Why Does this Matter Now?

Obviously, with a tax filing deadline coming up in a few weeks, tax related issues come to the front of many people’s minds. This year, in the midst (waning end?) of a recession, making up the so called ‘tax gap‘ is even more important to the IRS. The Congressional Budget Office releases a yearly projection of tax receipts compared to Gross Domestic Product. In 2009, tax receipts fell to a very low 14.8 percent of GDP, and the CBO estimated tax receipts to recover to only 14.9% in 2010. The long run average, from 1950 to 2007, was around 19.5%.

Congressional Budget Office Tax Projections (2009 Actual)

Fundamentally, any money recovered from this program is ‘found money’ – it would have been lost if no one had informed on people they knew. This allows the IRS to handsomely reward informants in this program. If enough people inform, it also closes the tax gap I mentioned earlier.

How Do I Participate!

Is the lure of 15% of the cheated funds enough to loosen your lips? If you can stomach reporting on someone (not everyone is cut out to be an informant!), note that you will have to report your name to the IRS. This should be kept private throughout the investigation. Surf on over to the IRS’s “Whistleblower – Informant Award” page to read the full rules and regulations.

Happy ratting!

I Smell a Rat! (Robert Cudmore)

Media Response

As a result of Bunning’s tactics, he and Kyl quickly were spun as obstructionist senators preventing the safety net of the unemployed from being deployed.  Writers like Nobel Prize winning economist Paul Krugman quickly rushed in to rebut Kyl’s ideas.  However, Krugman’s arguments seem to contradict statements he writes in the economics textbook that he writes with his wife.  Yes, introductory economics does state that unemployment benefits do create disincentives to work in those that receive the benefits.

Obviously we are in a recession, and not everyone who wants a job is able to get one (and unemployment benefits are an important benefit for many people).  However, it is naive to believe that the benefits provided are being used without any gaming of the system.  If you have any doubts, see the oft-cited study produced by Dale Mortensen in 1977.  As you probably expect from the tone of this article, the study found the upcoming cessation of benefits increases the number of jobs found, among other things.

Eurosclerosis and Funemployment

Eurosclerosis is a term coined to explain the phenomenon in Europe in the 1970s and 1980s where rising levels of economic output were paired with large numbers of the ‘long-term’ unemployed.  Even with huge gains in productivity and economic output in Europe, unemployment and especially long term unemployment remained stubbornly high.  Job mobility was another sticking point.  In fact, it was only when unemployment benefits were (paradoxically?) cut in the 1990s and the firing of employees was made easier that Europe left its funk.

Witness the United States today.  True, the recession hit hard and unexpectedly.  However, we potentially now find ourselves in a ‘jobless recovery’, in which productivity is rising and wage growth is increasing, but unemployment is remaining stubbornly high around 9.7%.  The number of workers unemployed for 26 weeks or more is hovering around 6 million people.

In June, the Los Angeles Times ran an interesting article about the concept of “Funemployment”.  In the midst of the biggest recession in a long time, instead of looking for new work, many laid off workers were instead increasing the amount of their leisure time.  Even if unemployed people aren’t completely freeloading off unemployment benefits, the promise of paycheck which comes in lieu of working and stops immediately upon finding a job is certainly a disincentive to begin working again any way you slice it.

Congressional Response

Congress’s response has been, predictably, appealing to emotions and claiming (incredibly) that increasing unemployment benefits increases employment.  Get that: increasing the amount of time people can be unemployed and provided with benefits decreases the amount of people receiving those benefits.  Therein lies the contradiction.  Nonetheless, Congress opted to increase the allowable length of time through the Emergency Unemployment Compensation Program in 2008.

As with many political issues, the problem with unemployment is not the issue that it undertakes.  An unemployment net for people who lose their jobs is a laudable benefit, and one that many people consider a lifesaver.  The issue is with how the program is designed.  Much like the Health Savings Account program, there are other plans which cover unemployment benefits.  In 2002, Chile offered a hybrid model of unemployment benefits, which covers around 80% of the workforce.  Under this model no ‘Solidarity Benefits’, which originate from the program, are paid out until an unemployment savings account is drained.  The unemployment savings account is a mandatory account which workers pay into to be tapped in the case of unemployment.  The idea is to give workers some incentive to avoid the draw-down of the account, and to put some skin in the game.  As you might expect, reducing the disincentive to seek employment actually does decrease the length of unemployment and increases the job finding rate.  Imagine that.

Anyway, unemployment benefits aren’t as cut and dry as they appear on the surface.  Let me hear what you think!

Lucky for you, I have uploaded all of my data, compiled from the 2010 Vancouver Olympics web site and the CIA Fact Book, to IBM’s Many Eyes visualization site.  It allowed me to create the following visualizations, and it allows me to open up my data to you readers.  Feel free to edit it, modify it, add categories, or whatever, and let me know if you have created a new data set which I can link to from my site.

First up, I have plotted all of my categories on a world map.  Depending on what option you select in the pulldown, you can see countries colored in by the number of medals of each type and overall they received.  You can also take a look at my efficiency ratings, although the map format isn’t the best way to visualize this data:

My efficiency ratings go best in the form of a Bubble Chart, mostly because of the vast number of countries that medaled in the games.  Here is what that chart looks like:

Note that you only have to click on the chart to interact with the data provided.  Have fun, and if you create something, email me at pkamp3 (at) dqydj.net !!!

I’ll come back with some longer and deeper content for you soon!

• “Attempting the Secret Ripoff” was hosted at Budgets are Sexy for the 245th Carnival of Personal Finance!  Nice doodles; check it out!
• “Cutting up the Card” was featured in the 105th edition of the Money Hacks Carnival at Live Real, Now… Now, go visit the site…

Posts We Liked!

• “Taste Test Experiment: Bottled Water vs. Filtered Tap“ - I’ve enjoyed Len’s product comparison articles ever since his famous battery article was written.  This one is no less fun to read.  I actually suggested a comparison for him to cover; we’ll see if he picks it up in a few weeks…
• “The Indisputable Inter-Age Rule for Dating” – you’ve got to read it now.  Yes, my life fits the formula, but I’ve only got a month gap!
• “Own a Piece of Hollywood Thanks to the Hollywood Stock Exchange” – Think you can predict Hollywood hits and bombs?  Put some money on the line, Mr. Ebert!
• “10 Highest Degrees in Demand 2010” – Computer Engineering was #5, one spot below Computer Science.  C’mon my fellow CECS majors!  We can do Electrical Engineering too, let’s close the gap!
• “The ‘Stimulus’ Actually Raised Unemployment” – scare quotes are the name of the game.  2009 saw ’stimulus’ become a dirty word!

Welcome New Fees and Terms!

When the government closes a door, if any windows aren’t boarded up, they will be opened.  In this case, expect to see credit cards for people with iffy credit come burdened with more and greater fees than those for folks with decent to good credit.  Of course, the law has capped the amount of upfront fees that can be charged.  That’s why credit card companies have started issuing cards with ridiculously high interest rates to the lowest of the subprime set- as high as 79.9%!

Does 79.9% violate usury laws?  No, not in this case.  In a time when the average variable credit card rate is 13.63%, 79.9% does stand out as an outlier.  However, it’s likely that the high rates you now see are the calculated rates that companies need to overcome the cuts they will have to make for the new law.  Before cursing the credit card companies as money grubbing or somehow immoral, note that the alternative is charging less, making less money (likely losing money), and having to drop credit issuance for the subprime corner of the credit card market.  Also, if the subprime credit card borrower follows the rule, they can bypass the paying of these interest charges anyway.

The link notes that one credit card company, First Premier, is already feeling the heat from the laws.  They have offered high rates from 39.9% – 59.9%, but are looking into increasing processing fees and cost cutting… such as layoffs.  The terms of the law are already hurting some of the companies which offer credit to this corner of the market.

Of course, even though the old cards had better advertising points like low APRs, the new card terms are more representative of what it will cost to actually have the card.  Upfront fees may look better than a 79.9% rate, but now the choice of the upfront fees is over.

Better?  Worse?  Do we want under 21 year olds and the subprime credit crowd getting cards easily?  Thoughts?

Limiting Credit

In short, the new rules bar the issuance of credit cards to people under 21 unless certain new conditions are met.  First up is a cosigner – a cosigner over the age of 21 can allow the under-21 crowd to continue to be issued credit cards.  In lieu of that, proof of assets (in an amount determined by the bank) can also get you a credit card.

On the surface, these seem like reasonable ideas.  Either one is completely defensible, and you can come up with a multitude of reasons why citizens entrusted to vote shouldn’t be allowed to run a balance (without 21-plus knowledge!).  Maybe you even feel the younger crowd is a responsible set, and 21 is the perfect age to give kids both alcohol and credit.  Either way, you have to admit this will limit the amount of credit issued to  college students – and even young adults working post High School.

Shirking Responsibility

Tear Down This Bank! (Steve Burke)

I feel that these provisions are sorely misplaced, however.  The negative actions of a few are no reason to limit the useful tool of credit to everyone.  In the same manner that exotic mortgages like a 5/1 ARM have their place for certain people, credit cards have a use for the college set – increasing liquidity in the absence of regular, repeated paychecks.  Yes, students will sometimes run up massive debts unbeknown to their parents, but a lack of personal responsibility will manifest itself in other ways in the absence of credit cards.  Hating the tool which caused the damage is the altogether incorrect response.

Of course, the linked CNN article is full of fun little quotes like this one:

“I cannot believe that these card companies were allowed to take such advantage of college kids,” McDonald said. “How could they possibly issue cards with high credit limits to kids with no visible means of support.”

With all due respect, Mrs. McDonald, you don’t have to spend up to the credit limit.  If I spent to my credit limit I would quickly be feeling the pressure of owing large proportions of my annual salary to a handful of banks.  The blame isn’t completely unfounded – I’m all for increased disclosure, a reduction of trickery in due dates, and other informational law changes.  If the banks can’t regulate themselves, fine.  However, I’m not so quick to give a free pass to borrowers.  If students are charging multiple spring breaks on their cards, that’s a problem of a misuse of a tool.  When will these parents, like Mrs. McDonald, shine the spotlight on their adult aged children?  The banks gave them a credit limit because they felt that it was reasonable to expect some payback of the money.  In other words, the bank DID calculate they would get something in turn of lending to Mrs. McDonald’s daughter.  Regardless, read the article.  It presents a fair viewpoint of the effects of the law.

I may be preaching to the masses here, but it bears repeating – credit is merely a tool.  The fact that you are reading personal finance articles on the internet means you are either in the process of living a debt-free (can we say ‘debt constrained’ or ‘debt limited’?) lifestyle, or in the process of paying down massive debts you incurred at one point in your life.  Your first step was recognizing the problem – you misused the cards.  Your next step is rectifying this problem by living below your means while the cards are paid off.  Whether debt isn’t a problem for you, or it will eventually not be one, you’re one of the good ones.

For the record, I got my first credit card at 19 years old.  I didn’t have a cosigner or even show proof of assets.  Those days are over.

• “Does Money Prevent Happiness?” – I certainly hope not!  Great writeup!
• “Bragging Rights – Have You Considered the Context?” – A slightly angry article by Darwin which makes a good point.  Remember that a rising tide lifts all ships, and context makes all the difference .  See through those shoddy statistics!
• “Why the Jobs Bill Won’t Really Generate Many Jobs” – With a title like that, what are you waiting for?  I think the key takeaway is to never put 100% trust in any legislation coming down the track.  Unattended consequences abound – and weird ways of admitting, ‘yeah, we were wrong.’
• “Want to Work for Free?  Start a Business” – How true it is!  Expect long hours for pennies and pride!
• “Obama Should Seek a Divorce From Big Labor” – Pursuing Craig Becker as the nominee for the National Labor Relations Board doesn’t look too good, either.

The Cast of the Jersey Shore

15 Minutes of Fame

The phrase “15 minutes of fame” doesn’t quite fit in this situation – the cast gets 15 minutes every episode.  An entire subculture is now devoted to heckling and parodying the show – see here and here. It’s safe to say that the peak of their celebrity – although we don’t know how long it will be – has started.  It only makes sense for them to strike now and branch outwards.  The article talks about diversification – since $180,000 per cast member per episode is a good start, but the potential earnings are much higher.

Mike S, who goes by the moniker “The Situation”, is reportedly marketing a cologne that smells like money.  I suppose if you wanted the money smell, you could buy the cologne in lieu of rubbing cash all over yourself.  Regardless, I predict that it will sell to a certain corner of the scent market – go figure.  Jwoww, Jenni Farley, has the right idea with her clothing line.

The best line of the article came near the end, however: “In other words: Buy stock.”  Yes, the cast enjoys their 15 minutes of fame now, but no one will buy ‘The Sitch’ money-scented cologne in 2015.  Of course, I wish the Situation luck, and if it is still selling well, I’ll buy it as a condition of me writing this article.  Still, Mike (and the rest of the cast!), you’ve got to invest some of that cash into some proven assets – like stocks and bonds.  I hope that their fame ends with them having plenty of money, and don’t end up celebrities for a different reason – losing the money they had.

Find the best credit card offers and more at BillShrink.com

Like that little comment on the end?  Well, too bad, I’m sort of okay with one sappy day a year.  In fact, here was my contribution to the $422 million in flower sales (I know, 2004 numbers) for the year:

Valentine’s Day Flowers