Carl from Chicago

Business executive interested in history, economics, taxation and energy policy.

Hype and Promise

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This week I walked by the always-mobbed Apple store on Michigan avenue where they had a big window display for the new iPad mini. I liked the expression on this woman’s face as she looked at her new iPhone.

Down the street you can see the lonely Garmin store. Garmin, the GPS related company, has its only retail store in the world (per wikipedia, at least) on Michigan Avenue and I have been by it many times and it is sparsely populated, at best.

GPS used to be a great hype story, with the possibilities seemingly endless, and companies poised to clean up with huge stock prices. Soon, however, GPS became a widely used tool, background almost, and the hype was forgotten. Garmin (GRMN on NASDAQ) initially was a darling of the stock market, a momentum stock, but which has since transformed itself into what appears to be a well-run and diversified company spread across the marine, flight, exercise, and auto areas. They have changed from a stock touting the limitless growth of GPS to a practical stock that explains their gross and operating margins for each segment clearly and also how they are using the free cash flow that they receive to pay investors a large and growing dividend – go here for a brief presentation for investors from their web site.

It is interesting to see how our perception of a company or stock is based on our personal experience with the consumer devices. We see Apple at home or at work, and interact with it every day of our lives (if you are an “Apple” person). On the other hand, few of us think much about Garmin, but it is integrated into cars, exercise devices (one of the few stand alone devices that really seems to be growing), planes, boats, and many other areas. At one time it seemed that everyone would have a stand alone GPS devices, but then the “coolest” consumer application components were integrated into iPhones and Android phones and became commonplace in autos so it just became less exciting over time.

Cross posted at LITGM

Warren Buffett The Hypocrite

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Taxes are very complex in that there are many different types of taxes designed to raise revenue and modify behavior that the government wants to incentivize or dis-incentivize. At the highest and most simplified level you have:

Sales Taxes – generally taxes paid by the buyer to the seller at the point of purchase (tax on food at the grocery store)
Income Taxes – taxes on money people earn paid to the Federal, State or Local governments. Often this money is “withheld” from your paycheck. Typically there are myriad deductions applied to determine the amount owed
Property Taxes – taxes levied on property owned based on valuation and paid to the local government annually
Excise or “Sin” Taxes – taxes on specific items that the government wants to dis-incentivize such as cigarettes and alcohol, collected at the point of purchase
Payroll Tax – tax on wages used to “fund” social security and medicare and are levied on the employer and employee alike, to a certain amount, with few or no deductions
Capital Gains Tax – tax on the profits of securities, properties or businesses sold when the amount received is greater than the cost
Estate Tax – tax on the accumulated assets of someone who died, paid to the government.

There has been talk in the media about wealthy individuals who advocate “higher taxes” for various reasons, and they receive disproportionate press coverage for their “selfless” actions. Warren Buffett in particular has called for higher taxes on the rich, specifically INCOME taxes, as you can note below:

As fiscal cliff talk buzzes around Washington and Wall Street, Buffett on Monday published a New York Times editorial calling on Congress to impose a 30% tax on people making $1 million to $10 million a year and 35% percent above that.

However, Warren Buffett is taking significant steps to actually avoid paying the ONE tax specifically designed for him – the estate tax. Here he joins with other billionaires on their “pledge” to give away their fortunes (to trusts that they would designate how the money gets spent).

Warren Buffett got 11 more billionaires to agree to give away half of their wealth to charity.

It is hypocritical for those billionaires like Buffett to set aside their money in charities to be directed for purposes that they “believe in” while everyone else’s money is funneled to Federal, State or Local governments to fund whatever that governmental body decides to do with it. You and I can’t control where our payroll, income, sales or property taxes go – and we have to accept that. Then Buffett, too, should accept that when he calls on higher taxes for everyone (but income taxes hardly dent him since his wealth would be taxed through capital gains if he chooses to sell or most likely the estate tax on all of his unrealized gains through his lifetime) he should dismantle his “estate tax” protections and just show up and give his billions directly into the US Treasury when he dies, to be used for whatever purpose the government chooses, likely to pay interest on debt that we issue to the Chinese or to pay for some sort of poorly run entitlement or wealth transfer scheme.

Warren – if you believe in the call for higher taxes, then just die without an estate plan, and let the Federal government get their 40% of your billions. It is the right thing for you to do, since you believe (apparently) that they will spend this money wisely.

Cross posted at LITGM

More Tales from the “Front Lines” on Gun Control

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This article is from our good friend Gerry over at LITGM, who works on the “front lines” of gun control.

While a good portion of the rifle display is vacant, while half the handgun case is empty and the ammo aisles are barren we still see a lot of customer traffic. A lot. One veteran employee coworker told me earlier in the season that after Christmas the store would be empty and part-timer hours would be cut. Some may be laid off. Didn’t happen. After five years of working there, Ed is surprised.

Ed claims four years ago, after his first election and due to his past history Obummer frightened the masses enough they began stocking up, causing a mad rush for ammo but not so much for firearms. After the ammo was gone (most popular was handgun ammo at the time I recall as a customer) the crowds subsided after a few weeks. Not this time. Customers flock in during certain hours interrupted by more moderate, what we now call rest periods. The worst times are early mornings, after 5pm and on weekends all day long. We are at the point where customers are buying anything in stock and will make compromises. Definitely a seller’s market.

They come in and comment on the barren shelves. Without a prompt they comment on politics and politicians. Military veterans and law enforcement officers seem to be the most vocal in opposition to potential new laws and bans. Do not believe the liberal media propaganda machine.

Some customers will stand and stare, some just gape, slack-jawed at what little ammo selection is left, as if miraculously more will appear or the price will suddenly drop. If you are reading this and like to shoot and/or hunt you had better buy any ammo available. Prices have already gone up and will not, in my opinion, be going down again anytime soon.

Last Friday an older retired gent pushing a cart wearing a hearing aid needed assistance. He and his wife were standing in front of a free-standing display that holds buckshot and slugs. Because of his hearing loss the wife acted as translator and at times repeated what I said very loudly. He explained that his WInchester pump shotgun was nearly fifty years old and he has had it in a closet, unused for the past twenty. His question was, is it safe for him to use 00Buck in such an old weapon? My response at first was to ask what was the fixed barrel choke (knowing that an older shotgun such as his was without changeable screw-in choke tubes) set at? He claimed that it was a full choke since he used it for goose hunting. We never recommend anything regarding firearms unless the customer is very specific in a request or I can visually inspect the firearm for which they want to buy ammo, scope mounts, scope rings, etc..

Here is where you may have a few problems sir. First you should have your shotgun inspected by a professional gunsmith. Second, a constricted full choke creates a potentially dangerous situation when firing 00Buck no matter how new a shotgun may be. when firing, the muzzle may splinter or the barrel may bulge by being over pressured. At that point his wife jumped in and loudly said, “That would be ironic, here we’re trying to protect ourselves and we could end up being the ones getting hurt.” In this situation something I often do is suggest they get a second opinion. There are two others who work in my area with much greater knowledge in firearms than I so I will call for one on the 2-way when the need arises. Roger came over and confirmed my advice. We then set the gent and his wife up with a box of #4 lead shot. It’s not 00Buck but #4 should get the job done. Larger lead shot for wing shooting such as #4 is always hard to find but we had a few boxes.

This couple is no different than many of the customers who have come in lately. They are either first time buyers or aged owners who put away their firearms long ago for whatever reason and now want to have them back in good working condition. These folks are taking what they believe could be their final chance to possess personal firearm protection legally.

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Efficiency and Bad Mental Models

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Back when I was growing up we kept the boxes on all electronics. Up in our attic there was a box for each PC, each TV, our stereo, and anything else of similar worth. You kept the box because these items were valuable and you might want to return them, and if you moved (in and out of college, or between apartments), the boxes might minimize damage to these important goods in transit.

Recently I bought a new printer, an Epson all-in-one Workforce 545. I bought this printer specifically because it had “iPrint” which allows for immediate printing with no drivers or other installation on all Apple devices, including iPads, iPhones, and my Mac. For your iPad or iPhone if you upgraded to IOS 6 you can see it immediately when you click on the icon. It works great. I have it directly connected to one of our Windows PC’s and it works great as a traditional printer, as well.

But what do we do with the box nowadays? I keep it around for a couple of days to make sure everything runs reasonably well, and then I throw it out. Why? Because that printer, which has capabilities that would have seemed like science fiction a few years ago in a home device (remotely print across all devices without drivers) cost me about $130. That printer is essentially disposable. This printer, which includes a scanner and actually relatively advanced networking functions, has plummeted in price from what it WOULD have cost to do the same functions (if it were even possible) a decade ago.

To see the opposite of efficiency, go out for dinner and drinks on a Friday or Saturday night in River North. Entrees, an appetizer salad, a couple of drinks each, and a dessert will definitely cost you north of $100 and likely closer to $200. Every time I go out on the weekend I essentially purchase one of those printers and throw it away anyways.

This difference between manufactured goods and services (or “crafty” items, like designer lighting or tile) has grown immense. I understand why it is expensive to buy a meal in River North – real estate is punishingly expensive, food is expensive, labor is expensive, you have to pay a raft of fees and taxes of all sorts (likely under and over the table) to run your business, union labor has to be used to build everything (unless you want a giant rat installed in front of your business, which I see a lot in River North). There is little or no efficiency inherent in any of the above items (except for food production), and few incentives to change the business model when you can just pass on these rising costs to people like me who go out on the weekend as long as they are willing to pay for it.

I still fall for the “mental trap” and sweat over paying a few dollars more for an electronic device buying from one location or another and whether or not to pay more for an upgrade or advanced features. Meanwhile I go out on the weekend and end up paying $200 for a meal for two and that is business as usual (in River North, at least). This is because I haven’t yet shed my upbringing to “keep the box”.

Cross posted at LITGM

Our Broken Frame of Reference on Government Spending

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When I first traveled to Door County in Wisconsin I visited the various lighthouses and was given a tour by local historians. One of the points that stuck with me most of all was that these lighthouses essentially were one of the few elements of the Federal government that were locally present in the region.

Today our government is ubiquitous at the Federal, State and local level, especially here in Chicago where Cook County is one of the largest counties in the country, with massive hospitals and criminal court facilities.

I wrote about government influence and how it is all around us in posts aptly titled “We’re Barely Capitalists” here and here based on some (semi-humorous) local insights. It would be difficult to find substantial portions of the economy anywhere in a place like Chicago that wasn’t heavily influenced by government spending and allocations.

This article in Business Insider reviews recent job growth and notes that 40% of it was subsidized by government.

Consider our economy right now: about 17% of it is health care; about 6% in terms of GDP is education; and with some overlap, 15-20% is what we call government consumptiongovernment activity, not just transfers. At all levels of government, including state and local. Add those all up, take out the overlap, and it’s a pretty big chunk of the economy, like 20-30%. Those are all sectors where there are massive subsidies, massive distortions of incentives, a lot of bad policy; and it’s hard to measure value.

State and Local governments are poised to grow in 2013, according to this Bloomberg article.

After slashing their workforces by about half a million in the past five years, state and local authorities will add employees in 2013… Their payrolls in the fourth quarter will be 220,000 larger than in the same period for 2012.

Bloomberg then goes on to explain how this state and local government job growth is funded; by Federal US deficits at the trillion dollar+ level that then are passed down to the State and Local levels.

States get about one-third of their revenues from Washington. The agreement Congress hammered out to avoid more than $600 billion in automatic spending reductions and tax increases –the so-called fiscal cliff — spared states from cutbacks, at least for now. (states received) approximately $519 billion…in aid last year.

Don’t forget that, in addition to the US Federal debt and borrowings, the state and local governments are also deeply indebted. Not only are we borrowing to fund current needs, we are also accumulating pension and medical obligations that are truly enormous and growing, especially here in Illinois where recent pension reforms failed to get off the ground.

Our frame of reference on all this government spending and debt, however, is skewed by our comparison group. We continually compare US spending levels to the “Industrialized Powers” which include Western Europe and Japan. Comparing the US to these countries, many of which are economic “basket cases”, is not relevant for a forward looking appraisal of countries where our actual economic competition is coming from – we need to look at China, India, and other rising powers that represent the future.

One of the oldest shibboleths is the fact that the US doesn’t have a “single payer” health system, like the (broken) comparison group listed above. However, if you get sick in China, Brazil, India or other rising countries, there is a (small) safety net but you essentially have to pay substantially extra or have connections in order to get what we’d consider to be modern and effective medical care.

Another point of comparison is greenhouse gases and various environmental practices, such as use of “green” power. Our broken “peer group” countries like Spain invested heavily in massively subsidized wind generation, as I document here, which recently collapsed the moment that these subsidies evaporated (which correlated with the country essentially going broke and being re-floated by the EU central bank. China and India continue to invest enormous amounts in coal power, since it is so effective and plentiful and is needed to power their growing economies.

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