Carl from Chicago – Page 114

Iran and Prognosticators

June 29, 2009 by Carl from Chicago

One of my favorite quotes (I don’t even know if it’s true) is supposedly from Jack Welch and it is about how he got rid of his forecasting department:

We might be surprised, but we won’t be surprised we’re surprised

Businesses are often surprised by changes to the environment, even while they tout their ability to master the situation. One company I used to work with had a joint venture with CISCO in the dot.com era – at the time CISCO was touting their advanced financial capabilities, their ability to close the books a few days after quarter end, and most importantly their supply chain mastery that allowed them to accurately forecast demand. Almost immediately after that period of boasting, CISCO had a big inventory write down since they built too far ahead of demand and had to scrap the unsold goods and materials.

State Tax Update – California

June 29, 2009 by Carl from Chicago

State Tax Review:

Given the recent financial events that have hit Wall Street, real estate, and the average American consumer, the purpose of this post is to look at how our largest states have responded to this fiscal crisis with regards to tax policy. Let’s start with California.

For some background – here is a high level overview of state income taxes (circa 2006, hasn’t changed much since then on a relative basis). If you go to this section at LITGM you can see all of the tax posts we have put up over the years that cover similar topics.

California:

California is governed by a solid Democratic majority with a Republican governor. The California situation is different than most states in that a 2/3 majority is needed for tax increases, meaning that tax increases are difficult to pass through the legislature. California also has a “proposition” culture, where items are put directly to the voters (such as the famous “Proposition 13” which limited growth in property taxes).

California has a very high “graduated” state income tax (meaning that it is tied to the Federal tax liability, with some exceptions) and this forms a significant portion of their total tax collections. Per this very helpful site, in 2008 47.5% of their total tax revenues came from the state income tax, above the average of 35.7% for all states as a whole. However, this percentage is lower than its total impact – some states (like Illinois) have an essentially “flat” 3% state income tax (at 32% of Illinois state tax burden), but California’s is graduated so that they are taking 9.3% on all “taxable income” > $47,000 and another 1% on all income > $1,000,000, making their total tax burden at 10.3% for the highest earners. California is proposing to increase this rate (highest in the US of major states) by an additional 0.25% with their latest budget proposals, to a high of 10.55% (the 0.25% increase was part of Proposition 1A, which was defeated).

Reliance on a high, graduated state income tax is a two-edged sword – during “boom” times (such as the latest economic expansion) high income payers contribute a disproportionate amount to the budget (relative to other states) – but when the stock option gains evaporated starting in 2008, this portion of the state receipts is hit harder than other sorts of taxes (sales taxes, property taxes, gasoline taxes) because income and gains can fall rapidly which immediately reduces collections.

California immediate reached for the lever of increasing sales taxes as soon as the recession hit, raising the state portion from 7.25% to 8.25%, with local additions rising it up to 10.25% in some areas. Raising sales taxes is generally viewed as a “regressive” tax measure, because it hits the poorest hardest because they consume a higher percentage of their total earnings than the rich (the 1% increase was also defeated with proposition 1A).

California also has a very high corporate tax, at 8.84%, which makes up 10% of their total tax receipts. This rate is the highest in the nation, making it a dis-incentive for businesses to move into the state (unless they are able to reduce their Federal tax burden, which will result in tax relief, through various tax strategies).

The Tax Foundation (a non-profit group) wrote an excellent analysis of the California tax situation here. Per the Tax Foundation:

These tax increases are estimated to raise $10 billion, with the extensions from Proposition 1A generating a further $6 billion. California has been struggling to close a $40 billion budget gap between desired spending and expected revenues in its $92 billion 2009-10 budget.

Proposition 1A was defeated, leaving the state’s finances in a precarious state as far as balance of payments, although the state faced a huge budget gap in any case.

Soccer vs. Baseball

June 28, 2009 by Carl from Chicago

When I grew up I played a little bit of soccer. This was a long time ago and I was not particularly talented. Our team was better than most in the Chicago area because two German-born children of the coach of the long-defunct Chicago Sting also played alongside us and clearly led the team. I’m sure as actual German soccer players 30+ years ago they must have thought our soccer skills were absolutely pathetic, in contrast with European standards of the day.

There have long been debates on the (low) popularity of soccer in the United States, along with hand-wringing about the cause and various opinions on all sides. I haven’t paid too much attention to the debate but I was on vacation in Italy when the US team tied Italy in 2007 and I did feel good at the time (it was quite a shock to the locals, I’ll tell you).

Over the years soccer has grown as a youth sport and also as a competitive sport. The Chicago Fire soccer team actually is able to draw a decent crowd. In Chicago we have a vast foreign born population and whenever there is an important match on overseas our local bars pick up the games on satellite and are packed full of hard drinkers in bar wear for their favorite team.

The US beat Spain recently in a huge upset that did get some press. To say the team from Spain was favored is to vastly understate the scale of the upset; some compared it to the US defeat of the USSR in 1980 in ice hockey.

Nuclear Energy Update

June 20, 2009 by Carl from Chicago

Background on Nuclear Energy:

Nuclear energy provides a significant portion of the world’s base load power capacity, along with coal power, gas, and hydro-electricity. While “renewable” energy and conservation receive the lion’s share of the media coverage, in fact they make up a minuscule proportion of our total generation.

In the United States, for various reasons, there has been little or no investment in new base-load energy capacity, other than natural gas, and our existing plants are continuing to age. Since the plants have a long lead-time, if no new plants are started soon, we will have retirements and no reasonably priced options to replace them, which will drive up the total cost of energy and make our economy less competitive.

There are two viewpoints that I see frequently on this topic:

1) “The Greens” who view nuclear plants as a possible solution for greenhouse emissions and less “dirty” than coal, and I will put most of the government and media dreamers in this category
2) “The Engineers” who talk about new plant designs and how efficient they are and how technology can help us resolve this situation, which seems plausible given that most of the technology behind nuclear and coal plants actually in operation today stems from the 60’s and early 70’s

One viewpoint that I don’t see very often is what I will call “the bitter realist”. I am definitely in this camp, based on decades of experience with the utility industry, focused primarily on the financing side, which also requires a fair dose of regulatory experience (since they are closely intertwined). You can see much more detailed posts (50 and counting) on the energy industry in the US here.

Recent Events in Nuclear Power:

One event that didn’t receive the coverage that it deserved is the decision to abandon the Yucca Mountain storage plan in Nevada for spent nuclear fuel. Obama made this decision not to fund Yucca Mountain in the 2010 budget, although this has not been finalized. Over $9 billion has been spent on Yucca Mountain and work has proceeded on this effort since 1987. Utilities have been paying into a Federal fund to contribute to this storage site, and now each individual utility will need to determine how to store their own fuel on their own location indefinitely. There will also likely need to be some resolution to the amounts that the utilities have paid into the fund and whether these contributions will continue.

This plan was the signal monstrosity of the “greens / government” combined with the “engineers”. The site was studied to death but even 2 seconds into it the “bitter realist” could have told you that there was no way that thousands of shipments of nuclear waste were going to be shipped all the way across the USA and dumped into Nevada; this process could be halted anywhere by 1) bitter fighting by the state of Nevada (note that Harry Reid is now a big power in the Democratically controlled Senate, and he is celebrating) 2) lawsuits or even protests along the tracks 3) any sort of snafu (which seems inevitable, considering the logistics) along the way, the same way that the Three Mile Island incident was used to be the death knell of nuclear power in the USA.

So, now effectively we have abandoned any type of central storage (don’t believe the nonsense by the new energy secretary about a new plan; this one took 22 years to die and we haven’t even started thinking of another one) and now each of the utilities effectively need to plan for their own spent storage on site, indefinitely. This will also be something that the protesters can use to try to slow down / stop any new construction (do you want radioactive fuel in your neighborhood FOREVER? – I can see the signs in my head, now).

Another problem is that utilities have to plan for decommissioning their existing sites and pay for it “as they go”, unlike the Federal government, for example (which just issues debt and more debt). The cost of decommissioning is gigantic; you can only imagine the feast of lawyers and regulators that swoop to the site like seagulls at a garbage dump. The Nuclear Regulatory Commission recently cited 18 nuclear power plants to address these funding shortfalls – since they are not able to invest in risky securities, the current low interest rates will also mean that additional cash infusions will be required at some point in the future (although these policies mean that they didn’t lose money in the recent crash, either).

US Government Selects Four Companies for Federal Loan Guarantees:

The US Government recently selected four companies for Federal loan guarantees for new nuclear plant construction. Per the WSJ article titled “US Chooses Four Utilities to Revive Nuclear Industry”:

Seventeen companies applied for $122 billion of federal loan guarantees for 21 proposed reactors. In creating their short list, federal officials sought companies with strong development teams and plans that could be implemented quickly. They also wanted a mix of traditional utilities (Scana and Southern) and newer “merchant” generators (NRG, UniStar) that sell electricity at unregulated prices. Merchant operators have reaped big productivity gains in nuclear power in recent years. Foreign partners that might be able to contribute loans or equity were also considered a plus.

Hmmm…. when I saw this list I was pretty confused.

Blogging and Marginal Cost

June 19, 2009 by Carl from Chicago

A recent article in the NY Times titled “Blogs Falling In An Empty Forest” described the apparently common phenomenon of people starting blogs, and then abandoning them. Per the article

According to a 2008 survey by Technorati, which runs a search engine for blogs, only 7.4 million out of the 133 million blogs the company tracks had been updated in the past 120 days. That translates to 95 percent of blogs being essentially abandoned

The article went on to describe some common situations; a stay-at-home mom trying to earn some money from her blog, or talking about their personal beliefs and such. The blogs seemed to promise profitability, but didn’t deliver, even if they had a reasonable amount of page views.

The writer of the article was clearly a journalist and not an economist – the economist would have immediately proffered the explanation for why this occurs

The marginal revenue for this product ultimately will be equal to the marginal cost

And what is the marginal cost for setting up a blog? Why it is roughly zero, of course. And with millions setting up blogs and “chasing” (or not, in the case of LITGM and many other blogs we know and like) page views and advertising dollars, the market was instantly overloaded with choices and soon became a mass of abandoned blogs.