Aug 22

A couple weeks ago, I read a Times’ article The Typical Household, Now Worth a Third Less. The punchline of this article was the fact that the US median household saw their net worth fall from $87,992 in 2003 to $56,335 in 2013.

The article linked to a report, Wealth Levels, Wealth Inequality, and the Great Recession. It offered further context to the median wealth numbers.

WealthData

Keep in mind, during this period, stocks, as measured by the S&P 500, rose by an inflation adjusted 61%. Yet, total wealth (look at the first line, the mean number) fell by 8.6%. This would be disturbing enough, but the top 5% saw an increase 14.4%, identifying a large shift in wealth to the top. Three quarters of households fell behind, losing 36% or more of their wealth.

The ten year period in question contained the housing crash, and the losses shown reflect the fact that even at the 75th percentile, much of one’s wealth is contained in their home. Overall, real estate represents less than 25% of wealth in this country, but this number doesn’t spell out how this is distorted at the sub 75th percentile. For the median family, most, if not all of their wealth might be in their home.

Back to the title of this post. These ten years reflect the continuation of a frightening trend, a middle class that is fading away. Income hasn’t kept up with inflation or with the long term trend of improved productivity. In other words, the average worker is producing more, yet seeing no increased reward for the fruits of his labor. We’ve seen the results of economic bubbles, how a too-high NASDAQ (remember the dotcom bubble?) will come crashing down. We saw the housing crash. Now, I’m looking carefully at this statistical shift in wealth. A democratic society can’t continue on this path, as this trend simply shifts more and more wealth to a select fewer and fewer people. I don’t have a solution to offer, only these observations. And the desire to see a strong middle class return to this country.

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Aug 16

RobinWilliamsI was watching an old tape of Comic Relief ’87 when I saw the Tweets that Robin Williams had passed away. He had an amazing career, graduating from stand-up comedy to TV, to roles in movies which showed his amazing range of talent. The only other celebrity that I believe can claim such range is Tom Hanks. Let me know if you have another nomination for ‘best range’. Rest in peace, Mr. Williams.

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Jul 25

I was away for a weekend, at a friend’s house on the lake in New Hampshire, and we went to pick up lobsters for diner. The price list caught me a bit off guard.

lobster

I always understood the larger lobsters would cost a bit more per pound, so for example, the 1-1/2lb lobster is $18 vs $10 for the 1lb’er. No issue with that. What struck me was the drop in price per pound for the 4lb or bigger. Let’s do the math, 2lbs for $26, 3lbs for $39, 4lbs for $32. Let’s fill in the gap, 2.5lbs for $32.50. I did the math and wondered why anyone would buy one between 2 and 4 pounds.

If you are not a lobster eater, it’s tough to understand. A small lobster has a piece of tail meat and two claws. In a larger lobster, the small claws are also worth eating as is the body, where the effort of cracking it open and digging in is well rewarded. I’d happily split a 4lb lobster with a friend than to have a 2lb one to myself any day. I asked the store owner why the drop in price. He explained that the big ones don’t sell. They don’t sell because they come out tough. To paraphrase Shakespeare, the fault lies not in our lobsters, but with our chefs. First, lobsters should never be boiled, not unless you are making lobster bisque. If you are serious about your lobster eating, you’ll get a steamer pot big enough to steam your lobsters. 35 minutes or so and they’re done. A nut cracker for each dinner guest will help, as will a mallet and towel if the shells are a bit hard. I love lobster, but not enough to risk cracking a tooth. Now you know.

Do you live where fresh lobsters are sold? Is the pricing flat or does it look more like the picture above?

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Jul 25

When we look at where we were just a decade ago, Solar Power has come a long way. The little solar voltaic cells were enough to power a calculator, and I thought of it as saving me $5 every year or two for as long as owned it. In hindsight, it was less about the $5 and more about having a dead calculator when it mattered most.

We’ve come a long way and solar now seems to be hitting the mainstream, getting close to the point where it’s economical to power one’s home from these panels during the day. I specify day as there’s still a bit of an issue with storage of excess power that can bridge the gap until the next day. For now, the excess power you can produce is pushed back to the grid, driving your meter backwards. If solar continues to drop in cost, we will reach a point where the grid can’t absorb this power and local storage, either by home or neighborhood will be needed.

The math isn’t too tough. A 1KW panel enjoying 1500 hours of strong sun each year is going to produce 1500KWHs of power each year, and at 12 cents per KWH, the US average, save the consumer about $180 per year. Many electric companies are also charging for the peak demand, i.e. the top usage during a 15 minute period of time. This is the amount of generating power they need to service you, even though your average usage is far less over the full month. It varies by company, but I’ve seen a demand charge as high as $28 per kW of demand. That solar panel generating 1KW will save you $336 in demand charges over the year, this is in addition to the savings all ready mentioned. For companies with large demand, an energy conversion calculator will help keep the Kilowatts and Megawatts straight.

There are a number of variables that come into play for when the tipping point will be reached. Panel cost, cost of financing (i.e. current interest rates), average number of sun-hours per year, cost per kilowatt-hour, and demand charges. Once these are all taken into account, a clever analyst will be able to product a map of the US identifying what areas are currently candidates for profitable solar installations, and which are in line as the price of solar drops.  The cost to produce electricity and natural gas will only continue to rise, and the technology driving solar panels continues to improve.

I hope to hear my grandkids ask me, “they burned stuff to produce power? Why? The sunshine is free!”

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Jul 05

As my regular readers will recall, I often pass Walden Pond, as I live a few towns away, and while writing at Walden Pond, Thoreau wrote, “Our life is frittered away by detail. Simplify, simplify, simplify! I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumb-nail.” Partially with this in mind, I like when a bit of proposed tax code aims to provide some level of simplification to our utterly incomprehensible too-long code.

The particular proposal I am looking at today offers to simplify the tax benefits for higher education. as the Ways and Means report states:

  • Under current law, there are 15 different tax benefits relating to education that often overlap with one an other.
  • The current-law education tax benefits are so complicated that they are ineffective because many taxpayers cannot determine the tax benefits for which they are eligible.
  • The IRS publication on tax benefits for education is almost 90 pages long.
  • Streamlining education tax benefits would enable taxpayers to understand better the tax benefits for which they qualify.
  • The provisions would help to simplify considerably the tax benefits relating to education.

The above puts in perspective just how difficult it is for the average parent to navigate their choices amongst the different benefits. The new proposal appears simple, a 100 percent tax credit for the first $2,000 of certain higher education expenses and a 25 percent tax credit for the next $2,000 of such expenses. So far, so good. A total $2500 gift from Uncle Sam to pay for your child’s college tab. Not so fast, a phase out for MAGI between $86,000 and $126,000 for joint filers and $43,000 and $63,000 for other filers. This is a tough one for me. For a Joint filer, that next $20K of income will kill $2K worth of the tax credit. In effect, a 10% extra phantom tax for the AGI between $86K and $106K for that couple. Many people with college age children are not far from retirement, and on my advice, they might be navigating to avoid the phantom tax that will hit retired couples on their social security income. The effect of this phaseout is that a couple will see a phantom 25% rate for income that should otherwise be taxed at 15%, the 15% bracket I suggest that pre-retirees “top off” by converting some money to their Roth IRA. I suppose that any credit such as this one should have a cap, an income level above which one doesn’t qualify. The real question is whether a joint AGI of $86K is the right level for the phaseout. My own opinion is no, I think $125K or higher is more appropriate. What do you think?

It doesn’t end there. The government gives and the government take away. This provision includes the repeal for the exclusion from United States savings bonds used to pay higher education tuition and fees. In other words, you followed the rules, you patriotically bought US savings bonds with the promise that the growth would not be taxed if these were used to fund higher education. Ouch. The estimate is that this will save $100M over 10 years, so only $10M per year or so. But save in this case means that people will be taxed when they weren’t expecting to pay tax on this money.

Other take-aways include the repeal of any student loan interest deduction, the repeal of deductions for qualified tuition, and the end of the Coverdell Education Savings Account (The account formerly known as the education IRA.)

That’s about it. It seems that simplification comes at a price, and anyone who thinks they understand today’s tax code enough to benefit from it had better keep up on changes that our congress may vote on. To miss these changes can be quite costly.

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