Economics & Finance

Larry Kudlow makes a strong case that the US dollar has turned:

At the turn of the new year the vast majority of pundits expected the dollar to continue to slide. Yours truly disagreed, arguing that lower tax-rates, monetary restraint, and solid economic growth was a prescription for a dollar rebound. Since December 30, both the broad and the narrow dollar indexes have appreciated more than 3 percent. The dollar-euro cross rate has improved 3.5 percent in favor of the greenback.

And commodities have hit the skids. Gold is off 5 percent, spot metals are off 4.5 percent, futures are off 2.5 percent, and the broad spot commodity index is off 4 percent. The net drop in oil since late October has been nearly 20 percent. The fall in the Baltic dry index (raw material goods shipping) has been 29 percent. On the oil front, the tanker rate on the Arabian Gulf to Singapore route has dropped 77 percent since early November.

Shortly after the November election, in a media opportunity in the Oval Office with Italian President Silvio Berlosconi, President Bush linked his fiscal policies of lower taxes, Social Security reform, and intensified budget restraint to the Fed’s efforts to drain excess cash and raise their target rate. Bush explicitly mentioned the need for a stronger dollar. This was the first time the President had taken this up, and the first time he linked his fiscal strategy with the Fed’s monetary restraint. Most folks ignored this signal. They shouldn’t have.

Kudlow’s post is worth reading in its entirety.

Gary Becker and Richard Posner of the University of Chicago have now started a weblog, believe it or not. The format is a little daunting, in that the first thing you see today is a pair of essay-length replies to previous essay-length postings. Also, they were both on today’s Wall Street Journal editorial page, unfortunately available to paid subscribers only. Reading the dead tree edition, I was struck by Posner’s argument that it is irrational to neglect remote but catastrophic possibilities such as tsunamis in previously quiet regions and asteroid strikes anywhere. The amounts spent might well be wasted money, but the consequences of failing to avoid the disaster are insufferable.

What struck me is that he should have given credit to Blaise Pascal, who first advanced this argument as Pascal’s Wager.

Thanks Fred for pointing out this interesting tidbit:

Maud Newton and Mark Sarvas are boycotting Amazon because, according BuyBlue.org, 61% of Amazon’s political donations went to Republicans — whereas Borders gave 100% and B&N gave 98% to Democrats. Seems a bit harsh to me, but I can respect their stance.

I’ve always liked Amazon. Great layout, fast delivery, and good prices.

Borders and B&N always seemed overpriced (both books and food/drink) with limited selection. Nice to browse, but when you need something specific, Amazon (or the local library) is the place to go. Not to mention the wear and tear public browsing causes at Borders and B&N. If I want to buy a new book or magazine, I rather it be new…

So I won’t be throwing my money at Borders and B&N anymore.

Buyblue.org is a useful site. I’ll be sure to use it to check who the big Republican donors are and buy from them.

I’m not a fan of big government. Being an honorary Chicagoboy, I think given any task, chances are, the private sector will do it twice as well for half the cost. So obviously, I think Social Security is a joke, and that private accounts are the way to go. Since it’s the Christmas lull, I put some ink to paper, which me being a financial analyst, means putting it on Excel. I did a simple spreadsheet to see how a private account for a baby boomer household retiring in 2004 would have fared against the government. This is based on commonly available information, so is not a fine tuned model, but it’s enough to make my point.

I took the Census bureau’s household income from 1967 to 2003. I assumed 2004 income levels are the same as 2003 for simplicity sake since it’s not available yet. I assumed the current 6.2% Social Security tax rate is the same from 1967 to 2004 also for simplicity’s sake. The assumption is that the 6.2% tax would go into a government administered private account instead of the general pot. I then took the Dow Jones Industrial Average from July 1, 1967 to July 1, 2004, and calculated the compounded annual returns for the private account. I picked the July 1st mid-year point to correct for year-end fluctuations. I based the returns on the DJIA because it’s available. I would have preferred the S&P 500, or a broad market index such as the Wilshire 5000, but they aren’t available. The good is that the DJIA represents the best of American industry such as GE, Coke, and Boeing. The bad is that it doesn’t truly reflect the technology revolution as say the S&P 500 would. But it’s life.

Assume also that after retirement the account shifts to a low risk interest bearing account earning 5% a year on the unused account balance.

According to their website, the current, unfunded, maximum payout for 2005 Social Security payments is $869 a month; which translates to $10,428 per year.

Assume someone had a stroke of genius in 1967, and enacted the Social Security Reform Act of 1967, shifting all contributions to private accounts and invested the accounts in the DJIA.

Assume further that Incognito’s worker bee household began contributions to the account at age 25 in 1967, retiring in 2004 at age 62. If Nito’s household has always been in the mid-tier household income bracket, his final 2004 household income would be $54,453 a year. Under the plan, his monthly payout from the plan would be $1,417 a month, or $17,000 a year. This is 63% more than the current Social Security payout. The huge difference is that the private account is funded for 20 years of retirement, or to age 82.

Say Nito’s household is in the top income bracket for all or most of his life. His final 2004 household income would be $154,120 a month. His household payments for retirement would be $3,583 a month, or $43,000 a year. Again, this would be fully funded for 20 years of retirement.

Second tier 2004 household income would be $86,867 a year. Monthly payments would be $2,167 a month or $26,000 a year.

Say Nito wasn’t very successful in life. Fourth tier ending 2004 household income would be $34,000 a year. Social Security payments would be $950 a month, or $11,400 a year. Fifth tier ending 2004 income would be $17,984 a year. Social Security payments would be $504 a month, or $6,050 a year. Again the big difference being that it’s fully funded.

So the only time you’ll be below the current Social Security maximum is if both husband and wife make minimum wage all their lives.

Change the number of retirement years from 20 to 15 or 10, and you’ll be living well.

What-if numbers amount to exactly zero ($0). But it makes you think.

Maybe 37 years from now we’ll still be talking about reforming Social Security. Maybe someone will say wow, wouldn’t it have been a great idea to put it in private accounts?

Here is my Excel.

More thoughts: Based on the Census Bureau, there are 112 million households in the U.S. If you take the current annual mid bracket Social Security contribution of $3,376 a year as the average, that’s $378 billion a year. Investing private accounts for Social Security in a broad market index would imply putting 98% of the amount back into the economy (index funds charge about 1% for management fees, going by my rule of thumb for government implies a 2% management fee for lazy bureaucrats.) You can argue that putting $370 billion back into the economy would create a tremendous amount of new jobs, which in theory would cascade into more income, more contributions, etc etc. lifting all boats.

Update: Looks like good ol’ Cato Institute was way ahead of me:

For example, assuming historical rates of return, if individuals born in 1970 were allowed to invest in stocks the amount they currently pay in Social Security taxes, those individuals could receive nearly six times the benefits that they are scheduled to receive under Social Security, as much as $11,729 per month. Even a low-wage earner would receive nearly three times the return on Social Security.

Update 2: Thanks to Cole for pointing out the correct historical rates.

I’ve updated the excel and the numbers blow away the current Social Security payments. Even the lowest bracket is comparable to the current unfunded maximum payout:

There’s vending machines in many schools across the United States. The kids can buy sodas, candy, chips. The school gets a cut of the profits. Works out well for everyone concerned.

Lately, though, school administrators have been worried about public pressure. Parents have been complaining about the high calorie snacks that the kids have been buying while at school. They wanted the selection to be changed to a more healthy mix. (Why this is the school’s problem instead of an example of lax parental supervision is something I can’t answer.)

So the schools got rid of the really tasty stuff and replaced it with, I dunno, organic fruit and soy energy bars. You know, stuff that no one buys for the taste.

And the obvious happened. The kids stopped buying stuff from the school vending machines.

Now the schools are upset. The money they got from the sales of all that sugary stuff has dried up. In some areas the loss is staggering, with schools in the San Fernando Valley losing $100,000 USD a month from soda sales alone! (There can’t be that many paper routes, so the parents there must really pass the cash out every morning. I wonder if they’ll adopt?)

Supporters of the junk food bans say that they knew that there was going to be a loss in revenue for awhile, but that sales would pick up eventually. I suppose they figure the kids will get used to the crappy taste or something. Looks like they aren’t parents who ever had to convince a child to eat their carrots.