Who's losing jobs?

Interesting data on who lost the most jobs during the recession. Another good reason to get a college degree.

Someone mentioned in a church talk a couple years back that recessions happen every 8 years or so. The linked report confirms that's mostly true. That means we should expect another recession to start in the 2016-2018 timeframe, and another in 2024-2026.

We also know that people who graduate during a recession typically stay at lower salaries than those who graduate during a normal growth period, even many years on into their careers.

That means if your kids are scheduled to graduate during a recession, they should definitely consider an advanced degree, which will improve their earning potential, and keep them from starting into the workforce at a depressed salary.

Hopefully someone will figure out how to break that cycle.

Healthcare Costs

I never paid much attention to my medical plan at work, until a few weeks ago when people started complaining about healthcare premiums being higher in AL. I hadn't noticed.

So when my benefits-selection stuff showed up, I decided to do a little research on the plan I had selected.

Check this out:

Year	My healthplan cost as a percentage of my salary (gross)
2001	1.4%
2002	1.5%
2003	1.7%
2004	1.9%
2005	2.2%
2006	3.0%
2007	3.1%
2008	3.5%
2008 (move to AL)	3.9%
2009	3.9% (good raise)
2010	4.2% (also good raise, but not good enough!)

Can you believe how fast this is climbing? And this is adjusted for my salary!

Surely there are better alternatives, especially for people like us who aren't getting as much as we're paying.

One idea is to just save the many thousands of dollars we're putting into health-plan premiums, pay cash for whatever services we need, and if someone needs a major operation, get it done in New Delhi or Costa Rica.

I have no confidence that Congress will come up with a healthcare plan that works on purpose. But they might get lucky...

What I learned by reading Alan Greenspan's book

Reading Alan Greenspan's book, The Age of Turbulence, has been a fascinating experience for me. I always struggled to understand how the world's economy works, and I think (perhaps dangerously?) that I mostly get it now.

So here are the questions I wish my kids would ask me someday about it, and the responses I think I'd like to give. Not sure how much is directly attributable to AG (some of it's probably Warren Buffet too), but I won't take personal credit for any of it that's right.

So how does the economy work, anyway?

Simply, the world is full of people making things other people want.

You (or someone you love =) makes or does something for someone else, and they trade you for something you want -- usually money.

Another way to think of it is "adding value". If you buy parts for $10, put them together and sell the product for $100, you created $90-worth of value. People make money and provide for their families by adding value. That's how places like Hong Kong and Singapore and Japan, with very few natural resources, manage to be such wealthy places -- they've figured out how to add lots of value to "stuff".

We're constantly consuming that value too, e.g. making a $3 burger disappear, putting miles and years on our cars that decrease the value, etc. So if we just stopped working, we'd quickly consume the value we've stored in the fridge, bank accounts, gas in the car, etc. -- and that's when the pain starts.

But as we figure out how to create value faster, our standard of living improves.

How come the US is so much better off than places like Africa and South America?

We in the US are incredibly more productive than they were a few hundred years ago. Why? Division of labor is one reason. If you have enough people around, each person can do one thing and get really good at it, and therefore be really efficient.

Education is another. It helps us figure out how to waste less time and make stuff better, faster, and cheaper.

Time is yet another -- it takes awhile to figure out how to build really good cordless drills, but now that we've got it worked out, lots of people can have one and use them to create value faster than we could before. We as a society invested the time, and now are reaping the benefits.

Here's an example. Suppose I could build 50,000 incredibly awesome dishwashers a day for $10 apiece, everyone would certainly be impressed at my efficiency =) -- and pretty soon everyone would have an incredibly awesome dishwasher, and their lives would (arguably) be better for it. Although an extreme example, that's a big part of what's going on. We build lots of great stuff faster and cheaper than other places, and have been doing it for awhile now.

... But China makes lots of things cheaply, how come they're still so poor?

They're doing better now, actually, but they still have problems. One, even though they produce *tons* of stuff, in many cases they're not adding as much value as their US counterparts. I'm sure iPods are made up of 5-cents worth of raw material (silicon, lithium, carbon, etc.), which (mostly) Chinese companies turn into a $15 unit (that's a guess) that Apple sells for $149. Apple's adding the lion's share of the value with their engineering, design, marketing, distribution channels, etc.

AG talks about another problem that other countries have: limited (or absent) property rights. If every time I get something it gets taken away from me (stolen by thieves, confiscated/taxed by the gov't), I'm going to start putting my energy into protecting or hiding my stuff instead of building whatever it is I'm good at building. So I go down to only a hundred $10 dishwashers a day and spend the rest of my time putting bars on my windows and a wall around my house. Then we might as well be in South America. And a lot fewer people will have incredibly awesome dishwashers.

Why can't the government just pay for everything?

It could.

China and Russia are great examples of the government trying to do and pay for everything. Have you heard about hordes of people wanting to emigrate there? Me neither, those places are mostly economic wrecks. Yet how funny is it that the Obama administration's policies look a lot more like socialism/communism than what brought us to where we are today.

AG talks about "economic populism", which is what South American presidents tend to end up with -- promising to spend government money to do all kinds of things for the people that the government can't afford to do. It gets them elected, but isn't a sustainable way to run a government.

For example, just because you promise free national healthcare doesn't mean that a bunch of doctors, nurses, and pharmacists will start working for free -- someone has to pay them to do all that work. In other words, somebody somewhere has to be producing the "value" that will be given/paid to those doctors and nurses -- and if it's not the employers of productive employees, who will it be? Likely you and me. And if you get sick more often than most, you probably like the sound of that. If not, though, you'll be paying for other people's doctor bills. Simple as that.

Remember, it's *our* money the government is spending! And although I'm fine with them building roads, maintaining the military, running the courts and police, etc., I'm not thrilled about government giving money to abortion clinics, paying for everyone's health care, sponsoring people's unemployment, subsidizing farming, etc.

So why not let American businesses foot the bill for the national healthcare system?

Consider how much of the value created in this country comes from American businesses. A lot! Jobs too. But our businesses are competing with those from China, Singapore, Japan, etc. Pushing the healthcare burden onto our businesses slows them down and drives up their prices. My $10 dishwasher will have to get a bit more expensive if I have to pay ten thousand dollars a year in healthcare for each of my employees -- and that makes it easier for a Chinese company to come in and undercut me. And if they do and drive me out of business, I'm out of a job, and not only do we lose my business' contributions to the national healthcare system, we also have a few more unemployed people to support.

American business is the engine that drives our country forward and creates value -- let's streamline it, not burden it down!

...

This next one's a little different from the other questions, but I'm not sure where else to put it:

If we get a lot of our oil from the Saudis, why don't they jack up the prices? It seems like they've got us stuck, a rich country with an oil addiction seems like a perfect target for price gouging.

I never understood this, I just always assumed they would be happy if the prices were to skyrocket and stay as high as possible.

But as with every balancing act, AG points out that as prices go up, people start figuring out how to get their energy elsewhere, or how to go without. And if pressed, we could come up with some cool stuff that would permanently lower our consumption rates. With Venezuela and Russia also churning out oil, a drop in consumption would upset the balance and put a glut of oil on the market and force prices to instead go far lower. (If everybody in the country already had one of my incredibly awesome dishwashers, how much do you think I could sell one for?) According to AG, that scenario happened in the 70's and the rate of "growth in consumption" "never fully recovered even as prices fell".

If that's the Saudis primary source of income, you can see why they don't want to mess too much with it.

Interesting.

---

Just a reminder, none of this is really mine (except for the wrong stuff) -- credit goes to AG (and to a lesser extent Warren Buffet). Still, if you made it this far, I hope that means you found something interesting or useful. =)

My economic recovery platform

Today I had an epiphany on how either of the presidential candidates could pull the US out of this economic freeze we're in. Ready?

Gather and store

It starts by recommending that American individuals and families begin gathering and storing food and other household items.*

Why do I think that would that work?

• Gets people buying. Economies are made simply of people producing things that other people want, getting paid, and then buying things that others have made. Initiating a nationwide program like this gets lots of people buying food and other goods, much of which is produced here in the US, therefore encouraging movement of money around in the US again.
• It's stuff they need anyway. Encourage people to only buy things that they need, things they're going to need eventually anyway. It's insurance against future shortages, especially in times of plenty.
• Leverage the fear. Economies spiral downward because people who are scared stop buying stuff and start holding onto their money. However, if fear can prompt people to buy goods, especially ones they will soon need anyway, we should use it to improve the economy, instead of letting their fear drag it down.
• Real value. If the economy were to really go sour (which I doubt it will), people will be very glad for the things they had bought.
• Real bargain. As people start to hold on to their money more, inventories will go up in the short-term, which will cause prices to drop. That's the time we should encourage people to buy, when prices are somewhat lowered. If not, the factories will begin to lower production rates and we'll end up with fewer (and pricier) goods, and fewer jobs.**

Note I said "begin" up there, if we induce panic there'll be a run on the stores and it'll just make a mess. It has to have a gentle kickoff, then persistent, steady pressure to continue.

Don't forget to vote tomorrow. We'd hate to find out that the goose that lays golden eggs just tastes like chicken.

---

* Just like a years supply.

** I'm not an economist, but I play one in my office sometimes.

Zimbabwe's inflation

You've probably heard about this, but check out Zimbabwe's inflation rate. Ever seen a $100,000,000,000 bill before?

If that ever happens here, my advice is to avoid cash money like the plague... It will quickly become worthless in your hands, like gold that turns into dirt overnight. If someone pays you in cash, go buy some canned food (or toilet paper or socks, etc.) with it *right then and there*.

The picture of the guy carrying two armfuls of money to pay for dinner is just crazy.

"The Age of Turbulence"

At the recommendation of a good friend, Daniel Rovey, I'm reading The Age of Turbulence by Alan Greenspan.

I still have a lot more to read, but a few things have already started sink in. The first is that this truly is an age of "turbulence". Other things:

We've already tried that...

Hearing a lot of talk about regulating financial companies these days? Though I wasn't around, supposedly in the early 70's the country was facing double-digit inflation and high unemployment, which was supposedly a new phenomenon (which they labeled "stagflation").

Everyone (including President Ford) came to the conclusion that overregulation was *causing* the problems, and that the industries needed to be deregulated. They were, and it worked. The economy started growing again.

(It would've continued, except it was an election year, and the pundits and press claimed the steady growth had stalled [which it hadn't, according to Greenspan] and somehow blamed it on Ford, who then lost the election.)

Bottom line: We were already "regulated", and it caused bigger problems than we have now.

Stunning to me how often through history we have cycled from one extreme to the other on policy (corporate regulation, foreign interventions, farm policy, etc.), when reason simply encourages us to stay carefully in the "middle".

If businesses aren't failing, it's not capitalism

Mr. Greenspan brings up several times the concept of "creative destruction" -- that the strength and beauty of capitalism is that only the creative and successful succeed in business, and they're the ones who do things better and more efficiently than the other guys. Those who can't keep up or adapt are forced out, and their resources are redistributed so others can have a chance.

That process results in better products coming to us cheaper, and innovation being encouraged and rewarded.

If we bail out the losers with public tax-dollars, what are we rewarding then? Bloat and sloth.

Let them fail and open up the market so others can step in and do better.

Miracle-gro?

Economies are like plants, growing too fast is a recipe for disaster. Just like my bradford pear trees that were originally planted because they grow fast, economies that grow too fast don't have the stability needed to weather the storms.

As a rule of thumb, Greenspan seems to point to mid-to-high single digits as a sustainable rate of growth for an economy.

(Maybe a good level to shoot for on your personal investments too? As an aside, I sold my Apple stock at the beginning of June -- check it out today. My 401k isn't faring as well, I'm down 20% in just the last few months.)

Doing the right things right.

In life, it's not enough just to do the right things. You have to do the right things right.

If I get a flat tire, changing it is the right thing to do. However if I forget to tighten the lug nuts, my day's going to get a lot worse. I did the right thing, but I did it *wrong*.

We don't always know what the right things are, though, so we look at the outcomes. If the outcome is bad, we often assume that we did the wrong thing -- but all too often we have done the *right* thing, but we have done it *wrong*.

Buying a new house for most people is a "right" choice. Buying a house that costs more than a third of their gross income is doing it wrong.

We need to bailout, but we need to do it right.

We need to regulate, but we need to do it right.

We need to change some things in Washington, but we need to change them right.

I certainly don't know how to do these things right -- one of many reasons I'm not running for President -- but I hope the guy who does has some pretty good ideas. At this point, though, I'm not convinced that either of our candidates knows how to do any of this stuff right.

But I am pretty sure the solutions of one will be much farther from *dead wrong* than the other's.

700 Billion dollars?

A bedtime story

Once upon a time, the US economy starts to improve a little, and people decide to take their money and invest in real-estate, "which has always been a very solid investment".

House prices start to rise. Others say, "Hey, house prices are starting to rise nicely, looks like a good investment." They buy another house or two.

Average Joe sees his equity go up, and says, "Hey, sweet, I've got equity now -- I'm selling here and buying a bigger house." Joe cashes in some equity on that house and drops it into a new house.

Mortgage banks see housing prices rising and say, "Wow, that's a terrific investment -- let's loosen the reins a little on these mortgages and sell more."

"Sweet, look at all the money we're making!"

Stockholders in other companies complain -- "Hey, how come they're making huge gains and we're just sitting here? We need to get into that action!"

House prices rise faster and faster, and sanity in the lending practices starts flying out the window. Real-estate never goes down in value, remember?

In late 2007, someone realizes -- "Hey, we've been building and buying houses like crazy, but um... who's going to live in them all?"

Uh, oh. Uh oh. "Maybe we don't want our money in mortgage backed securities right now..."

Others -- "Oh oh, neither do we." ("Um, let's slide out the side door before anyone else notices...")

Everyone else -- Huh? Nobody wants them??! They're dropping in value! Panic! Lots of people can't sell now, and they can't afford all these houses we've lent them money to buy! That means we foreclose, but they're dropping in value fast! What are we going to do with them?! Our books are full of depreciating assets, and we don't have enough cash to cover them!

Crash.

Mess.

Bottom line? Every market is driven by "fear and greed" (thanks, Larry) -- greed drove up the prices, and fear is going to rip the bottom out from under us.

We as a nation inflated the values of all our homes, bought a bunch of them, then watched them all deflate in value. The money evaporated.*

So all these huge companies (Bear Sterns, Lehman Brothers, Merrill Lynch, etc.) that borrowed money to fund all this "action" are now gone.

Gone.

Serves 'em right?

"Let 'em crash, serves them right!"

We're agonizing over high CEO pay and golden parachutes, but these are pennies compared to the big picture here. According to Alan Greenspan (so I've heard anyway), at one point in his tenure we were only 4 years from eradicating the national debt. Huh? I thought the national debt was the number with so many digits that people tried to remember what came after "trillion", would be what finally crushed my grandchildren's dreams and drove the nation into poverty...

But no, money was coming fast into the federal government's coffers -- fast. Where was all the money coming from? Prosperous US businesses producing stuff, and all the taxes rolling in from that activity.

A rising tide raises all ships? That rising tide almost saved my grandkids from economic ruin. But if we let our biggest businesses die, the economic engines that supported and drove that kind of growth, our tide goes out -- way out. They are why our economy is the biggest and most stable in the world. If we let the tide go out, the big ships will end up wrecked on the rocks, but so will lots of others. ("Let 'em crash, serves them right...?") And wrecked ships don't magically float again when the tide comes back in.

We can complain about golden parachutes and try to bring the more buoyant ships down to the same level as ours, but who really cares if the water's receding and our own keels are already bouncing off the reefs?

So greed inflates value and "creates" capital; and fear destroys it. Anybody seeing any more fear? Yes -- the tide goes out faster.

What to do? "We need greed back! We need the real economic engines to keep running." Can it really be as simple as throwing in a bunch of money and rescuing those engines and giving the "greedy" cash to be greedy for?

$700 billion.

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* Well not exactly -- some, like me, happened to sell at a half-decent time and pull out a few tens of thousands of dollars in equity that since would have disappeared had I not grabbed it. Lucky move.

Why didn't anyone see this coming? Brandon Carpenter can attest that *I* saw it coming -- I complained in 2006 that this was "totally ridiculous", and that it was completely unsustainable, and that we were in for a huge mess. Yet nobody at the Fed. listened to me. =)

Hmm... I thought being right about that would have felt more satisfying than it does.

By the way, $700B is about $2300 for every man, woman, and child in America, and is almost what we've spent so far in the Iraq war ($845B).