U.S. Real Productivity 1947-2010

It seems as if the United States has become much more productive over time. Using data from the BLS I use 1947 as a baseline of 100 and adjusted for yearly increases in productivity. The United States is 4 times more productive than we were in 1947! The greatest gains were seen in the 1990's. People argue that tax rates were higher and we still had a great economy during this time period. However, I would argue we had a great economy despite high taxes. People forget the technological revolution we had during this time period. What is interesting is that we still seem to have modest increase in productivity.

100,000 Hearts A Surgeon’s Memoir: Review

The other day I was at the grocery store waiting in line and flipping through Texas Monthly and noticed an article about heart surgeon Dr. Denton Cooley. The article mentioned his memoir was about to be published. When I got home I did some research online and found that it was available at the River Oaks book store (I actually received it before it goes on sale on Amazon). The book was a Christmas gift to myself. Cooley’s memoir is once of the best memories/autobiographies I have ever read. Even the book was written by a heart surgeon the book did not have very many technical. I was surprised by how well Cooley writes.

After reading the book anyone could say that Denton Cooley is in a true way an all-American. Cooley went to the University of Texas on a basketball scholarship. Not only did he play basketball, was in a fraternity, graduated with highest honors, and served in the Army after medical school. In medical school, he excelled as reaching the top of his class at John Hopkins. What is seemingly clear thought the book is Cooley’s work ethic. During his peak years he would wake up 5 a.m. every day and work 15 hours. Since 1947, Cooley has published over 1,400 articles which is prolific if you consider that not every article submitted to medical journals get published. Cooley also taught at the University of Texas-Houston medical school and the Baylor College of Medicine. Clearly, Cooley has led a busy life. On top of writing and teaching the thing he is most well known for is the amount of surgeries he has done. The Texas Heart Institute which Cooley is affiliated with has performed over 100,000 surgeries. Cooley stopped performing surgeries at 78 (he is currently 91). Throughout the book he is constantly innovating new techniques or using different devices to try to save the patient’s life. Cooley took on difficult cases that other doctors would have never touched. In the period between 1962 and 1967 the mortality rate for people that received heart transplants fell from 70% to 8%. Cooley and Domingo Liotta worked on the first artificial heart which allowed the first patient to live 65 hours. Today artificial hearts can last between 1-2 years. Cooley no doubt helped advanced medicine and promote Houston as one of the best medical centers in the world with St. Luke’s. The best part of the story is saved for last when Cooley who had a rift with fellow surgeon Dr. Michael DeBakey for 40 years make up.

The book is written from an honest viewpoint and demonstrates how humble Cooley is. Not only does Cooley talk about his successes but he also talks about unfortunate situations. All in all though, Cooley’s memoir inspires the reader to make a difference in the world. Cooley has touched so many hearts yet many more lives.

Big Pharma’s New Business Model: FDA Does Harm

In today’s Wall-Street Journal Dr. Scott Gottlieb points out the obvious problems of the FDA. Gottlieb argues correctly that advances in medicine have been hindered by too much regulation. The average cost for a drug company to create just one pill is roughly $1 billion. The FDA now requires more patients, more tests, and I believe regulates to the point where they create drugs that are too safe. The number of patients required for clinical trials have increased from 1,600 in the late 1970’s to roughly 4,200 in the 1990’s. This of course creates additional costs for the drug companies. Today the cost of enrolling just one patient in phase III (final stage) trials is $26,000. In 1987, the cost to develop a drug was $437 million (in 2010 dollars). By 2000, this number increased to a little over $1 billion (in 2010 dollars). The question is what is driving up the cost?

Note this is just for one patient. The number of tests that must be done on patients (blood work, x-rays, etc) has from just 1999-2005 has increased 59%. During this same period the amount of time required to complete clinical trials has increased 69%. The percentage of drugs getting approved has also decreased. 63% of drugs advance from Phase I to Phase II testing. However, only 33% of Phase II drugs get into Phase III. At Phase III the chances of a drug becoming approved are 80%. The percentage of drugs that get passed has been decreasing over time.

The FDA is focused on making sure that drug companies are producing safe drugs. The FDA can restrict what drugs people choose to take. This to me doesn’t make a lot of sense considering we choose what to eat, drink, and do with our bodies. The most common argument about why we need the FDA is because people simply don’t know enough about drugs. True, individuals themselves may not however this is why people seek out information. People can get vast information about diseases, illnesses, and drugs online. Individuals can evaluate their own risk-reward models. No system will be perfect. However, the question is what leads more people better off. Right now many people are suffering from pain and illnesses because the FDA won’t let XYZ drug company test their drug. One great idea is if patients want to take a drug not approved by the FDA to sign a waiver from the drug company saying that they can not later come back and sue. The FDA has little or no incentive when it comes to approving a drug. Have you ever heard of patients suing the FDA for not approving drugs that could have potentially saved lives?

TCU Historical Admissions 1999-2011 and AP Football Ranking

TCU’s football program has gained national recognition in the past couple of years. My freshman year at TCU (2005) I remember TCU beating Oklahoma who was highly ranked. Since 2005 TCU has been ranked every year except 2007. Around this same time I noticed applications to TCU were dramatically increasing. I was curious as to how much of the increase in applications could be explained by the football program. When I looked at the TCU Fact Book I found that a higher ranking really didn’t correlate with the increase in applications. For instance, the largest percentage increase came in 2007 when the prior AP ranking for TCU was 22 but the increase in applications was 37%. However, after TCU won the Rose Bowl and was ranked #2 and the number of applications increased 36%. The largest increase in the number of applications (not percent) did come after the Rose Bowl win. Also was it interesting is that the acceptance rate of TCU has gone down dramatically. In 1999, the acceptance rate was only 75%. For 2011, the acceptance rate was a mere 38%. In a little over a decade it has become twice has hard to get into TCU!

Congrats TCU Poinsettia Bowl Winners!

Congratulations to TCU last night for winning. TCU didn’t play their best however they came out with the win. Skye Dawson had a magnificent catch that lead TCU for the go-ahead touchdown. TCU will be taking home $750,000 for the win (less after they divide it up between the Mountain West Conference). TCU is going to the Big 12 division next year which should be interesting. I am proud to have graduated from Texas Christian University!

Income Inequality: Top 1% Myths

Time magazine recently named “The Protestor” the person of the year. No doubt this year we saw complaints between the bottom 99% and the top 1%. However, although many people in the bottom 99% may be complaining I would question whether they have all their facts. According to Federal Reserve data 33% of the people in the top 1% in 2007 were no longer in the top 1% in 2009. Note that this is only over a two year time horizon. Less than 15% of people on the Forbes 400 stay on the list for over a 21 year period. Also it is important to note that inherited wealth is in fact the minority of people on the Forbes 400 list. What is even more interesting is that according to the Edward Wolff of NYU is that the percent of inherited wealth has been decreasing. In 1989, 23% of the top 1% inherited their wealth. By 2011, this percentage decreased to 9%. Also it is interesting that income inequality is lower now than where it was in 1995. Also the concentration of wealth in the top 1% is lower now than where it was in 1998.

People will always want more. This desire is part of human nature. What seems puzzling is why people are envious of other people who work harder, longer, and smarter than themselves. To me if someone wants to work 80-100 hours per week earn all that money and contribute to society more power to them. As long as they are not asking for government money everyone should be fine with this arrangement. We could of course cure income inequality by having recessions. Everyone would feel more equal yet it would come at the price of growth and expansion. One point people forget is that the top 1% often take the most risks. This is known what Robert Frank describes as the “high-beta rich”. Frank makes an interesting argument that the top 1% has more because they took more on more risk. This is common sense. Often people who have large amounts of wealth have most of their net worth tied up in their stock options or their business. The majority of Americans don’t have stock options and live off their paychecks. Since a large percentage of people in the top 1% have their net worth in one asset they have to constantly worry about what happens if that asset implodes. This means that the super rich have much more volatility in their net worth than say the average person. One year you might have $200 million and then the next $50 million if the stock market drops.

Income inequality should make people want to work harder (if they decide they want more money). Complaining about why other people are successful does nothing for any individual. Everyone wants more money yet very few people want to do what is required or necessary to get there. We can’t forget that people are paid on value creation and productivity.

Special thanks to Robert Frank for giving me the idea for this post.

Amazon Price Checker

Amazon.com recently came out with an application for phones that allows individuals to use their phone to scan barcodes of any item and instantly the price of that item. The application will scan the barcode then show the price of item available on Amazon.com.

The other night I was curious about the application so I downloaded it myself. I wasn’t at a store but I started to scan a bunch of books on my shelf and realized how cheap it would be to replace them!

Clearly, Amazon is trying to lure their business their way by showing people that their prices are cheaper. If someone wanted to compete with Amazon they could create an application that could scan every single price online and display the cheapest one. Retailers are upset because they obviously charge higher prices than Amazon. However, although retailers may complain consumers benefit. I doubt you will hear any consumers complain about the application. Would you complain about paying lower prices? In a world filled with millions of prices being able to find a cheaper price is always good. Although, Amazon has low prices they don’t always have the lowest. For instance, I bought some DVD’s from Amazon and then found the exact same DVDs cheaper at Best Buy because they went on sale a day after I bought them. If someone wanted to give Amazon a run for their money they could create an application that could scan the whole internet and all local stores. Also Apple has an application/assistant called Siri that answers questions for people. I am sure in a couple years this application would be able to do similar things by voice recognition. While we’re at it Siri could answer questions like “My car is low on gas where the closest and cheapest place to fill up?” Amazon’s price scanner is turning shopping into a consumer’s paradise.

America Obesity Epidemic?

People often talk about obesity being an epidemic. As if there was something in the water that was somehow making us all larger. Recently, in the news there was a story about how Americans are now 20 pounds heavier than they were 20 years ago. The average weight for men is around 196 and 160 for woman (note these figures are self reported). Around 62% of Americans are overweight or obese. You have to be careful because many times people are overweight or obese as defined by BMI (Body Mass Index). This can be misleading because some people have more muscle which makes it appear they are overweight. There is a prediction that by 2030 more than ½ of Americans will be obese. The problem with this prediction is trends don’t persist forever. People start to wake up and realize they are overweight and start working out and start to eat more sensibly. The problem is often is it hard to keep up this up. There are predictions that life expectancy will decrease in the coming years because we have so many overweight people.

Many people have tried to pinpoint the causes of the rise in weight gain. Some people blame genes, shifts in the role of work lives, and individual choices. Blaming genes to me is a red herring. I would agree that some people might carry genes that could make them more likely to be heavy but I don’t think somehow overnight genes just made people bigger. A better explanation might be because of the changes in the role of the family. Years ago most housewives cooked nightly meals for the family. Times changed and housewives moved into the labor force. This would allow less time for making home cooked meals like in the good old days. Today, it seems as if people get more take out, fast food, or pick up pre-made meals from the store. According to a survey done by CBS in 2005 21% of families ate out at restaurants 2-3 nights a week. Around 17% of people ate fast food 2-3 nights per week. Years ago people rarely went out to a restaurant to eat (usually it was for a special occasion). Fast food companies like McDonalds, KFC, and even Taco Bell were are formed before the 1970’s but people didn’t really start eating at these places until the 1980’s and 1990’s.

However, what I find interesting is why everyone is so worried about how much other people weigh. Shouldn’t we be more concerned about our own health? Somehow people think overweight or obese people are a problem. If anything it helps non-overweight/obese people because it makes them relatively more attractive. I suppose people don’t like the “externality” of looking at large people (which I am sympathetic to). However, people should be able to eat and drink what they want. We all should have the freedom to choose what we put into our bodies. After all we own our own body.

Black Friday: Waste of Time (Why You Don't Have To Go To Wal-Mart, Best Buy, or Macy's)

The internet has transformed all of our lives. If you ask most people if they could live without it I have a feeling very few could actually say yes. The internet allows people to do wonderful things like send mail across the world, pay bills, and order items. With the holidays approaching I want to focus on that last thing of ordering things. In the United States, we have an event called “Cyber Monday”. Essentially Cyber Monday is a day where people go online to order gifts for themselves, family, friends or loved ones. This of course is after Black Friday where people wait in tents all night in order to secure great deals on gifts. This year stores many retail stores like Wal-Mart, Best Buy, and Macy’s opened at midnight instead of opening the usual 3 or 4 a.m. like they usually do. This year alone over 220 million people participated in Black Friday. To me I never understand why people spend hours waiting in line to save some money. Of course, there will be other great deals (maybe even online) but what is the opportunity cost of waiting in a line

For those that don’t want to wait in line there is always the internet. In 2011, consumers spent $6 billion from November 28 through December 2. Clearly, this is a lot of money and many retailers are involved. What is interesting however is how online shopping makes things much more efficient. Back in the day people would drive from store to store looking for deals (they may had help from ads or coupons). Today people can find what they want and find it at the cheapest price and have it shipped right to their doorstep without going outside. If anything the internet decreased gas consumption because we don’t have people wandering around wasting gas (not to mention people are also saving gas through their navigation systems). The counter argument might be it takes trucks and cars to deliver all these items people order. This may be true however if you notice UPS and FedEx have trucks that carry hundreds of items and know the most fuel efficient way to deliver these items. FedEx expects to deliver 17 million packages on their busiest day. UPS last year exceeded 25 million deliveries.

Data from Price Grabber shows than 37% more percent of people will shop on Cyber Monday than last year. The major reasons people listed for shopping online were finding the best deals and basically not having to go to the mall. If you think about it people have expotentially more options and a better chance of getting a better deal sitting behind a computer than walking around the mall. Truly technology is glorious.

Bottom 99% Are Already Top 1%

I think it is interesting when people show graphs of income inequality over time between the top 1% and everyone else. One thing I think people fail to understand is that the top 1% of today is not the same top 1% of yesteryear. Recent data from the Tax Foundation drives home this point. The Tax Foundation looked at tax returns between 1992-2008 and looked at the top 400 taxpayers. The results are somewhat interesting.

Close to 73% of individuals were only in the top 400 taxpayers for one single year over the 17 year period. Only 3% stayed on the list for 5 years. Only .4% of people stayed on for 15 years and .1% stayed in the top 400 taxpayers for 17 years. This would say only 4 taxpayers were in the top 400 taxpayers for 17 straight years. People might complain that even 4 is too high. The evidence shows that an overwhelming majority of people only stay in the top for a short period of time. One explanation is that people do sell their businesses or they retire and have options that get exercised. So what is actually happening is that people are high income earners and then drop out of the top 1%. In fact, according to

a report entitled “Income Mobility in the U.S. from 1996-2005” 57% of the people in the top 1% had dropped into the bottom 99%. For the top 5% around 46% moved into lower income groups. The major point is that the top 1% or even top 5% are not some elite group that stays constant.

An even better point is that even the bottom 99% have a higher standard of living than many of the people in 10% in other countries. Real per capita GDP over a longer period of time has been increasing. When people complain how things are today the question should be would you rather live today or in the 19th century? The things people had to worry about in the 19th century are much different than things we worry about today. Infant mortality was much higher during this time period. People had to worry more about sanitation and also worry if there would be enough food. People during this time didn’t even shower daily. Today, these are things even the homeless don’t really have to worry about (if they seek a homeless shelter) I have seen people at stores purchasing their groceries with food stamps yet they have IPhones. No one a decade ago had an IPhone. The amazing thing about markets is that it brings creative destruction. Entrepreneurs and inventors figure out what people want and bring it to the masses. Competition keeps out bad products and services while ensuring high quality and low prices. The bottom 99% should be embracing markets and income inequality should be an incentive to want to work hard to get in that top 1% (even if it is only for one year).

"Old Americans are 47 times richer than young"

A story I recently saw was titled “Old Americans are 47 times richer than young”. Data shows that in 1984 people 35 and under had a net worth of $11,521 while people who were 65 and older had a net worth of had a $120,457. This numbers for 2009 show a different picture. The net worth of people under 35 in 2009 was decreased to $3,662. Meanwhile, people 65 and older had a net worth of $170,494 (numbers adjusted for 2010 dollars). What this would say is that older Americans now have a net worth that is 47 times that of younger people. Why are not people shouting about net worth inequality?

What people forget is that people who are 65 have had 30 years more to income to accumulate net worth. It would make sense that older people have more assets than younger people. Also another interesting data point is that 37% of young household have a zero or negative net worth. In 1984, this same percentage was only 14%. Perhaps this generation is spending more than previous generations.

One argument I find very interesting is how we can’t afford to cut back on Social Security payments to senior citizens when the data clearly shows they have a larger net worth than anyone else. A large majority older people are in low tax brackets because they are not working. The income they earn usually comes in the form of dividends, interest, and other fixed income. Not only are these older people using their income from all these sources to live on, but also can sell assets if they need money to live on.

Having a net worth of a little over $170,000 is still not a lot to live on. If you consider health care costs and nursing home costs it could be hard to live with this net worth. If a 22 year old started with a $1 and saved $3,000 per year until the age of 70 invested it in the market (average return of around 7.5% over the long-term), that individual by the time they turned 70 would have $1.34 million. If the individual become ambitious and saved $5,000 per year they would have $2.23 million. I have a feeling very people consistently save year after year. People nowadays have credit cards and can charge almost anything. One of the rules of personal finance is never to put anything on a credit card that you will consume before you get your next bill. The best way really to reduce spending is to just spend the cash you have on hand. This way you feel the “pain” when you pay for things out of pocket. When you buy things on credit you might have an idea of what something costs, but you don’t feel how much it costs. The key to accumulating wealth is saving.

Down With Evil Corporation Fools

R.I.P. Steve Jobs

Today it was announced that Steve Jobs passed away. Jobs was only 56 years old. If you look at what Jobs accomplished in his lifetime it is pretty amazing. People forget that even Steve Jobs was fired from the company he founded. Jobs left in 1985 and came back in 1996. I would say that the real innovation at Apple came in the new few years with the IPod in 2000, IPhone in 2007, and IPad in 2010. Clearly, these products made everyone better off. Steve Jobs was able to figure out what millions of people would enjoy. The vision Steve Jobs had allowed us to listen to hours of music, video conference with people from a cell phone, and introduced one of the first multiuse phones that allowed for internet access. People describe Jobs has obsessed with details. Steve Jobs obsession for perfection made our lives better.  Not only did Steve Jobs enrich millions of lives by providing employees with jobs, money, and benefits, but made himself wealthy in the process. According to Forbes, in 2011 Steve Jobs had a net worth of $8.3 billion. By pursing his passion and being obsessed with details he made himself better off an in addition thoroughly served his fellow man.

Wall Street Protesting Nonsense

In the past couple of weeks there have been protests going on across cities nationwide. It seems as if the protests started in New York and spread to other cities like Washington D.C., Los Angeles, and Houston. The one small point I agree with the protesters is the crony capitalism when major banks got bailed out. Everything else these people are talking about is utter nonsense. The people claim they are the bottom 99% and are complaining about the top 1%. Of course, people are okay with the top 1% who claim they want to pay higher taxes (but don’t voluntary do so). Presidential candidate Herman Cain said, “If you don’t have a job and you’re not rich blame yourself”. I partially agree with Cain. However, government legislation and regulation have been putting people out of work. The protesters claim that corporations have power. I find this interesting since no company has ever forced me to buy any of their products. I voluntary got out of my chair, voluntary drove to the store, and voluntary handed the cashier money to purchase that product. The main complaint is that corporations have large lobbying power. What the protestors forget is that corporations want lobbying power because the federal government hands out valuable goodies. The government spent over $3.5 trillion last year. If companies could get any part of that federal money through contracts or through specialized legislation they are willing to spend money to get favors. The protestors have the cause and effect backwards. The power of government is causing corporations to spend money to get favors granted. If the scope and size of the government was limited politicians wouldn’t have as many goodies to hand out which would put the lobbyists out of business.

If the protestors think they have it that bad they should take a visit down south to Cuba. Economics is the studying of allocating resources and considering alternatives. The last time people are not trying to break out of the United States to flew to Cuba. Rewarding people for hard work and punishing people who make bad decisions sounds pretty fair to me. No economic system is perfect. The question is what system has lifted more people out of poverty. The answer to that question I would say is free market capitalism.

Luis von Ahn = Brillance

Google: Do No Evil

In what seems like one of the worst antitrust suit cases of all time the Department of Justice is going after Google for their search engine. Like nearly all antitrust suits competitors begin to gripe about how “unfair” the market is and try to get the government involved to break up any type of “monopoly”. People are concerned about Google’s dominance. Nextag and Yelp claim that Google was ranking Google products higher than leading competitor’s products. What is really fascinating is that unlike previous monopoly companies (Microsoft, Standard Oil, and IBM) Google doesn’t even really charge to use its service. I find it hard to call Google a monopoly when consumers are not even paying for it! Not only is Google search free, but other Google products like YouTube, Google Maps, Gmail, and other services are free to use. This is interesting because people years ago would have paid a premium for the quality of data on Google. Researchers even in the early 1990’s had to physically go into libraries hunt down books in order to do research. Google has made searching for hard to find facts and data fast, easy, and very inexpensive. Google handles 34,000 searches per second or over 1 trillion searches per year. I have a feeling Google uses these searches to improve searching. One feature I have noticed Google uses is auto-complete where you type something in and Google tries to figure out what you are typing. Also if you misspell something Google will say “Did you mean…” Google was only founded in 1997 so it hasn’t had a long history yet I have a feeling the technology will get better.

With so much data online now the value will be data mining. Data mining is using data to solve problems or recognize patterns that can help researchers find a common thing between data. Google ranks websites or pages based on how relevant they are. In 2009, alone 47 million websites were added. Google has software that can crawl though these websites and pick up information that people might search. Sites that are visited more frequently are ranked higher than sites not used as much. Even when I have researched certain things I find Google doesn’t always give me the best answer. No doubt in the coming years even more information will be put online which will allow Google searches to get even better.

Why the Department of Justice is wasting countless hours bringing top executives from Google to testify is mindboggling. Executives at any Fortune 500 could be doing better things with their time rather than explaining why their search engine is better than everyone else’s. Like history shows consumers never complain about monopolies it is the competitors who complain because they are getting their clocks cleaned.

Driverless Car: Berlin

Researchers at Free University in Berlin have been experimenting with a driverless car. The driverless car is similar to Google’s Toyota Prius and has been driving around without completely by computer. The car can sense the road, people, buildings and trees up to 200 feet. As would be expected the car has a faster reaction time than that of a human being’s. The car costs around $552,000. I doubt this car will be on show room floors any time soon.
 
Experts claim driverless cars should be available in the next 10-40 years. This is probably a good estimate with the better estimate being the 40 years. The problem I see in developing driverless cars is ensuring quality on each one. Google and the researchers at Free University have made one of these cars, but once you start creating a thousand of anything it leads to quality control problems. As long as manufactures can prove the cars are safer than the human alternative I think people will buy them. Although, people will be reluctant at first to buy a machine that they can’t control. However, one could make the argument that air travel is done by auto pilot which essentially is a computer operating at 30,000 feet above the ground. The number of fatalities today is around where it was in the 1950’s. This is incredible given we have exponentially more drivers. A better measure is looking at highway deaths per miles driven which has dramatically decreased since 1921. Driverless cars in time will make us safer. The people most likely to buy the first cars will be people who have money, who don’t like driving, are bad at driving, or are prone to accidents. Taxi cabs would be put out of a business if a driverless car could pick up and drop off people.

The main argument for driverless cars I see as I mentioned in an earlier post is the amount of time that would be freed up to do other things. This alone would increase GDP, allow us to get more sleep, more fuel efficient cars, and give people even more leisure time. Driverless cars if proven safe would drive down the cost of insurance. We could even get to a day where cars do errands for people! Imagine if you could send a car to the store and the car could pick up groceries or go to Best Buy to buy something. I am imagining lines where store employees load cars and the car then drives back home to its owner.

The $550,000 cost of the current car will decrease over time. During the early stages of any new technology the cost is very high because very few people are doing it. However, once other competitors enter into the market the price will drop making everyone better off (once they finally decide to release a commercial version). Something tells me the price would have to be less than $100,000 for anyone to actually buy one. Time will only tell if or when this even happens. The future can’t be predicted no matter what the past shows because there are technologies just waiting to be discovered.

TCU Admissions 2011 and Historical Admission Rates

I updated my historical admission rate for TCU for 2011. For 2011, the acceptance rate at TCU was only 38%. I plan to update this graph with football rankings to see if the football rankings have had anything to do with this.

Source: TCU Fact Book

Koch Wealth

Seems as if the Koch brothers are creating wealth by pleasing their fellow man. Although, the brothers inherited the company from their father they still have grown the company by leaps and bounds. People forget that just because you inherit something makes you rich. People can inherit companies or money and blow through it very quickly. Most of the time this is the case with inherited wealth. One generation will create and the next generations will either give the money away or squander it.

Buffett Tax

This week President Obama announced the Buffet Tax. The Buffet Tax would tax people making people who earn more than $1 million. In Buffett’s article in the New York Times entitled “Stop Coddling the Super Rich” Buffett makes the case that he pays lower taxes than his secretary. This of course is true since Warren Buffett’s income is taxed at a much lower since Buffett earns all his income on capital gains which is much lower than ordinary income (income from working). However, what I find interesting is that Buffett leaves out the taxes that his company pays in order for him to receive that income. Buffett runs Berkshire Hathaway which is a large conglomerate of companies. When Berkshire Hathaway earns income that income is taxed at a corporate rate. In 2010, Berkshire Hathaway paid 29.4% in corporate income taxes. Generally companies pay 35% in taxes but companies can lower this rate through their tax department. Berkshire Hathaway then passes their income to shareholders which Warren Buffett is. The income is first taxed at the corporate rate then Warren Buffett pays individual taxes. So in essence this income is taxed twice. Warren Buffett claims his income tax rate is 17.4%. However, the true tax rate Warren Buffett pays is 46.8%. People don’t really look at the tax rate corporations pay because people assume corporations are paying the taxes not people. People pay taxes not corporations. If corporations pay taxes its less money they have to operate which lowers their return which lowers the return of millions of shareholders. If Warren Buffett really is claiming his tax rate is 17.4% then he is essentially saying that Berkshire Hathaway pays no income taxes. Clearly, this is nonsense. Buffett would have more money if his company didn’t pay taxes. It is frequently brought up that although corporations are in a 35% bracket they don’t really pay it. This point is valid although I would point out lowering the tax a company pays comes at a cost. Hiring accountants and creating tax departments are not cheap. This cost is never talked about though. A company can’t magically lower their taxes without a cost. It would be interesting to see someone study the cost of taxes if you included how much time, energy, and money it took for corporations to lower their tax rate.

I myself am a fan of a progressive flat tax. This would free up corporate accountants and individuals from calculating their tax rate. Tax revenue would no doubt increase because it would be very hard if not impossible to shelter income if people paid one flat rate. Right now there are many legal ways to reduce taxes although billions of revenue is never collected because the tax system is so complex that very few people even understand it. The only problem I worry about is that if we raised more revenue it would lead politicians to want to spend more. It would be as if politicians went to a buffet and realized there was even more food than they thought.

I myself am a fan of Warren Buffett when it comes to his investing advice. However, his political views leave much to be desired. If Buffett really felt he was paying to little in taxes he could always voluntarily pay more. No one is stopping him from giving more money to the government. His actions show he is okay with paying the existing tax or else he would voluntary give more. You can’t say you are for raising taxes if you comply to pay lower rates than you otherwise would.

200th Blog!

I am happy to annouce this is my 200th post! I appreciate everyone that reads my blog. Apparently, according to my blog statistics I have people reading my blog not only from the United States but all over the world in places like India, Russia, and Asia. I am actually surpised I have still continue to blog. When I started blogging I didn't think I would be doing it that long (thought I might run out of topics to discuss). I hope to continue blogging!

The True John D. Rockefeller Sr.

 
Even Rockefeller was unemployed....
“Each morning, he left his boardinghouse at eight o’clock, clock in a dark suit with a high collar and black tie, to make his rounds of appointed firms. This grimly determined trek went on each day-six days a week for six consecutive weeks”-Page 44

John D. work ethic from the early days…
“Starting each day at 6:30 A.M. he brought a box lunch to the office and often returned after dinner, staying late. One day he decided to throttle his obsession. “I have this day covenanted with myself to be seen in [the office] after 10 o’clock P.M. within 30 days”-Page 49

War on Poverty: Fail

Interesting chart from Dan Mitchell showing that poverty was already decreasing before the "War on Poverty" was declared by LBJ.

Case for More Lawyers

People often complain that there are too many lawyers. I would make the argument we don’t have enough lawyers. What I mean by this is that occupational licensing restricts the number of lawyers than there otherwise would be. According to the American Bar Association in 1963 there were 135 law schools with around 9,600 people getting law degrees. By 2009, the number of law schools increased to 200 yet there were over 44,000 law degrees awarded. One could argue that the number of law schools has increased by not at the rate of law schools being awarded. Four times as many law degrees are being awarded yet there hasn’t even been a doubling in the number of law schools. From 2009-2010 the attrition rate for all law schools was 9%. This means that 91% of first year law students stayed in school.

Nearly all law students take the same classes. Anyone that goes to law school has to take contracts, torts, criminal law, property, and other courses. Usually in a graduate degree program you can specialize in a certain area. For instance, for an MBA people can choose to have a concentration in Finance, Marketing, Management or whatever the school offers. Law school is just a general degree stating you have completed the courses and passed them.

In my industry there are estate planners who have to go to law school. Some people can claim they do estate planning, however estate planners are the people that usually write wills, create trusts, and will show up to court if there are any problems with the estate. However, estate planners may only have one or perhaps two courses on estate planning in law school yet in theory these should be the only one or two courses people need to become an estate attorney. There probably is some background knowledge you might need before the course, but I seriously doubt three years is needed. Lawyers might be overeducated because they take one time courses that they never use again. In a way this is like college, where you take many classes yet very few are actually used in your job. One explanation as to why colleges and law schools do this is to help students discover what they want to do.

The American Bar Association (ABA) creates a cartel by deciding if a law school can become a law school. Of course they have an incentive to restrict the number of law schools. If the ABA can restrict the number of law schools they can restrict the number of lawyers which increases their value. The ABA is claims it is voluntary I don’t know of any school that isn’t ABA accredited. In order to sit for the bar exam you have to attend a ABA accredited school. So even if there were ABA schools it would be worthless since in order to become a lawyer you have to pass the bar. California allows anyone to take the bar exam which might help explain why the pass rate is between 35-55%. There was a documentary I saw just about the bar in California called “A Lawyer Walks into the Bar”. One guy in the documentary had taken and failed the bar 41 times. Apparently, anyone that goes to University of Wisconsin doesn’t even have to take the bar and graduates are ready to practice law. I really don’t think people need three years of courses to practice law. Especially considering there are many different types of law. In my own state of Texas there are around 24 areas lawyers can practice in. It would be make more sense to offer degrees in these instead of law school.

One show that has destroyed this whole notion of needing a law degree is “Suits” on U.S.A. The show is about a young guy who has never been to law school yet knows all the laws because he has studied law books and has a photographic memory. Current law is based off previous law or precedent. If we let anyone who wanted to become a law school there would be more lawyers which would not only drive down the price of lawyers, but allow more people to get legal education. Some people now may go into other fields because they are rejected or because law school is too expensive. By allowing anyone to establish a law school it will increase the supply of lawyers.

The laws of supply and demand are always in motion. I have a feeling the ABA will continue to maintain their cartel like status given so many politicians and legislatures are lawyers. However, everyone would benefit if we allowed anyone to become a lawyer.

We Don't Have A Spending Problem, We Don't Have Enough Taxpayers

This sums everything up so beautifully...(H/T Mark Perry)

24/7 Culture

Often people talk about how we have a 24/7 lives. This seems to be true in one sense but false in the other. Today people are working fewer hours than ever before and have more time for leisure and enjoyment. Sites like YouTube, Facebook, and Netflix prove our standard of living is higher because people have more time for leisure activities. To think that these days someone could find rare footage for almost nothing is astounding. In today’s society, we have an on demand culture. People can access information 24 hours a day 365 days a year via the internet.

The biggest difference I see is the access to information. Now we can research things that use to take hours looking through books in a matter of seconds. Researchers have can now spend less time trying to find the data and more time creatively thinking about what they want to spend time on. So if we were to take someone that was working 60 hours in 1980 and someone working 60 hours today the person working 60 hours in 1980 would be very unproductive in modern times. Today a typical business person can check messages while waiting or sitting in a car. Years ago someone might call a business and they would get the secretary to take a memo and it would have to wait for the next day. In today’s society, we are more connected and wired than ever in human history. So in essence a worker could be working less hours today and still be more productive than the worker of generations ago because of technology.

One thing I have noticed is that technology has allowed us not to have to plan as much. If two people were dating in the early 1990’s they would have to call each other (assuming the person was home) to make sure they were going to pick up their date at the right time. Today in less than a second we can change plans. I think people take this for granted.

Although, there are some people who wish we could go back to the yesteryears of only having three TV stations, phones without text messaging, and in general simpler times. This of course is foolish and silly. We all benefitted from these technologies that not only made live more enjoyable but easier.

I just did a search for 24 hour restaurants in Houston and found 16 (not including Whataburger, McDonalds, Waffle House, Denny’s, and IHOP) which are also open 24 hours a day. I would be interested to see if there was any type of data on whether or not 24 hour restaurants have increased over the decades.

It looks like 24/7 culture has only benefitted society and has not taken anything away.

Steve Jobs: Why I Never Owned Apple Stock

Just a few hours ago Steve Jobs resigned as CEO of Apple. I have never invested in Apple because of this reason (also the company hasn’t had a long history of paying out dividends). At any rate, tomorrow the market will decide how much this will affect the value of Apple through their stock price. Jobs is leaving a company that is worth $349 billion in market value. Time will tell whether this increases or not.

People are asking why Jobs is not running the day to day operations of the company and I think the answer is pretty obvious. Steve Jobs has had significant health issues over the years. Usually CEOs are very reluctant to give up the reigns of their company. One can only speculate the health issues Steve Jobs is going through. I honesty wonder how long Jobs will be alive given he has pancreatic cancer which is usually a death sentence.

I find it a little bizarre that people act as if Steve Jobs as some saint. If anyone did any type of research they would realize he heavily micromanages his employees and somewhat of an egomaniac. However despite this, I would say that we all have benefitted from this. Steve Jobs takes only $1 salary which is of course symbolic. If you look at the actual amount Steve Jobs makes in just stock options it is over $14 million which is well above the average of $8 million paid to a CEO of any S&P 500 company. Jobs also did get a $90 million Gulfstream V jet in 1999 as a bonus. So if you include all the perks and extra that jobs get it is well over $1. The problem I have is people actually might believe that Jobs is living off very little and not greedy. I don’t believe a CEO or owner of a company wakes up to just make money. The main reason I believe a CEO or owner gets up is to create something new, to solve problems, or to more importantly make progress. Money of course does give people an incentive. Steve Jobs has made many people better off including himself. However, people are now saying Jobs is the best CEO of all time. I enjoy when people make statements but have no data or evidence to back it up. If you look at the performance of Apple stock and compare it to Oracle or even Microsoft since the 1980s, Apple has underperformed both stocks. A CEO’s job is to create value. So Steve Jobs may have taken his $1 symbolic pay, but compared to other companies Steve Jobs is not increasing shareholder value at the same rate as other companies within the same industry.

Part of the reason I never owned Apple is because of Steve Jobs. If Steve Jobs ever left or walked away it would be hard and maybe even difficult to recreate what he brought to the company. Warren Buffet points out that you shouldn’t need a rock star to run a business. Only time will tell if Jobs leaving will make a large impact.

Economics of Alternative Energy

Whenever I hear people talking about “green jobs” I shake my head. Green jobs are primarily jobs that are in clean and alternative energy. Energy can be derived from solar, wind, or water. I am actually in favor of alternative energy as long as the government doesn’t fund any of it. People making energy more efficient and bringing down the cost of energy is great. In fact, I believe energy in 20 years will not only become cheaper but more plentiful.

The biggest argument for alternative energy seems to be that it will create jobs and reduce our carbon footprint. The New York Times ran a recent article called “Number of Green Jobs Fails to Live Up to Promises”. The gist of the article is that government officials promised x amount of green jobs but in reality there ended up being much fewer. California spent $93 million in order to create 538 full time jobs. This works out to be $172,000 per job. Not only did it create very few jobs it came from tax-payers money.

In December of 1974 Popular Science predicted that by 1986 the cost per watt would be 60 cents per watt in today’s dollars. In 2007, the price per watt of solar was $3.66. Clearly, this prediction was way off. I use to subscribe to Popular Science and remember getting them on Saturday afternoons. One problem I realized was that nearly everything they were writing about was basically in a research and development phase which meant most of the things they talked about never came to the market place. Experts keep predicting in x more years solar will be competitive, but the main reason why this never comes true is because the government offers generous subsidies, incentives, and tax credits for installing solar which distorts the true price of solar energy. If we got the government out of subsidizing solar and other alternatives the technology would get better and prices would drop faster than if the government was subsidizing it.

Right now the U.S. consumes a lot of crude oil. Last time I checked crude oil was more abundant and cheaper than any other resource. In order to get the same energy out of one gas station you would have to cover the city of Los Angeles in solar panels. Remember this is just the energy for one gas station. The U.S. has 21 billion barrels of proven reserves. Not only do we have these proven reserves we also have undiscovered oil (can’t drill due to regulations) of 134 billion barrels of oil. Not only do we have oil but if we ever ran out there are other countries around the world that could export it to us. I am always reminded of the words that we will never run out of any resource that is valuable. In the last twenty years we used crude oil more efficiently. Even the cell phone has increased crude oil efficiently since people can now communicate in real time so they aren’t wasting gas trying to figure out where other people are. Navigation and GPS systems have also made us more fuel efficient by getting us to where we want to go. No doubt we will become more fuel efficient and develop better ways to use crude oil.

Alternative energy could help just as long as it isn’t subsidized. This week Evergreen Solar a maker of solar panels announced they were going bankrupt. It seems as if the company made most of their money off government subsidies and credits offered to consumers. Data from the Energy Administration and Greeneconmetrics Research shows that solar energy in terms of cost per kilowatt hour is more than seven times that of oil.

My prediction is we will be using more solar energy in the future (hopefully without taxpayer money). The technology will improve slower than people expect because we keep subsiding it. Think of the computer industry in the 1980s and 1990s got subsidies. How much worse off would we have been?

Charles Koch Responds to Warren Buffett

Direct from Charles Koch...

“Much of what the government spends money on does more harm than good; this is particularly true over the past several years with the massive uncontrolled increase in government spending. I believe my business and non-profit investments are much more beneficial to societal well-being than sending more money to Washington". -Charles G. Koch, Chairman and CEO, Koch Industries, Inc.

I really wish Charles Koch would do more interviews to push back the frontiers of ignorance.

Matt Damon Is A Moron

Uncle Nevin, Benefits, and University of Miami Football Scandal

A recent investigation into the University of Miami football program showed that booster Nevin Shaprio tried to recruit players to play for the Miami Hurricanes by giving players: cash, trips, jewelry and other goodies. Shaprio provided gave an estimated $2 million in benefits to players to at least 72 players from 2002-2010. Not only were players getting benefits but coaches were also getting them as well. What is ironic is when Shaprio got into financial problems (he was running a Ponzi scheme) and asked players who had been drafted into the NFL for money they told him to take a hike. Looking at the record for University of Miami over the same time period as the scandal is looks as if the team did very well during the scandal winning over 70% of their games. No doubt the team could maybe not able to play for the season.

Paying athletes is not new for the University of Miami football program. Between 1986-1992 rapper Luther Campbell was paying players $500 to score a touchdown. However, it seems as if the scandal of today makes the past scandal seems look fairly simple. This scandal does resemble SMU’s payola scandal in the 1980s were players were given cars, cash, and all sorts of incentive to come play for SMU.

University of Miami has a history of scandals. From 1984-1994, an academic advisor helped 57 football players falsify Pell Grant applications in order to get more than $220,000. Also in 1994 nearly 1 out of every 7 football players had been arrested while playing on the team. It seems as if not only the athletic department of the University of Miami has problems but the whole school does. My personal feeling is that the president of the university, the administration, and even the athletic director looked the other way while all this was going on. The administration usually has compliance people making sure boosters and players try to keep their distance from one another. The NCAA is no angel here either.

The bigger issue however is why boosters are giving out all these benefits to college players. Really the boosters are part of an underground market with athletes. The only way to fix the problem is to allow players to get paid which would get rid of the scandals. Players are essentially saying, “Look I am underpaid because if I were properly compensated I wouldn’t have to take these cars, money, and other benefits”. Let the market decide what players are truly worth. I find it interesting that people think of this fairy tale of college athletes solely playing for the love of the game. True, some players love the game but if players just played because they loved the game how would you explain players taking goodies?

Warren Buffett: Higher Taxes Please

Warren Buffet in a New York Times op-ed yesterday said that rich people should pay more in taxes. Buffett points out that he paid 17.4% (or $6.9 million) in taxes last year. The reason Buffett is in a low tax bracket is because nearly all of his income comes from capital gains (buying and selling stock) which is taxed at a much lower rate than ordinary income (wages from a job). Warren Buffet claims he doesn’t mind paying higher taxes. Interesting that Buffett doesn’t voluntarily paying his highest marginal tax rate of 35%. In fact if Buffett felt really patriotic he could make a gift to the U.S. Treasury Department to pay down the United States national debt. I have a feeling Buffett isn’t going to be making a gift any time soon.

Our tax system is extremely progressive. The top 1% (people making $380,000 and up) pay an average tax rate of 23.3% this is higher than any other bracket. Meanwhile the average tax rate for the bottom 50% is a mere 2.6%. In addition to this, the top 1% of taxpayers are paying 40% of all income taxes. This percentage has only been increasing since 1980 not decreasing. The top marginal rates since 1980 have also decreased. If politicians wanted the top 1% to pay “more of their share” of income taxes all they would have to do is lower the marginal rates.

No doubt Buffett is probably one of the best investors of all time. However, I find it surprising that someone with an economics degree from Columbia doesn’t understand demand for anything slopes downward the higher it is priced including taxes. If Buffett was really serious about paying his fair share he would voluntarily pay more in taxes. Buffett can say how he wants to pay more in higher taxes, but until he voluntarily does so it’s all talk. Talk, rhetoric, and blame are all great tools for politicians. Blame in fact is an unlimited resource.

Postal Layoffs and Time to Privatize?

The U.S. Postal Service (USPS) announced plans to lay off 120,000 people. Even though USPS has been around since 1775 it only started to lay off people beginning in 2008. The Post Office is constantly burning through money and at this point they are trying to minimize loses. Next month the Post Office will become insolvent. This is actually positive if we are closer to privatizing the mail system. The number of mail items second through the post office has dropped over the years. The main reason for this is the internet which allows people to send electronic mail for a minimal price.

USPS is now trying to figure out how to remain solvent. Cancelling Saturday mail has already been discussed although I don’t that will do much to solve the major problems of: pensions, compensation, or accountability. In terms of pensions USPS in June of this year had to suspend employee contributions to try to save $800 million. USPS claims that they have been overcharged for pension obligations and are due $75 billion from the government. In 2009, an average postal worker made $79,000 in total compensation (wages + benefits). Economist James Sherk found that postal workers earn an extra 15%-20% per hour than workers in the private sector.

The Post Office employs around 560,000. This means the Post Office spends $28 billion a year on salaries. The total cost is more if you include providing benefits for workers. The Post Office until three years ago had never laid anyone off in their almost 240 year history. The Post Office has little to no accountability for its workers. Take the example in May of a mail carrier in Portland, Oregon who defecated in a yard while on his mail delivery route. The worker was put on unpaid leave but was transferred to a different route. If this happened at UPS or FedEx the worker would have been fired the day it happened.

Hopefully, more people and politicians will realize USPS can’t continue. In 2010, the Post Office had a loss of $8.5 billion. If we had FedEx and UPS delivering mail not only would we get rid of the deficit of the USPS, but more revenue would come into the government since FedEx and UPS would have to hire more workers who have to pay taxes. The idea is to create more productive use of assets and more tax payers.

Apple: Most Valuable Company?

As of today Apple is now the “most valuable company”. Apple now has a market capitalization of $337.2 billion surpassing ExxonMobil with a market cap of $330.8 billion. I put most valuable company is quotation markets because the market can misprice things. The technology bust of 1999-2000 and the financial crisis are just recent episodes of this. The sector weightings of both technology and financial companies during this period became very high. The weightings became high creating bubbles within certain sectors that eventually went bust.

Apple is known for producing computers and electronic devices that consumers use around the world. The iPhone I would say has been the biggest hit for Apple in recent years. The iPad also seems to be very popular as well. Even though Apple has had successes they have also had failures. One failure that sticks out in my mind is the Lisa computer that was developed in the early 1980’s. The computer would be over $21,000 in current dollars yet lacked the computing power of any modern day cell phone. Another flop I remember was the Apple Newton which is what use to be called a personal digital assistant (PDA). Basically the device allowed you to set your calendar and organize contact information.

One problem that I think few people realize about Apple’s success is solely based on Steve Jobs. The biggest worry is the health of Steve Jobs. In 2004, he had a rare form of pancreatic cancer. In 2009, he had a liver transplant. The five year survival rate for liver transplant is between 75-90%. I honestly would be shocked if Jobs lived a long live. Being CEO is hard on perfectly healthy people and would be even harder on people with health issues. Jobs seems to be the superstar for Apple and if he were to leave it would cause great uncertainty for Apple. Jobs himself has created over 230 patents.

What is perhaps the most interesting is how the media and even some people think of Jobs somewhat of a hip entrepreneur who is earth loving and kind. I don’t think people understand the type of personality Steve Jobs really has. Steve Jobs is intense and demanding. From what has been written about Jobs he is obsessed with making something people will enjoy. It wouldn’t be hard to classify Jobs as a perfectionist. There was a movie years about a decade ago called “Pirates of Silicon Valley” that shed light on the type of personality Jobs may have had during the early days of Apple. Whatever his personality may be Jobs has made everyone else better off including himself. Steve Jobs got rich by figuring out what consumers trying to perfect exactly what consumers wanted. As a result Jobs has a net worth today of $8.3 billion.

Jobs created a company that very consumer eccentric. Apple figures out what consumers really wanted. People complain that Apple products are more expensive, but there are always alternatives. Being paranoid and a perfectionist are not classified as desirable traits yet in the case of Steve Jobs millions of people have benefitted.

S&P Downgrade: Who Is to Blame?

With Standard and Poor’s (S&P) downgrading the United States debt there has been a lot of blame as to who is at fault. The S&P 500 reacted to the news by dropping 6.66% on Monday. Today the market was up almost 5%. David Axelrod senior advisor to President Barack Obama said that the downgrade was the credit downgrade was a “tea party downgrade”. Michael Moore wanted to arrest S&P officials (which is what Italy tried to do when S&P downgraded them only Italy wanted documents as well). Rick Santelli the man I would credit most with creating the tea party said that if it weren’t for the tea party the U.S. would be BBB.

Let’s sort out some facts first. Standard and Poor’s is in the business of reporting the credit rating of companies and sovereign nations. Moody’s and Fitch which are two other credit rating agencies kept their AAA credit rating for the United States. Standard and Poor’s did not err in their decision. In 2010, the United States took in $2.38 trillion. The very same year the United States spent $3.55 trillion. So in essence we are spending $1.17 trillion more than we take in yet we have the highest possible credit rating. If individuals overspent this much they wouldn’t even be credit worthy. Not only are we spending more than we are taking in but we have more than $14 trillion in debt. With all these facts the United States should have perhaps even a lower credit rating then S&P gave us.

Another interesting idea is why people are blaming credit rating agencies for the downgrade when it is really the fault of the people for electing people that take money from one person and promise it to someone else. The United States got the downgrade because of political instability and unclear and murky recommendations from the recent legislation. It would be as if a person called someone overweight (when they are) and the overweight person said, “I am not overweight you just don’t know what overweight is”. The parallel is yesterday when the President claimed at a press conference the other day that we truly are AAA even though we are told that is not true. People seem to blame the credit rating agencies for the downgrade and the 2008 financial crisis. In the 2008, financial crisis people were claiming S&P was too loose with its credit rating agencies. Now they claim people that S&P is being too harsh. I think the credit rating agencies realized after 2008 they had to make their criteria more stringent, but even with that said the United States should have been downgraded.

Credit Ratings Of Nations Around the World

Death of Arcades

In my younger days I was much more interested in video games than I am today. Most people who are now in college or just recently graduated from college can remember an era where kids pumped arcade games full of coins, played games like Teenage Mutant Ninja Turtles, X-Men, and Street Fighter. Today, very few arcades exist. My question is why have arcades seemed to have vanished?

To this day I can remember in virtually every mall in Houston there was some form of an arcade. I can even remember Sam Houston Racetrack having a mini arcade. I would imagine it allowed parents to drop their kid off somewhere while parents did their shopping. The main arcade I remember was a place called Exhilarama which was located in Memorial City Mall. Exilarama was not only an arcade but had food, a playground, and go carts. I remember in the 1990s this place on the weekend would be packed full of kids. By 2000 the company was defunct and a new arcade came in called Tilt. Tilt was only around for a few years and then went out of business. Discovery Zone which was a place people usually had their birthdays also went out of business in 1996 due to filing for bankruptcy. The bankrupt stores where bought by Chuck E. Cheese which is still in business today. The only other large chain arcade I can think of is Dave and Buster’s which is targeted to adults. According to Play Meter a magazine that covers the arcade industry in 2010 there were only 2,700 arcades which decreased from 4,000 in 2006. As of 2004, Konami stopped making arcade games however Sega and Namco still do. In the 1980’s the amount of video game arcades peaked at 13,000. I remember arcades in places like Cici’s Pizza and Mr. Gatti’s.

So the question is what caused the decline of arcades? The main reason is that video games that consumers could play at home over time became more powerful and allowed people to play some of the exact same games as they were in the arcade. Street Fighter 2 was one of these games. Mortal Kombat was another game that many people played on arcade in the 1990s then became widely available on video consoles. Also the internet had a large effect on how people played games. Today, people can play games online with others from around the world. Back in the day you could only usually play against whoever showed up to the arcade. During the 1990’s we had the introduction of Playstation 1 and 2, NES, SNES, Sega Genesis, Sega Dreamcast there was little reason to go the arcades. Instead of spending an afternoon pushing quarters into a machine people could have unlimited play at home. Also computers also became much cheaper during the 1990s. There was always demand for playing games on the PC however, during the 1990s the graphics, computing power, and hard drive space for computers increased dramatically.

Technology over time improves and becomes cheaper for the masses. The arcade/video game industry is one example of this. Creative destruction is the process of letting bad ideas fail and only the best ideas stick around in the market place. I would argue that today more people have access to video games than ever before at a cheaper than any other time in history.

Regulations Costing Over $100 Million

Standard & Poor's Downgrade, Economy, and Solutions

Early this evening Standard and Poor’s (S&P) downgraded the United States credit rating from AAA (highest) to AA+. S&P cited political instability, a high debt/GDP ratio, and growth of government spending. S&P got this call right. The 2011 budget for the United States predicts a $1.65 trillion deficit. Note this is just an estimate and can be even more than predicted. What I find interesting is that we are predicted to bring in $2.17 trillion in revenue. The budget is divided into mandatory spending and non-discretionary spending. In 2010, over $2 trillion was spent on “mandatory” things like Social Security, Medicare, and Medicaid. Discretionary spending was a little over $1 trillion. My point would be that all spending is discretionary. No doubt the downgrade will have implications for the economy. The most noticeable difference will be a rise in interest rates charged to consumers. When Spain and Portugal faced similar downgrades the interest rates rose between .2-.4 percentage points. This seems small but when you look at how many homes, cars, and other expensive items are financed with interest rates it would have a large impact on the economy as a whole. The entity that will pay the most will be the United States government which will see higher interest payments on the debt.

This week the debt ceiling was raised yet I have a feeling pretty soon the Treasury will find itself in a bind and try to figure out how to pay their bills. The debt ceiling claimed there would be cuts; however I would question what base lines were used to determine if any true cuts were made. It would be like going into a store and learning they are having a sale on everything for 30% yet raised the prices 50% before they lowered them.

The jobs report today showed that 117,000 jobs were added making the unemployment rate 9.1%. However, if you look at the percentage of people in the labor force it was fallen to 58% which is the worst it has been in more than a decade. This I believe is a better measure of unemployment since the way unemployment is calculated is somewhat of an art. People who have stopped looking for the past month for a job are not counted as being unemployed.

The only real way for our country to avoid going down the tubes is to initiate some free market reforms. The government should first go through all regulations and figure out which ones have the highest cost and provide the least amount of benefit. Also taking money from hard working people and transferring it to others is not only wrong it’s immoral. If 47% of people don’t pay any federal income taxes why should they care if income taxes are raised? People claim that other countries in Europe are better because they provide free health care, free education, and other free social benefits that are “more fair”, help them live longer, and make them happier. I would argue our standard of living and purchasing power is much higher in the United States than in nearly any other country. The reason why people in our country don’t live as long is not because of health care, but what we choose to do with our bodies. Everyone could in America could have the best healthcare and best insurance, however if we eat too much, drink too much, or smoke too much statistically we will live lower lives. Also the United States has higher murder and suicide rates than other countries which would decrease our life expectancies.

We are at a turning point for our nation. I hope politicians embrace not only free markets but choice and liberty. If not we will be left with no choice but to succeed.

Pfizer and Over The Counter Lipitor

I read an article in today’s Wall Street Journal that discussed Pfizer trying to get the FDA to approve Lipitor for over the counter use. The patent for Lipitor expires by the end of this year and Pfizer wants to make sure that people are still aware of the drug. Drugs get a patent for a decade. After a decade the drug company loses the patent to make the drug and a generic substitute comes onto the market. People often say the generic is exactly like the original drug however this is a little misleading. The original drug can have a better quality delivery system, higher self life, and more effective even though the molecules for the original drug and the generic are the same.

Pfizer being very aware that Lipitor is going to become a generic drug wants to allow consumers to purchase the drug without the prescription (known as over the counter). I have always wondered why the FDA has not made more drugs over the counter. Many drugs that you need a prescription for are not very dangerous. Plus, if consumers really wanted to do harm they could just up the dose on over the counter prescriptions already.

There are benefits to putting prescription drugs on the market. The first if the drugs were allowed to be sold over the counter more people would have access to it. Drug stores and regular stores would have to compete on drugs which would reduce the price of drugs. Also another benefit would be since people are sometimes reluctant to go to the doctor you would provide them with the opportunity to take particular medicines.

The FDA worries about people taking the wrong dose or possible drug interactions which is understandable. People care more about their risk tolerance profiles than any bureaucrat. Plus, no doctor has perfect knowledge of any individual patient. Patients when they are in need seek information. I really don’t find the argument of “people don’t know what’s good for them” very compelling. Today, we have more information than leading doctors did 20 years ago. I would be more sympathetic to this argument if it were made decades ago.

Allowing people to take drugs without a doctor’s prescription would not only increase quality of life but lead to better information. Doctors could run their own trials with patients and measure the effects of the drugs on people. I don’t see why a drug should have to go through the FDA again for non-prescription use after the FDA approves it.

The Poor: Better Off Than People 20, 30, and 100 Years Ago

Inside Pfizer: The Downfall of Jeff Kindler

 

Fortune came out with a great article (one of the best I have read in a while) about the inner workings of Pfizer. The article is the cover on Fortune magazine and entitled “Inside Pfizer’s palace coup”. What is really interesting is Fortune spent 4 months and interviewed 102 people who worked at Pfizer. The story starts off with Jeff Kindler the former CEO of Pfizer trying to convince the board of directors for Pfizer to retain his job. Kindler was CEO from 2006-2010.

During Kindler’s tenure the stock price of Pfizer went from $49 to $17 a share. The article talks about how smart Kindler is graduating with high honors from Harvard Law School and all of his prestigious positions before joining Pfizer. Kindler’s management style was aggressive and blunt. He often left angry voicemails late at night to other employees. From reading the article you get the sense that Kindler really didn’t trust anyone at Pfizer except himself. The HR department at Pfizer also seems dysfunctional. Mary McLeod was the head of human resources and was fired from Schwab for trying to remove rivals and claiming she had had the CEO under her thumb. She no longer works at Pfizer and due to poor rankings from her subordinates.

When Kindler took over there were two promising drugs Pfizer had. One drug was intended to increase good cholesterol, but this flopped when there was an increase in deaths compared to the control group. Another drug was Exubera which would allow diabetes patients to inhale their insulin through an inhaler. Between these two drugs Pfizer spent over $2 billion dollars and many years developing drugs that didn’t pan out. The average cost per drug approved for Pfizer between 2000 and 2008 was $6.7 billion. I really don’t blame Pfizer for this since the FDA puts burdensome regulations on drugs companies. Kindler tried to drastically cut research and development costs, however two people on the board who were doctors told him no. A drug CEO trying to cut research and development doesn’t make any sense since that is where nearly all their profit comes from.

Before Kindler took over the CEO was Henry McKinnell who ran Pfizer from 2001-2006. McKinnell had a strategy of putting more funding into research and development since drug companies are in the business of innovating. One problem with McKinnell is he was not in the office much. He was off funding charities in Africa and wrote a book about health care reform. McKinnell was ultimately fired because the stock price for Pfizer was down 46% since he had taken over. I am surprised McKinnell couldn’t create shareholder value considering he had a PhD in finance from Stanford.

At the end of the day the CEO takes responsibility for the performance of the company. However, I would argue though that the FDA has more control over the profitability of drug companies than any CEO. The FDA can reject a drug or ask for more clinical data which makes the company either write off their research and development costs or spend more on clinical research to try to get the drug approved.

I am becoming more skeptical that IQ, background, or educational credentials really tells you much about whether someone can run a business. Some people can be very bright but not practical or have business sense. People in business are paid for what they can bring to the future of the company not what they have done in the past.