Category Archives: Small Ivy’s Big Ideas

If You Really Want to Close the Wage Gap, Here’s How

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We’ve all heard the statistics, that women only earn 81 cents for every dollar that a man earns or some such number.  Progressives argue that this is due to sexism and discrimination, so we must have the government go in and set salaries, have affirmative action in promotions and hiring, and probably remove some men from CEO seats and insert women.  But these solutions are neither fair nor will they be effective at both creating an equal society and one at maximum productivity.  As usual, Progressives can make us all equal but they do so by making everyone broke (except for a few progressive oligarchs).

I was reading a really interesting post on Money After Graduation called The Impossible Price of the Motherhood Tax.  In this post, Bridget Casey really nails it when it comes to the reason for the wage gap, at least when it comes to men and women of equal education and vocations.  On average, women and men make similar incomes coming out of college and through their early twenties, but then they diverge.  The reason that men make more than women after this point comes down to one obvious reason:  children.

In Canada, where the author resides, new mothers can use the unemployment system to take either a year or a year and a half off (depending on where you live) when they have children and receive a little over half of their pay while they are off (they can actually start a couple of months before they have children).  (Dads can take some time off as well, but it starts after the baby has been home a few months.)  Their employer is required to take them back in the same job and at the same pay when they return.  In the US we obviously have no government mandated system, but many women (and some men) take time off when they have children.  Some, those who wish to continue to work, then put their children into daycare at 6 months or at a year or two.  If they have very understanding employers, they may be able to come back into their old job.

Others stay home until the children are in kindergarten or older, which normally means finding an entirely new job, possibly in a different line-of-work.  Because they are not able to work full hours even once the kids are in school, they often take part-time jobs in whatever is available with the needed hours and flexibility.  Even when the children are in high school and full-time work is possible, many find that they don’t want to work full-time anymore since their priorities have changed or they don’t want to go through the effort needed to regain skills and get on-the-path again if they even can.

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As the author points out, the reason for the wage gap is that parents who stay home as full-time parents, even for a couple of years, miss out on experience, raises, and promotions.  This is not a temporary issue since future raises and promotions typically build upon where you are now.  If you miss out on 20% now, you’ll always be 20% behind, even if you work full-time after that.  And because most of the time it is the woman who stays home, men in their thirties, forties, and later will tend to make more than women in the same industries. It has nothing to do with sexism by the employer.  It is due to a break in a career.  There could be some sexism involved, in that an employer who fears that a woman of child-bearing age might go on maternity leave, might not select her for a critical position.  Women who never have children might, therefore, be passed over for the best opportunities.

She advocates that it is an investment to pay for daycare since then women (and men) who are the initial primary caregiver for the children will not miss out on as much time at work.  (She does not advocate that Canadians forego the year of paternal leave, although doing so would make sense if your career were your primary concern since taking a year off per child does not help your career progression either.  I’m guessing that there is a feeling of entitlement to that paid leave, so while daycare is an investment, foregoing paid leave is not.)  While I agree that taking less time off would help, it would not solve the issue.

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The problem is that while you can lessen the initial effects of having a child on your career by limiting your time off, the person who remains the primary caregiver for the children will continue to see their time split between kids and work.  If a child has a cold or another illness, the caregiver must take time off work.  If the kid’s school gets done at 3:00, the caregiver must leave work on a schedule to pick up or meet the children.  The people who make the most in the workforce are those who have their employer as their primary responsibility.  They are able to work over as needed, come in weekends sometimes, and perhaps travel on short notice.  Unless you have someone who can take the children when plans change, often on short notice, this cannot be a person who is primary caregiver.

While Ms. Casey advocates for 32-hour work weeks and the ability to work from home so that stressed mothers can take care of that pile of laundry, the truth is that those who make the big incomes are often putting in 100-hour weeks and are always at the office.  (They are also not doing laundry when they are supposed to be on-the-clock.)  Their employer knows that they are dependable and able to drop other things to be there when the business needs them.  Someone who is the back-up when childcare falls through cannot meet that kind of responsibility.

One idea would be to have both parents split the responsibilities.  The issue here is again, to really advance in salary and position, you need to be able to put work first.  If both parents are putting in just enough hours at work and taking time off sporadically due to the normal childcare issues, neither parent will get into one of these high-paid roles.  They will both top out in salary and stature.

The only solution I can see, if your goal is to equalize pay, is for more women to choose to be the primary bread-winner and more men to choose to become full-time parents while the kids are young and then part-time or self-employed workers when the kids are older.  This will mean that women who are planning to focus on career will need to choose men who have traits of great parents (patience, charisma, responsibility, energy, organization) rather than the type-A traits of a CEO.  They will need to also shy away from professionals with gobs of college and look for guys who would be willing to give up whatever they do to focus on parenting.  Women will soon discover what men have known for ages:  To be successful in a career, you need someone behind you that will relieve you of other responsibilities so that you can focus on career.

For the guys, I think the real issue is that men currently gain most of their identity and their pride from their work.  This will be difficult to overcome, but eventually, I think that they will find that being a fulltime parent is far more important than things that most people do at work in a given day.  They may also find that the benefits when the kids get older – having more time off during the day and the home to themselves – also can be nice.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

It’s Time for the Public Sector to Follow the Private in Retirement Plans

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Let’s say that you went to a bed and breakfast, checked in, and went up to your room.  The room was a mess with bed-clothes strewn on the floor, breakfast dishes piled up on the table, and a big black ring around the whirlpool tub and soap suds near the drain at the bottom.  You are then told that you owe a $100 cleaning fee to get the room back in shape so that you can enjoy it.  At least, you might get to enjoy it, but then again they may need to raise the rates after you pay the cleaning fee, or maybe they’ll just shut the place down entirely.

You protest, saying that you were not the ones who used the room last and that the ones who did should pay the fee.  The host replies that the last people have gone, that someone needs to pay to have the room cleaned, and that the someone is you.  You try to back out of your reservation, but you’re told that you must pay the fee or they are calling the cops.

How would you feel?  Would you feel that you had a responsibility to pay the fee?  Would you begrudgingly do so, hoping that the next person would pick up the tab for you?  If you paid the fee, would you then feel entitled to having the fee paid for you by the next guest?  A guest who, just like you, hasn’t stayed in the room yet and had nothing to do with any bargain you make with the inn keeper.

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The same thing happens with things like public pension plans and Social Security.  People long ago made agreements with politicians long since gone to receive something far in the future in exchange for their services or tax money.  In the case of public workers, voters and residents forty years ago received services for which they paid some taxes, but salaries were low in exchange for promises of generous retirement pensions, free healthcare for life, and other benefits.  Those benefits were not paid for by the residents who hired the politicians who made those deals.  They only paid for the salaries of the workers and in exchange they received various city, state, and federal services. Now that the workers are retiring or have been retired, the next generation is expected to pay for those retirement benefits.  This next generation is paying for the retirement of workers from which they received no benefit based on agreements they did not make.  Kind of like needing to pay for a room to be cleaned that you did not use.

Social Security is the same way.  Back in the 1930’s, people voted for President Roosevelt and a Congress who created Social Security, originally charging about 2% of pay in exchange for just enough retirement income to avoid starvation and to keep the lights on.  Voters at the time agreed to pay these taxes and pay out benefits to people who were starting their retirement at that point even though those people had paid next to nothing into the system, in exchange for the promise that they would receive a payment in the future.  As it looked like more people were going to retire than the system could sustain, the tax rates were raised in anticipation of needing more money, eventually reaching more than 12% of pay even though benefits remained flat.  This would have helped, but all of the extra money was spent as soon as it was collected, leading to the current situation where benefits will need to be cut in the near future unless taxes are raised further.  Again, people who had no part in the agreement are expected to pay up.

What if they say, “No?”  What if they decide to cancel Social Security, or cancel public pensions?  If they are forced to pay for these items because they are in the minority, what if they just decide to work minimal amounts, or quit work and raise a garden, producing just enough to feed themselves?  What if they move away to other countries or simply stop working and go on the public dole themselves?  What then?  Are you going to try to force them to work?  Isn’t that called, “slavery?”

Sorry, but those in the next generation are no more morally obligated to pay these bills than you would be if you would be obligated to pay for the cleaning of a room if you showed up to a bed and breakfast with a dirty room.  They did not make this agreement.  They did not continue to vote the politicians in who made these arrangements.  They did not look the other way while all of the extra money raised for Social Security was blown on battleships and public rail lines.  It is neither their agreement nor their responsibility.

“But someone needs to pay the bill,” you say.  There is no good answer for this.  Somebody will feel some pain because of bad agreements made years ago.  Perhaps the pain should be spread around a bit, but perhaps those who made the deals should take a greater share of the pain.

Going forward there is a better way.  Public employees and public retirement plans should follow the lead of private employers.  Rather than a future promise, retirement should be paid for as-you-go.  If a politician promises a lavish retirement in the future, the city, state, or Federal government should pay for their share of it right away by putting money away into an account owned by the employee.  Future governments are free to stop putting money into the account, just as the employee is free to leave and find another job if the retirement benefits being funded are not to his/her liking.  When the employee retires, his/her retirement is paid for and there is no need to rely on future taxpayers.

Likewise, money for Social Security should be paid into private accounts.  These could be invested automatically in broad stock and bond market index funds to eliminate the risk of poor personal management.  When individuals are ready to retire, they would have their own account and not need to rely on future workers contributing in order to continue to receive a check.  Isn’t that a better way?

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

An Easy Way to Make College Affordable

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Paying for college is a concern of many parents, and well it should be.  College debt is a concern of many graduates, and well it should be.  An issue is that the children of parents who decide to do something about paying for college by saving up money and doing without some things so that they will have at least some of the money needed for room and tuition end up with about the same amount of debt as those whose parents save nothing.  This is because colleges just raise the tuition for those children whose parents have saved.  OK, they actually reduce the tuition for those whose parents have not saved, but it is really the same thing.  Go into college with $50,000 in a college savings account and the college will figure that you can pay $50,000 more than someone without a savings account.
Now if the child with the $50,000 account came from parents who made $250,000 per year while the child without anything came from a family making $30,000 per year, the difference in tuition is understandable.  But often both families may make $80,000 per year.  One family just choose to maybe drive older cars or vacation locally so that they could put a few thousand dollars away each year into an Educational IRA, while the other family was trading in cars every few years and vacationing at Club Med, living for today and figuring that they would worry about college later.

              

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The issue with this system is that it encourages exactly the kind of behavior you don’t want.  It encourages spending and penalizes savings.  This means that more people show up at the financial aid office with no savings.  People are not foolish — they will find ways to go to college for less or for free if they can.  Why save up if there is no advantage?  As a result, not only do only children from poor backgrounds show up with nothing to contribute.  Many children of middle-class families who could have paid a significant portion of their own tuition and room-and-board show up as well without any savings.

Because colleges need to provide a lot of grants (as does the Federal Government) to prevent their colleges from being full of only the children of the wealthy who can float the tuition with their yearly income, they raise the base tuition so that those who can pay, pay more.  This provides more money for grants and scholarships, so long as people don’t decide it isn’t worth the cost and as long as all colleges do the same thing.  Because the cost is higher, however, it means fewer people are able to pay full tuition from income, which means more student debt and less people saving up since when the amount they can saved is dwarfed by the cost, they figure, “Why bother?”

So what is the easy solution to fix his issue?  Simple – stop using college savings when determining eligibility for tuition reductions and other grants.  Instead, base tuition rates purely on income.  Children who come from families with little income would still find a lower tuition bill that they can afford, but those from a family with a higher income will need to put away more money, use more of that income to cover tuition, and/or take out student loans.  Because tuition would be lower for everyone (since the colleges would be giving out less tuition aid because more people would be paying most or all of their bill), the cost would actually be lower for everyone.

Several colleges could also band together and establish a birth-to-college saving plan where parents could contribute an amount each year based on their income as their children grow with the guarantee that tuition and a certain portion of room-and-board would be covered for any of the colleges in the network.  This would eliminate the uncertainty we currently see when it comes to college tuition and also means that everyone will be paying what they can.  Parents whose children decide not to attend college could have their money returned with a reasonable interest rate applied.

So what do you think?  Would it work?  Do you have a better idea?  Let’s hear it!

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Would you Rather Have a Million Dollars, or a New Car Every Three Years?

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Would you drive a used car until you were 55 if someone would pay you a million dollars to do so?  Understand this doesn’t mean driving a junker – just driving a four-year-old car until it was eight years old and then trading for another four-year-old car.  If you would take this deal – and I think that most people would – why would you go on buying new cars anyway?

The fact is, if you can save up and buy used cars for cash every four years, rather than taking on a new payment schedule and dropping deeper underwater with each new car loan, you can invest the savings and have over $1 million by the time you are 55 just from the savings on the car loans.  Even more insane, that $1 million will turn into $2 million by the time you are 62, $4 million by the time you are 69, and a cool $8 million by the time you are 76 (which will probably be the new retirement age, given current life expectancies).

How could this be so?  Two reasons: depreciation and interest.

Basically, any car will drop in value by 50% in four years.  This means that a new car which cost $30,000 will be worth about $15,000 in four years.  This means that the car will lose an average of $3750 per year during each of the first four years.  This, by the way, is if you sell it to another individual.  If you trade it in, you’ll be lucky if the dealer will give you $10,000 (because he wants to make a profit from the sale of your used car to someone else).

 

              

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The same depreciation rate is true when you buy a used car – it will still lose about 50% of its value over four years –  but because the price of the car is less, the depreciation loss per year will be less.  Let’s say you pick up that car someone else bought new for $30,000 after four years when it was worth $15,000.  Even if it drops in value to $7500 over the next four years, you’ll still only be losing $1,875 per year.  This means that you will save $1,875 per year, which you can invest.

The second reason that what seems like a small amount of savings can turn into a large amount of money in 35 years is compound interest.  Specifically, while you are paying interest when buying a car on payments, you are being paid interest when you are able to save money that would have been going to a car payment and invest.  If you were going to be paying 8% interest on a car loan, but instead pay cash for the car and invest the rest, you will be getting an effective interest rate of 20% on your money, assuming a 12% return on stocks.  This means that instead of working extra hours to pay the interest on your car loan, you will be making money for simply letting others use your money to build their businesses.

So before you fall into the trap of endless car payments, think about what that car payment is really costing you – millions of dollars over your lifetime.  Is that new car smell and 32,000-mile warranty really worth that?

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is It Possible to Save for College?

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About 16 years ago I sat down and predicted the growth of my son’s college savings account.  I was planning to put away $2,000 each year into an Educational Savings Account (ESA).  Using an investment calculator, and using an estimate of a 12% return (about the average return for the stock markets), I predicted I’d have about $140,000 by the time my son was ready to go to college.  With in-state tuition at about $12,000 per year, plus money for food and housing, I was figuring a cost of about $30,000 per year, so the ESA would at least get him through undergraduate school.  He could then do research/teaching/etc. to help fund grad school if he went, and hopefully get out debt-free or fairly close.  That was the plan.

              

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Unfortunately, then came the 2001-2003 stock market, where returns were low or negative.  Things finally picked up after the 2003 tax cuts (yes, tax cuts do spur the economy, despite what some Liberal pundits will tell you), but then stocks fell during the 2008 housing market crash.  Since that point things grew at a modest pace, until Trump was elected, from which point on things have been on fire.  Despite the fairly good markets from 2009 – 2016, and the great market over the last 10 months, my annualized rate-of-return has been around 3.5% instead of 12%.

So, sitting here with about two years until the first tuition bills come in, my son’s account has a little over $52,000 in it today, instead of the $108,000 I predicted.  This is enough to pay for about two years’-worth of college expenses, but not four.  Alternatively, it is enough to pay for tuition, but not for room-and-board.  This has left me with a big dilemma:

How should I invest for the next couple of years, if at all?

With less than two years remaining, if I really need the money in two years, I should really put it all into bank CDs.  I cannot predict what the markets will do over such a short period of time, and they have about a 1/3 chance of being lower in two years than they are today,  There is a small chance, maybe one in ten, that they will be 25% lower or more, meaning I may only have around $39,000.  Then again, if we do see some great returns over the next couple of years, for example if Trump is able to pass big tax cuts and spur the economy, I could get 20% returns and have almost $75,000 when the first tuition bill arrives.  Note that my original predictions assumed I stayed fully invested in stocks the whole time, which was probably a bad assumption due to the risk of doing so during the last couple of years.

Another question this raises, however, is

Is it possible for a middle-class family to really save up and pay for college?

Granted, perhaps we should have been putting $4,000 or $5,000 away each year, with $2,000 in an ESA and then the rest in taxable accounts or a 529 plan after we maxed out the ESA.   But I don’t see how most families who don’t make $150,000 per year could afford that.  I mean, we have been very disciplined compared to many people our age.  Despite having an income far less than $150,000 per year, we paid off our home about six or seven years ago, leaving a lot of free cash flow available that many families who keep a constant mortgage don’t have.  Frankly, I don’t know how families who keep a mortgage are able to pay for the things they buy.  (Maybe they don’t, since the median amount of debt families who have a credit card balance is $17,000, according to Nerdwallet.)  Paying for everything and not using credit, including the things that come up like medical bills and auto repairs, I’m really glad we don’t have that $1,000 or $1500 mortgage payment each month.

I do think that many families should be able to get their children through college debt-free or close to it, but saving up everything ahead of time may not be possible.  Once our son gets into college, we could direct some of our regular income towards his room-and-board.  He is also likely to get scholarships that will cover most or all of his tuition.  If he also gets a part-time job and makes $500 per month, that would cover about half of his room and board.  Still, it does make you wonder why college prices are so high that many people need to get loans to get through.

Luckily in our case (and good planning and hard work create luck), we have some resources beyond the ESA to help pay for college.  Because of this, I will probably keep the ESA fully invested in stocks, hoping that we’ll see a couple of good years to boost the account balance.  If we see a drop in the next couple of years, we can cover costs with other funds for the first year or two while we wait for the ESA to recover a bit.  Really we don’t need to assume we’ll need to tap the account right away.

So what do you think?  Is it possible for families making $80,000 per year to save up for college?  Are tuition costs worth the value of the product they provide?  Is it worth it to run up loans to pay for college?

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

The Conservative’s Welfare Plan

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Let’s face it – welfare just isn’t working.  There is a lot of money being spent, but a lot of it is being wasted, to the point that kids are showing up at school hungry despite all of the food assistance money being sent to their households.  The issue is the same one that is always seen when you try to run something through central planning – those setting up the program don’t have the ability or the time to customize it for every person or region, so they create something that really doesn’t work for everyone.  In addition, the power created through centralization leads to fraud and abuse.  We need a better way to do welfare.

 

Some people are incapable of taking care of themselves and therefore need to be handed food, clothing, shelter, etc….  Others could take care of themselves but choose to game the system instead, taking resources from those who really need help (for example, those who abuse Medicaid to abuse prescription pain medications, making it more difficult for those who need the medications to get treatment) .  Rather than a check in the mail or an Obamaphone, many people really need a firm but caring “no” and perhaps an offer of something like a job or job training to get them back on track and being productive (and happier in the long run).  Some parents are struggling and sacrificing for their children and just need a little help to make ends meet, but others just ignore the children and spend all of the money on themselves.  Others have addictions, where giving them money just helps buy the next shot of heroin or fifth of whiskey.  A centralized program, with an army of government workers who quickly have any desire to change the system beaten out of them, gives you what we have:  fraud, waste, abuse, and a lot of hoops for those who really need help to jump through.

              

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The Conservative’s welfare program would rely on free-enterprise.   There would be a plethora of well-funded local groups that provide food, shelter, job training, and other assistance to those in need.  Because they were local, they could learn who really needs help and what kind of help is needed, be it a sandwich or a connection to a next job.  These groups would compete for donations by showing the good works they were doing.  Those who were effective at meeting needs would grow and receive more donations.  Those who were wasteful and ineffective would go out-of-business.  People could decide what was needed and direct their donations there.  If something got over-funded, to the point people for the charity were building palatial offices, people would donate somewhere else.

The issue with going to such a system is converting from what we have now.  Because people are already having a good portion of their tax dollars, on the order of 50%, going to welfare, it would be difficult for them to give additional money to charities (although a lot of them do).  It is also difficult to eliminate existing programs in order to cut taxes to allow for more private giving because there are always tragic cases for those that want to keep the power in Washington to parade in front of the cameras.  Luckily, there is a simple solution, and it would require very little effort.


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Here’s the plan:

Allow individuals to deduct their contributions to charities that provide services that replace government programs (food, shelter, job training, clothing, health care, etc…) directly from their taxes, dollar-for-dollar, up to 10% of their income.  Then, as the needs in different areas are met by private charities, discontinue the government programs, keeping them in place in areas where the needs are not met. 

Here’s why this would work:  

Right now, individuals are taxed, their money taken to Washington.  Washington bureaucrats making high six-figure incomes then hire an army of civil servants making high five-figure incomes to disperse the money they collect to programs such as food stamps and section-8 housing/HUD.  A lot of the money collected is lost in the process, plus the money is not distributed efficiently, resulting in bad results and/or an enormous cost.

By allowing individuals to give the money directly, which they would do if given the choice of giving it to causes they believe in or sending it off to Washington, groups that meet the needs of the poor and disadvantaged would be funded.  Because more money would be available, more groups would be developed and compete for funding by trying to do the most good at the least cost.  By limiting the amount that could be given, there would still be funding for things like Defense and essential government processes.

Advantages:

  • There would be more money available for the needy since there would be less waste.  Wasteful charities would change their ways or go out-of-business as more efficient competitors emerged.
  • People would be helped locally, meaning the charities would be designed to meet their needs, rather than some global need.  We’d see things like families being provided directly with food that met their dietary requirements rather than a check being sent to the home that gets spent on cigarettes and lottery tickets.
  • There would be enough different groups and people working within those groups to determine how to best meet the needs of those around them and actually improve society.  Imagine the minds who create things like the smart phone and FaceBook working on addressing the needs of society!
  • Needs currently not being met would be addressed as individuals looked for new charities to start once the space for things like food and housing became crowded.  Maybe there would be groups who drive people to job interviews or help those who are victims of crime right after they are robbed or assaulted.
  • Taxes could be lowered as needs were addressed more efficiently.
  • Those who are able to take care of themselves would be transitioned into productive members of society with an income, which in turn would further reduce the burden on those currently paying for welfare.  It would also bring pride back to people, which could change futures and neighborhoods.
  • Payers would feel good about their donations rather than feeling bad about needing to pay taxes.  There might be less tax-cheating.


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So in the end, we would all pay less in taxes, there would be more people working and producing things, which would make society wealthier, people would be seeing their needs met more efficiently and with less red-tape, and we would end the cycle of poverty, bringing pride to individuals.  If this sounds good, forward a link to this post to a friend or your FaceBook page.  Then, write your Congressman and your local newspaper.  We can make society better if we all work together for change.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Fixing the US Health Payment System: Repeal and Remove

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Many say the US healthcare system is broken, but they are wrong.  To see a broken healthcare system, go places like Vietnam and see people dying on gurneys in hospital corridors, or even Great Britain  to see people waiting months for critical procedures.  See also cases like Charlie Gard, where the government of Great Britain is basically telling the parents that they must just watch their child die, forbidding them from going and get care elsewhere.  Because the waits are so long, “good” Canadian insurance includes a clause that allows for treatment in the US if the lines are too long in Canada.  In the US you can almost always get into see a doctor the same day or at least within a couple of days, which is not true in many countries.  Even if you don’t have the money required to pay for care, you can still get the care needed to preserve and even better your life through the emergency room.  You may get a bill, but the hospital will just write the cost off and pass it on to other patients who have insurance.  No one is dying in the streets for lack of care.
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The issue in the US is not healthcare, but the effects of health insurance and government programs on the healthcare markets.  Because most people get insurance through work, and because each insurance company has their own deals cut with providers, it is virtually impossible to figure out how much you will pay for a procedure ahead of time.  You might get the list price:  “Popping that pimple will cost $20,000 plus doctor’s fees, billed separately,” but the actual price you and the insurance will pay will be maybe 10-20% of the list price.  The trouble is that the person who goes in without insurance will need to fight to get a better rate, and that rate usually depends on how much the hospital thinks they can get out of them.  If you can pay $20,000, you’ll pay $20,000.  If you can only pay $200, you’ll pay $200.

Health insurance also distorts the cost of routine care at your doctor’s office.  They charge $120 for the visit and $500 for x-rays and screenings, but they know they’ll actually get $60 for the visit and $150 for the screenings from the insurance company.  If you knew you would be paying $60 for a visit and $150 for x-rays, you wouldn’t be willing to pay $1200 per month for health insurance – you would just pocket the $1200 and write the doctor’s office a check during the half dozen times your family went in during the year.  Put the rest of that $1200 away each month and you’d have the money needed for the times you did end up with a hospital stay or more serious issues.

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The issue is that you don’t know what things will cost and what you will pay because insurance has distorted the prices so much.  As a personal example, after a family member spent a couple of weeks in the hospital recently, we received a bill for $60,000.  Insurance reduced the amount down to $15,000, then we paid $3,000.    A $60,000 bill is scary.  A $15,000 bill is significant, but manageable with some savings and perhaps a payment plan, particularly if we weren’t paying $12,000 per year or so in health insurance.  Without insurance, however, we would have needed to fight the hospital to reduce the bill, and perhaps seen it cut to $20,000 to $30,000 after a significant back-and-forth since we don’t have the negotiating power the insurance company does.  If insurance did not exist at all, however, the hospital bill would have been $15,000 to start with since no one would go to a hospital charging $60,000 when another one across town was charging $15,000.  There would probably be a phone app that you could use from the waiting room to compare prices at local hospitals and you would transfer for a $45,000 savings.

The Affordable Care Act (Obamacare) has not brought healthcare to millions of people as some advertise.  Instead it has just amplified the issues caused by the insurance market by making all plans cover the same thing (everything) and forcing everyone to pay with insurance instead of paying out-of-pocket.  It has also added government subsidies, which have the effect of making health insurance cost “whatever you are able to pay” rather than being based on the value of what you receive in return.

In addition, while you may have insurance through Obamacare, it doesn’t mean you’ll actually get healthcare.  Customers are stuck with insurance policies that they cannot use since the deductibles are so high.  It doesn’t do anyone any good to have a policy with a $9,000 deductible since very few people would ever reach that level in a given year.  Even if they did, how many would have the $9,000 to pay?  They would be better off just saving the $4,000 to $8,000 they spent on the insurance policy and just paying for healthcare out-of-pocket.

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Even those who are now on Medicaid, which covers all of the costs, are having trouble getting care since the government is not reimbursing providers enough to make them want to treat Medicaid patients.  In California the free and reduced price clinics have gone away due to the ACA, but doctors are not accepting Medicaid patients.  One individual was quoted in a recent Wall Street Journal article who went to mexico for a critical gull bladder operation after waiting for months in the US for the surgery needed to save her life.

The actions needed to fix the US health payment system are actually quite simple and could be summarized as follows:

  1.  Repeal the ACA in its entirety.
  2.  Eliminate the tax deduction for companies that provide health insurance to their employees.  This would incentivize them to stop providing employer healthcare and just pay higher salaries instead.
  3.  Create a tax deduction for individuals who buy insurance.  This would further create the incentive for insurance to be something individuals buy instead of the norm to be to get health insurance through work.
  4.  Outlaw insurance with deductibles of less than $3000 per year for a family of four.  This would cause most people to pay for routine care out-of-pocket, which means they would be more sensitive to prices and shop around.
  5. Require that all doctors and hospitals publish their rates for procedures online and outlaw charging different people different rates.  Pricing transparency is critical to an effective, efficient market.  Prices would fall as people sought out the best deals for healthcare just as they do for everything else.
  6. Require that everyone put 10% of pay into an HSA.  This would ensure people had the money to pay for healthcare as needed instead of buying a bunch of other things and then not having money for the doctor.
  7.  Provide a direct tax credit for donations made to organizations like free clinics and hospitals.  This would provide a safety net for those between jobs or who were unable to work.  Individuals would be funding these causes directly instead of the money filtering through the government first.

Take these actions and the issue would virtually disappear.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Lack of Regulation – How Billionaires are Made.

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 Everyone knew that taxicabs cost too much in places like New York City.  There was a need that was not being filled, at least in an economical way that satisfied the people who had the need.  Normally when this is the case in a free enterprise society, people come forward to fix the problem.  They start up new taxi companies.  Perhaps they just put a sign on their cars and start driving around themselves, picking up people and getting them where they need to go.  But this was not happening?  Why?

The reason was over regulation.  In order to drive a cab in NYC, you needed to have a medallion that was issued by the city, which cost over a million dollars.  A reasonable regulator would have seen that the barrier to entry was too high and started issuing a lot more medallions, maybe even for free, but the people who had the medallions worked with the politicians (and probably bribed then through campaign contributions and promises that the taxi company’s workforce would be strongly encouraged to vote for them in the next election) to keep the number of medallions out there too low.

Everyone would say that the reason was for public safety, which is usually a good argument.  After all, you might get robbed or raped if they let just anyone pick you up and drive you around.  Also, you might get hurt in an accident because of a poor driver if just anyone was able to drive a cab.  People from the major companies were background checked and their driving skills quality controlled due to the regulations, you were told.   Of course, in NYC you would usually end up in a cab with a recent Pakistani immigrant who just came into the country and barely speaks the language who cuts people off constantly and stays on the horn the whole ride, so maybe the regulation wasn’t working that well.

              

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Enter Uber and Lyft, by calling themselves “ride sharing” and using a cell phone app to hail drivers in unmarked cars rather than putting a sign on their roof and having people wave them down from the curb, these companies were able to enter the taxicab market.  And the response from all of those people who were being “protected” by the regulations if they used a traditional taxicab?  Did they not use Uber out of fear of being hurt in an accident?  No, they quickly went over to the new service, gladly giving up the major cab companies.  The service was better and cheaper, they would tell you.  And there wasn’t a rash of robberies and rapes despite the lack of a medallion.

As a result, the founders of Uber and Lyft became billionaires very quickly.  Somehow they had found a loophole in the regulations and created a new, high-demand service.  We’ve actually moved to the point that people talk about getting an “Uber” far more often than they talk about getting a cab.  Actually, they didn’t really find a loophole – they just ignored the regulations and since the regulators didn’t know what to do with a taxi service that called themselves a “ride sharing service,” and a company that was called by an app rather than via phone or hailing at the curbside, they were left alone while the regulators discussed what to do long enough to become wildly popular.  Just within the last year or two the taxi companies have started to use the existing regulations and get new regulations passed to attack the ride sharing services and try to get them shut down since they don’t like having the competition.  They are in for a fight, however, since people like Uber and Lyft.

 


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Other internet companies like Google and Amazon took advantage of the lack or regulations to grow into the giants that they are.  Amazon took advantage of the lack of sales tax collections to make their products cheaper than those found in local stores.  Both Google and Amazon took advantage of a free web, but you can bet they’ll be the first ones to support regulations since that will help keep out competition.  You can pay for a bunch of lawyers to file a bunch of paperwork when you make millions of dollars per year, but not when you’re two guys in a garage.


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If you want to become a billionaire, look for places where there is little regulation.  Or better yet, support candidates who will cut regulations (and hold them to it once they’re in office).  Even if you aren’t willing to do the work needed to become a billionaire, or don’t have a great idea needed to propel you there, new businesses create jobs and wealth, where old monopolies tend o reduce jobs as time goes on.  Everyone is better off with less regulation.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Don’t Conserve – Use the Water You Need

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If you live in a desert with a very limited water source and there are a lot of people around, ignore what I am about to say.  If you live in a place where water falls from the sky regularly, let me be a Green heretic and go against the common wisdom by saying:

Use all of the water you need.

Doing so makes the most sense financially, and really sets us up to be able to provide for future needs.  Here’s why:
A utility needs to maintain a certain amount of equipment.  They also need to do functions like billing and customer service.  All of these things require a certain number of people.  Once you get past a certain threshold of water production, the number of people needed does not change that much if you increase the amount of water needed.  You still need a certain number of people to maintain the equipment, and usually you’ll just buy the same numbers of larger equipment if you need more production, rather than buy more pumps, motors, etc….  The larger equipment in fact will usually be more efficient, meaning the cost to produce each gallon will decline as the utility produces more water.

 

              

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The other factor is that most of the cost is people, not electricity or other resources.  Sure, you will use more electricity cleaning and pumping more water, but again the cost per gallon produced will probably decline as you use bigger, more efficient equipment.  Unless the number of customers changes dramatically, you’ll also still need to be paying the same number of people to send out bills, maintain equipment, and do other administrative tasks.   In fact with modern computer tools, things like billing cost about the same whether you have a million customers or two million.  Customer interaction things like the service desk are the only areas where more employees may be needed.  If you cut the use per customer, you’ll save a little on electricity, but you’ll still have all of the other costs.  Since the utility will be producing fewer gallons, yet their costs will stay about the same, you’ll end up paying more for less water.

So lets say that you decide to turn off the water while you soap up in the shower, then just turn the water on briefly to quickly wash off, cutting your shower water usage from 20 gallons per shower to three gallons.  You might be able to cut your water bill by doing this.  But let’s now say that everyone in the town does so, such that the utility now sells 5 million gallons of water each year instead of 10 million.  They still have the same equipment, which they’re probably paying off on a 30-year bond or something.  They also still have the same number of customers, meaning they will still need to send out the same number of phone calls and send out the same number of bills.  They also have the same number of homes to supply, meaning they’ll need to do the same number of repairs and upgrades.  They might even discover that sewer line repairs will become more frequent since there will be less water mixed in with the sludge, causing pipes to clog.  The result will be that you’ll end up paying the same amount each month for your water bill as you were when you took a regular shower, yet you’ll have a miserable shower in the morning instead of a pleasant one.

 

 


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Utilities are also loath to cut employees, so they probably won’t slash staff even if they didn’t need as many people.  They’ll also still need to pay off the equipment they bought when there was more demand, so they’ll still need the same amount of money to operate.  They have no competitors so it isn’t like customers will transfer somewhere else if prices are raised, and the regulators aren’t likely to demand that they cut staff or swallow the costs of equipment they purchased when there was more demand, so the utilities can just say they need to raise prices due to cuts in usage and they’ll be able to do so.  You use half of the water, but your bill stays the same since the price per gallon doubles.

So instead of conserving and saving, use what you need.  This doesn’t mean that you should be wasteful with water.  Don’t leave a hose on, running water down the street all day for no reason.  Don’t leave the shower running through the night while you sleep.  It just means to use what you need to live a comfortable life so that the utility will set themselves up to produce that much water.

 


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But what about the power usage?  Shouldn’t we save the energy needed to make water?  The free markets have a great way of figuring out ways to meet needs.  If everyone cuts back to nothing, such that the amount of power we produce is easily made using existing technologies and infrastructure, we’ll never see improvements.  We want people to be building the infrastructure and developing the technologies we need to supply the power needed int he future.  If we use the amount we need (again, not being wasteful), we’ll see people come forward to build the needed infrastructure and make power more efficiently and with resources we don’t currently use extensively like biomass, solar, and wind.  So we can either conserve and be miserable, never providing entrepreneurs and industrialists with the incentive to improve things, eventually needing to cut back even further as populations expand, or we can use what we need and provide the funding and incentive to make cold fusion or cars that run on water.  I say use what you need.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

A Failure of Government and the United Airlines Passenger Debacle

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There is probably few people who haven’t seen the absurd video of the passenger being forcibly dragged off of a United Airlines flight.  Obviously this was a grave public relations error by United Airlines, and I hope the man in the video gets a lot of money from them.  In business, you put the customer first.  Bumping passengers from the plane so that four employees could take the flight was, in a word, stupid.  United could have:

  1.  Not overbooked the flight.
  2. Offered more money for people to volunteer to wait for the next one. (Someone would have volunteered if enough money were offered.)
  3. In the worst case, rent a car and have your employees drive the four hours to Louisville for the flight the next day.  As it was, they probably took longer to get there than they would have driving.

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The truth is, however, that scene could have been any of the major airlines.  They all overbook, and they all force people to miss their flight if they cannot get volunteers.  United was just the lucky ones who had the right combination of a clueless flight crew, a frustrated passenger, and an over-the-top group of security guards.

         

The real issue isn’t the airlines (or it isn’t just the airlines).  The issue is that the airlines have an effective monopoly on air travel, or at least there is little enough competition that an airline can say, “Gee, I should charge $50 to check a bag,” and there aren’t isn’t enough choice for passengers to tell them where they can stick their baggage fees.  This is one instance where government regulation is needed since there is not enough room for enough competitors to make free enterprise work.  There are only so many spots at the airports, and the air traffic control systems can only handle so many planes, and it is so expensive to start an airline that few people can do so.  This means there is not enough competition, so the airlines can basically abuse customers all they want, because “Where you gonna go?”

Here is where government should be stepping in to protect the consumers.   You would think that the government would be making sure the paying customers, many of whom have very little choice but to fly occasionally, were protected from price gouging and abuse.  They are falling down on their duty, and in many cases making things worse.   Why are airlines able to charge big fees for bags, or food on the plane, or even the ability to have enough leg room to avoid dying of a blood clot?  And why are they allowed to put so many seats on the planes and make it so uncomfortable?  Why are airport food prices so high, and why are they able to charge so much for things like water when every passenger is forced to buy water and drinks since they cannot bring them through security?  Given the monopoly airlines and vendors at the airports have, where is the government regulation protecting the citizens – the ones who elected them?  Instead, governments are conspiring with the airlines and vendors to get more money from the passengers in the form of taxes and fees.

Think of what had happened to that man before the video you saw, as happens to everyone foolish enough to take a flight:

  1.  He left home early, worried that he might hit traffic and be late to check in.  If he was late, he would miss his flight and lose his money.
  2. Once he got to the parking lot, he needed to wind all around to get into the lot, then drag his bags to a shuttle.  Hopefully the shuttle wasn’t full when it got to his stop.  No one helped him drag his bags up the stairs onto the bus, and everyone was impatient with him.
  3. When he got to the terminal, he had to drag his bags down, walk who knows how far into the building, and then drag his bags all along the concourse to the line for his airline.
  4. He had to wait, perhaps a half hour, for a kiosk to open up.  He then had to drag out his itinerary, figure out where the confirmation number was, pull out a credit card to verify his identity, and check himself in.  If he forgot something of had to wait in line too long, he might miss his flight.

                            

5.  After checking in, he had to wait for the airline attendant to print his luggage tags and give them to him.  He probably received no greeting.  He had to worry that his bags weighed too much, or he’d pay a $100 fee, plus he had to pay $50 per bag regardless.  When the airline rep was done, if he was lucky, she dropped the bags, face down so that things in the pouches got smashed, on a conveyor behind her.  If not, he had to drag his bags to another line and wait for them to be inspected by TSA.  He had to wonder as he left them if they would actually make it on the plane.

6.  After checking in the bags, he had to find the security lines for his gate.  He probably got no directions to the gate from the check-in counter and had to look all over his boarding pass to figure out which gate was his.  If he messed up, he would miss his flight.

7.  Once in the security lines, he probably had to wait 20 minutes to reach the first TSA agent, who probably gruffly asked for his ID and looked at him like he was a serial killer.  He may have gotten a nice greeting (the first ones are usually the most professional), but he would be made to feel that if he was lucky and did everything right, he would be allowed to proceed.  Otherwise, he would miss his flight.

8.  After getting his ID checked, he would then wait in an even longer line, wondering if he was going to make it to the gate on time or miss his flight.  Finally he would be told by an agent yelling to the crown that he needed to take off his shoes, belt, hats, coats, and empty his pockets entirely.  He would then need to put his wallet, passport, and everything else of value into the x-ray machine , wondering if someone would steal it on the other side before he got a chance to get to it since his stuff might get through before he cleared the scanners.  He probably hoped that he had not lost his ID in the rush and confusion.

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9.  After waiting for the people in front of him, and having to walk where lots of people who didn’t think to wear socks had trod just before him, an agent would then motion for him to enter the scanner where he would be forced to assume the surrender position – hands up, palms out — while his naked body was revealed to a total stranger in the other room.

10.  If anything was detected in his pockets, or if he was just lucky number 22, he would be made to go to a little cubicle, where he would be patted down all over his body, including his private parts.  Through the whole, humiliating experience, he would be wondering if he would miss his flight.

11.  After finally getting through security and struggling to get dressed again, he would need to stop by a shop to get some water since he couldn’t carry any through.  Rather than paying the $1 or so as he would have seen outside of the airport, the price would be $4 per bottle.  The government has done nothing to protect him from this price gouging.  Instead, the city and state government have probably set the rents really high, basically making the vendor charge a huge price for water.  He is captive in the airport, so he has no choice but to pay the price or go thirsty.

12.  At the gate, he would be required to wait for the flight to board, probably not told that there was a delay until the time at which he was to board had long passed.  If he were late, he’d miss the flight and lose his money.  If the plane was late, too bad.

13.  During boarding, he would need to wait while all of the more important people boarded the plane.  He would finally have his section called, need to wait in a long line to get through the doors, then wait in an even longer line as people slowly pushed their way past the folks in 1st class who were getting their first drinks, and make his way slowly back into the cattle section as people fought to get their bags stowed.  He probably didn’t have any room over his seat for his bag by the time he got there since someone sitting behind him took the space for one of her large bags.

14.  Finally, after all of this, he made his way into his tiny seat with no leg room that was just big enough to wedge himself into.

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Then, he is told he would need to leave so that the airline could have some of their employees fly.  Where is the government to:

  1.   Make parking rates reasonable.
  2.  Prevent baggage fees and other price-gouging fees.
  3.  Provide a smooth, friendly, courteous screening process.
  4. Ensure prices for concessions are reasonable, given the monopoly they have created (or maybe require the airlines give you a $0.25 bottle of water after you’ve paid $400 for a flight).
  5.  Prevent airlines from kicking you off of the plane after you have paid for your ticket and shown up on time.

Where government regulation is needed, they have failed miserably.

What do you think?  Please leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.