Relevant and even prescient commentary on news, politics and the economy.

Netflix Toasts Itself

I was going to write something about Reed Hastings’s inane email, but Wired covered the main point, even if they did bury the lede:

However, it’s impossible to see how the split itself benefits customers. The price and plan changes that flustered many of them months ago remain in place, but the company now directs them to two web sites with two search indexes, two completely separate sets of recommendations, two entries on their credit card statements, and so forth.


When Erik Loomis (now known as the sane political blogger at LG&M) noted the issues with Netflix splitting the company way back in July, there were some objections from the Twitterati that his post didn’t address any of the reasons Netflix had to make the change,* apparently ignoring that markets have to have both a buyer and a seller to function. As “Divorced One Like Bush” recently noted, there are business strategies you can use, and there are business strategies that work against you.

But rarely does one see a company deliberately opt for a business strategy that works against them.**

*One of the more prominent of those is now staunchly defending the company’s latest CF, but did have the decency to quote a respondent: “I admire the umbrage your taking on behalf of netflix and their ungrateful customers.”

**Well, maybe not so rarely, but at least Tyco management made no secret that it was determined to enrich itself at the expense of the companies it acquired and is now spinning off.

cross-posted from Skippy, the Bush Kangaroo

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HOUSING VS HOUSEHOLD FORMATION

Recently there has been some discussion of housing in the economy that looked at housing starts versus the long term trend of housing starts and concluded that starts have been so far below trend over the last few years that it should offset the excess housing built before the recession.
If the excess housing stock has been worked down the stage would be set for a rebound in housing starts and stronger growth in construction employment.

I have major problems with that analysis that is based on the assumption that trend demand was the same as trend supply. Several variables enter into determining the demand for housing. A couple include income trends and interest rates. While these are important determinants of the short run cyclical trends in housing the factor that drive the long run secular housing demand is household formation. Moreover, there is a tendency to assume that household formation has a flat or rising trend because of population growth. But actually, the long run trend for household formation has been down. In the 1970s-80s the baby boomers becoming adults and forming their own household inflated household formations. In more recent years the baby bust after the baby boom and the poor economy has held household formation down as young adults have had to continue to live with their parents. Recently household formation has been roughly half what it was in the the 1970-80s.


If you look at the smoothed data it shows that housing completions is strongly tied to household formations. Basically the data implies that back in the 1970s-80s household formation was strong enough to justify annual housing starts and/or completions of over 2 million. But in recent years that has not been true.


If you regress housing completion against household formation you get an equation that implies that housing starts or completions should be about 1.12 times household formation. This difference stems largely from the demand for second homes and the destruction of old housing stock But note that the average age of the US housing stock is about 29 years and the old homes that are destroyed would on average be much older and stem from an era when housing starts were much lower.


But if you work on the premise that housing demand is equal to 1.12 times household formation rather than just looking at the trend of housing starts you get a very different view of how much excess housing stocks there is. It shows that demand has just recently started to exceed the supply of new homes.

Moreover, if you look at the cumulative difference it shows that the current excess stock of homes has barely peaked and is still about some 700,000 houses. Compared to the low level of housing starts in recent years that implies that the excess stock of homes is roughly equal to the number of houses built in recent years. This implies that it will be a long time before the market works down the excess stock. This is in sharp contrast to the analysis that just compares housing starts to its long term trend.


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"House rich & cash poor": Why Social Security can’t be Raided(Part 2)

(Still cross posted from dKos. But since coberly and I have an extended colloquy there maybe not a bad place to start)
Part 1 was kind of a set-up in both senses of the word in that it didn’t really deliver on the post title. But I think a necessary set-up and so lets resume.

When we left off we had Social Security after having a long period of positive cash flow from 1936 to 1956 and so a lot of pre-funding, leveling off in terms of Trust Fund Ratio through the 60’s, only to go into some decline in the 70s. And if we return to Table VI.A2.— Operations of the OASI Trust Fund, Calendar Years 1937-2010 we can see a system that was by any measure you like very sick by 1981, and much sicker than today. Whereas the year end balance for OAS in 2010 still represented 4 full years of 2011 cost (TF Ratio of 400) the corresponding balance in 1981 was less than a fifth of a year (TF Ratio of 18). Action was imperative and the motivation was not Reagan’s desire to tap into worker pocketbooks to fund tax cuts, as far as the Trust Fund was concerned it was the farthest thing from a piggy bank. Which gets us to our second set-up point: the Myth of the Reagan Raid. Onward and lowward (i.e. below the fold).


The Trustees measure the health of the Trust Funds in terms of Actuarial Balance. A Trust Fund in annual balance ends the year with a TF Ratio of 100 or above. But the Trustees have a longer horizon than just the next year, instead they consider the Trust Funds to be in Short Term Actuarial Balance if they project to have TF Ratios of 100 or more in each of the next 10 years, while they are deemed in Long Term Actuarial Balance is they project to have those levels of TF Ratio in each of the next 75 years.

Now the vast majority of Trust Fund assets since inception of the program have been in Special Issues of Treasuries at times with an admixture of regular Treasuries (but at no point I am aware of ever representing more than a fraction of total assets). The restriction to Treasuries is a direct consequence of language in the 1939 Amendments to the Social Security Act of 1935 mandating that all funds credited to the Trust Fund and not needed for short term benefit payments has to be held in “instruments fully guaranteed as to interest and principal by the federal government”. Meaning it would take a change in the law to have them in any other asset class, and except for short term payment purposes even in cash. While some people see something nefarious in this practice it has served the system well over the years, for example large balances built up over the 40s and 50s were successfully used to bridge gaps between income and costs through the 60s and especially the 70s. The historical record shows that every obligation was honored down to the next to the last penny (and for DI starting again in 2005). Because in the eyes of the U.S. Treasury those Special Issues are just as good as cash, in fact they pay interest on them just as the Federal Reserve does on reserves deposited with it by member banks.

Which brings us to the first point here. There can be no ‘raid’ of Social Security in any year that has a TF Ratio less than 100. Instead the federal government via the Trustees has a positive legal obligation to buy Treasuries to build up that ratio back to a minimum of 100. And if we look at Table A2 again we see that Reagan inherited a Trust Fund that has fallen out of actuarial balance in 1971 (TF Ratio of 94) and never recovered. Indeed without a temporary loan of $17.5 billion from DI to OAS in 1982 checks might have been delayed for the first time ever. But between the loan and the fix installed in 1983 during the process that included the Greenspan Commission, the Trust Fund began to recover. But only just. In fact by the end of Reagan’s second term the TF Ratio was only up to 41 or less than half the target, if anything the argument would run that Reagan should have taxed workers even MORE so that the Trustees could buy even MORE Treasuries. Instead the fix was deliberately phased in with a ten year time table with remarkable success with the TFs finally get back over 100 in the course of 1993. Which in respect to Social Security takes both Reagan and Bush 1 off the hook, when examined dispassionately all they did was restore the Trust Funds to its minimum required reserve. Now as it turns out that reserve was mandated by law to be in the form of Treasuries which by definition meant cash going to Treasury, that is what buying a bond does, you give the government money, they spend it on what they want and give you a promise in return. There is nothing ‘Phony’ about that process, not at all. And certainly no ‘raid’, instead we have the Trustees fulfilling their mandate to restore actuarial balance with any cash flowing to the General Fund being a simple byproduct of that legal requirement.

Okay that settled, back to the topic of the posts. Over the course of the mid to late 90s the solvency of the Trust Fund continued to improve by every measure: TF Ratio, year end balance, and increase in assets. But even then this risks exaggeration of actual cash flow, instead you get that by netting out interest which came only in the form of Special Issues and so were not financed out of the outside economy. In fact in Clinton’s last year 2000 the actual cash flow was $74 billion out of total SS Surplus of $132 billion. And for the most part it never got better than that, though assets in the OAS Trust Fund grew from $931 billion in that year to $2.4 trillion today (in both cases excluding DI) a growing piece of that was simply interest credited to the Trust Fund.

And here is the key point. That interest is an obligation to the General Fund, it cannot by its nature be borrowed. It can and does score as income for both Trust Fund and overall Budget accounting, for those purposes it is considered as real as real. But it can’t be tapped for any other purpose even in theory, in the metaphor expressed in the post Title it is home equity and not cash, and in this case not subject to refinance to extract that cash, which in any case wouldn’t serve to increase net wealth as such.

No it is only actual cash flow above and beyond cost that is available for ‘raiding’ in any sense and examination of our table shows that cash flow stabilized and then dropped sharply after 2008 to the point that even though OAS returned a total $92 billion surplus in 2010 this represented negative cash flow for that program alone of $16 billion. And OAS is by far the healthier of the two OASDI programs, comparable numbers show that DI went cash flow negative in 2005 and actually started cashing in its principal in 2008. This contrasts to OAS whose total Income including Interest exceeds Cost at a rate that will keep its total balance growing until 2023 with assets sufficient to bridge its cost gap until 2038. On the other hand DI’s income imbalance is such that it projects to get totally out of assets by 2017. (Combine those two and you get the 2036 date reported for THE Trust Fund.)

You can’t raid Interest and even though cash flow for OAS was projected to go back positive briefly in 2013 it was never projected to be that much, to run out by 2017 anyway, and at this point probably won’t show up at all.

The history of Trust Fund operations from 1936 to 1982 shows us clearly that Trust Fund Assets are exactly that, assets available to the Trust Fund. But only in years of positive cash flow are those assets ever tappable for other purposes, (for example setting up personal accounts alongside Social Security on which fees can be charged by Wall Street). And the days of strong cash flows are over. Not a crisis, this outcome was fully projected in the 90s, and on balance things turned out better than expected on net. In 1997 the date of Trust Fund Depletion on a combined basis was set to be 2029, we actually gained 7 years of projected solvency since. So there was nothing wrong with the planning, this is the way the Trust Funds were designed to operate. As noted earlier balances built up from 1936 to 1956 were tapped starting in 1957 to bridge the Income Excluding Interest and Cost gap until funds ran short in 1982. And we are just repeating that process today with balances built up from 1983 through now started being tapped by DI in 2005 and OAS in 2010. The difference being that we still have a TF Ratio of 400 in 2010 compared to the 22 TF Ratio of 1982. The Trust Funds are real, they are just no longer stealable. The dollars flows were such starting in 1996 that raiding to fund private accounts almost penciled out, but that window slammed shut by 2004. (The plans floated by Bush in 2005 having seriously cooked the books to make the numbers run, subject for another post.)

Social Security: house rich, cash poor, and unable to be burglarized. Not because the walls are so secure, though they are pretty good, there just isn’t anything inside the house that you can actually sell to a fence.

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The Effect of Individual Income Tax Rates on the Economy, Part 7: 1988 – 2010

by Mike Kimel

[UPDATE: Graphic title corrected below. h/t Eric Whitaker]

This post is the seventh in a series that looks at the relationship between real economic growth and the top individual marginal tax rate. The first looked at the period from 1901 to 1928, the second from 1929 to 1940, the third from 1940 to 1950, the fourthh looked at 1950 – 1968, and the fifth from 1968 to 1988. Because the Reagan era is so pivotal in the American psyche, it was also covered again in the sixth post, which looked at the period from 1981 to 1993. This post will look at the period from 1988 to the present.

Before I begin, a quick recap… both the 1901 – 1928 period and the 1929 – 1940 failed to show the textbook relationship between taxes and growth. In fact, it seems that for both those periods, there was at least a bit of support for the notion that growth was faster in periods of rising tax rates than in periods when tax rates were coming down. It is worth noting that growth from 1933 to 1940 was generally quite a bit faster than at any other peacetime period since data has been available, both on average and for individual years. Not remotely what people believe, but that’s what it is.

In the 1940 – 1950 period, we did observe slower economic growth following a tax hike and faster economic growth followed a tax reduction. However, that happened when the top marginal tax rate was boosted above 90%.

Interestingly enough, though the so-called “Kennedy Tax Cuts” are often used as one of the prime exhibits on the benefits of cutting taxes, a look at the 1950 – 1968 period yields no such conclusion. Growth rates were already rising before the tax cuts occurred in 1964 and 1965, reached a peak when the tax cuts took place, and started shrinking immediately afterwards. The other period that is always pointed to as evidence that tax cuts spur growth is the Reagan years, which showed up in the 1968 – 1988 and the 1981-1993 posts. It turns out that put into context, the Reagan years produced one year of rapid but not particularly extraordinary growth a few years after tax cuts began. That’s it. In fact, its worse than that… during the Reagan Bush 1 years, aside from that one good year, growth tended to shrink as tax rates were slashed.

Real GDP figures used in this post come from Bureau of Economic Analysis. Top individual marginal tax rate figures used in this post come from the IRS. As in previous posts, I’m using growth rate from one year to the next (e.g., the 1980 figure shows growth from 1980 to 1981) to avoid “what leads what” questions. If there is a causal relationship between the tax rate and the growth rate, the growth rate from 1980 to 1981 cannot be causing the 1980 tax rate. Let me stress this point again as I’ve been getting people e-mailing me to tell me I’ve got the growth rates shifted a year. That is correct, and is being done on purpose (and is shown on the graph labels). To avoid questions of causality, the growth rate in year X used in this post is the growth rate from year X to year X+1. And when I say “to avoid questions of causality” – you’d be amazed at how many people write me when I don’t do this and insist that sure, higher tax rates seem to be correlated with faster growth, but that’s because when growth is faster governments feel more willing to charge higher tax rates.

So here’s what the period from 1988 to the present looks like [update: Graphic Title Corrected; h/t Eric Whitaker)

Once again, the data fails to show anything resembling the old “lower taxes = faster growth” story. In fact, once again, it kind of looks like things go the other way. The two biggest dips in the graph occur when tax rates are at low points (28% and 35%). The highest tax rates also coincide with the fastest overall growth. But no doubt next week’s post looking at the next period will be the one that finally shows what everyone believes is there. Oh wait, we’ve run out of years.

Now, I’m sure someone will bring up the fact that there was a tech boom and the internet in the late 1990s. And no doubt there was some of that. But that doesn’t explain why only once did the graphs appear to show that cutting tax rates correlates with faster economic growth, and that one time occurred in the middle of WW2 during what was essentially a command economy when tax rates were above 90%. Talk about a special case. Conversely, most of the other graphs that we’ve seen in this series have not shown any relationship between tax rates and economic growth. And then there were a few, such as those showing the Reagan era, that seem to at least suggest that faster growth was more likely when tax rates were higher. None of this matches what we hear in the liberal (ha ha) media. None of this matches what I see in econ textbooks. It doesn’t match what I read in economics journals. But anyone, and I mean anyone, can do these graphs. Not sure many people can replicate Barro.

Next post in the series… what it all means.

As always, if you want my spreadsheets, drop me a line. I’m at my first name which is mike and a period and my last name which is kimel (note that I’m not from the wealthy branch of the family that can afford two “m”s – make sure you only put one “m” in there) at gmail period com.

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"House rich & cash poor": Why Social Security can’t be Raided (Part 1)

(cross posted from Daily Kos Social Security Defenders Group)
There are three prevalent myths about the assets in Social Security Trust Funds, plural because there are two of them OAS-Old/Age Survivors and DI-Disability Insurance. The first myth, which comes mostly from the Right, is that those assets are just ‘Phony IOUs’. The second myth comes mostly from the Left and is just a version of ‘Phony IOU’, that the assets of the Trust Fund were real but were raided starting with Ronald Reagan. I and others have dealt with these two before and I mention them only to dismiss them for now, though happy to discuss the ideas in comments.

The third myth, and the topic of this post is the idea that the Trust Fund assets were and are real and are just a big juicy target of Wall Street, that is that they have not been raided YET. Well this like the first two is based on a profound misunderstanding of the nature and operations of the Trust Funds since their inception. But to clear up, or even begin to, requires some tedious plodding through the numbers and concepts, but for those that do I hope you will understand with I used the descriptor and made the claim in the post Title. Oh and did I say there would be numbers? Continued below the fold.

The Trustees of Social Security sign off on a Annual Report of Social Security each year. I say ‘sign off’ because the Report is not fundamentally their work product, although their top staff review and modify the ultimate conclusions the bulk of the Report is produced by the professional demographers and actuaries of the Social Security Office of the Chief Actuary, heretofore the OACT. Most people and about 99% of all reporters who even make an effort know the Report in the form of the Summary. And indeed if you go the Actuarial Publications webpage this publication is the second to be served up. But the first is the full Annual Report of the Trustees which adds just under 200 pages of data tables and explanatory text. And it is in those data tables that you begin to unravel the nature of the Trust Funds.

And this is where things get a little tedious. But necessary. The main table under discussion is Table VI.A2.— Operations of the OASI Trust Fund, Calendar Years 1937-2010 Note first that this Table does not include the DI Trust Fund, those numbers and ones for combined OASDI are available down the page in Tables VI.A3 & A4. This exclusion is necessary because DI has some complications of its own.

On inspection you will see by year Trust Fund operations reported under three categories: Income, Cost, and Assets. Assets are reported in three forms: Increase in Assets which is the annual surplus or deficit used for budget calculations, Amount at End of Year which is the total TF balance, and Trust Fund Ratio which is that balance expressed as a percentage of the next year’s cost with 100=1 year, in turn the official target. Income and Cost are reported as Totals and then sub-totals with all sources of Income less all incidence of Cost making up the Increase in Assets.

Income to the Trust Funds come in 4 forms, only three significant (at least prior to this year), Those three are Contributions or FICA tax collections, Tax on Benefits, and Interest. FICA taxes and Tax on Benefits represent actual cash money extracted from the economy while Interest in most years just comes as a credit from Treasury to the Trust Funds. This distinction will become very important later.

Cost equally comes in three forms being Benefit Payments which make up the vast bulk of expenditures, Administrative Costs and RRB Exchange. RRB is Railroad Retirement, a parallel and older retirement system to Social Security and one with reciprocal funding with Exchange being the net transfer. As you can see from the numbers not that important in current context. Administration too is insignificant, in fact for OAS it represents only 0.6% of cost as compared to the overall Admin cost of 0.9% for combined OASDI, since DI is a more expensive component proportionately though not absolutely. One of those ‘complications’ alluded to above.

To the meat of the matter (or the tofu or brown rice as your diet would have it). If we examine 2010 for Increase in Assets we see a figure for positive $92.2 billion which as noted is the OAS surplus for budget calculations. “But, but, but the WaPo told me Social Security was in deficit for the first time since 1983!” Well they did and there are two reasonably valid, though ultimately confusing reasons. One they are focusing on cash flow only and not total Income and two they are reporting combined OAS+DI.

As to cash flow as noted above in most years in this Table interest simply comes to Social Security in the form of a credit. Only in those years where Income excluding Interest fails to exceed Cost does some or all of it come in the form of cash transfers. And only in those years when Income INCLUDING Interest trails cost is there an actual decrease in TF balances or in other words a cashing in of principal in the form of Special Treasuries. But back to cash flow. Determining it for any given year is simple, just subtract Interest from Increase in Assets. A positive remainder means cash flow in, a negative one cash flow out. And if we perform the exercise we see positive cash flow every year from 1936 to 1956. But also might note that this didn’t equate to gains in Trust Fund Ratios as such, while through the 40s those ratios ranged between 15 and 27 years of reserves in terms of the next year’s cost by 1956 this was down to under 4 years, and interestingly by this measure the same position we are in today.

Which brings up a point in passing. People who claim that the current ‘pre-funding’ is unprecedented need to look at those numbers from the 40s. Instead of the popular picture of the first two generations of retirees/workers being pure parasites we see people who sent positive cash flow to the system ever year for twenty years and significantly pre-funded their own retirements.

And that pre-funding was needed. An examination of the numbers from 1956 to 1982 shows 14 years in which total balances shrank as Increase in Assets went negative but also additional years when actual cash flow was negative as well, for example 1971-1974 where Increase in Assets minus Interest also yields negative numbers. Meaning that Social Security was cash flow negative every year from 1971 to 1982. Again making hash of the argument that negative cash flows, as seen this year on a combined OASDI basis, are unprecedented. And also the accompanying claim that Social Security has ‘always’ been Pay-Go. Well not unless you count interest and not even then in all cases.

But this is getting long. So I stuck ‘Part 1’ in the title and will post this piece now with Part 2 coming right up. And in the interim maybe those interested can run through the numbers in the data tables.

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This is the reality of a real small business

 By Daniel Becker

This is a bit of an interlude in my writing regarding the income tax of yore. Though, this does involve taxation. This is also a continuation in my postings regarding real world small business experiences. Yes, you are going to get to read about a real situation that involves a real small business and tax policy.
Before I mislead anyone, the taxes of concern are not about income taxation. Your business has to actually have an income for that tax to matter. I’m not talking personal income. I’m not talking capital gains taxes. Darn few honest to goodness small businesses ever have to worry about that in their daily activities. Maybe in the end you will have some capital gains after you pay yourself back all the personal money you put into your small business. I’m not talking payroll taxes cuts. Yeah, on what was a $100,000 payroll you gain maybe a couple thousand dollars, but on what was a ½ million business that is now 55% of what it was with payroll adjusted to match, it means little. I mean, that business is sure going to be hiring new people with that!
 Oh, just in case you think I’m off the mark, consider this poll from 11/10.   In the poll, 90% hired what was needed or fewer than needed. The catch: Only 1% hired because of the a new tax break. 41% were to replace an employee. When asked why they hired fewer than needed: 79% worried that sales or revenue would not justify more employees. However, 13% did hire because business was better. The lucky ones. So go ahead, keep giving me tax cuts, blah, blah, blah and all that monetary relief because that US Chamber of Commerce sure represents my thoughts and desires. NOT! Idiots!
Some perspective on small business.

“In 2009,there were 27.5 million businesses in the United States, according to Office of Advocacy estimates.The lastest available Census data show that there were 6.0 million firms with employees in 2007 and 21.4 million without employees in 2008. “

I know it is soothing to croon over the days when the Dodge Brothers, Ford, Colt, Walton and Gates were small and became major examples for their time of the American Dream of economic power. But really, the truth is most small business were and are people earning a living on their own vs working for Microsoft (the definition of part time abuse) or Walmart or GM, or GE or Boeing… They were huge numbers of small local retail. All gone. Small local banks? Going. Small local agriculture (RI used to have a state fair), forget about it.  Look around.
So lets get to the heart of it. First a bright spot. The flower shop had it’s first month this year that was better than last year. August. No, I’m not assuming this is a trend and here is why.

The city of Woonsocket has lost it’s Walmart to the town of North Smithfield, it’s neighbor. Major tax hit to the city. N. Smithfield got the Walmart because it decided that building a 650K sq ft shopping development would offset their rising taxes. I mean really, when in the last 30 years have we seen big business pay enough in taxes such that they actually were paying for their presence? Cut, cut, cut has been their chant. So, I can expect my property and inventory taxes to rise unless something replaces that Walmart. Say the state stepping up. Which tends to happen via the state giving less to the towns like North Smithfield.
I wrote about this type of tax chasing in one of my first posts.

“You know what is missing in this discussion (a discussion happening in every town USA)? The question: Compared to what? What are we basing the above statements on? Is it simply that we have less money after the bills are paid? Well, from 1955 to 1998, GDP rose by a factor of 20. Tax burden as a percent of income rose by a factor of 26.7. But income for a family of 4, 2 people working (sound familiar) only rose by a factor of 11.5. From 1976 to 2001 the top 1 % share of income went from 8.6 % to 21%. Yes, we have less money at the end of the day. Unfortunately, not benefiting from the national wealth as we had in 1955 (when the tax burden was 18% of your pay and would be today if all was equal) is a national policy issue.”

This is the issue of small business. See, we are all just trying to earn an income. Just like the person who works for the multinational. The income is much less because business sales are down. So, how should I plan for the pending tax rise? Do not just give me an answer that involves further big business moving into the area, because as I showed in the post on property taxes and development, it’s not so simple as welcoming Mr and Mrs. big business into the neighborhood.

“But, for my purposes Smithfield (an abutting town) presented the most interesting data. They had a new retail development go in, but ½ the size of that proposed for my town. It’s citizens have seen since 1999 in sequence a 9.8, 4, re-val, 5.5 and 8.7 percent rise in the tax rate. It’s commercial development has been only 10% industrial. My town only had a 6.4% total rise in the same time span.”

Oh save me great god of the mega corporations from the evils of local taxation. Yeah, I didn’t think praying would work.
Next up involves a CVS move. CVS is headquartered in Woonsocket. It obviously has some new hot shot who has a better way. They are looking to own their stores and not lease. They are consolidating 2 stores into one bigger store on new property. Yes, about ½ the property was zoned commercial, the other ½ was residential (real houses on it) turned commercial. This is important, because the CVS consolidation will leave 2 existing commercial spaces empty. We’ll add them to the Walmart space and potentially the Lowe’s space as it is suppose to be moving to the new North Smithfield development which is built on what was 126 acres of woods.
Sticking with Woonsocket, the location of my flower shop, the city has managed to add to its commercial property stock while turning a good portion of it into none productive commercial property stock. How soon do you think those empty places will fill up? Don’t hold your breath.
Some more good news. I managed to cut a major expense for the shop just this June to the tune of $379/month. We were in a unique position in that they kind of needed us. It’s not going to happen again. $4548 per year. Nice. It’s the heating expense for a year assuming the speculators don’t get active again. Yep, get rid of those government regulations as they sure are doing me harm. NOT!
The plaza that one of the CVS stores is moving out of is a customer of ours. We do seasonal decorating for them. It is about $3900/yr. Well, we’re not decorating with mums this fall and Christmas looks to be out too. How much you wanna bet spring next year and for some years to come is out? Gonna bet enough to do Washington a favor and higher someone?
Are you seeing where all this is going? I saved us some big coin. I’m loosing the same amount. Now, this is not the first hit from a CVS decision. Some other person there decided to make it simple for them to pay for their flower needs by going with Pro Flowers instead of feeding the 4 local florists which they had done for decades. They think they are getting a 20% discount from Pro Flowers. Little 
do they understand the flower business. Not the first time mega corps thought they new more than the little guy. It represented about 2.4% of our business at the time. May not sound like a lot, but when you consider the extra business generated by CVS using one’s shop to send flowers, it becomes significant.
Let’s add a third issue. Refi. Time to take advantage of the low rates. The purpose is to improve, that is reduce your monthly cash outlays. But as any real small businesses owner learns, there is no such thing as a fixed rate. We have paid off 22.2% of the loan that combined the original purchase of the business and property with the rehab that needed to be done in 2004. We have about 36% of the tax appraised value in equity of the property.
Here’s the concern, do you take a 20 yr loan with a rate of between 5 to 5.5% to be reset in 5 years or do you take 6 to 6.5% to be reset in 10 yrs? Do I bet that in 5 years business is better because the economy is better which could also mean all that projected inflation do to the Fed monetary policy and at least protect my self for 10 yrs? Or do I bet that nothing will be much better and try to preserve my cash flow (in a small business it’s always about cash flow, accrual be damn) and go for the 5% figuring the Fed money flood won’t roost for at least another 5 yrs? Oh, the refi cost are going to run you about $4000. There goes that big saving from my hard nosed negotiations again.
Your facing tax increases beyond the usual but, not because the public employees are paid too much. Your running out of area’s to cut. Major corporation moves are working against you just as off shoring is working against the middle class, the very class of your concern as you are in it and draw your income from it. And all the policy talk being pushed has little to do with the issues that you are facing because the number one issue you are facing is a lack of a middle class.
Have you heard of the “hourglass strategy”? Look it up. Ah, no it’s not a strategy you can use, but is one that will work against you.

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Something Useful Which the Fed Could Do

Buy Greek bonds.

I am very suspicious of proposals that the Fed do more to save the economy which do not specify what. They seem to be based on the idea that expanding Fed liabilities would be useful no matter what assets the Fed buys. I am convinced that Fed purchases are useful if and only if the Fed purchases assets which private investors fear. I think the QEII experiment supports this view.

Investors fear Greek government bonds. The Fed certainly has the legal authority to buy foreign treasury securities. It can save Greece any day it pleases. This would be good for the USA, because it reduces the risk of another world financial crisis.

There is no chance that the Fed will do this. I don’t know why ?

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