to worry about, but like most cliffs you don't have to go over it. The U.S. doesn’t have to do a “Thelma and Louise.” It could do a “Rebel Without a Cause” where James Dean rolled out of the speeding car before it plunges over the abyss.

If you don't know what the "fiscal cliff" is, see a brief definition below. *

I’m not convinced that going over the fiscal cliff is such a bad thing. We need to wipe clean the slate of the Bush/Obama tax cuts to facilitate a responsible budget compromise. The mushrooming federal debt, like global climate change, is too big to conceive and grows too slowly to scare most Americans into dramatic action.

In World War II, there was a collective sacrifice to meet a formidable and unmistakable foe. Today, every side is busy protecting their interests and suggesting what the "other guys" should sacrifice.

I'm tired of the "no new taxes" mantra of Republicans. Expiration of temporary tax cuts is not a tax increase. I'm tired of Democrats saying you can't change Social Security and Medicare. It's been changed in the past to keep it viable for future generations. I'm tired of President Obama wimping out and saying we can only increase taxes on the rich. I'd also like to see him suggest simplifying the tax code and eliminating the kind of Romneyesque loopholes available only to the super-rich.

The military budget is the largest component of federal discretionary spending, prudent cuts here would make it easier to balance the budget. The expanding federal debt is also a major threat to national security that can make us vulnerable to pressure from countries like China who own a large portion of our debt.

We all have to pay more. We all have to accept less from government. If we don't do both, we could face a day when the entire budget of the United States is spent on interest on the debt.

This is theoretically possible if interest on the debt becomes a larger percentage of federal expenditures and interest rates rise dramatically--and they will at some point.

I thank preceding generations for not being selfish - the way we are today. Our children and grandchildren deserve the kind of society those generations built for us. That cannot be done without collective sacrifice. I wish our leaders had the political courage to explain our situation and ask us all to help us rescue each other.

*Fiscal Cliff defined by Wikipedia, the free encyclopedia
In the United States, the fiscal cliff is a newly coined term (neologism) referring to the effect of a number of laws which, if unchanged, could result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013.[1] These laws include tax increases due to the expiration of the so-called Bush tax cuts and spending cuts under the Budget Control Act of 2011.

The year-over-year changes for fiscal years 2012–2013 include a 19.63% increase in tax revenue and 0.25% reduction in spending.[2]

Some major domestic programs, like Social Security, federal pensions and veterans' benefits, are exempted from the spending cuts. Spending for federal agencies and cabinet departments would be reduced through broad, shallow cuts (referred to as budget sequestration).

The Congressional Budget Office reported an increased risk of recession during 2013 if the deficit is reduced suddenly, while indicating that lower deficits and debt over time improve long-term economic growth prospects. The deficit for 2013 is projected to be reduced by roughly half, with the cumulative deficit over the next ten years to be lowered by as much as $7.1 trillion or about 70%.

Thursday, November 1, 2012

Comparing Stock Market Returns by Presidential Terms

If I was President Obama's campaign chairman, I would run would ads showing a crawling line representing the movement of the Standard and Poor's 500 stock index from when President George W. Bush took office to the present. As you can see from the chart below, the S+P increased by 75% during Obama's 3 3/4 years in office. During Bush II's first term, the market index declined by 32%. During his second term, the S+P declined 12%.

If you look at the stock market performance by presidential terms going back to 1960, you'll see that the stock market has performed substantially better when Democrats were in the White House. During the last six Democratic presidential terms, the average return over four years time was 53%. For the seven terms Republicans were in office, the average return was 15%.

These statistics are surprising given that Republicans are generally perceived as better for businesses and the stock market. I'm not advocating for a candidate, though some of you might be aware of my political leanings, I'm just pointing out some surprising statistics. Be sure to vote.

Stock Market Returns by Presidential Terms

Presidential Term S+P 500 Index 4 year Gain/Loss %
Obama +75% (3 years + 9 months)
G W Bush (2nd term) (31%)
G W Bush (1) (12%)
Clinton (2) +73%
Clinton (1) +79%
G H W Bush +51%
Reagan (2) +64%
Reagan (1) +33%
Carter +28%
Nixon/Ford (13%)
Nixon (1) +14%
L Johnson +23%
Kennedy/Johnson +40%

Democratic Administrations are in bold

Source: Yahoo Finance (October, 2012)

Tuesday, July 31, 2012

The Unemployment Dilemma

The official unemployment rate has been hovering at about 8.2% during 2012, but it's down from its recent peak 10.3% in October of 2009 (Source: National Conference of State Legislatures).

When you look at how the economy has evolved over the last twenty years, it is amazing that the rate isn't higher.  Consider these trends and events:

Technological advances have encouraged American companies to replace human employees with machines (bank tellers vs. ATMs).

Outsourcing of manufacturing jobs to poorer countries is a continuing trend.

Internet shopping has devastated not just local retail stores, but major corporations (book stores).  As the dominant online sales company continues to expand its product line, it threatens other retail companies, big and small.

Internet services have reduced the need for human service providers (travel agents and financial advisors).
Government job reductions not only increase the unemployment rate, but it means that fewer workers will spend their money at private businesses.  Think Furlough Fridays in Sacramento.

Consumers have never recovered from the economic disaster of 2008.  People in the middle class are afraid to spend for discretionary items.  At our art studio, sales have not come close to what they were before.  While frugality is good, it doesn't stimulate the economy. 

Huge corporations continue to consolidate and merge.  This reduces the number of mid-level jobs.  As industries become oligopolies or virtual monopolies, employees with industry-specific skills are less able to bargain for good paying jobs. 

Finally, the worldwide recession continues to drag on, reducing demand for American products.

As confidence in the economy grows, businesses and consumers will start to spend more. Job growth will increase and unemployment will decline, but due to fundamental shifts in the type of jobs available, the U.S. economy may never reach that magical "full" employment number again.

Thursday, April 19, 2012

Gasoline Price Hysteria

Gasoline is a unique commodity. It is something most of us need to buy periodically. Its price is posted prominently wherever we drive. Our awareness and outrage about its price is disproportionate to the real impact it has on our budget.

Its price and price movements rarely make sense. Why is gas (after subtracting state gas tax) 27 cents cheaper in Kansas than it is 5 miles from an oil refinery in California (

Political finger pointing is always a byproduct of a price spike, but when its price declines there is rarely fanfare. Do you remember when gas dropped below two dollars a gallon in late 2008?

How much impact does a gas spike of $1 a gallon cost you a month? Here's the calculation:

1) How many miles do you drive a month?

2) How many miles does your car get per gallon?

3) Divide 1) by 2) and multiply by $1. Example: 1,000/miles per month/25 mpg = $40/month or $480/year.

Gas is a commodity we pay for separately and regularly. It's a shared consumer experience. If milk goes up, it's just part of a larger grocery bill.

When I started driving in 1964, a gallon of gas cost 29.9 cents, that equates to $2.25 in current dollars. Today I paid $4.16 per gallon. That's an 85% inflation-adjusted increase over 48 years. My health insurance has doubled in just the last three years!! Now that's something to get hysterical about, and I'm not expecting my health care premiums to go down anytime soon.
Several years ago a client told me that she planned to cancel a much anticipated vacation because gas prices had gone up 20% in a short time. I ran the numbers for a worst case scenario and calculated that it would cost the family an extra $150. They took their trip and had a great time.

The next time you get upset about gas prices, remember that a gallon of gasoline is still cheaper than a gallon of water bought in little plastic bottles ($6.40/gallon) or scorpion venom ($40 million/gallon). Source: 47 Liquids chart linked below.

Below are links to a variety of articles and charts about gasoline prices. I hope you find them thought provoking or at least amusing.

Interesting Articles on Gasoline Prices:

Why Gas Prices Are Out of Any President’s Control - New York Times, By Richard H. Thaler (March 31, 2012)

Free global gas prices - by Lawrence Solomon (Mar 23, 2012)

FACT CHECK: More US drilling didn't drop gas price --Associated Press (March 21, 2012)

Where Might Gas Prices Head Over The Next 5-10 Years? - (12/30/2010)

Chart -Average Annual Gas Prices (Adjusted for Inflation) (2/27/12)

Chart - The White House and Gasoline Prices - The New York Times (April 1, 2012)

Chart - Comparing the price per gallon of 47 liquids (2006)

Saturday, March 3, 2012

Is Your Tax Bracket Higher Than Mr. Burns?

What is your tax bracket? What percentage of your income do you pay in taxes? Even those who know that a certain presidential candidate paid 13.9% of his income in taxes, don't know their own effective tax rate or their tax bracket.

Your tax bracket is the percentage of tax you pay on the last dollar you earned. Your effective tax rate is the percentage of your total income that you pay in tax.

Here are three example of how much tax is paid by hypothetical taxpayers with different types of income.


M. Burns (Nuclear Power Plant Owner) – single
Income: $100,000 capital gains dividends plus $100,000 in tax-free interest
Federal Income Tax: $8,400
Social Security & Medicare Tax (0%): $0
Total Tax: $8,400
Marginal Tax Rate: 15%
Effective Tax Rate: 4%

H. Simpson (employee of M. Burns) - married with three children.
Income: $100,000 employee wages
Federal Income Tax: $9,731
Social Security & Medicare Tax (@ normal 7.65% rate): $7,650
Total Tax:$17,381
Marginal Tax Rate:25%
Effective Tax Rate: 17%

M Szyslak (self-employed proprietor, Moe's Tavern) - single
Income: $100,000 self-employment profit
Federal Income Tax: $16,981
Social Security & Medicare Tax (@ normal 15.30%): $15,300
Total Tax:$32,281
Marginal Tax Rate:25%
Effective Tax Rate: 32%

So, how much you pay in taxes is based not just on how much you earn, but on what type of income you receive. Most people don't know how much they paid in taxes. They just know if they got a refund or paid the IRS or state taxing agency. You can find out how much you actually pay in income taxes by checking your 1040 Form. SS and Medicare taxes are on your W-2. Ask your tax advisor what your tax rate is.

Thursday, January 12, 2012

How is the economy doing as we start 2012?

So how is the economy doing? Your answer probably depends on whether you get your economic updates from official sources (Bureau of Labor Statistics and Congressional Budget Office) or Faux News and Republican Presidential candidates.

My opinion is that the economy, while still struggling, has steadily improved for the last 18 months. It's been doing better than the perception of how it's been doing. Part of the blame for this perception goes to the odd assortment of Republican candidates whose consistent theme has been that the economy sucks as long as Barack Obama is president. If the American people believe the economy is improving, none of the Republican candidates will become the next president.

Mostly, the economy is stubbornly independent despite what any president try to make it do, but governmental action can change things for the better or worse. The Republican controlled House of Representatives and the filibuster-controlled Senate have been committed to preventing any action that might stimulate the economy (except for giving tax cuts for the super-rich).

Those of you who I've talked politics with know that President Obama has been a great disappointment to me and just about everyone I know who was delighted when he was elected. Despite his foreign policy stands, gutless appointment decisions and moderate Republican stances on some social issues, I think he has done a fairly good
job on the economic front.

President Obama was elected shortly after the disastrous economic meltdown of 2008, and it took time before things started to turn around. Here are some indications of the direction of the economy and stock market:

• Unemployment is down to 8.5% from 9.4% a year ago and from its high of 10.0% in October of 2009. The number of non-farm jobs have been steadily increasing since February of 2010.

• The Rasmussen Consumer Confidence Index is at its highest level in a year.

• Though it doesn't seem like it, the stock market (measured by the S&P 500) has increased by 58% since Obama took office. During George W. Bush's eight years in office, the S&P declined by 39%.^GSPC

I expect gradual economic improvement to continue in 2012 barring some unexpected major event--of which there are too many to possibly worry about. I can't help it, I'm just an optimistic guy, and I think you have to be optimistic to be in this business for over 30 years.

Hope we all have a great 2012.