There is a great technique used to diagnose problems or investigate issues known as the “5 Whys”.  It’s best explained with an example.

• The car will not start. (the problem)

1. Why? – The battery is dead. (first why)
2. Why? – The alternator is not functioning. (second why)
3. Why? – The alternator belt has broken. (third why)
4. Why? – The alternator belt was well beyond its useful service life and has never been replaced. (fourth why)
5. Why? – I have not been maintaining my car according to the recommended service schedule. (fifth why, a root cause)

It seems silly but actually has a lot of practical applications.  Just pick a random problem and apply the 5 whys.

• The economy is in shambles

1. Why? – Because of a real estate bubble that popped.  (first why)
2. Why? – People couldn’t afford their payments. (second why)
3. Why? – Interest rates that were fixed became variable. (third why)
4. Why? – Their mortgages were sold to them that way. (fourth why)
5. Why? – Mortgage brokers were able to place people into homes they couldn’t normally afford. (fifth why, a root cause)

This illustrates 2 points.  The first is that the 5 whys can be used for a variety of situations.  The second, and most important, is that while the 5 whys can help you come to a root cause, it is just that – ONE root cause.  Not THE root cause, A root cause.

So give it a shot.  Try it with something simple, or something complex.  You may end up with a root cause in just 3, or it might take 6.  Sometimes I end up in an endless loop between 2 whys.  Practice makes perfect.

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These are the sounds of money leaving my accounts and moving into the merchant accounts of dozens of businesses all over town.  Restaurants, grocery stores, gas stations, clothing stores, book stores, office supply stores… you name it I swipe it.  Lately, I’ve been making more and more transactions as The Sheconomist and I transition from bachelor and bachelorette to newlyweds (not telling when).

The end result is a pile of receipts.  I’ve got receipts to stuff I didn’t even buy.  It’s impossible to keep up with everything, and even if I could keep up I don’t need receipts to 95% of the stuff I’m buying.  I’m tired of receipts, and we’re about to enter the 2^nd decade of the 21^st century, these tiny pieces of paper have got to go.

Receipts were once a useful method of tracking sales for the business and providing a summary of the transaction for the customer.  The receipt is a record of everything of everything purchased for both parties and the price paid, that way if there is any dispute or reversal of the transaction, everyone has the same record.  Very smart.

But in this day and age we don’t need receipts like we once did.  Sure we need a record of the transaction, but we don’t need a physical record that’s just going to get washed during the next laundry day or lost in the depths of a wallet.

I see a great potential market for the likes of Visa and MasterCard in partnership with banks.  Every time I swipe my card, Visa will record the details of the transaction, itemizing purchases and showing taxes, product IDs, and even barcodes in an electronic record.  Each purchase can be emailed to me by my bank, or they’d keep the record with my account.  If I need to return something all I need is the product and my credit card, which many stores already rely on instead of receipts.

This process would be so easy to implement and no one really loses.  If the value-add is good enough, merchants will have no issue paying a tiny bit more per transaction for the electronic receipt.  Afterall, it costs money for those receipt printers, ink, and paper.

Smartphone users could even have an bank application on their phone that keeps the receipts.  If Bank of America’s iPhone app allowed for this, a BofA credit card user could pull up the receipt on their app and show it to the customer service department if need be.  It could also manage your receipts, and maybe companies like Mint.com could add some budgeting resources.

Environmentalists should love this too.  I have no idea how much paper is used for receipts every year, but you know it’s a lot.

Cash is king to many, and if you continue to pay with cash you’ll have to live with the disadvantages of keeping up with a receipt to prove your transaction.  Maybe something can be done to record those transactions, but it’s only a matter of time before some companies start to refuse cash as payment because it’s too expensive to handle.

Receipts serve a great purpose, but I get so many these days they’ve all lost their usefulness.  I’m tired of receipts, let’s bring them into the 21^st century.

Photo: jelene

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Some of the regulations include longer lead times to interest rate changes, reduced fees that were deemed unfair, and an extension from 14 to 21 days on the minimum time billing statements can be sent out before they are due.  Many of these new regulations do not go into effect until February of next year.

The credit card industry of course protested many of these changes and said some of them would require an increase in fees or interest rates.  To a certain extent I agree with this.  Change is expensive for big firms.  So why is Congress surprised that credit card companies are taking advantage of the generous lead time and jacking up interest rates and fees while they still can?

If you must make a profit to keep your job, you’re going to do whatever you can to make that profit.  The credit card companies are doing exactly what Congress has allowed them to do.  We can only expect these companies to do this.

Congress passed legislation yesterday that made many of these changes effective immediately, as if they’re somehow punishing the credit card companies.

When will Washington learn that you can only expect companies to do what they are legally allowed to do?  In a monopolistic industry (such as credit cards) this is the only outcome.  I’m not disappointed in Bank of America, Capital One, Chase, and anyone else, I’m disappointed in Congress.  Photo: rpongsaj

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The world is getting warmer! Humans are polluting and their pollution is making the world warmer faster! Unfortunately even I agree with this claim. The debate is how much humans really impact the rising temperatures. But that debate is not for today.

If we want to curb our use of polluting energy sources, the government needs to enact some kind of legislation, else we’ll never get on board since energy is so cheap (yes, this is cheap). One of the most popular suggestions to control the amount of CO2 we pump into the air is a system that is now known as cap and trade.

Cap and trade is appropriately named, it starts with the government putting a cap on the amount of CO2 that can be placed into the air. This regulation is done at the corporate level, so think about power companies. They are also given credits which allow them to expel their CO2. If the company uses less than they were allotted, they can sell their credits to other firms that would like to pollute more than their fair share. Over time the cap would be reduced so as to encourage the economy as a whole to reduce their carbon output. Everyone wins right?

Actually, yeah. But the funny thing is the biggest winner may be Wall Street. Almost as quickly as a cap and trade program is put in place, a market for exchanging credits will be created. Wall Street will pounce. Carbon credits are basically a right, but not an obligation to pollute. This is the same setup as an investment called an option. High finance would dominate this market in the same way they dominate commodity markets for items like oil and gold. The government could keep them out and only allow energy companies to trade, but all that will mean is energy companies will create trading departments and hire away Wall Street MBAs. Cap and trade should be very good for Wall Street.

Of course when I said everyone wins, I lied. If everyone wins, no one really wins. The system might actually work if every developed nation on the planet played along. But almost as soon as cap and trade is put in place, American made products would lose even more ground to Chinese exports on a level of price. Energy would be more expensive here than in China, and therefore Chinese products get a win. The economic turmoil is unknown, and many would prefer to keep it that way.

The funniest thing about cap and trade is that it’s nothing but a big front. Do you want a carbon tax? Want the price of oil to go from $100 to $200 over night to help curb our consumption? Nope. Americans are notorious for wanting to be taxed indirectly. You idiots (including me) will never understand that any tax levied on a company effectively taxes you as well. Cap and trade taxes corporations, this cost will be sent on to you in the form of more expensive products and devaluing of the dollar due to increased imports from the likes of China.

The carbon tax may be more efficient albeit less politically favorable. Sure we’d all complain about the increased cost of energy in the short run, but what you fail to understand is we immediately get a price cut in the cost of energy as well. If oil is $100 a barrel and a $100 tax is levied the price goes to $200. But demand will fall so sharply, you’d find oil somewhere between $120 and $180 a barrel. The tax revenue would be returned to us in the form of subsidized green energy initiatives and all those other things. What about China? Well that can be fixed too with some help of the WTO. We can’t force China to tax their citizens, but we can tax China. They are reliant on exports to those fat capitalists in America, so we keep American products competitive by placing hefty tariffs on imports to the States. China will have to pay more and we’ll either redistribute those tariffs in further subsidies to taxpayers or they’ll get on board with a carbon tax to keep the playing field level.

That’s probably a lot to digest. The important takeaways though are that cap and trade may not be the most efficient means of controlling our carbon emissions, despite what environmentalists and economists might say. Cap and trade has become such a political issue these days that in all likelihood nothing will happen. This should keep the Libertarians happy. In closing, don’t pass judgment on me about these issues, I’m neither for nor against cap and trade. I’m merely pointing out what’s going on behind the scenes and telling you the stories the traditional media won’t tell you. If you want to add by talking about the downside of a carbon tax, feel free, I’ll do that post sometime.

Photo: azrainman

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One of the biggest companies you’ve never heard of went bankrupt yesterday.  It was the 5th largest in US history.  CIT Group, which is not to be confused with Citi, was one of the largest providers of financing to businesses.  They worked with 80% of Fortune 1000 companies and millions of small and medium businesses to secure financing backed by assets (stuff the businesses own) and other services meant to help businesses with their money needs.  Last year, then Treasury Secretary Hank Paulson made a pitch to bail them out due to an affliction I’ve come to call “Inflammation of the Lower Manhattan financial artery due to macroeconomic conditions and negligence” or simply “Wall-Street-Itis”.

CIT became a bank holding company and secured $2.3 billion in TARP money.  With 138 million taxpayers that’s about $17 a pop we gave to a company that went bankrupt.  That does not include the interest we must pay to the Chinese for the privilege of borrowing the money to support CIT.

Bankruptcy does not mean the end for CIT, and it’s still possible that the government will get their TARP money back, but it’s unlikely they’ll get all of it.  CIT plans to emerge from bankruptcy quickly and be back on their feet before the end of the year.

It’s important for you, as a Weakonomics reader, to understand how a company like CIT goes down, and not just because your children will have to pay more taxes in 30 years because of it.

If I were a small business and needed cash, I could go to CIT and get some.  Perhaps I would back it with some assets, such as a building.  Many times I’ll actually back the loan with money that is owed to me by my customers.  These are known as receivables, and are a fact of life in business.  So the money I get from CIT is backed on the money I’ll receive from my customers when they pay up.  If the world keeps spinning, must customers will pay me, and then I can pay CIT.  Well, in 2007 the world slowed down and in 2008 the world came to a halt.  My customers weren’t paying me and therefore I couldn’t pay CIT.

CIT, in order to stay afloat needed to get some money.  Since the businesses they had lent to couldn’t give them the cash they needed to operate they had to find investors willing to give them cash.  No one believed in them and so they went to the government and got some of that tasty TARP.  It wasn’t enough so they struck a deal with some of their bondholders to get some more cash. It still wasn’t enough and alas they exhausted every possible cash collection method and were forced to file bankruptcy.

In bankruptcy, CIT is protected from having to pay up on some of their bills, which gives them the space they need to reorganize and get back on their feet.

Hank Paulson tried to convince us that CIT was too big to fail.  That doesn’t seem to be the case because Wall Street hardly bat an eye over the news.  It’s been a long time coming for CIT, but I can’t help but wonder, what other banks did we save that were too big to fail the same way CIT was?  We can always ponder, but like the licks it takes to get to the center of a tootsie roll pop, the world may never know.

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656,000.  Would you believe that is how many pieces of mail are delivered every day?  I’d hope not because the actual number is 660 million.  656,000 are the number of employees at the United States Postal Service.  That is second only to Walmart in civilian employees.  Here are a couple of other statistics, 263,575 and 260,000.  One is the number of vehicles owned the other is the Postmaster General’s (like CEO) salary (not including bonuses and perks), doesn’t really matter which is which huh?

Before you get up in arms about government pay or waste or whatever kind of stuff The Weakonomist usually does, you should know that the USPS has not received a dime of our tax money since the 80s.  They live in limbo between non-profit corporation and government entity.  They are granted certain “perks” the private companies do not have.  First and foremost, they don’t pay income taxes.  Second, they can claim property under eminent domain.  They can also borrow money at cheaper rates than the rest of us.  Naturally it’s implied that if they were in serious financial trouble the government would give them money too.

But the USPS has to adhere to some rules as well.  It was George Washington’s dream that everyone in his country have access to the free flow of information.  Back in the day mail was the way to do it, today the internet serves this need.  So no matter how far and wide you need to send a letter, it’s the same price.  They must also maintain a post office within a reasonable distance for most people (though the government does toss in a small subsidy for this, just don’t tell anyone).  In exchange the government grants them a monopoly on all letters sent in the United States and exclusive access to our mailboxes.  Sweet deal.

What does all this add up to?  A crappy, half-subsidized, grumpily employed bloated organization with no incentive to operate in any other way.  That’s a bit crass, but no less accurate.  The postal service has been on the decline with the invention of email and the internet, not to mention wildly unpredictable fuel prices (fuel budget is something like $2-$3 billion).  With a government monopoly and no shareholders to report to, the USPS has no incentive to improve efficiency or control costs because it really doesn’t have to compete.  Sure they compete with UPS and FedEX, but only superficially.  If the USPS were cut loose and put on their own, they’d be pushed out of the industry in less than a decade.

Between the intenet, and private shipping firms like FedEX and UPS, the USPS has a rough future.  Stamp prices are increasing so fast many of us don’t have enough time to run through a book before they go up again, prompting them to offer forever stamps.  By the way, if you’ve considered forever stamps as an investment, this writer and plenty of others have done the math, it doesn’t work out.

The USPS is one of the few government agencies explicitly described in the Constitution.  So despite my sometimes Libertarian viewpoints of government, I can’t hate on them too much; unless there was some way to amend the Constitution to update it to modern times.

But that isn’t to say the USPS should be cut loose.  Perhaps our mail should be controlled heavily by the government in some fashion.  It seems to work alright in other areas of government granted monopolies, like utilities.  Sure consumers have complaints there, but it’s done more good than harm.  Should the USPS remain in this government/private sector limbo?  Only time will tell, and at the rate things are going for them, time is almost up.

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I could say something about how capitalism has ruined this holiday, but it’s going to be one of the few times of the year that The Sheconomist will let me eat tons of candy without getting in trouble.

But you don’t get off scott free, your homework before the kids come by the house is the read up on Halloween’s history.

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The biggest news of the week is no doubt the GDP numbers for the 3^rd Quarter of 2009.  Gross domestic product grew at a 3.5% annual rate, which means over the quarter the economy grew 3.5/4 = 0.875% which is actually a large amount for a developed nation.  When you consider we’ve had lower GDP numbers for a year then this is fantastic news.

Fantastic news maybe, but not surprising news.  When economic recovery occurs it’s usually preceded by the end of the recession, which means positive economic growth.  But the end of a recession is like coming out of surgery after falling from a window 100 feet above the sidewalk.  Sure you’re alive, and will survive, but you’ve got a long way to go before you’re back to your marathon training.  Unless another economic crisis brings us back down, the worst is behind us.

But now it’s time for physical therapy, and you have to relearn how to use your hands.  Unemployment has continued to rise over the quarter, despite the economy growing.  Though the rate of unemployment is slowing, we should crest the 10% unemployment rate (funny because this is one sign of depression).  GDP means nothing to my friends that will find out around Thanksgiving whether or not they’ll have jobs after the weekend.  GDP numbers mean nothing to the bean counters that will make that decision.

Of note, is that our economy has basically reset back 3 years to the 3^rd quarter of 2006.  Measured based on the S&P 500, we’ve reset back to October of 2004.  Hardly a cause for celebration.  Even better, much of this growth is funded by the government, using borrowed money.  Contributions include Cash For Clunkers, TARP, and various stimulus programs.  If private money continues to sit on the sidelines and not be invested, then we don’t have a recovery, just a shot of adrenaline.

Finally, GDP is a measurement of the past.  This was Q3 GDP, and Q3 is over.  That means from July through September, when we thought we were suffering, the economy was growing.  Did you feel good then?  Did your underwater mortgage get out of the flood?  Did your laid off husband find a job?  Probably not.  You don’t have anything to celebrate today that you didn’t have a few months ago.

But don’t let me take the wind out of your sails, I’m just a humble realist with an astonishing comprehension of the macroeconomic status of the United States.  Marinate on that for the weakend, and don’t forget to do your exercises, you’ll be in the hospital for a while.

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Back in 2008, Timmy was running the show on Wall Street.  The NY Fed was well aware of the issues all the banks were having and everyone involved knew the repercussions bank failures would have on investor confidence and main street in general.

AIG was in the middle of the whole thing.  I’ve taken the liberty of simplifying the story but have included the original article from Bloomberg responsible for all these revelations and a summary article from the Washington Post.

AIG owed banks money for some mortgages that had gone sour.  Basically, AIG sold the banks mortgage insurance so when the mortgages went bad the banks came calling.  AIG didn’t have enough money to pay all the banks, and so bankruptcy would have protected them from having to pay the total amounts of money they owed.  Capitalism at its lowest, but capitalism nonetheless.

In circumstances such as this the banks could expect to get some of the money they were owed, but not all of it.  Terms of such payouts are negotiated between interested parties or in bankruptcy court.  The banks could expect to get a percentage, usually expressed in terms like 50 cents on the dollar (or 50% of what is owed).  In this case, the goal was 40 cents on the dollar.

But in steps the government.  They keep AIG out of bankruptcy by loaning them (our) money.  Apparently, in this arrangement either the government sucks at negotiations or simply didn’t try to save the taxpayer some money.  AIG payed 100 cents on the dollar for the money owed to these banks.

It is absolutely true that the banks legally had a right to all the money.  But for 99% of the world when you have a claim against someone and they don’t have the money, you don’t get your money.  Many people feel that what effectlively happened here was the government bailed out Wall Street before the TARP program was even a sticky note on a Congressman’s ideapad.

The weakest part of this whole story is everyone got all pissy about the few hundred million AIG paid out in bonuses, but no one seems to care that we overpaid Wall Street by $13 billion in this transaction.  And if you think for a second AIG is going to pay us back for the hundreds of billions we loaned them then you’ve got some good hash from your dealer.  I’m not outraged at secret government dealings or wasteful spending, I’m once again pissed at the American public for picking the wrong battles.

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Logically speaking, it doesn’t make a whole lot of sense to advertise prescription drugs to consumers. All the ad money should be going to pushing doctors, that way when we go in to see our docs they know what products to sell you prescriptions to write for you. But the logical consumer is not logical at all.

DTC (direct to consumer) ads started appearing a few years ago when the FDA changed regulations on how pharmaceutical companies must run commercials. Previously, the amount of legal mumbo-jumbo took up 3 minutes of ad space, but then the rules changed to allow for smaller commercials. One of the ways this must be done is with the “see our ad in…” you usually see somewhere along the commercial. If you’ve flipped through a magazine, you’ve seen these two-page ads (notice always front/back not beside each other) which list every possible outcome and the entire text of a Shakespearean play translated in Spanish. You can see one of these commercials with a “see our ad in…” here.

Once these advertisements became easier to push on TV, the business exploded. The leading drugs we see on TV see about $1.40 in operating income for ever $1 spent on marketing. Now, the pharmaceutical companies tell you what you may or may not be suffering from, and kindly suggest that you go ask your doctor if their product is right for you. Because the “logical” consumer is actually a complete idiot, this strategy works.

Business has been quite good for pharmaceutical companies over the last few decades. The good news is that this industry is tightly regulated. Not only must the drug companies fund the 3 levels of screening of their drugs for the FDA, but the FDA also regulates how these drugs can be marketed. The process is so expensive, that you can be assured that any product you see a commercial before will actually do what it claims to do.

And here’s what really grinds my gears about pharmaceutical companies over the last few decades. Chris Rock said it best, “Doctors don’t cure $#!+! They don’t cure $#!+! The last disease doctors cured was polio, when’s the last time you met someone with polio?” Billions of dollars spent, and the best we’ve got are a bunch of drugs you have to take for the rest of our lives. I’m not saying they’re holding back, but there is no financial incentive to ever cure a disease.

That digression aside the DTC ad business for pharmaceutical companies is not going anywhere anytime soon. Television channels love them, and they’re about the easiest commercials to use to identify the target market of the shows you watch. Just watch Jeopardy, it’s a geriatric shopping list at Walgreens. Everybody loves them, and if you’re smart enough to read Weakonomics, then you’re smart enough to avoid being a logical consumer to getting on all these pills and just be happy they subsidize your TV show watching.

Photo: notion’s capital

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