Borrow a Trillion Dollars

Woot + eBay + Slot Machine

2008-12-12T18:57:00.002-07:00

Jeff Atwood over at Coding Horror has an interesting post about Swoopo, an "entertainment shopping" website.

I first discovered Swoopo a few months ago, when I started seeing Google ads for things like Wiis and PS3s describing auctions where those items sold for amounts like $45. After seeing them repeatedly, my scam-o-meter went off and I investigated. On its face, the way it works is as an auction, anyone can bid on an item, and the high bidder wins.

The kicker is that each bidder pays to bid, even if they don't win. So, to figure out how much Swoopo's getting paid for an item, it's not enough to look at the final price. You have to divide the final price by fifteen cents (the bid increment), and multiply that by 75 cents to see how much they truly made. For example, to get a Wii at $45 required 300 bids, which cost 75 cents each, which comes to $200. Add in the actual $45, and they're selling it at about cost.

Looking at their site right now, I see a Wii that went for $107.70. That's 718 bids, at 75 cents each, which comes to $538.5 - almost $650 for a $250 item.

Just looking at the home page is hypnotic - each flash of a new bid is more money rolling into their coffers.

Is it legal? In a sense, you are because you're betting that no one else will bid after you do. On the other hand, they have a legitimate argument that it's just an auction with different rules. If I were on a jury, I'd have trouble convicting them of any kind of fraud, or being willing to call it gambling.

As I mentioned in Jeff's comments, when I first discovered Swoopo, I spent an hour or two on Wikipedia reading about logical fallacies, cognitive biases, and so on, hoping to find inspiration for something similar. No luck.

The best part about running something like Swoopo is that if the FTC does come sniffing around and talking about criminal prosecution, you more likely than not will wind up with a consent decree, a minor change to your business plan, and maybe having to hire some bureaucrat's wife's consulting firm for a year. It's extremely unlikely that the founders of this site, even if they were American (they're German) would ever see a courtroom.

No disrespect intended

2008-11-18T15:22:00.002-07:00

Flags are funny things. Colored scraps of cloth that represent a military regiment, a people, a state, a country, an ideal, or any number of other things.

Because of that, flag desecration is serious business. If you damage or destroy a flag to which a person has an emotional attachment, that person might react irrationally. For the past twenty years, politicians in the United States have been able to score cheap political points by promising to amend the constitution to prohibit desecration of the national flag. Countries like Denmark make it illegal to desecrate foreign flags so as to avoid offending foreigners. Pretentious art students damage or destroy flags as art.

I went to a Mexican restaurant today. This restaurant, like many such restaurants, puts a little Mexican-flag-on-a-toothpick onto every meal as a decoration.

I'm never quite sure what to do with this flag. Any other decoration would be casually set aside once I begin eating, but with a Mexican flag - in a restaurant staffed largely by Hispanics - it seems vaguely disrespectful to just toss it onto the table for it to be thrown away. I'm not sure what the rules for the Mexican flag are, but an American flag is not supposed to touch the ground and should only be disposed of (ironically enough) by burning.

So, to the Mexicans of the world, when I take your national symbol, stick it into the coleslaw that I'm not going to eat and then let it get thrown in the trash and covered with my uneaten enchilada sauce, I didn't mean any disrespect to your country when I did it.

Interesting fact of the day

2008-11-13T10:12:00.004-07:00

In 1654, a colonist named Anthony Johnson had an indentured African servant named John Casor. John Casor tried to transfer his indenture to a different person, and the court refused, declaring him to be the property of Anthony Johnson, and indeed, "Property for Life". Thus, John Casor was the first legally-recognized slave in the English colonies that would eventually become the United States. Casor spent the rest of his life owned by Johnson.

Bizarre Twilight-zone-esque twist: Anthony Johnson, Casor's owner, was black, and was himself an African immigrant.

But I thought it was for...

2008-11-12T14:01:00.004-07:00

So, the bailout, which was originally sold as purchasing valuable if artificially depressed assets, won't even be doing that. Now it's just a general, free-for-all fund to give money to any company or industry that claims to need it.

I think we all know that any money given to GM, Ford, or any of the others that are asking for it, will never, ever be seen again.

And they're going to do it. Somehow, our government is going to come up with hundreds of billions - possibly over a trillion - dollars and pay it to any company who asks for it.

We had an overarching deficit before this all started. Now, suddenly we're spending billions more that we don't have.

If only there were a political party that was *against* giving large sums of money to private companies. I'd vote for them.

I don't fear Obama...

2008-11-05T08:22:00.002-07:00

...but I am concerned about the fact that the Democratic majority in congress is going to be running the show for the next two years.

Things that I'm worried might happen, in no particular order of probability or magnitude:

1) Tax hikes

2) More complicated taxes

3) Elimination of my HSA and forcing me to go onto my employer's health insurance

4) Any criticism of the president being called racist

5) Reintroduction of the fairness doctrine and other attempts to suppress dissent

6) Elimination of my employer's health insurance and forcing me to go into a national single-payer system

7) War in Pakistan

8) War in Korea

9) War in Iran

10) War between Iran and Israel, potentially nuclear

11) Higher gas taxes

12) Much more expensive mortgages

13) A draft, either military or 'mandatory national service'

14) Loss of integrity in the power delivery system, with rolling blackout and mandatory remote shut-off devices on your air conditioner and other high-power devices becoming the norm

15) 'Card-check' union elections

16) Massive new gun control schemes

52%+

2008-11-05T06:29:00.002-07:00

Well, I was wrong. As of this morning, with 96% of the votes counted, Barack Obama managed to pull over 52% of the popular vote, making him the most popular Democrat to run for President in over 40 years.

Interesting events on eBay...

2008-11-03T10:48:00.005-07:00

Microsoft Live Search has teamed up with eBay to offer cash back - currently at 25% of purchase price - for people using Live Search to buy things on eBay.

The 25% maxes out at $200 per purchase, meaning that you get optimal payback by buying an $800 item. This discount only applies to buy-it-now items, not auction items.

Gold is currently running at around $750 / ounce, and one-ounce gold coins have long been popular on eBay. I have occasionally looked into buying gold coins there, and they usually trade at just a very small premium over melt value - not more than a few percent.

Until recently.

An economy seems to have sprung up on eBay of people selling gold coins (and other ~$800 items) to each other at a substantial premium. Right now, the cheapest 1-ounce gold coins are selling via buy-it-now for around $910, and most non-interesting one-ounce gold coins seem to be priced around $950, about $200 above melt value. This premium represents the entire cash-back that a buyer will get via the Live Search program.

So, the law of supply and demand is still functioning. By subsidizing purchases, Microsoft has just added $200 or 33% to the cost of every purchase on eBay.

And on a side note, if I were in the gold business, I'd be dumping my entire inventory on eBay right now, since I could get 25% above regular market value for it.

Sigh...

2008-10-31T23:01:00.002-06:00

It used to be so simple. Until about four years ago, I lived alone in my house. For Halloween, I usually turned off my front light, went to the back of the house, and watched a movie. Trick-or-treaters knew that light-off meant nobody-home, and I usually didn't have to ignore more than one or two knocks per night.

I was quiet and lived alone, and didn't know my neighbors all that well. It was a good arrangement.

Then, about four years ago, police started loudly saying that sex offenders and other parolees were required to leave their lights off and not answer the door. To avoid any misunderstanding with my neighbors, I started leaving my light on and giving out candy. This was probably for the best, as it increased my neighborhood activity participation quotient by at least 0.4%.

This year, again, I had my light on and gave out candy until around 8:30pm. Then my girlfriend and I turned off the light, went out on the town for a bit, and came back at around 10:00. A little after 10:30, we were getting ready to go to bed, and I decided to turn my front light back on to discourage any mischief that older kids might decide to partake in.

I didn't have the light on for much more than ten minutes when another group of older kids knocked on the door. At 10:50 at night!

I didn't answer it, and turned off the light after they'd left. I'll just hope to not find any property destruction outside in the morning. Sigh...

Will Barack break 50%?

2008-10-31T13:45:00.003-06:00

So, as I write this, we're four days out from the 2008 presidential election. As I wrote two years ago, Democratic presidential candidates never get above half of the popular vote unless there has been sufficient national trauma to drive voters to them. While the last two years have seen soaring gas prices (which have come back down quite a bit), bailouts, a continuing war in Iraq, and more, I'm not sure that any of those things constitute the kind of crisis that makes the Democrats a majority party.

In discussions with friends a few months ago, I first made a prediction that Barack Obama would win the presidential election with 44% of the popular vote. I assumed that Ron Paul or some other spoiler, combined with conservative loathing of John McCain, would cause enough of a split in the right half of the country to create such a result.

As of Halloween, no such spoiler appears likely. Ron Paul is not on the ballot in very many places, and no other candidate will get anywhere near 1% of the vote. I still predict that, barring a major surprise between today and Tuesday, Barack Obama will be elected.

However, this is still a very divided nation. I wouldn't be surprised to see a repeat of 2000, where the winner of the popular vote is not the winner of the electoral vote.

Looking at the most recent polls, the ones I was able to find indicate about a 49-42 popular vote split for the two, with the remainder presumably undecided or 'other'.

That bodes well for an Obama majority. Assuming, of course, that Obama supporters are not more likely to refuse to answer pollsters or lie to them, that they come out to vote, and that the polls are otherwise accurate.

So, I don't think that 44% will happen. But 48-49% - with victory - wouldn't surprise me at all.

I'm back!

2008-10-31T13:42:00.001-06:00

OK, after a 2+ year hiatus, after encouragement from a fan of my rants at work, I've decided to try blogging again. Let's hope I stick with it better this time.

Space age in reverse

2006-09-11T22:18:00.000-06:00

If you look at the history of the space program, it could almost have run in reverse. This is a suprisingly plausible alternate-history space program:

1950's: Entrepreneurs begin building small suborbital craft that can take rich people on a thrill ride up to 75-100 miles above the surface for a few minutes

1960's: The government decides to start building a human presence in space. The Space Shuttles - large, reusable vehicles - are constructed. After a few test flights, where the craft is launched in fulll daylight and covered with cameras, they begin hauling up small pieces of a space station, and sticking them together in orbit.

1970's: As the piecemeal station is finally put into a state where it has at least a little bit of value, the frequency of shuttle flights increases. Not much science is done on board the station, but we learn a lot about how to build (and not build) a space station.

1980's: The piecemeal station is abandoned as we realize that most of this stuff can more easily be done directly on board the shuttles. Their flight frequency increases dramatically.

1990's: We decide to try the station idea again, but this time, we use the upper stage of one of the new moon rockets that are being built to make a space station that can all be launched in one shot. Within a couple of weeks of the launch, it's fully ready for habitation. It's much simpler and lower-maintenance, allowing more real science to be done. Major experiments are done on the effects of extended time in space.

2000's: The first missions are launched to the moon. Simple missions, carrying only a few people to the moon, and only long enough to spend a day or two there, but enough time to do real science and exploration

2010's: The Air Force becomes interested in space and begins researching its own launchers and planning its own space station. Meanwhile, the US Government begins researching Orion, a nuclear-bomb-powered spacecraft capable of carrying 1000 people to Mars.

An interesting experiment for someone with Lexis/Nexis access

2006-05-09T20:33:00.000-06:00

Bond yields and bond prices move inverse to each other. If the price goes up, the yield goes down, and vice versa. Therefore, on any given day that the market is open, it's possible to write one of the two following stories about the bond market:

Bond yields were up yesterday as {the government moved to strengthen the dollar} {investors responded to higher prices in the stock market} {etc.}

Bond prices rose yesterday as {investors moved more money into t-bills} {the latest figures from the government showed lower inflation} {etc.}

It is also possible, on any given day, to write one of the following stories:

Bond prices fell yesterday as {investors dumped US treasury securities} {inflation seemed to be picking up} {etc.}

Bond yields fell yesterday as {investors pulled out of the volatile stock market} {foreign investors sought to purchase more treasury notes} {etc.}

It would be an interesting experiment to analyze financial reporting in major newspapers to see how often they publish the pessimistic-sounding story and how often they publish the optimistic-soundng story, and how that ratio changes over time, especially in relation to things like proximity of elections.

The Democrats' continuing quest for 50%

2006-05-09T20:26:00.000-06:00

The Democrats have a problem, and it's a problem that they've had for over a century.

Absent major national trauma, they don't appeal to a majority of the voters. Never have. Possibly, never will.

We all hear the narrative in school: We have a two-party system, and those two parties compete for votes; Every few years, we have an election, and one of them gets a majority and gets to own the

White House for a while. Sometimes the Republicans get a majority, and sometimes the Democrats get a majority, with the occasional spoiler (Perot, Nader) pulling the winning candidate below 50%, but that's an abberation.

Wrong.

The fact is, Democrats rarely win majorities. Over the past 106 years, from the election of 1900 to the election of 2004, spanning 27 elections, only three Democrats were able to win more than half of the popular vote.

Those three were FDR (who did it four times), LBJ, and Jimmy Carter.

Three men, in 6 out of 27 elections.

In that same span of time, eleven Republicans, in thirteen elections, won at least 50% of the popular vote, with Eisenhower and Reagan doing it twice. McKinley, Teddy Roosevelt, Taft, Harding, Coolidge, Hoover, Nixon, Bush Sr. and Bush Jr. each did it once.

In the other eight elections, the winner won with less than 50% of the popular vote. Of those eight elections, Democrats won the presidency with a plurality in six of them. In 2000, Al Gore won a plurality of the popular vote but lost in the electoral college. The only Republican to win an election with a plurality-but-not-majority of the popular vote was Richard Nixon in 1968.

Democrats have consistently been unable to convert peace and prosperity into popularity. The only way for a Democrat to win a majority of the popular vote is with some sort of national trauma. FDR had the Great Depression and WWII. LBJ won the sympathy vote from JFK's assasination, and Jimmy Carter was elected because of public disgust with Watergate. When Bill Clinton was president through the peace and prosperity of the mid-90s, he got 49.2% of the popular vote in 1996. The economy boomed in the late 90s, the peace continued, and his vice president got 48.4% of the popular vote in 2000.

Richard Nixon was the first president ever to voluntarily resign when it became obvious that he was going to be impeached, convicted, and removed from office. Gerald Ford -- the only man ever to hold the Presidency without standing for an election first -- earned the wrath of a nation by giving Nixon a full presidential pardon. Jimmy Carter leveraged that wrath into 50.1% of the vote in 1976, but only managed to get 41% in 1980.

LBJ got a huge sympathy vote in 1964 (with 61.1%, the highest percent of the popular vote of any presidential candidate in the 20th century), but by 1968, was forced to make his famous declaration that, "if nominated, I will not run, and if elected, I will not serve".

If you define success for a politician as reliably getting a majority of the national popular vote, then the only successful Democratic politician since the beginning of the 20th century is FDR. He won a majority of the popular vote in all four elections in which he ran, and his vice president went on to be reelected after his death (though with only 49.6% of the popular vote).

In 1948, 'Dixiecrats' ran Strom Thurmond as their candidate, and he received about 2.6% of the vote. Truman received 49.6% of the vote, so it can be said that Democrats received a majority in that election -- but no single Democrat managed to.

The Democratic party has become used to two things: They are used to scratching out a win with less than 50% of the popular vote, and they are used to (unconciously?) exploiting national tragedies for political benefit. This latter fact is the reason that every scandal is Watergate, every factory closure is the Great Depression, and every organization is The Secret Cabal that Killed Kennedy.

What did FDR do that no other Democrat has done? Was he elected on his own merits, or was he elected because the Great Depression and WWII? Why did people re-elect him three times with a clear majority of the popular vote, when no other Democrat got re-elected with a majority even once in that 106-year span?

One possibility is the simple fact that he brought actual ideas to the table. From WPA to SSDI to AFDC, Roosevelt actually gave people something to vote for.

On the other hand, Bill Clinton brought ideas as well (remember HillaryCare? Gays openly in the military? Middle class tax cut? Cancelling China's MFN status? Assault weapons ban?), and those ideas either didn't pass or helped feed the Republican takeover of Congress in 1994.

Al Gore was big on environmentalism, and unsuccessful in 2000.

Ideas propelled the Republicans to success in 1994 -- the Contract with America was a briliant move that converted 460+ local races into one big national race.

In 2004, Kerry had no big ideas, and his little ones tended towards the absurd. The biggest issue of the election was the war in Iraq, and in his speech accepting the nomination as the Democrats' candidate, the only coherent ideas he had about Iraq were to (a) somehow get other countries to shoulder our burden there, (b) buy more weapons and body armor for the troops, and (c) not build so many firehouses there.

So, lately, the Democrats have no big ideas, and when they do have them, they get rejected by the public. They've limped along for a century now, riding the occasional national tragedy and Republican spoiler to victory. Only once in the past century have they managed to produce a candidate that a majority of the population actualy likes and wants to vote for.

So what to do? I don't know. Getting rid of the 60s relics who run the party might be a good start. Unbonding from powerful interests like government employees, union bosses, and trial lawyers might be another, though the short-term cost in money and influence might not be worth it.

Democrats are still coasting on FDR's legacy -- but the youngest person who ever voted for him (18 years old in 1944) is today 80 years old. The youngest person who has any memory of the JFK assassination (5 in 1963) is almost 50 years old.

I'm not offering specific policy suggestions for the Democrats here. I'm just pointing out a cold, hard fact: Absent national trauma, Democrats cannot win majorities in presidential elections.
Democrats have been in denial about this fact for a century, and will continue to be the also-ran
party that bounces from trauma to trauma until they realize this fact and start offering something to vote for.

A better 'loser-pays'?

2005-06-11T09:34:00.000-06:00

One legal reform that's been kicked around for a long time in the United States is 'loser pays', a system where the loser of a civil action would be required to reimburse the winner for legal expenses sustained during the trial. This system is in place in most countries throughout the world, but not in the US. In extreme cases of frivolous suits, the defendant's legal costs can be awarded as damages, but in practice this almost never happens.

The standard argument in favor of 'loser pays' goes something like this: Lawsuits are expensive. Even for an individual, successfully defending against one can cost thousands of dollars. For a corporation, those prices can go far higher. A good strategy to extract cash from a business (or an individual) is to threaten to sue for some barely-plausible reason, and then offer to settle for less than the cost of a lawsuit. While a lot of people and businesses won't accept such extortion on principle, many will. A loser-pays system that required the loser of a lawsuit to compensate the winner would remove most of the financial incentive to settle early, and thus reduce or eliminate this extortion.

However, loser-pays has potential problems, too. The standard argument against it goes something like this: The courts are (or at least, are supposed to be) the great equalizer in America. If Globex Megacorp commits a wrong against me, I can bring Globex to court and have the situation made right. If loser-pays were implemented, then Globex could discourage lawsuits by threatening to run up enormous legal bills during one. A few corporate attorneys, working for a few hundred dollars per hour each, will rapidly result in a potential liability to the plaintiff that is far beyond the ability of a typical plaintiff to pay. I might be willing to accept the $1000 tort rather than take even a tiny risk of having to pay them tens or hundreds of thousands of dollars in legal fees. This would allow large corporations to commit anything other than the clearest, bright-line torts with impunity.

These are both good arguments, and I think that given the choice, most Americans would rather hose the big, evil corporations than the 'little guy', and that's the direction that our justice system has gone.

However, there is another way. What if we could eliminate the incentive to settle early, while at the same time enabling small plaintiffs to file suits against large defendants without having to worry that a loss would mean bankrupcy? I believe that we can.

Rather than implementing a pure loser-pays, I propose this rule: During the lawsuit, before the verdict, both parties will report their costs to the court. When the winner is announced, the loser will pay the winner the lower of the two reported values.

This neatly solves the problems with both the current system and a standard loser-pays arrangement. Frivolous lawsuits become more expensive to file, but you can safely pursue a suit against a much larger opponent without fear of a catastrophic loss.

There are lots of areas that need to be fleshed out for this proposal to work. For example, how and when would the costs be reported? At every major stage of the suit? Every Friday? Every day? How would costs for things like corporate salaried lawyers be figured? Would there be limits to how much an attorney could charge? A minimum floor for costs, might prevent itemizations that look like this:

$10 Cut-and-paste defendant's name into my standard ADA complaint suit
$5 Send paralegal down to courthouse to file suit

How would a private party, filing or defending a pro-se suit, be compensated? Would there be a standard hourly fee for non-attorney work like that?

Would the reported costs be secret? If each party could see the other's reported costs every week, it might allow them to learn information that might better be kept secret. On the other hand, it might be useful to know how much you can spend and get compensated for it if / when you win.

Would the costs be reported, or bonded? What if each party had to post cash every week along with reporting their costs? This would help keep costs down, and ensure that the final payment was made.

This proposal also has the useful side effect of discouraging expensive lawsuits -- whoever spends more on the suit winds up spending that last bit out of his own pocket, leading to each party trying to keep their expenses below the other's.

While there are lots of things to work out with this proposal, I believe that as a starting point, it could lead to positive reform in the legal system.

'Free' Wi-Fi for all!

2005-03-05T11:29:00.000-07:00

Lately, the issue of whether or not the FCC can forbid municipalities from offering 'free' Wi-Fi to their residents has been heating up. Philadelphia has been on the forefront, with plans to create a city-wide wireless network that everyone can access.

I'm going to expand on a post I made on Slashdot: These proposals are like "free fishing lures". Imagine that a city government decided to start up a program giving free fishing lures to any interested citizen. After all, the old saying says that to end poverty, you teach a man to fish, right?

The vast majority of Americans don't fish on a regular basis. This is not due to inability to afford it, but a simple lack of interest. However, there is a small group of Americans who do fish, and they can be quite enthusiastic about it. These people already know exactly what they want in the way of fishing lures, and probably already have it. If they don't have it, it's doubtful that the People's Ministry of Fishing Lures would be able to provide it.

Not only that, but a fishing lure is useless if you don't have a fishing pole, and the knowledge of how to fish. A 'free fishing lures' program wouldn't provide either of these things -- at best, it would provide a marginal benefit to people who are already interested in fishing, at the expense of everyone else who isn't. (Ironically enough, many of whom would be poorer than the fishing lure beneficiaries...)

Responding to IraqNow

2005-03-02T17:50:00.001-07:00

Jason over at IraqNow makes a thoughtful response to my call to abolish the Roth IRA, pointing out a few things I didn't think of and giving a few other comments.

I think I can accurately summarize his criticisms thus:

It's very hard to get the same growth (g) in a non-tax-deferred account as you can get in a tax-deferred account.
There are some very important differences between retirement accounts in how they are treated at death. I am unmarried and childless, so estate-planning concerns didn't occur to me. While I only considered "withdrawable balance" to mean "How much cash can I turn it into?", there should also be a consideration of "how much would my spouse/kids get if I kicked off tomorrow?"
You can rebalance a tax-deferred account much more easily.

His first point is very valid. I had a comment about it in an earlier draft of the posts, but it slipped out. All that's left of it is a quick gloss about how Neal should keep his money in a growing non-dividend paying stock. Capital gains and dividends, which make up the bulk of non-growth income in an investment account, are currently taxed at 15%.

This means that if your IRA is growing at x%, then your non-deferred account will grow at somewhere between (x * .85%) and x%, depending on what percentage of your growth is taxable. If your growth doesn't fall into these categories, your growth can be as low as x * 65% if you are in the 35% tax bracket.

Jason mentions that the S&P 500 issues a dividend of around 1.87%. If you put $1000 into a S&P fund, you'll get $18.70 in dividends, which will mean that you will owe an additional $2.81 in federal taxes, reducing your growth by almost 0.3%. Compound that over 30 years, and your non-deferred account will have about 9% less money in it than your Roth IRA does. However, if you're not yet 59.5 years old, that slightly smaller balance can be withdrawn at a far lower tax rate than the Roth IRA can be. As I said initially, the Roth IRA will (assuming identical growth and g > 1) always have a higher withdrawable balance after age 59.5 than before.

However, there are lots of other problems with the Roth IRA:

They create an entire class of people who consciously don't care what happens to tax rates, and (I believe) subconsciously want them to rise.
They result in significantly smaller initial investments in the economy when people decide to save for retirement.
They take away the government's ability to Borrow a Trillion Dollars. While I'm mostly libertarian, I'm all for the US using its collective "riskless" credit rating to earn tens of billions of dollars per year.
Unless tax rates change, they will still always have the same withdrawable balance as a traditional IRA / 401(k) at retirement (but maybe not death)
Their ability to make investment choices without considerations of tax consequences is also available in traditional IRAs / 401(k)s.

The post that gave my blog its name...

2005-02-25T18:45:00.000-07:00

(Part 5 of 5)

I’ve got a great idea. The government can borrow money really cheaply, right? It can issue bonds backed by the “full faith and credit of the US Government”. Rating agencies classify its bonds as “riskless”. The 14th amendment even makes it unconstitutional to question the validity of the public debt of the United States.

So, I propose that the government issue a bunch of bonds, about a trillion dollars or so, and dump that money into the stock market. There is a good spread between the yield on government bonds and the return of the stock market. This spread has historically been around 5%. This spread would result in a nice income of around $50 billion per year to the government. We couldn’t lose.

OK, so it might not be the best idea. The stock market might collapse, leaving the government owing its creditors a trillion dollars and not having the assets that were supposed to back that loan. Further, governments directly owning stocks – and thus businesses – is a bad idea; just ask the people who lived in the Soviet Union.

So, maybe it’s a bad idea for the government to borrow a trillion dollars and put it into the stock market. Too bad that the government has already done exactly that.

Look back at Ted up there, with his traditional IRA. By putting $1000 into it, he deferred $250 in taxes. That means that the government had to borrow an extra $250 that year. However, in return, the government got a claim on 25% of any profits that Ted makes in his IRA. If Ted waits until he’s 59.5 and then cashes out his IRA, then the government gets $250 * g. Across a hundred million taxpayers, g probably represents something pretty close to stock market growth. However, that $250 that the government borrowed had to be paid off at government-bond rates. By deferring $250 in taxes, the government got to borrow money at government-bond rates and invest it at stock-market-return rates.

As of 2005, IRAs, 401(k)s, and similar tax-deferred plans have about $5 trillion in them. That represents about $1.25 trillion in assets that the government has a claim on when they’re cashed out. If that $1.25 trillion is growing at 5% faster than the bonds that the government had to issue when the taxes were deferred, that represents $62.5 billion of appreciation every year. Even if Ted does manage to drop into the 15% tax bracket a few decades later, the spread will more than make up for the difference.

The government has managed to successfully borrow over a trillion dollars and invest it in over a hundred million little mutual funds, each of them managed by an ordinary citizen of the United States. Those citizens invest that money as if it was their own, and the government gets to keep the stock market rates-of-return that are generated, but without the bread lines, gulags, Great-Leaps-Forward, and similar things that usually happen when the government gets too directly involved in the economy.

Not only is it growing, it’s a cushion that the government has if it ever needs to collect some extra tax revenue. If it wanted to, the government could simply declare that all IRAs and 401(k)s are being converted into Roth IRAs, and that all of these rollovers will be taxed at 25%. This would result in a one-time windfall of about $1.25 trillion in revenue, though the effects on the stock market would be…interesting. Because most people know that they’ll wind up paying taxes on their withdrawals in the end anyway, an announcement like this would probably only result in a minor outcry. Drop the tax percentage to 20% and you would probably make people happy, and still pull in a trillion extra dollars. In early 2005, George W. Bush proposed a 2.5 trillion dollar budget. It would appear that the federal government is following the 6-months-of-savings rule that any financial advisor will tell you is a good idea.

So, what public-policy implications does all of this have? The government is investing in over a hundred million little mutual funds, each managed by an ordinary citizen of the United States. Some people will handle their money well, others poorly. To maximize the spread, we should try to get as much tax-deferred money into the accounts of people who are good at growing their own money, and discourage less-capable stock-pickers from having IRAs.

One possible way to do that is to increase your ceiling on 401(k) and IRA contribution limits by a factor that is related to the amount of capital gains you had that year. This would have the effect that people with lots of capital gains would accumulate larger IRAs. To the extent that past performance predicts future results, the return in IRAs would slowly creep up as the good investors were allowed to have larger balances. Growing the spread by .5% would earn the government an additional $6 billion per year.

If the IRA contribution limit were raised from $3000 to ($3000 + net capital gains), then that would result in people who had capital gains putting more money into their IRAs. Right now, capital gains are taxed at 15%, so every $1000 in capital gains I earn would results in me owing $150 in taxes. If I could turn around and put $1000 into my IRA and deduct it from my normal inncome, I would be able to defer $250 in regular income taxes. The government would actually have a net tax loss (this year) of $100, but would in return have $250 growing at stock market rates.

This looks suspiciously like a subsidy to the wealthy, so getting it through Congress might be challenging. The editorials pretty much write themselves: “The government is actually PAYING the wealthy to have capital gains! When the rich earn money on their stocks, not only do they not pay the taxes due on them, they get 10% of the gain back from the taxpayers!”

Another thing to do is to make sure that people who are already in a high tax bracket don’t contribute to IRAs. Deferring 35% taxes now in return for 15% taxes later requires decades of a healthy spread (almost 18 years at 5% just to break even) before it’s a good idea. This is already done with phase-out limits on IRAs, though the rationale (at least publicly) is more along the lines of “keep the rich from having too many tax breaks”. Combining this with the previous suggestion of allowing capital-gains-earners to put more money in their IRAs might also be challenging.

Finally, I believe that we should eliminate the Roth IRA. It's almost never the best choice for taxpayers. It sucks money out of the economy, and it deprives the government of future revenue, with no corresponding benefit to taxpayers or anyone else.

Roth IRAs are bad public policy

2005-02-25T18:39:00.000-07:00

(Part 4 of 5)

So, having established that there is no significant benefit to having a Roth IRA for an individual, is there any public-policy benefit to them?

They look tax-free, which might encourage people to save more than they might otherwise, and that’s usually good.

On the other hand, the taxes in a Roth IRA have been paid up-front, and if the owner holds the account until retirement, no further taxes will be paid on the balance. This has the effect of creating a large group of people who don’t care what happens to tax rates. This is not a good recipe for sound fiscal policy. Not only that, but I fear that because Roth IRAs are only the right thing to do when tax rates go up, people who have them will subconciously want that to happen.

A final, even more important note: Let’s consider Ted, Neal, and Ralph again.

Ted gets his $1000 and puts it into his Traditional IRA. There’s now an additional $1000 out in the economy, funding businesses, being loaned to homeowners, or doing whatever else savings do. Meanwhile, Ralph and Neal each give $250 to the government and put $750 into their accounts. There’s now only $750 out working in the economy while the government spends $250 on [pick your favorite government-sponsored boondoggle]. Multiply this by over a hundred million taxpayers, and this leads to slower economic growth. Roth IRAs first appeared in the late nineties, right before the economic slowdown of the early 21st century.

There is only one significant advantage to Roth IRAs...

2005-02-25T06:50:00.000-07:00

(Part 3 of 5)

...and that is the ability to take the principal out early without penalty. If you want to cash out the entire thing, you are better off with a traditional or non-deferred account. However, if you only take part of the cash, the principal, a Roth is the best choice.

Consider Ted, Neal, and Ralph again. Imagine that they each make their $1000 contributions, so that T=1000, N=R=750. After a while, the amount in their accounts has doubled, and they decide they want $750 in their hands.

Ralph has $1500, removes $750, and still has $750 there. This is not a taxable event for him.

Ted has $2000. To have $750 in cash, he actually needs to withdraw ($750 / 65%), or $1154, leaving $846 in his account.

Neal has $1500. Half of whatever he withdraws will be capital-gains profit, taxed at 15%. To get $750 in hand, he has to cash out $375 in principal and $375 * 1.15 to cover the capital gains -- a total withdrawal of $806, leaving $694 in his account.

Assume that the remainder for each man doubles before they hit 59.5 years old. Ted will have a total balance of $1683, or a withdrawable balance of $1262. Ralph will have a balance of $1500, all withdrawable tax-free. Neal will have a balance of $1388, or a withdrawable balance of $1236.

Again:

Ted: $1262
Ralph: $1500
Neal: $1236

This assumes contribution, g = 2, withdrawal, and g = 2 again. If the two g-values are different, it can lead to wildly varying results.

In the situation where part of the money will be withdrawn early, a Roth IRA can be the best choice.

For an individual, a tax-deferred account is at best only slightly better than non-deferred account, and a Roth IRA is almost never the best choice.

2005-02-24T23:48:00.000-07:00

(Part 2 of 5)

In the United States today, there are three basic ways to save money.

Let’s imagine three people, call them Ted, Ralph, and Neal. Each of them has a $1000 bonus coming from his boss and decides to save it for retirement. Ted puts his $1000 into a traditional IRA, Ralph puts his into a Roth IRA, and Neal puts his in a non-tax-deferred brokerage account. To make this a bit simpler, I’m going to ignore state taxes, and assume that all three of them are in the 25% tax bracket. There is one more important rule:

Money placed into any of the three types of accounts will grow at the same rate; $1 placed into any of the three accounts will, after a certain amount of time, have grown to exactly the same amount (before any taxes and withdrawal penalties).

I will call this growth factor ‘g’. For example, if the underlying investments return 10% anually, then after one year, g=1.1, and after ten years, g=2.59.

Tax rates are unstable. Every few years, they move up or down a bit. Nobody knows what personal income taxes will be like 10, 20, or 50 years from now. For this analysis, I’m going to assume that they will be the same when our three guys hit age 59.5 as they are now.

Let’s start with Ted, who puts his money into a Traditional IRA (I’m going to ignore 401(k) accounts for the rest of this article. For tax purposes, they are almost identical to traditional IRAs.) If we imagine that his boss can put the money straight into his IRA, we can ignore the withholding and later tax refund, which cancel out. Over time, the balance printed on his monthly account statement is $1000 * g. However, if he wants to access his money after retirement, he has to pay 25% taxes on it, so the final withdrawable balance at retirement will be $1000 * g * 75%. If Ted withdraws the money early, there will be an additional 10% penalty, and the withdrawable balance will be $1000 * g * 65%.

Let’s move on to Ralph. He decides to put his money into a Roth IRA. Because Roth IRAs are funded with post-tax dollars, Ralph’s extra $1000 in income results in him having an extra $250 in tax liabilities, giving him only $750. At first glance, he seems to be at a severe disadvantage to Ted, because the balance printed on Ralph’s account statement is $750 * g. However, Ralph can access his original $750 tax-free. If he decides to access the entire account, the amount above $750 is considered taxable income. Further, if he accesses it in the first five years, there’s an additional 10% penalty. However, at retirement, the entire balance of the account will be withdrawable completely tax-free. Unfortunately, the various penalties make the formulas more complicated, but, Ralph’s withdrawable balance looks something like this:

Profit = 750 * (g – 1)
Withdrawable balance in the first five years = 750 + (Profit * 65%)
Withdrawable balance after five years = 750 + (Profit * 75%)
Withdrawable balance at retirement = 750 * g

The interesting thing to note is that Ralph’s withdrawable balance at retirement, (750 * g) is exactly equal to Ted’s, which is $1000 * g * 75%. At retirement, if Fred’s tax bracket at withdrawal is equal to Ralph’s tax bracket was when they received the $1000, then the actual value of their accounts will always be identical. The only difference between a Roth IRA and a traditional IRA is that the taxes are levied at the front instead of at the back. With no change in tax rates, the actual realizable value from the two accounts is identical.

Meanwhile, what happened to Neal? He doesn’t trust fancy accounting shenanigans, so he just puts his money into a non-tax-deferred account. Like Ralph, he can only fund his account with $750. Also like Ralph, the original $750 can be taken out tax-free. However, Neal has some important differences when compared to Ted and Ralph. There will never be any special penalties on Neal’s withdrawals. Nothing special happens to the true value of his account at retirement. Finally, the big advantage: Gains in Neal’s account can be taxed at the much-lower capital-gains rates instead of as regular income. If Neal buys stock with his $750, then his gains won’t be taxable until he sells that stock. Further, as of 2005, capital gains from any stock held more than a year, as well as all dividends, are taxed at only 15%. Because of this, the best option for Neal is to buy a non-dividend-paying stock and hold it until he is ready to withdraw the full balance. If he is able to do that, his numbers look like this:

Profit = 750 * (g – 1)
Withdrawable balance in the first year: 750 + (profit * 75%)
Withdrawable balance after one year: 750 + (profit * 85%)

Neal also has one other advantage: If g is negative, meaning that the underlying investments have lost value, then Neal gets to take that loss as a tax deduction. Neither Ted nor Ralph get to take losses in his account as a deduction.

Maximum Withdrawable Balance, Profit = ($750 * (g-1))
	Ted (Traditional IRA)	Ralph(Roth IRA)	Neal (Non-Deferred)
After one year:	$1000 * g * 65%	750 + (Profit * 65%)	750 + (Profit * 85%)
After five years:	$1000 * g * 65%	750 + (Profit * 75%)	750 + (Profit * 85%)
After age 59.5:	$1000 * g * 75%	(750 * g) or 750 +(Profit * 100%)	750 + (Profit * 85%)

Again, this table assumes that tax rates will be stable, and that all three workers will stay in the same tax bracket, from deposit time to withdrawal time.

So, what does this table tell us? As noted above, once they hit age 59.5, Ted and Ralph have exactly the same withdrawable amount. However, I should note that Ralph and Neal have the advantage of being able to take the whole thing at once, whereas if Ted tries to take too much at once, it might push him into a higher tax bracket.

The next thing to notice is that Neal’s withdrawable balance is always higher than Ralph’s up until retirement, and always lower afterwards.

To recap: Before retirement, a non-tax-deferred account is better than a Roth IRA, and after retirement, there is no benefit to a Roth IRA over a Traditional IRA. The only time that a Roth IRA is better than the others is if tax law changes, and the withdrawals from the other accounts become more expensive. Assuming static tax rates, there is no situation where a Roth IRA will have the highest actual value of the three account types.

Finally, if g is high enough, Ted will have more money than Neal, even if they withdraw their money before retirement. With 25% tax rates, the crossover point comes at g=9, which will happen after 25 years at an 8% growth rate. If both Ted and Neal invest in an investment that will be worth 10x what it was before, then Ted’s higher starting position will cancel out his higher taxes, even before retirement. However, the difference between the accounts is very small. If (before retirement) g = 3, then Neal’s withdrawable balance will be less than 4% higher than Ted’s. On the other hand, if g=20, then Ted’s withdrawable balance will be barely 1% higher than Neal’s.

So, assuming reasonable investment growth rates and static tax rates:

Before retirement, The withdrawable balance in a non-deferred account will be very close to the withdrawable balance in a traditional IRA; N ~= T

Before retirement, the withdrawable balance in a Roth IRA will always be lower than the withdrawable balance in a non-deferred account; R < T

At retirement, the withdrawable balance in a traditional IRA and a Roth IRA will be identical; T = R

At retirement, the withdrawable balance in a Roth IRA will always be higher than the withdrawable balance in a non-deferred account. R > N

Or, again assuming static tax rates and reasonable growth:

Before retirement, R < T and T ~= N
After retirement, N < R and R = T

Unless tax rates go up in the future, a Roth IRA is almost never the best choice. There is one very important exception, which I'll discuss in my next post.

The way we evaluate tax-deferred accounts in fundamentally flawed

2005-02-24T23:38:00.000-07:00

(Part 1 of 5)

When using Microsoft Money to tally my net worth, it adds up my asset accounts, subtracts my credit accounts, and gives me a total. This is an unrealistic way to figure the value of any non-liquid asset; my house might be worth $120,000, but (even without a mortgage) I could not easily convert it to $120,000 sitting in my checking account.

Tax-deferred accounts, even if they’re filled with nothing but cash, are similarly non-liquid. While I can cash out an IRA or 401(k) on a few days’ notice if I really want to, doing so is very expensive. The bank who holds it is required to withhold 20% of any withdrawals. If I’ve got a balance of $1000, the largest (unrestricted) check they can give me is $800. Since I’m a middle-class 25%-rate taxpayer, I will incur an additional $50 liability to the federal government and $78 to my state (Idaho) government. Since I’m not yet 59.5 years old, there will also be a $100 early-withdrawal penalty. That means that while the balance printed on my IRA statement is $1000, I can really only convert it to $572 in spendable cash.

I’m not planning to access the money immediately. However, when I do access it, I hope to be earning enough income that I’m still at least in the 15% tax bracket. As of 2005, that means having less than $29,050 in taxable income. Even if I have stay below that (inflation-adjusted) boundary during retirement, I’ll still have to pay at least 22.8% of any withdrawals to one layer or another of government.

The true value of an IRA, 401(k), or similar tax-deferred account is the amount of cash that can be extracted from it. For an Idahoan like myself, that is somewhere between 57.2% and 77.2% of the balance printed on the monthly statement. Unless you’re planning to be significantly poorer in retirement than you are during your working years, it’s not really fair to say that you get to “keep” your money by putting it in an IRA. At best, you get to hold onto it for a little longer before giving it to the government.

Going back to my $1000 above, if my IRA doesn’t grow, and I am in the 25% tax bracket at retirement, then putting money into my IRA means that I trade $672 now for $672 later. The benefits of retirement accounts only appear when the money in them grows, or tax brackets change. Even then, those benefits are not as big as they might seem.

First Post!

2005-02-24T23:20:00.000-07:00

Welcome to my blog. This blog focuses on economics, politics, and personal finance, plus whatever else strikes my fancy.