Thursday, October 27, 2011

Trickle Down Economics

Do tax cuts pay for themselves? For example when President Bush lowered the top tax rates on those making over *$250K from 36% to 33% some thought that by freeing up money then people would buy more goods, start or invest in more businesses and generally help the economy. This is a common conservative theme repeated almost as much as "government is the problem."

*Why set the bar at $250K? I remember reading an article that asked the question "why does LeBron James pay the same tax rate as his dentist?" and thinking that it was a very good question. In 1913 the marginal tax rates were introduced and the top level was defined as $500K. That was quickly changed in 1916 to have a top level be a $1M. The top % on those that made $1M year rose to an incredible 94% in 1944. The level stayed above 90% until it was replaced with a top level being defined as $250K. That top level has fluctuated with a downward trend to the current level of 33%. Why did the United States decide to make such a big swing from taxing the ultra-rich at such a high rate to not even differentiating between the rich and the ultra-rich? Would it make more sense for a progressive tax rate to have those making between $250K and $500K to pay 33%, those making between $500K and $1M pay 40% (near Clinton's level for the top rate) and those making over $1M to pay $45%? You can disagree with the %s, but it seems like a logical plan to tax the $250,001th dollar at a different rate than the $1,000,001th dollar.

So do supply side economics work? I will look at this at a very micro level and look at my own financial situation with my wife. We are in the lucky position that we make more than we spend. What do we do with our extra money? After you take away the money we spend on restaurants, rent, car maintenance, groceries,entertainment etc the rest of the money goes to the following;
  • Stock market: The majority of our extra money goes to the stock market. We are saving up for a house, kids, retirement, etc. What happens to this money? It goes to corporations like Target, Apple, Diageo Chipotle and Intel. The majority of the corporations are headquartered in America, but also have significant operations in other countries. It is rare to find a large company that doesn't have an internationalal presence
  • Our savings account
  • Trips: Most of our trips are domestic, but occasionally we go to places like Spain, Austria or our upcoming trip to London and Paris.
  • Gifts: I enjoy giving back to Miami University as well as buying normal birthday/Christmas gifts for family and friends.
From the above four points I can see that a good portion of my money does trickle down to help the domestic economy out. (Example: I went to Las Vegas this weekend and my group of four did our part to help the local economy.) However, a lot of my money does not trickle down to help create any jobs in America. If I invest in a stock that then decides to employ someone in Russia that doesn't help the unemployment here very much. If I save my money then I don't see how that helps anybody but myself. If I go on a trip to London and spend all my money buying William and Kate decorative items then I'm probably not helping some factory in Fort Wayne, Indiana.

My point is that if you give me a tax break then there is a good chance I will spend more money, and likely some of that will trickle down to the domestic economy.  However, there is zero chance that will be a 1 to 1 ratio, which makes the theory that trickle down economics will pay for themselves invalid.

Thursday, October 13, 2011

Fun with interest rates

During the week when I don't have any plans for lunch it isn't uncommon to find me reading the paper in my work's library. It is a nice change of pace to be able to sit down, relax and read the WSJ, New York Times and occasionally the Star Tribune. One thing that I keep reading about is how interest rates on mortgages are declining and/or at an all-time low. This has been a common refrain when writers bring up home buying. Anyway, all of this commotion made wonder what this all meant in terms of actual dollars. I decided to do my own research using the national mortgage rates of today compared to previous years. It is pretty interesting to see how your monthly mortgage changes based on the rate. Below is the scenario I set up.

I went to Edina Reality and found a $300K home and set the inputs to have $60K down (creating a $240K loan) over 30 years with a yearly property tax of $3,671 and a yearly property insurance of $900. These inputs were based on real data from this random home I found in Minneapolis. Anyway, below is the difference based on the interest rates:
  • Current Rate of 3.94% = Monthly payment of $1518.
  • October 2010 Rate of 4.24% = Monthly payment of $1560
  • October 2009 Rate of 4.95% = Monthly payment of $1662
  • October 2008 Rate of 6.2% = Monthly payment of $1851
  • October 2005 Rate of 6.07% = Monthly payment of $1831
  • October 2000 Rate of 7.79% = Monthly payment of $2107
  • October 1995 Rate of 7.48% = Monthly payment of $2056
  • October 1990 Rate of 10.17% = Monthly payment of $2517
  • October 1985 Rate of 12.14% = Monthly payment of $2875
  • October 1980 Rate of 13.79% = Monthly payment of $3185
Back in October 1980 you would have to pay twice as much as per month by just changing the interest rate. What is even more shocking to me was that you would pay $333 more per month (22% more) back only 3 years ago in 2008.

Can the interest rate go lower? I looked at the data that included every month from 1971 to now and the current rate is at an all-time low. That doesn't mean it can't go lower (the trend is certainly pointing that way), but the rates are certainly a lot better than they were at pretty much any other time in the recent history.

Tuesday, October 11, 2011

Home Buying - 20/20 hindsight analysis

Two and a half years ago I proposed to M and we began looking at where we were going to live. Also, we had to decide on whether or not we wanted to buy or rent. I was a big fan of renting for a few reasons, but I thought we should still do a little research on what houses were available. Interests rates were low and house prices had dropped from their peaks. Anyway, I found 17 houses listed that fit our criteria and kept that list on an excel spreadsheet.

Now, 2.5 years down the road I was cleaning up my computer and found that same excel grid. Being curious I decided to see what happened to those houses. I have the listing price from 2.5 years ago, so I wanted to compare what the actual sell price was to the listing price. From that analysis below is what I found:
  • 9 of those homes have not been sold in the past 2.5 years. Some have been taken on and off the market a few times and others just have been taken off the market completely. This was the biggest thing I found. Over half of the home buyers have decided for whatever reason not to sell their home. Are they renting it out? Do they think the market will rebound? Did the get no interest when they tried to sell it? It is kind of scary to think that such a high percentage would not be able to sell their home.
  • The 8 homes that sold were sold for on average 10% less than their listing price. This probably has something to do with the fact that the listing price is rarely the price people actually are willing to sell their house at.
  • The average price of the house has dropped 16% in 2.5 years. Now I don't know how accurate Zillow's estimate is, but if it is true than that is a pretty big drop. In the same time the SP500 has grown 38%.
Now did we not buy a house because we knew what was going to happen in the stock and housing markets? Did we do some great analysis that influenced our decision to rent, save money and invest it in stocks? No. We didn't buy because of a few reasons, but a clear understanding of the markets was not one of them. We were lucky.

Monday, October 10, 2011

Memorial Stadium

Life is like a roller coaster, but not for the normal reason you might think. Sure life is filled with ups and downs (like a roller coaster), but for most people life isn't as exciting as a roller coaster. Generally speaking each day is the same. You eat the same breakfast before going to the same job in the same city that you spend most of your time. Most people live in the same house for a long time and hope to have a long and happy marriage with the same person. Life consists of the boring monotony of the day to day living, which should make you wonder why I am comparing it to a roller coaster.

The reason is that to go on a roller coaster you need to wait in line. For some popular rides at places like Cedar Point you have to wait in lines that last at least an hour. You wait and wait for a ride that can be over in less than a minute. That is like life. Life is boring and you find yourself waiting for those few exciting moments that make it all worth while. You work 5 days a week, so that you can let loose over the 2 day weekend. You plan for a year to take a European trip that only lasts a week. You put in a lot of time in hopes of a few moments of freedom.

Sports can be like that in that you wait and wait for transcendent moments. I had one of those this weekend in Lincoln, Nebraska watching the Cornhuskers come from a 21 point defecit to defeat Ohio State

The context of the experience is that I grew up a huge Huskers fan. My Mom's side of the family is from Nebraska and one of my extended family members indoctrinated me with posters of Memorial Stadium and a subscription to Huskers Illustrated. I was as big of a fan of Nebraska as I was Duke, the Jazz, etc. Something happened in college (a combination of the Huskers hiring Bill Callahan and the Redhawks becoming a good team with Roethlisberger) though as I found myself to drift away from rooting for Nebraska. I still wanted them to win, but Huskers football was no longer appointment viewing.

Still, I am and always will be a Nebraska fan. One thing that I needed to do as a fan is make the trip down to Lincoln for a football game. When Johnny suggested that we meet there for the game this past weekend against Ohio State, it gave me a chance to change the fact that I had never been there before. This weekend consisted of about 16 hours of driving for only about 7 hours of tailgating and watching the game. That is a high driving/activity ratio, but it was worth it. The game was incredible and the fact that I saw a Nebraska home game is one thing that I will always remember. I will forget the drive, but the game is something that was much better to experience live than on the TV.

In the end I had an amazing time this weekend. My only regrets are not doing enough in Lincoln. I wish we would have a better tailgating spot (an open lot next to Huskers fans), better seats (not that ours were bad, but the sideline would be better than the end zone) and time to go out on O street after the game. There will be a chance to do things better for a future game. However, when I compare driving that way and going to the game compared to my previous weekend plans of sitting around and watching TV then it is clear that I made the right decision. Also, when I think about how even though I want to go back there is no guarantee that I will go back. Instead of making me upset though, that thought actually brings a smile to my face because I know that at least I went to one game at Memorial Stadium.

Games like this past one make being a sports fan worthwhile. It remind you why you follow sports and why a 16 hour drive to see a game played by a bunch of people you don't know isn't crazy. It is nice that when things can get bad (and for most of my favorite teams things are bad) you can have moments of joy. What a great game and a great experience in Nebraska.

Monday, October 3, 2011

Sports Nadir?

Just over a year ago I wrote a post asking if I had reached the sports pinnacle? Life was pretty good for my favorite teams. Duke had just won the National Title and was coming back as the consensus favorite to win the 2011 title. The Miami Redhawks were on their way to a MAC championship winning year in football and had just completed back to back Frozen Fours in hockey. The Jazz had just finished a 50+ win season and were adding one of of my favorite players Al Jefferson. The Dolphins were 2-0 with two impressive road wins. The Twins were headed towards the playoffs and adjusting to life as a "big revenue team" with Target Field.

Also, I didn't write about it then, but my fantasy football teams were stacked with the likes of Arian Foster, Peyton Hillis (2 teams), Jamaal Charles, Adrian Peterson, Michael Vick, etc.

Now it looks like their has been a dramatic change for the worse. Below is the update:

Duke basketball - They were blown out in the Sweet 16 to Arizona, which marked the final game for Nolan Smith, Kyle Singler and Kyrie Irving. While it wasn't a terrible year (going 2-1 against UNC, winning the ACC tournament title) it also wasn't nearly up to the considerably high expectations. Also, it was a terrible year considering UNC won the ACC regular season title, made it to the elite 8 and Roy Williams somehow worked his jedi magic to convince 4 first round picks (Barnes, Marshall, Henson and Zeller) to come back to school. The team can now literally start a roster of 1st round picks because of the addition of James McAdoo. They are going to be good and my only hope is that the small sample size of the NCAA tournament gives them a bad roll of the dice.

Miami Redhawks football - They are 0-4 and not particularly competitive. They lost this weekend to their rival Cincinnati 27-0 despite winning the turnover battle 4 to 2. Their special teams are awful (33.1 average punt in the last game and a kicking game that has missed multiple extra points during the season) and their running game can be summed up by the fact that I rushed for more yards than Miami did against Cincy (38 carries for -3 yards). They have lost as underdogs (to Missouri and Cincy) as a favorite (against Bowling Green) and as a slight underdog to a Minnesota team that has lost to New Mexico State, North Dakota State and by 58 points to Michigan. This is shaping up to be just like the 2007 season, when the Gophers only won one game all year and that just happened to be against Miami.

Miami Redhawks hockey - They lost in the 1st round of the hockey tournament this past year, but they are ranked #1 (or #2 depending on the poll) in the preseason hockey rankings. This is definitely a bright spot among my favorite teams.

Nebraska football - They were destroyed by Wisconsin on Saturday. I lost a small bet to my friend because I thought that at least the Huskers could cover a 7 point spread.

Utah Jazz - They traded away their best player (Deron Williams), missed the playoffs after finishing 39-43 and had Coach Sloan resign in the middle of the season. Their 2nd half collapse was a sight to see as the team almost overnight went from being one of the better 10 teams in the league to being one of the 5 worst. The team has a bunch of young talent, but right now the roster is strangely constructed (too many post players and not enough guards) and their is no guarantee that players like Enes Kanter or Derrick Favors will ever turn into All-Stars. They are just a collection of average to slightly above-average players in a league that requires you to have at least one (normally 2 or 3) superstar.

Miami Dolphins - Last year started off well and ended very poorly. They finished 7-9, which is bad enough to never really feel like they are a playoff team, but good enough to miss out on a top draft pick. In the off-season they kept a coach they should have fired, drafted a center best known for not being able to snap the ball, cut a fullback that was 14 out of 15 in 3rd/4th and 1 situations and decided to hand the offense back to Chad Henne. They have started this year 0-4 and I have decided to root against them in hopes of getting Andrew Luck. Really the best thing you can say about how this team was constructed and has played is that they are much closer to getting the #1 pick than making the playoffs. This year will only be a "success" if they finish with the worst record in the NFL. That is my only positive spin on this year.

Minnesota Twins - The Twins won 94 games last year, which was only 3 wins off the best record in MLB. Of course that still didn't prevent them from getting swept (again) by the Yankees. At the time I was lamenting the fact that I had seen four Twins teams play more than 162 games and zero playoff victories. They were 0-9 in the three series against the A's and Yankees (2). Also, their was the 1-0 loss to the White Sox in Game 163 of the 2008 season. However, at least those teams played good baseball over the course of the year. This year's team won 31 less games than last year and finished as the 2nd worst baseball team in the majors. Every move they made turned against them (example: turning Santana into Gomez into Hardy into Jim Hoey) and the future of the franchise is pretty bleak. Joe Mauer hasn't stayed healthy and Justin Morneau has been worse than a minor league replacement player. They didn't get production from their best players and their worst players (Nishioka, Butera, Tolbert) have been some of the worst MLB players you could ever watch on a day to day basis. It was one of the worst years one can imagine considering the expectations (high), payroll (9th highest in baseball) and end results.

Also, while it isn't a "real" sport team my fantasy football teams are a combined 4-8. I lost Jamaal Charles for the season in two leagues and have had some bounces go the wrong way. For example I lost by half a point in a league because of any number of reasons, but one that stood out was getting a negative point because Alex Henery's missed a 63 yard field goal. This week I lost in a game when I had the 2nd most points in the league, but just happened to be playing the guy with the most points thanks to Aaron Rodgers, Matt Forte and the Ravens D.

I ended last year's post with the comment "Let's see how the Twins and the rest of my favorite teams do in the next 365 days." The answer is not well.