Year-End Deductibles Create Inefficiency

Christmas crowds the consumer shopping calendar and thereby creates inefficiencies and inconveniences. Guess what other personal finance event does the same thing, on exactly the same schedule? The year-end medical deductible!

The large majority of US healthcare plans match the deductible to the calendar year. The results is a skew toward pushing off treatment, in order to maximize meeting the deductible. Likely the largest factor is when a patient knows they are a candidate for an expensive procedure whose timing is highly elective (e.g. joint replacement). 

This covers the both the clear need case (knee replacement), but where there is substantial flexibility to push it off for a few years. It also cover the case where the patient wants a medically-covered procedure, even if they don't absolutely need it (in my own case, drooping eyelid that slightly obscured field of vision, so that it was medically necessary, but also something I could live with indefinitely). 

The result is that a substantial number of major procedures get crowded into the year-end. This makes life difficult and inefficient for everybody:

1. Providers and staff work too much at end of year.
2. Facility capacity has to be geared toward peak (like how utilities have to have generating capacity for daytime peak, rather than average load).
3. Consumers schedule things based on deductible-satisfaction, not their calendar optimum.
4. Some people get crowded out--including those with an urgent medical need, not tied to deductible-timing.

Probably even magnified since if you conclude in August you are likely to hit your deductible, it is going to be Nov-Dec before you can have that expensive procedure--magnifying the crowding.

I think it has always been that way

Inconsistent benefits years sucks for married people, but there could be some kind of fix, li

Idea: longer deductibles, like maybe 3 years? 

Decreased Family Size & Social Class Concentration

From a purely statistical point of view, smaller family sizes decrease the likelihood of having close relatives who fall into more economically disadvantaged status. For instance, in a middle-class family of 6 siblings, it is not hard to imagine that 1 or 2 might, for various reasons, wind up experiencing substantially lower standards of living. This might tend to create empathy in more well-off layers of society, since they have close experience of those in a less-advantaged economic class.

In a family of 2 siblings, the statistics are greatly reduced. Then on top of that, there is the generational wealth factor. A comfortable family will be able to deploy more resources to help prevent or assist a child who might be in danger of slipping economically.

Inflation's Distorting Effects on Taxation of Interest

We've been in the era of 2% inflation so long that many of the distortions it causes have faded from memory. While reading up on iBonds, I remembered one of them: taxes are assessed against total returns, not real returns.

High-inflation example: 

• Inflation is 8%
• Your aggregate marginal tax rate is 32%
• You earn 10% interest (2 points above inflation)

So your after-tax yield is 6.8%--somewhat below inflation, so you are not even quite preserving your capital.

Low-inflation example:

• Inflation is 2%
• Same aggregate marginal tax rate of 32%
• You earn 4% (2 points above inflation)

Your after-tax yield 2.76%--somewhat above inflation.

Comments on Crypto

I'm a hardcore crypto skeptic, borderline hater. Regarding digital currencies, such as Bitcoin and Ethereum, I don't see what real problem they are solving--outside of enabling criminal activity in general, and ransomware spectacularly. 

My impression is that many of the proponents fall into 2 or 3 camps. One camp is the promoters--they have something to sell. Maybe because they are also a believer (Camp 2), often because they are a huckster. Another camp is the deep believers. These seem to be libertarian types, who have some very deep-seated dislike of any form of centralization. They see currency independence a crucial step in some form of idealized, Atlas Shrugged-ish elimination of the need for individuals to have any need for government. Then the third camp are speculators. They see the meteoric rise of crypto and are drawn in by the justifications. The difference between the deep believer camp is that the financial payoff is what gets their attention; the belief follows.

So there is another strike against cryptocurrency--the company it keeps.

There are a number of crypto supporters who jump in to say that the tech is about much more than currencies. But I never hear even vaguely convincing examples(1). People talk about smart contracts, but they seem very vague, it isn't clear to me how they practically improve on "dumb" contracts (other than the satisfaction of removing a "middleman", even if that doesn't save money or have any tangible benefit), and it seems like they assume away the enforcement problem.

Then there are NFTs! The first time I read about them, I thought it was an elaborate tech in-joke. NFTs are screaming "The Emperor Has No Clothes"--setting aside extreme niche, hobbyist uses, that could probably also be accomplished with traditional commercial centralization (e.g., being able to prove were an early backer of some Indie artist). 

I've listened to podcasts on the topics, to see if I can find out what I am missing, and they usually just convince me more. I should admit, I am at some risk of "motivated reasoning", especially regarding NFTs, because their promoters talk about creating "digitial scarcity". As if scarcity can be a social good! I hate scarcity, I want abundance!!!! 

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(1) Granted, it in principle it could be that time will find great use cases, even if nobody is citing them now. E.g., Friendster or even FB didn't foresee the power of the news feed. I will still keep my bet.

Building distributed tech hubs to drive economic prosperity

Devolution of infotech in the US away from Silicon Valley/San Francisco is a topic I've been sporadically obsessed with for a while. So absurdly ironic that the industry which makes things virtual has such a strong value on physical centralization. This article covers the issue, hoping that Covid-driven remote work arrangements break the cycle. I sure hope so...though I do remember a similar sentiment at the dawn of the internet, but perhaps we weren't ready then. 

So many benefits to geographical diversification:

• Ability of employees to live where they want--both in a different part of the metro from the office, and different metro entirely (or not in a metro per se).
• Diffusion of entrepreneurship, wealth and concommitant benefits to other parts of the country--some of which really could use it.
• Optimization of the labor market, both for employees and employers
• Savings to employers on the high cost of office space. Savings to employees on 
• Savings of time can benefit employees and employers. As a 10+ year full-time-telecommuter, that was my rough philosophy--I get half the time saved, employer gets half the time saved. 
• Nuances, such as the fact that (salaried, mostly) employees can adjust working hours to match their personal productiivty. Even for jobs that have core hours, you can decide whether to "stay late" to finish a backlog, or come back to it when you get a second wind at 10:00pm.

What if Everyone Had the Risk Tolerance to Invest in Equities?

I invest 100% in equities. I have no plans to change this, even in retirement (still years away). Both theory and empirical evidence indicates that, over a reasonably long time horizon, equities provide a much better rate of return than bonds or, heaven forbid, CDs. So my question is, what would happen to the economy if all savers had a risk tolerance for equities? Set aside the transition effects, obviously it would be disruptive if it happened overnight. But assume over the course of a generation, everyone wises up and develops the risk tolerance for equities. What would happen?

1. Would return on equities go down, since more capital is available?
2. Would economies become more productive, since middlemen are being cut out, and risk capital is available?
3. Something else entirely?

Low Unemployment Yet No Wage Gains

I have heard so many news reports over the past few years about how tight the labor market is, yet employers are not raising wages. Here is my theory for one cause; I call it "Wages and Employment are Sticky, but Employees Do Tend to Expect Internal Equity".

Let's say you have 100 widget builders, their hourly rate is $12/hour. Demand is high, you need 15 more widget builders to meet demand. However, the labor market is tight, you aren't finding candidates at $12/hour. Based on some experimentation, you conclude that in order to attract those incremental employees, you need to offer a 10% premium to the current wage, or $13.20/hour. Given strong demand, you have pricing power (no discounts) and equipment utilization is excellent, so even at $13.20/hour, those incremental employees will be profitable.

Except--what about your 100 existing employees? They are experienced and loyal. If you are taking people in off the street at $13.20 per hour, don't the existing employees deserve at least that much?

And therein lies the problem. "Buying" incremental labor is not like buying incremental raw materials. Raw materials don't expect internal equity. In the above case, the incremental hourly cost, idealized to ignore internal eequity, would increase by 16.5%. But if we factor in the need for internal equity, it goes up to 26.5%--making additional employees much more expensive, and exerting far more pressure on profitability.

I'm not a trained economist, but that is my theory. I don't claim that it is a complete theory. For one thing, the same principle would apply over the ages--hardly unique to our time. Still, it seems I am surprised that I never hear this argument explored, in the innumerable news reports I have heard on this topic.

Dream Hoarders

I've been following Richard Reeves, author of Dream Hoarders: How the American Upper Middle Class Is Leaving Everyone Else in the Dust, Why That Is a Problem, and What to Do about It lately, as well as some other writers on the same topic.

In this latest newsletter, he highlights pundits who disagree, including Robert J. Samuelson, Samuelson says Reeves has it almost backward, the upper-middle class are setting a good model for society to aspire to:

Reeves has the story almost backward. As a society, we should try not to restrict the upper middle class, but to expand it. In general, it’s doing what we ought to want the rest of society to do. Its marriage rates are higher, its out-of-wedlock births are lower, its education levels are higher. As for parents, why make them feel guilty for wanting to help their children? What are parents for, after all?

I think there is a straightforward reconciliation to their two positions, and it is already embedded, I think, in Reeves model. The problem being that the UMC may disproportionately enjoy these traits in their own orbits, but exclusionary housing policies, and the leveraging of networks, prevent them from migrating to less privileged groups.

True Value of 15% ESPP Discount

Disclaimer: I am an amateur. I did spend a few hours researching and modeling this. But there is always the possibility I used bad information or, more likely, made a mistake.

My current employer is the first with an Employee Stock Purchase Plan (ESPP). As is typical with such plans, it offers a 15% discount, and up to 10% of one's base salary can be directed to the ESPP. So even if you are generally disinclined to invest in specific stocks, as opposed to broadly diversified mutual funds, this is too good a deal to pass up.

However, what I didn't realize until recently, when I had reason to sell some of the stock, was that it is better than a 15% discount. Considerably better, for several reasons.

First, getting to allocate 10% of your base salary to stock, and buying it at a 15% discount, sounds like a 1.5% bonus. But the benefit is actually the reciprocal of 1.00 - 0.85, or 17.6%. So noticeably better than a straight 15%.

Then there are the tax effects. Two considerations here. First, Qualified ESPPs are not subject to payroll taxes[1]. So no 7.65% FICA. Second, so long as you hold the stock long enough[2], that discount is taxed as long-term capital gains, rather than ordinary income. Your mileage will vary, depending on tax bracket, but a typical scenario would be a 15% rate, rather than 28%. The state's bite, in my state of MN, is unchanged at about 8%. So instead of a total FICA + Fed income tax + State income tax bite of 42%, your rate is only 23%. That means your take home is .77/.58, or 32.7% greater.

So the 17.6% discount, multiplied by a 32.7% benefit from the tax treatment, gives you an effective benefit of 2.34% of your total income, assuming you invest the max 10%. More than a 50% increase in the apparent 1.5% benefit. Most 401k matching is 3%, so one way to view that 2.34% gift is that is almost doubles your 401k match.

But Wait, There's More!

There is more to that 401k parallel. Just as a 401k gives you the opportunity for tax-deferred compounding, so does ESPP compensation--so long as you hold the stock. (That does have a downside, though. Over time, you will accumulate a very large position in a single stock--the non-diversified anti-pattern. Worse yet, it is the stock of your own employer. So my preference is to flip the stock. Hold it long enough to get favorable tax treatment, but then sell it--even as you continue to buy more to get that discount on the new purchase.

One More Thing

Some ESPPs have a "look-back" provision. This establishes the purchase price as the lower of the price at the first day of the period or the last day of the period. This has a couple of benefits versus the last day of the period. In ordinary circumstances, the first day price would be a few percent lower than the last day price. So getting the first day price is more than ample compensation for having your contributions tied up for 6 months, earning no interest. Moreover, if the stock does particularly well, the value of the lookback is greatly increased. On the other hand, in the event of a downturn, you are still protected, receiving the last day price.

Notes 

[1] I'm pretty sure this is true. I found websites that say this, but I had to look really hard, and some seemed to suggest that this might change.

[2] The holding period is tricky. Many people will know there is a 1-year holding period to receive the very favorable long-term capital gains rate. But it turns out there is a 2-year-from-grant-date for the discount to be treated as a capital gain, rather than ordinary income.

Apprencticeship vs Extended Secondary Vocational Education

I believe the contemporary American view (or really, default assumption) that:

1. Higher education's purpose should be vocational
2. The optimal form of vocational training is higher education

is a big, expensive mistake. I believe apprenticeship and on-the-job training is both more economical, and more effective, for providing most types of vocational training. And the mission of higher education (it is called "higher" for a reason) should be breadth of learning, cultivation of intellectual curiosity and development of analytical thinking.

Anyway, this quote from a chef, regarding the closing of Le Cordon Bleu cooking school, is right on:

Jones said with the foodie boom, demand for chefs is higher than ever. He said Le Cordon Bleu grads aren’t ready to run a kitchen.

“Kids come out of culinary school and say: ‘I want a job as a sous chef.’ And I say, ‘No, you have to start at the bottom, like anyone else!’” Jones said.

Those entry-level jobs cutting, blanching and glacéing vegetables don’t pay very well. Jones said grads can come out of two years of culinary school with tens of thousands of dollars in student loans.

“You learn infinitely more in a restaurant like this, than you would anywhere else, virtually,” Jones said. “The idea that anyone would want to come into this industry with debt is ludicrous.”

Assortive Mating's Contribution to Income Inequality

For a long time, I've suspected that "assortive mating"--marrying someone from a similar socioeconomic background, educational institution and/or vocation--was an important contributor to income inequality. Far from the only one, and the factors are probably multiplicative, such that if the other factors were diminished, the contribution of assortive mating would be proportionately diminished. But nevertheless significant and worth considering.

This article makes the point, and claims statistically that something like 25% of income inequality may be explained by the contribution of assortive mating.

Opportunistic Acquirers of Orphan Drugs Like Labor Unions?

This is kind of old news now, but the outage over a company that acquires rights to an orphan drug and promptly raises the price from $13 to $750 per pill is an outrage that no ideology of capitalism should attempt to defend. Most pro-capitalists would decry crippling labor strikes. rightly. Just because some damn union gets a stranglehold on a mundane, but crucial corner of the economy (trash collection, public transport, coal mining, whatever) doesn't mean they should be able to use that un-earned leverage to extort above-market wages. Well, what is right for labor is also right for capital.

Understanding "one in a million" in the age of big data

This is a great article for several reasons. My short version of what it says is: if you evaluate one million million-to-one propositions, it is likely enough that one of them will be "true".

First, it reinforces the idea, well-known in many quarters, that it is possible to be a superior stock-market trader. It particularly undercuts the idea of "technical analysis", something I have always doubted and dismissed.

Second, I've always thought this is one of the things that causes people to assign meaning to improbable but coincidental events in daily life. The hours and years of daily life offer so many different opportunities for patterns to emerge, everyone is bound to experience a few that seem remarkable, but are nevertheless entirely coincidental. (You may at this point call me unromantic or bloodless--I prefer the former, but I'll answer to either :) )

Third, although I'm not sure the article explicitly makes this point, it is yet another cautionary tale of the dangers of mixing correlation and causation. The most aesthetically pleasing way to discovery is to first formulate a theory, and then to prove it with data. Next best is to proceed from observational data, to formulate a well-constructed, internally-consistent theory that relies on well-known first principles. Less appealing is to find a correlation in data, and to construct a theory from it, using new principles that may amount to a post-hoc explanation, rather than time-tested principles. Worst of all is to take a statistical observation as law, without any underlying theory at all.

Practical Center-Right Social Policy?

Some excellent suggestions from David Brooks:

Relocation subsidies

I love this one. Very innovative. Instead of promising dying cities that tinkering with the economy in just the right way will bring them back (Detroit, Buffalo), instead help people escape to more promising areas. This is definitely not a magical approach, relocation is a big deal, especially for the poor, and especially if it is relocation to an area where the relocatee lacks a support network. But it is definitely seems like one useful took in the toolkit.

Bus subsidies

In the wealthy suburbs, there is starting to be a shortage of entry-level service workers. My own teens and their peers are complaining how many hours are being pushed on them in their part-time jobs. What a tragic mis-match of demand and supply. So long as housing remains highly segregated by income, getting those in need of employment out to where the jobs are is a helpful compensation.

Human Capital Investments

Less innovative than the other two, but still valid. The whole gamut here, early childhood education, intervention, better schooling, better vocational training. Still a continuing struggle to make cost-efficient progress. If I had to pick two things, I think it would be early-childhood and vocational. If I had to pick one thing, it would be vocational.

Inherited income regression to the mean?

NYT: "According to a recent study, if your income is at the 98th percentile of the income distribution — that is, you earn more than 98 percent of the population — the best guess is that your children, when they are adults, will be in the 65th percentile."

Seems much more of a regression than I would have thought.

Government: Invest in research, not industries

David Brooks:

most people on Wall Street are primarily motivated to make money, but a few people are primarily motivated by an intense desire to figure stuff out.

This is why investing in research, not industries, is where scarce government investment dollars should go. The payoff from research is just tremendous. 

Glide Path to Retirement

From a financial, longevity demographics and keeping mentally fit standpoint, early retirement looks like a worse and worse idea. In fact, I think most people will need to work past even the current "full" retirement age of 65. What we really need is more labor-market flexibility, where people slowly ramp down. Maybe work 32 hours a week for 3-4 years after 65, then 25, 20, 15 and maybe out around 75-80.

Net IRR of bankrupt companies

I've always wanted to see a study of the net ROI of companies that go bankrupt, or all-but-bankrupt (e.g., Blackberry). Many other examples, such as Borland, GM. I seriously don't know whether all the paid-out dividends over the years make it okay.

The study I would like to see: if you invest 1 year after IPO, and hold till liquidation, how does the investment perform?

More Examples of Mis-Guided Social Engineering

That last post got me warmed up. Some more examples of mis-guided, government-sponsored social engineering that spring to mind:

• Locations of the campuses of the State University of New York (aka, SUNY), So many of them are in godforsaken corners of the state: Fredonia, Oswego, Oneonta. I don't know for sure, but it sure feels like that was someone's (Rockefeller-era?) idea of a way to spread the wealth.

• There is a trend to putting prisons in rural areas. Yes, there is some justification, in that land and labor is probably cheaper. But separating prisoners from family members seems very much at odds with any hope of rehabilitation.

• Special economic zones for depressed areas. This is really just the general case of the last post. State governments will commonly provide tax incentives for companies to relocate to depressed areas within the state. The tax incentives don't last forever, of course. So most likely, what you get for a 5-year tax incentive is creation of some job, a number of which are filled by people who relocate to the depressed area. Then when the 5 years are up, nothing about the area is any more intrinsically appealing than it was before, so the employer shuts down. But now they have dragged even a few more people to the depressed area, actually making the local unemployment problem worse.

Social Engineering Is and Ever WIll Be A Big Fat Fail

In President Obama's State of the Union this month, he proposed the creation of hubs for manufacturing research. It seems the idea is to revitalize decimated cities and geographies, such as  Detroit and Youngstown, OH, by setting up research hubs dedicated to developing super-high-tech manufacturing. This kind of thing just doesn't work. Government incentives can't make people--especially the kind of upwardly mobile people who are likely to invent the future of anything--live in places they don't want to live. It's a waste and a boondoggle.

Opposing wishful thinking like this is the job of true conservatives.